Updated: Sep 9, 2022
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With uranium companies becoming more vocal about re-starting mining operations and increased investment capital flowing into just about every US focused ISR developer, we take a look at which specific projects will be realistically the first to re-start or enter production. Additionally, we take a stab at current valuation based solely on realistic, near-term uranium projects expected to come on stream within two years, as opposed to simple pounds in the ground which will forever remain uneconomic or undeveloped. Strictly speaking, for uranium exposure what you should be paying for now is the ability for (and quality of), near term production. The wait is over, the time is now. Based on this criteria, we see the largest value proposition with Peninsula Energy (PENMF).
With four months still remaining in the year, it’s already been pretty clear that the uranium sector has been one of the highlight commodities of 2022. Following the post-Fukushima doldrums since 2011, the uranium market fundamentals have never been more positive. Given tailwinds such as the emerging theme of energy independence prompted by a concerted effort (by the West) to wean off of Russian sources, numerous other global gamechangers have since been announced, further adding to the bullish narrative. Some of the more recent game changing announcements have been the EU labeling nuclear power as “Green & Sustainable” (ratified by the European Parliament on July 6 and thus paving the way for increased investment inflow into the space) and more recently, Japan’s Prime Minister making an official statement on August 23 pledging to re-start at an accelerated pace many of the currently 23 idled nuclear power plants, while also looking to extend the lives of the 10 nuclear plants which are in current operation while also looking to construct new reactors. In the US, progress has been made concerning the Department of Energy creation of a $10.0B national strategic Uranium Reserve. To date, $75.0M has thus far been authorized for the purchase of uranium with many of the US ISR producers angling to fill part of the required inventory. Compared to gold, silver and copper futures with YTD declines, the uranium spot and LT uranium price has advanced by 18% and 22% respectively YTD. This performance has prompted many of the US based ISR developers to start signing LT supply agreements while almost all have been prioritizing a production re-start of mothballed uranium operations. As such, since 2021 the average performance of the US ISR peer group (URG, UEC, UUUU and EU.V) has been nearly +90% while the often overlooked Peninsula Energy has returned just +24% in the same timeframe. We'll go through the reasons for the underperformance in the later section, but in short, it has more to do with limited exposure in North America or Europe (Peninsula has a primary ASX listing) along with a JORC compliant resource statement instead of the more familiar, NI-43101. There are however no doubts about asset quality or management track record - therein lies the opportunity.
Looking to capitalize on the recent uranium momentum and renewed interest in the space, talk of re-starting uranium mining operations has become more prevalent in most of the miners identified above. At this point, we thought it worthwhile to look at which uranium projects would likely be the first to re-start and what sort of value proposition can be inferred at current prices. First some context: Though this type of “most-realistic-project” analysis certainly has its flaws in the broader context of company holdings in various commodities (and in various geographies), one thing we can unequivocally say is all the companies listed below have through the years built their reputations as 1) uranium companies first and foremost and 2) being US focused. For context, even though Uranium Energy Corp. has large uranium resources in Paraguay (Yuty, Oviedo), development projects outside of the US were not considered for purposes of this analysis. And within the US, UEC projects such as Anderson, Dalton Pass, Workman Creek and many others were not considered either since they are realistically far from ever being close to production. For purposes of this analysis, we give zero value to companies which acquire exploration properties or pounds in the ground which will likely never be developed let alone ever in production. We are strictly looking at shovel ready (or in this case ISR ready) projects. Our rationale is simple – to capitalize on a currently rising uranium environment, the market will like to see some near term production in order to capture the strong current fundamentals. All of the companies below have a stated goal to actually produce as opposed to just acquire, explore and develop. All that said, this filtering process was repeated with the entire US ISR peer group. The most realistic and meaningful projects (maximum 1-2 only) for re-start or development for each company include the following:
Peninsula Energy (PENMF): the Lance Development Project located in Wyoming
Ur-Energy (URG): the Lost Creek re-start located in Wyoming
Energy Fuels (UUUU): the Nichols Ranch re-start located in Wyoming
Energy Fuels (UUUU): the Alta Mesa development located in Texas
enCore Energy (EU.v): the Dewey Burdock development located in South Dakota
Uranium Energy Corp. (UEC): the Burke Hollow development located in Texas
For all the listed projects, note that all are In-Situ Recovery (ISR) projects and that all the respective companies have their own processing facilities which are fully licensed and permitted for production – Energy Fuels with White Mesa, Ur-Energy with the Lost Creek facility, Uranium Energy Corp. with Hobson, enCore Energy with the recently completed Rosita facility and Peninsula Energy with the Ross processing plant. Below are the corresponding resource estimates for the mentioned companies' most realistic to advance uranium projects:
Ur-Energy (URG): A production re-start decision is expected in the weeks ahead. The company noted that Header Houses (HH) 2-4 are anticipated to be ready for production sometime in Q3 should the appropriate decision be made. This past year the drill and construction program for HH 2-4 has been ongoing in Mine Unit 2 at Lost Creek while delineation drilling for the next 5 header houses in Mine unit 2 has also been ongoing. On August 8 the company announced an initial sales agreement which calls for an annual base delivery of 200,000 lbs of uranium over a six year period, beginning in 2H/2023. Note that since initial production from lost creek in 2013, over 2.7M lbs of uranium has been produced. The company has delivered under very conservative management, note that since 2011, this company has had the least share dilution (115%) versus peers – Energy Fuels leads the way with the most dilution at 6,000%+. Ur-Energy currently holds 326,000 lbs in inventory while also maintaining a current cash balance of $42.0M in treasury.
