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We’ve received an overwhelming amount of interest/questions/commentary from our numerous uranium updates over the last few months. We noticed that a majority of inquiries were concerning US focused, near-term producers. Interest in that particular theme is timely given the emerging realities we have highlighted earlier – these game changing realities include that of energy security, or more specifically, increasing emphasis on domestic uranium supply chains & domestic production. These themes have become increasingly prevalent following Russia’s invasion of Ukraine and following the recent passage of the Inflation Reduction Act which provided significant incentives to extend the lives of just about every US nuclear power plant (case in point, Constellation Energy (CEG), update here). All that said, we figure a deeper dive is warranted. Our emphasis for this report keys in on near-term production (within the next 18 months) with projects promising 1.0M+ lbs of annual US based uranium production. Given the numerous cross currents occurring at present both domestically and internationally, we continue to believe that now is the ideal time to invest in actual near-term uranium production as opposed to speculating on drilling success for projects which may or may not ever become economic, 5-10 years from now.
Setting the ground rules for analysis: On a project specific basis, the three companies with ambitions for significant long-term (and near-term) US production include Ur-Energy (URG) with a restart at Lost Creek, enCore Energy (EU.v) with Dewey Burdock and Peninsula Energy (PENMF) with Lance. What we won’t consider are smaller scale projects which are not considered as principal (such as enCore’s Rosita). We stress that we choose to focus on companies that are singularly focused on bringing one significant project on-line in the near term. This means that companies such as Uranium Energy Corp (UEC) are given slightly lower benefit for re-start execution, given the multiple initiatives it currently has spread across the Americas at both the exploration and development stage. Though we include UEC’s Wyoming (Irigaray) and Texas (Hobson) projects as re-start ready, management commitment in the form of martialing the needed resources for any near-term re-start simply hasn’t quite been seen yet. The re-start signaling has simply not been emphasized while the individual project details have also been hard to come by. The same goes with Energy Fuels' (UUUU) Alta Mesa project. Though a much longer life project than Nichols Ranch, over the past few years management has indicated a much stronger commitment to developing and advancing the vanadium and rare earth elements (REEs) businesses. As such, any indications of timelines and re-start costs have been hard to ascertain. More of our earlier thoughts on Energy Fuels’ transformation from a uranium company to now a primary REE and vanadium producer can be seen here.
Ultimately, what we’re left with are three significant projects, each lead by experienced management teams that are laser focused on advancing and/or re-starting their respective projects – Lost Creek, Dewey Burdock and Lance.
Ur-Energy – Lost Creek: It is assumed that once there are more LT delivery commitments signed, a 6 month restart process at approximately $15M is all that’s needed to get Lost Creek back into production. Note that the facility has a nameplate capacity for 1.2M lbs/year. The company is looking to contract approx. 50% of annual production (200k so far spoken for) before a re-start decision. Note that Lost Creek began initial ISR production in 2013 and to date has produced 2.7M lbs. With approximately 90% recovery rates since initial production, 11.9M lbs M&I along with 6.6M lbs Inferred ensures plenty of runway for production expansion and/or a long-lived asset. The Lost Creek property itself comprises five additional contiguous projects at its periphery – LC North, East, West, South and the EN Project (all together representing a land package of approximately 35,000 acres). Each of these projects have had varying degrees of drilling dating back to the 1960s and will likely contribute to future resource expansion going forward. At present, drilling at Mine Unit 2 is on-going (delineation drilling for Header Houses 5-9), as is construction of Header Houses 2-4. The necessary permits for the new mine units are expected before the year end. Recall that the production license for Lost Creek facility has recently been amended to allow for an increase to 2.2M lbs per year (wellfield production and toll processing). The company maintains 324,000 lbs of ready-to-sell uranium inventory.
enCore Energy – Dewey Burdock: enCore controls approximately 16,962 acres of mineral rights and is in the midst of permitting. Though many of the necessary permits are already in hand (the By-product Materials License was issued in 2014 by the U.S. Nuclear Regulatory Agency while the Underground Injection Control Class III and V permits were issued by the EPA in 2020), the necessary permits for construction and operation of the project have been applied for and are expected to be granted in the months ahead from the South Dakota Bureau of Land Management (BLM). Once all permits will be in-hand, the project is expected to undergo initial wellfield development and facility construction over an expected 18 month period. That said, initial capex is estimated at $31.7M. Note that given a PEA conducted at a LT uranium price of $55/lb, a post-tax NPV8% of $147.5M was estimated, along with an IRR of 55%. Though Dewey Burdock currently hosts 17.1M lbs, without much more drilling, minimal resource expansion is seen given the currently sub 1.0M resource in the Inferred category.
Peninsula Energy – Lance: 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 estimated 37.8M 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 sizeable Inferred Barber 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. Note that Peninsula Energy is the only fully licensed company for low pH ISR production.
Though a rising (uranium) tide lifts all boats, from a fundamental and growth standpoint, Peninsula Energy stands out on several fronts. Most notably, what stands out versus peers is the resource upside (via currently estimated Inferred resource) which is multiples higher than what has been currently booked by peers. Secondly, given the significant potential for further resource expansion, note that the Ross Processing Facility has the highest licensed capacity among peers, at 3.0M lbs per year. The strong company fundamentals extend to the corporate front as well as Peninsula has by far the largest current contract book. 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 16% of EV based on the latest Trade Tech spot quote of $48.50/lb) provides a certain level of financial flexibility following the rapidly approaching construction decision.
Given the strong fundamentals, why the consistent underperformance and valuation discount ? In short, very few know of the Peninsula story outside of a well informed investor base in Australia. Peninsula is essentially a one project US focused company, however it trades in Australia on the ASX and is OTC elsewhere. This means that the shareholder registry is pretty limited to Australia, with minimal current exposure to a possibly very large investor base from Europe and North America. We expect this will change (hopefully sooner rather than later) because a good story with very near term drivers needs to be told to a much larger audience.
Scroll all the way up to the larger comp price performance chart - as the first interactive graph indicates, the massive performance difference since 2020 between enCore Energy and Peninsula Energy illustrate the willingness and appetite for this type of development story coming from a North American and European investor base and a financing/investment banking audience. Despite a much larger asset base, a much larger plant production capacity and a much larger LT order book, Peninsula currently trades at a ~60% discount on an EV basis relative to enCore and Ur-Energy. This discount is just as telling on an EV/lb basis as well. 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 has yet to build a processing facility for Dewey Burdock). Though the current discount to peers can to a certain extent be understood, it won’t last. For all the points mentioned above, we believe that a premium valuation is in fact warranted for Peninsula. Therein lies the current opportunity.