Updated: May 25
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Continuing our model review on the most compelling stories in the Athabasca Basin, we re-examine NexGen Energy’s (NXE) large-scale Arrow deposit which hosts the Rook I project. 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 1.05x NAV8% target of C$11.70/$9.40 per share. We view NexGen Energy’s Arrow deposit as the platform for a generational project in Rook I. Following a four year construction and site preparation period, we expect significant uranium production at the magnitude of nearly 30M lbs per year towards the end of this decade.
Located on the western portion of Canada’s prolific Athabasca Uranium Basin (Saskatchewan), NexGen Energy’s Arrow deposit is the largest (and most advanced) undeveloped uranium project in the world. Following initial drilling in 2013, the Rook I project has advanced from Preliminary Economic Assessment (PEA in 2017) to Pre-Feasibility Study (PFS in 2018) to the current Feasibility Study (FS in 2021). The project itself currently boasts an estimated 239M lbs of uranium contained in the Proven & Probable category alone. Located in the uranium-rich Athabasca Basin, the one criticism most often heard about the project is the fact that it is located on the western portion of the Basin which lacks the already-built critical infrastructure seen in the east, encompassing a road network and mills (Key Lake mill, Rabbit Lake mill and the McClean Lake mill).
What more than counter-balances the western Basin location is the geological superiority offered by nearly 250M+ lbs (excluding any Inferred resources) grading an average of 3.10% U3O8. Equally as impressive to Arrow’s sheer size is the fact that the deposit is situated near surface, beginning approximately 100m below surface and extending to a depth of nearly 850m. This type of deep and narrow underground mining is nothing new, Cameco (CCJ, CCO-T) perfected that type of ore extraction at Eagle Point, an ore body which extended to a depth of 920m, surpassing that of Arrow in depth. Eagle Point has long been regarded as one of Cameco’s most successful mines.
Similarly as displayed from the Feasibility Study, we assume an 11 year LOM operation averaging just over 21.0M lbs annually, highlighted by nearly 30.0M lbs annually between years 2-5. This is top tier production, for context, the only uranium miner currently producing well over 20.0M+ lbs annually is Kazatomprom (KAZ-LN) via its ISR properties located in Kazakhstan. Within the Basin, apart from McArthur Lake at a P&P total reserve nearing 400.0M lbs, there is no other single asset deposit which come close in terms of size. The highlighted Athabasca Basin deposits are listed below, note that we only include quality resource encompassing just P&P and/or M&I).
Similar to as expected from the FS, $1.1B is expected to be spent as initial pre-production capex, spread over a four year build. In an ideal scenario, construction would begin in 2023, followed eventually by initial production by 2027. We model an 11 year LOM peaking between years 2-5 when production will benefit from the highest grades and therefore contribute nearly 30M lbs of annual production. From 2032 onwards, production will be significantly lower, nearing 15M lbs annually before dropping to nearly 8M lbs in the last year of production. At an average production rate of just over 1,200 tpd, we see the average LOM operating cost at below $8.00/lb while the average expected mining and processing cost will average under $6.00/lb. Note that similarly to the FS, we only model depletion from the current M&I reserves, thus leading to a 11 year LOM. Recall however that permitting is underway for a 24 year LOM indicating the true potential (and upside longevity) for the Arrow deposit. The full extent of Arrow and the surrounding area is still unknown (the deposit remains open in all directions) and will require a lot more drilling (along strike and to the northeast/ southwest along the Patterson corridor) seeing as 90% of the prospective area remains untested. For context, ten rigs can be drilling full time for ten years and we still wouldn’t have a full geological evaluation of the area. Our model profile and sensitivities (LT pricing and discount rates) are displayed below:
NexGen is a classic one asset company with Arrow contributing to 99% of the mining NAV. Though the additional exploration properties located in the Basin have demonstrated potential via scintillometer results or assays (Bow, Harpoon, South Arrow, etc.) they are all still pre-maiden resource so we ascribe minimal value to those particular assets. We value the Rook I project at the parameters stated above, using our base LT uranium price forecast of $70/lb, we establish our 1.05x NAV8% target of C$11.70/$9.40 per share. NexGen Energy shares in Toronto currently trade at a 0.51x P/NAV.
The shareholder registry is wide-open seeing as 33% of shares are held by insiders and institutions (of note, CEF Holding’s Li Ka Shing has been involved since the early goings). The strategic partnerships will come into play when financing will be undertaken, given a capex requirement we estimate at C$1.5B. We note that given the strong project economics (an after-tax IRR of 68.7% and an after-tax NPV8% of C$5.85B using LT $75/lb), a portion of the financing will be amenable (and communicated as ideally maximized) via project debt. Details still to come.
We continue to view the Arrow deposit as a generational asset which would lead to production volume the likes of which only Kazatomprom has achieved to date. Given the production profile (and coupled with eventual depletion of Kazatomprom ISR production), Arrow will very likely become the largest future source of clean energy anywhere in the world. In the short term, we expect the Canadian Nuclear Safety Commission (CNSC) to complete its initial review of the Environmental Impact Study sometime before the end of 2022. In addition to on-going regional exploration drilling, a geotechnical confirmation program is expected to commence in 2023, as is the commencement of detailed engineering.