Uranium Energy Corp. (UEC): The year so far has seen the completion of 106 monitor wells from production area 1 while delineation drilling for production area 2 was also completed. Note that production has been largely curtailed from Hobson since 2015 however the Hobson processing facility remains fully licensed and permitted for up to 2.0M lbs per year of physical production. Next up from the Hub & Spoke production model seems to be the Burke Hollow deposit which is located approximately 54 miles from the Hobson facility. The 20,000 acre property is currently only 50% explored. We viewed the recent move into the Athabasca Basin (via acquisition of UEX Corporation) as more conducive to promotion with extremely minimal synergies with their current US focused ISR development trajectory. The company ended the most recent quarter with $180.0M in cash in treasury along with 5.0M lbs of uranium in inventory.
EnCore Energy (EU.v): Last quarter the Rosita processing plant completed a modernization update (currently licensed for production of up to 800,000 lbs) which was on schedule and on-budget, placing the company ready for 2023 production. That said, the Rosita extension wellfield drilling program is on-going as is permitting at Dewey Burdock. Estimated to have a LOM of 16 years at approximately 1.0M lbs per year (Dewey Burdock), the company announced on July 28 that it signed its latest sales contract for 600,000 lbs commencing in 2025. The company is still awaiting three final state permits from the South Dakota Department of Agriculture and Natural Resources. The company ended the most recent quarter with $25.9M in treasury.
Energy Fuels (UUUU): We view Energy Fuels as the least exposed to near term uranium production since over the past few years, other commodities such as vanadium and most recently Rare Earth Elements (REEs) have been promoted for production at the White Mesa mill. Though the company is guiding towards FY/2022 uranium production between 100,000-120,000 lbs, all of this amount will be coming from stockpiled ore. Though the company recently booked three sales contract for up to 3.0M lbs of uranium between 2023-2030, we can only assume that the deliveries will be heavily back-end loaded. Uranium production doesn't seem like the corporate priority at present. The company ended the most recent quarter with $86.3M of cash in treasury and expects to end the year with 800,000 lbs of uranium in inventory. More of our views on how we now see the company as a primary REE or vanadium company (as opposed to a primary uranium company), can be seen from the link here.
Peninsula Energy (PENMF): – Peninsula is the least know of the uranium ISR players however given a Definitive Feasibility Study (DFS) released on August 14, 2022, a final construction decision is expected later this year with ultimate commissioning and a ramp-up in production from the Lance project expected by the end of 2023. The company already has several LT sales agreements in-hand, highlighted by delivery for up to 4.8M lbs extending to 2030. As of the latest quarter, the company had 310,000 lbs in inventory along with a cash balance of $7.6M in treasury.
What we specifically like about the Lance Project is that relative to all other near-term production assets from the peers, Lance has by far the largest ISR resource at 53.6M lbs (or even at the reduced, 21.8M lbs used as the basis for the DFS) located in the tier 1 ISR uranium district in Wyoming’s Powder River Basin. Specifically, the DFS estimated a two stage ramp up to 2.0M lbs of production per year, averaging 1.3M lbs of uranium per year over an 11 year LOM. Using a $62/lb LOM average sales price, an NPV8% of $125.0M and an IRR of 43% was estimated. It is important to remember that the LOM and economics for Lance will improve further once the nearly 30.0M lbs of (currently) Inferred resources located in the adjacent Barber area will be included and used for future feedstock. For the sake of conservatism, the DFS only included the M&I material from the Kendrick production area and from the Ross production area, once including Barber, significant upside is expected as the market is currently ascribing zero value to the nearly 30.0M lb adjacent resource. Moreover, the introduction of a low pH ISR method used for extraction will generate a higher overall resource recovery factor accomplished at a faster pace (more uranium extracted over less time). A field trial and demonstration has already been accomplished as part of de-risking the asset. Peninsula Energy is the only fully licensed company for low pH ISR.
As can be seen from the graph above, the Lance project currently trades at an EV/lb of just $2.0/lb using the global 53.6M lb resource, or $5.0/lb using the 21.8M lbs as seen from the DFS. Lost Creek is next at an EV/lb of $13.50, followed by encore Energy’s Dewey Burdock at $17.80.
Why the underperformance ? There certainly are reasons to explain Peninsula’s valuation discount - First and foremost is the fact that the company is primarily listed and traded in Australia, along with some liquidity on the OTCQB. Moreover, though the methodology and rigors for resource estimation are comparable, the entire Lance resource is notably JORC compliant (the methodology favored in Australia) rather than the NI43-101 methodology more known to North American investors. That said, the two main things we look for in a successful mining operation is 1) a quality/economic asset base and 2) management with a proven track record. Point 1 was addressed with the DFS (along with sizeable uncaptured upside) while for point 2, we can safely say that Managing Director/CEO Wayne Heili has a proven/successful ISR track record having designed, built and commissioned the Lost Creek ISR operation as previous President & CEO of Ur-Energy.
On back of the successful DFS, management will now be working towards stage 1 financing (an estimated $10.0M-$20.0M needed for production) and with it a possible secondary listing in North America (finally!). Any timeframe on a secondary along with an anticipated Final Investment Decision will be the major catalysts for the remainder of 2022. The very compelling Peninsula Energy story has been dormant over the last few years but the company will become more prevalent over the course of 2022 and beyond as institutions and an increasingly sophisticated retail investor base become much more engaged.