Fission Uranium: Ahead of the Triple R Feasibility Study, is the Discount Justified ?
Updated: Nov 13, 2022
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Following yesterday’s release of arguably the best ever single drill hole assay result from the PLS property, we conclude our Athabasca Basin model refresh and update with the examination of the third most significant deposit, Fission Uranium’s (FCU) Triple R. Given the review, we are rolling out our 12-month price objective following an extensive model refresh and review. Using our base LT uranium price forecast of $70/lb, we establish our 0.80x NAV8% target of C$1.60/$1.20 per share. We view Fission Uranium’s Triple R deposit as a solid PFS-level project in the Athabasca Basin, however not as of yet displaying the stronger economics as seen from peers Dension Mines' (DNN) Gryphon/Phoenix deposit and NexGen Energy' (NXE) Arrow deposit. With PLS, we expect a three year construction period with the start of commercial uranium production forecast by 2029. An upcoming Feasibility Study is anticipated by year-end or Q1/2023 – this may serve as a de-risking catalyst particularly if the updated economics encompassing additional zones of mineralization offset the expected increase in project capex.
Located on the western portion of Canada’s prolific Athabasca Uranium Basin (Saskatchewan), Fission Uranium’s Triple R deposit sits just to the south-west of NexGen Energy’s prolific Arrow deposit. With just under 115.0M lbs grading 1.94% U3O8 in the M&I category along with an additional 15.4M lbs grading 1.10% U3O8 in the Inferred category, Triple R is one of the largest uranium deposits situated in the Athabasca Basin. Triple R ranks second only to the Arrow deposit in terms of size and grade located on the western portion of the Basin. It remains open in multiple directions and at depth.
The PLS property itself comprises 17 claims and encompasses 31,039 ha of which an estimated 80% is under explored. That said, the property itself contains over 100 electro-magnetic (EM) conductors each containing numerous exploration hotspots. As for the current deposit, unlike Arrow, Triple R is characterized as a shallow deposit (mineralization beginning approximately 50m below surface and extending to nearly 300m in depth). Also unlike Arrow, a considerable amount of the deposit appears underwater, below Patterson Lake (notably the R780E zone) over a total resource which extends from R1515W to R1620E, totaling a length of 3.18km east-west.
Just yesterday the company announced that a recent drill hole assay from the R840W zone returned a continuous interval of 34m grading 19.12% U3O8. On a grade x thickness measure of 650.7, this essentially equates to one of the top drillholes ever drilled to date on the PLS property. The market reaction quickly discounted the good result as Fission stock ended the day at +2.8%. This performance was in line with Athabasca developer peers, despite the phenomenal assay result. This was justifiably so given that R840W isn’t currently included in the PFS calculations. More importantly, assay results (despite how positive they could be) have much more impact on pre-resource and pre-technical report companies. Right now, the market is focused on Fission’s up-coming full Feasibility Study (FS) to further de-risk and define the production and economics at PLS. This FS is expected to be announced later this year or in Q1/2023. We expect considerable capex inflation since the 2019 PFS. We also expect the filing of an Environmental Impact Statement (EIS) sometime in 2023.
Additionally, note that the current resource only includes what is contained within the R780E and R00E zones. PLS’s other three zones (R1515W, R840W, and R1620E) were not considered for the resource estimate. That said, the PFS based solely on R00E and R780E envisions a three year construction build (initial capex C$1.177B) followed by a seven year LOM underground operation averaging 11.3M lbs of uranium/year. Using a base case LT uranium price of $50/lb, the after-tax NPV8% was calculated as C$701.8M along with a 25% IRR.
In terms of actual production, the underground excavation design includes a roughly 100m decline to the R780E zone with the area around the decline dewatered prior to excavation. Similarly with the PFS, we also assume a three year construction build (commencing in 2026) with commercial production beginning in 2029 at a LOM operating cost averaging C$9.57/lb (or just mining & processing at $7.37/lb). Sustaining capital is assumed to be $200M. Note that the conceptual mill design consists of a nominal federate of 350,000 tpa, capable of producing as much as 15.0M lbs if U3O8 annually. We have processing grades at 1.60% along with recoveries averaging 96%. Though a LOM extension to 10 years is possible, our model profile and sensitivities (LT pricing and discount rates) are displayed below:
We value the PLS property at the parameters stated above. Using our base LT uranium price forecast of $70/lb, we establish our 0.80x NAV8% target of C$1.60/$1.20 per share. Fission Uranium shares in Toronto currently trade at a 0.36x P/NAV. We feel that a 0.80x NAV multiple (and the current P/NAV discount to peers) is justified on 2 fronts:
1) Cost/Benefit analysis: Given the fact that the Triple R deposit is currently at the PFS stage and that it will require the most capex per current production profile out of its peer group (Arrow and Gryphon/Phoenix), the discount to peers is more than justified. Keep in mind that Arrow currently has a C$1.5B FS projected capex for an 11 year LOM producing a total of approximately 220M lbs while Denison’s Gryphon/Phoenix projected $945M capex is expected to produce a 13 year LOM producing approximately 101M lbs.
2) Increasing scrutiny on Chinese SOEs: Seeing that the Federal government of Canada recently ordered certain Chinese companies to divest their stakes in lithium companies with assets in Canada, we feel that a renewed emphasis on Chinese State Owned Enterprises (SOEs) with assets in Canada may become more of an issue, specifically in the area of critical Canadian minerals deemed crucial to national security. Recall that Chinese SOE China General Mining (CGN) currently holds a 14.2% stake in Fission Uranium, a holding they have maintained since December 2015. Note that when announced in late 2015, CGN paid C$82M in cash for a 19.99% stake which at the time represented a 25% premium to Fission’s last close. At that time, Fission had an attributable M&I resource of 79.6M lbs along with an additional 25.9M lbs in the Inferred category. That transaction was the first of any Chinese SOE entering the Canadian uranium space. Since then, know that CEF Holdings, Li Ka-Shing’s investment vehicle closed a $110M financing with NexGen Energy in 2017. CEF currently holds an approximately 18% stake in NexGen. Unlike CGN however, CEF is not a subsidiary of any Chinese SOE but rather a private investment holding company. In any case, there will be renewed scrutiny for any such SOE involvement in Canada not only going forward, but clearly as demonstrated with the lithium companies, retroactively as well.
Using our base LT uranium price forecast of $70/lb, we establish our 0.80x NAV8% target of C$1.60/$1.20 per share. We see a lot riding in the upcoming Feasibility Study. Following the expected FS release by Q1/2023 at the latest, expect the filing of an Environmental Impact Statement (EIS) sometime later in 2023. That said, until the FS is announced, within the Basin we continue to rank the attractiveness of Triple R behind that of Phoenix/Gryphon and Arrow.