Peninsula Energy: Production to be Fully Insourced Following Processing Contract Termination
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As surprise disclosure late last night, Peninsula Energy announced that uranium yellowcake production from the Lance ISR project would be delayed due to notification from Uranium Energy Corp (UEC) choosing to suddenly terminate a long standing toll processing agreement. This announcement came as a surprise to Peninsula seeing as the toll milling agreement with UEC was in place since 2015 whereby loaded resins from Lance were treated at UEC’s Irigaray Central Processing Plant (CPP) in order to produce finished yellowcake. Though a mutually agreed upon provision provided for a 270 day notice of termination period, given the unexpected circumstances, Peninsula has elected not to use any of UEC’s resin processing capacity during the remaining term of the agreement. Keep in mind that a steady state of production is what is needed for ISR operations, not one of start, pause and then re-start again. A total of 270 days would not have been sufficient to bridge to the accelerated in-house timeline. The sudden announcement was both disappointing and frustrating since Peninsula was on the cusp of production re-start and since UEC has no immediate need for any resin drying capacity for its own operations. Recall that since the beginning of toll milling agreement, Peninsula did partially provide for the upkeep of the Irigaray CPP which is currently licensed for 2.5M lbs annually. Though essentially pulling the rug from under Peninsula's feet at point of maximum pain, for whatever reason, UEC did have the contractual right to terminate the toll milling contract without cause. Though a hit to near-term production, an accelerated focus to become fully self-reliant only positions Peninsula towards a much better place strategically over the longer term.
As we await for details on the accelerated ramp schedule and associated costs, we refrain from making any drastic changes to our initial Stage-2 production ramp. The notable changes being a delayed start (now seen in 2025), higher average annual production spread over a shortened LOM - now extending to 2033, and an estimated $50M financing. Though we previously had a price objective anchored by a 1.30x NAV8% multiple, for the time being, we will refrain from any 12-month price objectives.
Though bearish in the near term as evidenced by the -30% stock price reaction at the North American open, Peninsula will emerge stronger in the long term given a newfound focus to accelerate the in-housing production strategy. Recall that initially (as described in the 2022 DFS), the plan was to outsource the loaded resin and only move to in-house resin processing following a two-year period. Specifically, the two stage ramp up process was envisioned as follows:
Stage-1: Utilize low pH solutions at the flow capacity of 2,500 gpm which would result in annual production of approximately 820,000 lbs (average head grade of 76 ppm).
Stage-2: Following two years of stage 1 production with the outsourced toll-milling agreement, the Ross CPP has been expanded to reach flow rates of up to 6,250 gpm while elution systems for stripping uranium from the resins have been added, along with the needed drying capacity needed for yellowcake production. At an envisioned head grade of 76 ppm, annual production was seen at 2.0M lbs U3O8 per year. That said, permits in-hand allow for production of up to 3.0M lbs annually. This represent the highest ISR plant production capacity outside of UEC’s Hobson (4.0M lbs annually) and Cameco’s (CCJ) Smith Ranch-Highland (5.5M lbs annually).
Given the very sudden contract termination announcement, budgets and detailed timelines have yet to be re-worked, finalized and disclosed in order to achieve the accelerated path to Stage-2 (full in-house) production. Peninsula was on the verge of production re-start given that Mine Unit 1 was fully prepared for operations with well patterns already pre-acidified and flowrates of 500 gpm established and increasing. Recall that the Ross CPP was constructed in 2015 – though fully licensed for production of finished uranium yellowcake, the facility at this point was built to produce uranium bearing ion-exchange resins. As per DFS, the upgrades to reach Stage-2 production would have taken two years at an estimated capex of $69.9M (specifically $24.1M for plant expansion and $45.8M for wellfield expansion). We estimate that an accelerated timeline would likely take between 12-18 months. Providing a certain level of cushioning, note that Peninsula's cash on hand amounted to $21.5M (as of June 30, 2023) in treasury along with finished uranium inventory totaling 210,000 lbs (currently valued at $11.76M using the current $56.0/lb spot). Just as importantly, the company has zero LT debt.
