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In the midst of Last week's WNA symposium in London, Laramide Resources (LAM) announced that it has entered into a three year option agreement with Aral Resources Ltd, Kazakh company. Aral Resources has secured 17 mineral licenses (along with 5 additional licenses still pending approval) covering nearly 6,000 square kilometers in Kazakhstan's Chu-Sarysu sedimentary basin. The Chu-Sarysu Project represents a very prospective project, located in a part of the world which has constant geo-political risk. Though not an outright acquisition, the option agreement nevertheless increases the risk profile of the company while also diverting from the exploration budget we previously thought would be devoted exclusively to Churchrock (New Mexico) and Westmoreland (Australia). Following this update, we reduce our targeted NAV multiple from the previous 0.70x to the current 0.60x. Our revised 12-month price objective equates to C$1.55 (rounded), down from C$1.80 previously. Cognizant of the 42% share price decline over the last two months, our revised price objective equates to upside of +238% from the most recent close.
Located proximal to Kazatomprom's (KAP) currently operating ISR mines such as Budenovskoye, Muyunkum-Tortkuduk and Inkai (being a JV with Cameco (CCJ)), the Chu-Sarysu Project encompasses 22 subsoil licenses covering ~6,000 square kilometers. Specifically, the project is located in the ISR hotbed of of the Suzak District located in South Kazakhstan. Under terms of the option agreement, Laramide will have the right to to acquire all outstanding shares of Aral Resources Ltd at any time during the option period, thereby obtaining full ownership of the Chu-Sarysu Project. Following the definitive grant to Aral Resources of all license applications related to the Chu-Sarysu Project and approval from the TSX, the payment terms will be as follows:
Laramide will make a one-time payment of $450,000 in cash and shares to the optionors and annual payments of $150,000 payable in cash on each anniversary of the Option Agreement, commencing on the first anniversary.
The option is exercisable for a term of three years and may be extended for an additional one-year term with a one-time payment of $400,000 in cash and shares.
The option can be exercised by Laramide at any time during the term of the agreement through a one-time payment of $14.0M in cash and shares.
During the term of the option agreement, Laramide will be the operator of the property and will exercise exclusive supervision, direction and control over any and all operations, programs and budgets relating to the property. Apart from the annual payments, all payables would be delivered as 50% cash (USD) and 50% common shares.
Though we acknowledge the relative low-cost needed to keep the option valid, We expect that the exploration programs will require much needed time, analysis and most importantly, capital. We've liked the company for a long time specifically because it offered a robust development project (Churchrock ISR) located in what we consider as one of the best uranium jurisdictions in the world (Four corners, specifically in New Mexico). Given a recently announced PEA on Churchrock, the economics looked promising given a post-tax NPV8% of $239M along with a post-tax IRR of 56% ($75/lb LT). We see this ISR project as being the company maker, much like Lost Creek is to Ur-Energy (URG), Alta Mesa is to enCore Energy (EU) and Lance is to Peninsula Energy (PENMF). Moreover, upside optionality was seen from the Westmoreland project which currently hosts 36.0M lbs Indicated along with 15.9M lbs Inferred. The deposit is one of the largest undeveloped deposits in Australia and one of the very few at that size (globally) not owned by a major mining company. Given Australia elections in the near future, the risk is on the upside (in our view) for a change in policy allowing for the start up of mining operations. Ultimately, this two asset dynamic fundamentally changes with the introduction of the Chu-Sarysu Project. Now with three projects competing for exploration of development capital, we see development timelines at both Churchrock and Westmoreland extending.
Additionally, though certain current employees and Board members have past experience with operations in Kazakhstan, we don't see a dedicated local assuming the role of point-person on the ground in Kazakhstan. In the emerging markets, such a person with local contacts and knowledge of the culture (let alone being fluent in Kazakh) is imperative to drive negotiations and while also pushing plans forward. Understanding the complicated interplay between neighbors China and Russia make for a tough operating environment. Though Cameco has been active with its JV in Inkai for many years, Cameco is far from being considered a junior company.
As seen with the recent Paladin Energy (PDN) - Fission Uranium (FCU) takeover talks, the trend is to de-risk the asset base (ie Paladin entering the Athabasca Basin), not the other way around. Even with that said, the deal is still no sure bet to close seeing as voting is still on-going. No competing bid has emerged since Paladin announced the takeover in June.
Ultimately, with an exploration budget now needed for Chu-Sarysu, we see development at both Churchrock and Westmoreland now over extended timelines.
We see an increased company-wide risk profile given that a project from Kazakhstan is now part of the development pipeline. As such, we decrease our NAV multiple, going from the previous 0.70x to 0.60x. We maintain our LT $120/ lb uranium price and maintain our split Churchrock NAV10% + in-situ valuation for the rest of the portfolio. Correspondingly, our 12-month price objective decreases from C$1.80 per share to the current C$1.55 (rounded). This equates to upside of +238% from the most recent close. We note that given the recent downturn, shares of Laramide Resource have declined by -42% over the last two months. Based on our estimates, shares of Laramide Resources currently trade at a 0.18x P/NAV multiple.
We acknowledge one final "option" within the recently signed option agreement. There is a clause which would allow for an alternative mechanism to proceed with the opportunity by way of a spin-off transaction. We would think that developing the Kazakh property would be much better suited as a majority Laramide-owned, independent, stand-alone entity. The timing on this alternative is hard to estimate, specifically at present given the recent downturn and risk-off mentality.
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