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Spot Uranium at a Fifteen Year High; Revisiting Performance and U Price Leverage

DISCLAIMER: Any written content contained herein should be viewed strictly as analysis & opinion and not in any way as investment advice. No compensation was received for this report. Visitors to this site are encouraged to conduct their own due diligence.

With the spot uranium price hitting fresh fifteen year highs and hovering near the $75/lb level, North American uranium equities have had a strong 1-month performance with the US ISR developers advancing by an average of +4.5% while the Athabasca Basin companies advanced by an average of +9.5%. In contrast, the African developer average was a decline of -3.4% in that very same timeframe. In light of this strong uranium performance, keep in mind that the "higher for longer" narrative has gained traction of late and has weighed on both corporate and consumer sentiment - October's 4.2% inflation reading was well above September's 3.2% print. Note that this latest reading is at the highest point since April and remains well above the 2.3%-3.0% range seen in the two years prior to the global pandemic. All eyes will be on the US CPI report tomorrow. For added context, the S&P posted a +1.6% MTD return while the Dow posted a return of +1.7% MTD.

Performance was highlighted by Cameco's 1-month return of +17.5%, buoyed by the announced successful acquisition close of the Westinghouse Electric acquisition. Recall that the joint acquisition ($8.2B total enterprise value, 49% Cameco (CCJ), 51% Brookfield Renewable Partners (BEP)) was originally announced on October 11, 2022 and received final regulatory approval on November 3, 2023. For a long time already we have been positive on Cameco's acquisition plan, its no surprise to us that Cameco has very easily outperformed a basket of equally weighted North American uranium related peers. As can be seen below, the performance spread has recently reached a high of 75. Our most recent Cameco note from July can be found here.

From the aforementioned performance table above, the performance lag between North American focused and African focused uranium companies has continued, not just YTD but very tellingly, MTD as well. Though we acknowledge that the financing picture has improved recently in Africa, suffice it to say that given the YTD negative corporate news encompassing (among others) an aborted financing (Global Atomic), political coups and talk of resource nationalization (in various African countries), the investment appetite for projects on the African continent has been muted. Case in point, Goviex's failure to generate any (credible) interest for the sale of its Falea uranium deposit (global uranium resource of 30.8M lbs) for even a bargain basement price of $5.5M. Note that the deposit is located in Mali, a country that has quite the understanding and history of successful mining projects (2.3M ounces of gold were produced there in FY/2022). Given our North American preference, we note that our preferred names such as Cameco, Ur-Energy and Denison Mines have posted significant YTD gains, all above +35%.

In light of the strong spot uranium gains (now a shade below $75/lb equating to a fresh fifteen year high), its worth re-examining our leverage to spot analysis as forecasted from our project specific models. As for base case assumptions, the sensitivities are based on $10/lb uranium price intervals, starting at a base of $70/lb and encompassing a range from $50/lb-$90/lb. Additionally, the specific output calculated is the pre-tax project NPV based on a constant 8% discount rate (though discount sensitivities range from 6%-10%, see the project specific tables below). The project lives are based on current technical studies, zero value is given to any potential resource exploration upside which may extend the project LOM. Keep in mind that these calculations are our own, as are the numerous estimates and assumptions which form the basis of our model driven valuation and analysis. Note as well that we exclude any current company specific hedges or contracts - we are strictly looking at the project value based on a given LT price. As for uranium price torque, the results are telling:

As can be seen, Lance offers the highest sensitivity to a uranium price swing of +/- $20/lb ranging from -85% to +85% while Lost Creek offers the least sensitivity, ranging from -55% to +55%. When keeping the discount rate constant at 8%, the highest to lowest sensitivity ranking are specifically: Lance +/- 85%, Alta Mesa +/- 66%, Dewey Burdock +/- 58%, Shirley Basin +/- 57% and Lost Creek +/-55%. More specifically:

The full project details for any of these companies can be found in the in the research repository posted above. More granular comparisons based on project LOM, cash costs, asset quality and corporate strategy can be found from the individual company reports contained there. The purpose of today's analysis is strictly to quantify the specific change in project value (given our current forecasts) to LT uranium price sensitivities.

As per Athabasca Basin developers, the forecasted sensitivities are as follows:

As can be seen, Wheeler River offers the highest sensitivity to a uranium price swing of +/- $20/lb ranging from -57% to +57% while Arrow offers the least sensitivity, ranging from -36% to +36%. When keeping the discount rate constant at 8%, the highest to lowest sensitivity ranking are specifically: Wheeler River +/- 57%, Triple R +/- 50%, Waterbury Lake +/- 46% and Arrow +/- 36%.

This longer time to initial production is a noticeable differentiator with regards to the near term producers, as is the total project size which skews much larger for the developers. As such, the sensitivities for the developers are more muted. For context, the developer projects have much higher average yearly production rates - Arrow 21.0M lbs over LOM, Triple R 11.1M lbs over LOM and Wheeler River 7.8M lbs over LOM. Best put, these projects are orders of magnitude larger than those from the near term ISR producers.

We maintain our current uranium estimates underpinned by a $80/lb LT uranium price forecast for our coverage list. We remain positive on the entire US ISR sector (highlighted by Ur-Energy (URG) and enCore Energy (EU) included). Specifically pertaining to Peninsula Energy, our 1.20x NAV8% price objective reflects nearly 130% upside from the most recent close. Details of the upcoming financing are expected shortly. As of yet, we do not formally cover Cameco. As such, we do not have any formal estimates or associated price objectives.


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