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On August 31st, Peninsula Energy (PENMF) released its updated production plans for the Lance ISR project. Given a recent strategy shift to in-house the entire uranium production value chain, initial production from Lance was pushed forward by one year with initial production now expected near the end of Q4/2024. Given the accelerated pace needed to expand the processing plant, the revised production profile now features higher yearly production condensed over a shorter, 10-year LOM (previously a 14-year LOM). That said, to reach these operational and strategic goals, the remaining capex needed until first production is estimated to total $53.4M while the total funding needed to achieve positive cash flows (expected in 2025) amounts to an estimated $95.0M. Factoring-in the financing requirements (a combination of debt and equity) spread gradually until 2024, we have updated our estimates for the project. As such, with a 1.2x NAV8% multiple (previously 1.3x), we establish a 12-month price objective of $0.14 per fully diluted share, equating to +140% upside from the most recent close.
Subsequent to the sudden toll milling contract cancellation as announced by Uranium Energy Corp (UEC) on July 18th (details here), Peninsula Energy announced the details for new strategic plan whereby full yellowcake production would be completely in-sourced. Though additional capex for plant expansions would be necessary as part of this new vision, the long term benefits of being fully independent justify the short term pain. Though the toll-milling agreement with UEC would have had the Lance project in production by now, the new vision will instead push production start to Q4/2024. That said, whereas the original DFS envisioned ~14.4M lbs produced over a 14-year LOM, the refined vision now sees higher production compressed over a shorter timeframe - specifically ~14.8M lbs produced over a 10-year LOM. The revised production model continues to be based solely on production from wellfields at Ross and Kendrick. More specifically, the model is based on a complete 5,000 GPM ISR recovery plant capable of producing up to 2.0M lbs of dry yellowcake per year. Given the added construction and infrastructure needed (additional ion exchange needed, along with elution, drying and precipitation functionality) approximately 12 more months will be needed from construction start (later this year) to first production expected by the end of Q4/2024. Current company guidance and our own pervious/current production estimates (HCM) are outlined below:
Costs have correspondingly increased since the 2022 DFS - cash costs have been revised to $21.69/lb (previously $16.34/lb) while the LOM AISC is now seen at $42.56/lb (previously $39.08/lb). Cost escalation has been most prevalent on the labor force and with the needed mining and processing hardware. At a run-rate of 1.8M lbs per year, the Lance project would become the single largest US production source. We stress that the current mine assumes an average production grade of 77.2 mg/L U3O8 while the global LOM recoveries are seen at 67.7%. There are currently two Mine Units located at Ross (MU-1, MU-2) while a third Mine Unit is currently under development (monitor well installation is already completed). Applications have already been submitted to State regulators to add Kendrick rolled into the production area license. Most importantly to note, the production profile involves production exclusively from the Ross and Kendrick areas. The much larger Barber area, which currently hosts ~30.0M+ Inferred lbs has been completely excluded from the current production plan. We feel that the massive Barber area (representing nearly 75% of the total 8km x 37km Lance acreage) can and will provide the next large pillar of LT production growth. A resource conversion drilling program will commence in the months ahead to upgrade the Inferred resource to the M&I category, thus making it more amenable to future mine plans. Given the current JORC Inferred resource, we feel that the market is currently giving the entirety of Barber a very minimal current value. Drilling and subsequent press releases will do much to change this narrative. Recall that the Central Processing Facility (built in 2015) is currently licensed for up to 3.0M lbs of dried U3O8 per year.
In terms of needed financing, $53.4M was outlined as needed for remaining capex for first production. Of note, this amount includes allocations for the processing plant ($19.3M), wellfield ($25.4M) and for general & contingency ($8.7M). Moreover, for the ramp-up stage (first production to flow capacity) $15.9M will be needed additionally for wellfield work. Finally, an additional $22.3M was estimated as required for purposes of corporate costs, non-exploration growth initiatives and for a working capital buffer allowance. All of this tracks relatively closely to the estimated ~$70M stage-2 capex as outlined in the original DFS. Note as well that the loss of 2024 revenues due to the cancelled toll milling contract also has been considered as having significant impact. This cash shortfall has been the largest driver of the projected cash requirements. Though Peninsula currently holds a cash balance of $21.4M along with inventory of 210,000 lbs (equating to $12.8M at the current $61/lb spot), the net financing needs have been estimated to total $95.0M.
Keep in mind that the required $95M for first production need not be raised in one shot, but likely instead in a series of tranches involving debt and equity (we assume $50M in equity, + private + government debt), extending until 2024. Factoring in the financing needs and revised production and cost schedule, we revise our targeted NAV8% multiple lower, from 1.30x to 1.20x. For the current Lance production schedule, we present the project specific sensitivities on a current and fully diluted (post financing) basis.
Recall that up until mid-July when UEC decided to abruptly cancel the toll-milling arrangement (which was been in place since 2015), excluding Cameco (CCJ), Peninsula was the best YTD performing uranium developer encompassing a peer list including companies with US and Athabasca Basin assets (let alone African assets). All was going to plan with Peninsula until the company was knee-capped by the surprise toll milling contract cancellation. Stronger for longer - we see the near term pain as necessary to fast-track the in-housing needed to become fully production independent.
All said, given a 1.20x NAV8% valuation, we establish a 12-month price objective of $0.14 per fully diluted share, equating to +140% upside from the recent close. Our positive thesis remains predicated on our bullish stance on US produced uranium coupled with significant factors which set Peninsula aside from domestic ISR peers – namely, low pH ISR recovery methods (as opposed to the more traditional alkaline recovery), the future resource potential from Barber, the modern CPP + licensed capacity and finally the current team and established track record. Note as well that the company currently has a uranium sales contract book of nearly 5.0M lbs (weighted un-escalated price of $55/lb) extending from now until 2033. The currently contracted lbs comprise up to 34% of the planned LOM production. Peninsula shares (fully diluted) currently trade at 0.50x NAV8% multiple.
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