As per delivery commitments, recall that Peninsula’s LT committed sales portfolio is one of the largest among peers - it currently includes a firm 5.25M lbs of U3O8 extending until 2033. During the Q1/2023 period Peninsula has delivered 500,000 lbs (of which, 300,000 lbs went to the US Department of Energy’s strategic reserve). Work is on-going to reschedule/modify any other deliveries for 2023-2024. A certain amount of flex is anticipated from customers as initial discussions have been cooperative with a level of understanding given the unforeseen events.
Though capex decisions and budgets have yet to be revised and finalized, we don't expect any deceleration to the planned exploration program at Lance. Though near term commercial production was a large component of the investment thesis, the infill drilling component at Lance remains a large value driver as well. Though the total Stage-2 production target amounts to approximately 14.0M lbs over LOM, note that the production areas considered for the DFS include only the Ross and Kendrick areas. Production does not yet include the Barber area where an additional 31.8M Inferred lbs can potentially more than double the project LOM. That said, additional delineation drilling to upgrade the Barber resource from Inferred to Indicated will be needed, however the point is that resource expansion risk is well on the upside. Both the LOM and corresponding LOM economics can potentially improve greatly. With a current combined global resource at 53.7M lbs (including the Kendrick, Ross and Barber production areas), the overall Lance project already hosts one of the largest ISR resources located anywhere in the U.S. Note that an exploration target was previously been estimated to be between 104.0M - 163.0M lbs based on a combination of exploration results and proposed exploration programs. Though the entire Barber area remains very “under-delineated” we continue to believe that the upgrading and inclusion of the Barber resource will also serve to unlock substantial value going forward. More on the Lance resource in comparison to peers can be seen from our May 2023 update, available here:
We stress that owing to the abrupt nature of the contract termination, management has just started working to optimize budgets and timelines for the accelerated path to in-house production. Those details (budgets, production costs, production ramp etc.) will be released once finalized in the weeks ahead. As such, we will incorporate the revised guidance accordingly. In the meantime however, we have made the following assumption changes: Initial production now commencing in early 2025 and amounting to 450,000 lbs over the course of that full year. We factor in higher production (now averaging 1.56M lbs annually) however over a decreased LOM – one which now ends in 2033 instead of the previously expected. Without any cost guidance we continue to highlight the previously forecasted LOM cash cost of 19.70/lb (including restoration and reclamation) along with a LOM AISC of $42.71/lb.
Though we previously ascribed a 1.30x NAV multiple, we are refraining from announcing any price objective at the current time, until we have clarity on costs and an estimated ramp up schedule. That said, factoring in the production delay and assuming a $50.0M required financing (using a combination of debt and equity), shares of Peninsula Energy currently trade at a 0.77x discount to our calculated NAV8% estimate. Our LT uranium price remains $70/lb. We stress that the accelerated ramp-up schedule may very well be much more aggressive than what we have currently modeled. Its even possible that at exit 2026 some wellfield production from the Barber area may be included in the LT production profile - this may really extend the LOM and/or annual production rate. No point speculating however, until management provides updated guidance, we are won't be making any drastic model changes. The updated project price sensitivities are presented below.
Note as well that we continue to give zero value to any potential exploration/resource upgrade upside - ie the entire Barber area is currently carried at zero value. Additionally, for some much needed context, the production delay will have negligible impact to the spot market seeing as at best, two years of maximum Stage-1 output would have totaled approximately 1.64M lbs (given that the Stage-1 nameplate capacity is 820,000 lbs annually). Despite the roadblocks as thrown up by competitors, we continue to applaud management's work with regards to asset development on the road to production. Development work since the official re-start decision last year was tracking largely on time and on budget. Though at this time we were expecting a press release heralding the official re-start of commercial production activities, the near term pain will lead to long term gain. We look forward to seeing the accelerated production profile and budget.