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Spot Uranium at a Ten 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 a 10-year high north of $55/lb last week, uranium equities were on a tear last week with many of the producers and developers advancing in the double digits. Though last week's blowout jobs report put a bit of a damper on the Fed pause narrative, the debt deal averting a global economic catastrophe was reason enough for the solid weekly gains. Last week's gains pushed the month-to-date (MTD) performance of the uranium miners/developers to post double digit gains, however performance is more mixed on a YTD basis. Specifically, our preferred area of investment - North America, has outperformed, posting positive YTD returns for both the US ISR players along with the Athabasca Basin players. By contrast, an equal weighted index of liquid developers/miners with projects situated in Africa have underperformed at -9.1% YTD. This comes in contrast to the TSX which has returned +3.3% YTD while the S&P which has returned +11.5% YTD

The performance data has validated our long standing investment thesis highlighting our preferred names, Cameco (CCJ) and Peninsula Energy (PENMF) which have ranked first and second in terms of YTD performance, with gains of +32.7% and +29.3% respectively. We continue to see Peninsula Energy with the best risk/reward dynamics in the US ISR space (most recent note from May 9, here) while we have called for Cameco's post-Westinghouse valuation spread versus peers remain near the current all-time levels, or even widen, (most recent note from April 11, here). As seen below, at 29.3, the divergence spread remains near the recent all-time highs when compared to an equally weighted index of North American uranium peers.

From the aforementioned performance table above, a distinction between North America focused and Africa focused uranium companies has emerged, not just MTD, but most telling YTD (and even extending even well beyond). Specifically, both Athabasca Basin and US ISR focused companies have consistently outperformed their Africa focused (namely Niger and Namibia) counterparts at all points of 2023, our reference year for this analysis. Suffice it to say that given the recent negative corporate news encompassing (among others) an aborted financing (Global Atomic) and talk of resource nationalization (Namibia), the investment appetite for projects on the African continent has slowed considerably. 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 despite the double digit rally from last week, only our preferred names such as Cameco, +32.7% and Peninsula Energy, +29.3% have posted significant YTD gains:

In light of the strong spot uranium gains (now above $55/lb equating to a 10 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 $60/lb and encompassing a range from $40/lb-$80/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 -120% to +155% while Lost Creek offers the least sensitivity, ranging from -80% to +100%. When keeping the discount rate constant at 8%, the highest to lowest sensitivity ranking are specifically: Lance +/- 120%, Alta Mesa +/- 98%, Dewey Burdock +/- 81%, Shirley Basin +/- 79% and Lost Creek +/-75%. 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, Triple R offers the highest sensitivity to a uranium price swing of +/- $20/lb ranging from -76% to +101% while Arrow offers the least sensitivity, ranging from -52% to +69%. When keeping the discount rate constant at 8%, the highest to lowest sensitivity ranking are specifically: Triple R +/- 67%, Waterbury Lake +/- 57%, Wheeler River +/- 51% and Arrow +/- 43%.

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 $70/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 1.30x NAV8% price objective reflects nearly 100% upside from the most recent close. 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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