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Ahead of the shareholder AGM to be held on November 29 and given the numerous near-term corporate catalysts on the horizon, we initiate coverage of Peninsula Energy (PENMF-OTC) while also establishing a 12-month price objective. Using our base LT uranium price forecast of $70/lb, we establish our 1.20x NAV8% target of $0.25 per share. We note that despite the +125% share appreciation we currently foresee, the parameters used to calculate our price objective exclude considerable upside from a significant Inferred resource along with the benefits of strategic corporate finance actions which we expect to see in the months ahead. When looking at asset quality and management acumen/track record, our 1.2x premium to NAV valuation is more than justified. We expect a construction “go” decision to be announced at the November 29 AGM or in the very least, before year-end. These near-term drivers coupled with the company’s current discounted valuation to US ISR peers makes for one of the most compelling risk/reward stories in the entire uranium space. The risk is certainly on the upside.
It’s well established that Wyoming is the hub of US ISR uranium mining however very few have heard of Peninsula Energy let alone the Lance project located Wyoming’s north-east corner, near Gillette. Few even know that of the minimal amounts of uranium produced this past quarter in the US (a mere 3,245 lbs in Q3/2022, according to the EIA), Peninsula was one of only two other current companies (the others being from Energy Fuels’ (UUUU) Nichols Ranch and from Cameco’s (CCJ) Smith-Ranch Highland) with current operations (though relatively minimal). That said, though Lance has been in operation since 2015, production has been effectively shut down since 2019. A re-start decision would only require a few months of transition time before meaningful volume production.
Given a primary ASX listing along with corporate headquarters based out of Perth (Subiaco) and share-ownership largely domiciled out of Australia, the company is very much under the radar to the institutions and investing community in both Europe and North America. As such, despite having a singular focus and a management team that has successfully developed and built ISR operations elsewhere in Wyoming, Peninsula shares have largely underperformed its peer group. Herein lies the opportunity.
Make no mistake, Peninsula Energy is singularly focused on its 100% US based operation, that being the Lance Project located in north-east Wyoming. Without getting into details, we believe that targeted steps to address these issues will be announced & taken, with the end goal of opening the shareholder registry to a much broader audience while also ramping up investor visibility.
In our view, given an imminent production investment decision, a relatively low capital requirement will be needed (we model sub-$20M for stage 1 production) in order to reach a modeled 700,000 lbs U3O8 production for FY/2024. This is followed by a stage 2 ramp which we see boosting annual production to near 2.0M lbs beginning in FY/2027. Over the course of a 14 year LOM, we see slightly more than 14.0M lbs of U3O8 produced with the average LOM cash cost averaging $19.70/lb or an average AISC of $42.71/lb.
The stock price underperformance relative to US ISR peers can be seen as twofold:
1) Due to the lack of visibility brought upon largely to the primary ASX listing
2) More recently Post-DFS (August 2022) as the investing community was expecting stronger
project economics.
We are confident that point 1 will be addressed in due time, but as per point 2, context is needed as is further detail into the actual DFS methodology and projections. According to the DFS, using a $62/lb LOM average sales price, an NPV8% of $125.0M and an IRR of 43% (both pre-tax) was estimated. What we stress is that out of the entire Lance project, only the M&I resources from the Kendrick and Ross areas were included for the DFS economic analysis. Additionally, of the 21.8M lbs of M&I resource encompassing Ross and Kendrick, a relatively conservative recovery rate of 65.8% was used, thus further lowering the actual LOM production figure to 14.3M lbs. That said, using a LT $70 price uranium sales price, we estimate an after tax NPV8% of $186.4M and an IRR of 67%
Note that the entire Barber resource area (denoted in green, above) was excluded from the DFS. At present, Barber has an Inferred resource of 37.8M lbs. This is a sizeable resource which doesn’t factor in for the project LOM or economics. Though zero value was given to this resource, Barber will figure prominently as a key production area for future ISR feedstock. No other US ISR project has this much Inferred upside. Given the significant potential for further resource expansion, note that the Ross Processing Facility (refurbished in 2015) has one of the highest presently licensed capacities among peers at 3.0M lbs U3O8 per year (ranking only below Smith Ranch-Highland's 5.5M lb capacity and Hobson's 4.0M lb capacity). 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. Note that Peninsula Energy is the only fully licensed company for low pH ISR production. These key points which are completely ignored when presenting any form of economic analysis is what leads us to our conclusion that Peninsula offers the highest risk/reward ratio per current valuation among domestic ISR peers.
The strong company fundamentals extend to the corporate front as well as Peninsula has by far the largest current contract book when compared to peers. Firm commitments for delivery of 3.65M lbs U3O8 have already been signed with major utilities located in both the U.S. and Europe, with deliveries extending until 2030. Moreover, note that the current contracts include the option for 1.35M additional lbs to be delivered at the option of the customers (between FY2024-FY/2026). Note that FY/2022 revenues were delivered into contracts generating net cash margins of over $9.0M. Lastly, 310,000 lbs of ready-for-sale uranium inventory (representing nearly 15% of EV based on the latest Trade Tech spot quote of $50.25/lb) provides a certain level of financial flexibility following the rapidly approaching construction decision.
Despite a much larger asset base, a much larger plant production capacity and a much larger LT order book (not back-end loaded), Peninsula currently trades at a ~53% discount on an EV basis relative to enCore and Ur-Energy. This discount is just as telling on an EV/lb basis as well (sub-$10/lb, considerably lower than all peers on a near-to-production project basis). We acknowledge that to a certain degree there is also a financing overhang (specifically for Peninsula's Stage 2, $70M expansion) but at this point the risk/reward dynamics remain skewed to the upside. With increased visibility and financing options there is no reason that Peninsula can’t at the very least match the current valuation given to enCore Energy (which we note is in the midst of a $120M purchase of Alta Mesa). Though the current discount to peers can to a certain extent be understood, it won’t last if the steps we expect to be taken, are taken. For all the points mentioned above, we believe that a premium valuation is in fact warranted for Peninsula. Therein lies the current opportunity.
We value the Lance operation using our base LT uranium price forecast of $70/lb, and establish our 1.20x NAV8% target of $0.25 per share, thus equating to +125% upside. We also feel that even further upside is warranted as the stage 2 development becomes more of a reality, coupled with de-risking and incorporating the 37.8M lbs of Inferred resource at Barber.
Peninsula Energy shares trading OTC currently reflect a 0.53x P/NAV. We feel that a 1.20x NAV multiple is justified on 2 fronts: Management has a successful track record (decades+) of developing ISR assets into production. Peninsula Energy’s current CEO was brought on board after having successfully de-risked, developed and put into production the ISR resource at Ur-Energy’s Lost Creek operation. Secondly, the upside from the large resource at Barber is essentially carried for free, but will very possibly extend the operations LOM and annual production to the licensed 3.0M lbs per year. If licensed capacity production is achieved, Lance would thus become one of the largest uranium producing properties located in the US.