Acquisition of Fully Permitted Reno Creek ISR Project
We continue to recommend Uranium Energy as a BUY, and increase our 12-month share price target to US$3.00 from US$2.70 on the back of this acquisition.
Our target is based on a 10% DCF model.
FULLY PERMITTED, LONG LIFE, LOW COST ISR PROJECT ADDED TO PORTFOLIO ~$18.8 MM acquisition cost via shares/warrants. UEC has purchased 100% interest in Reno Creek.
For its 97.27% interest, Pacific Road Investment Fund will receive 14 MM shares of UEC; 11 MM warrants with a $2.30 strike over 60 months, and will retain a 0.5% NPI royalty to be capped at $2.5 MM. Bayswater Uranium (BYU-TSXV, Not Rated) owns 2.73% and will be paid in equal terms, pro-rata.
The deal is expected to close by 31-Jul-17 and is subject to NRC approval.
• Suggested acquisition price is $0.82/lb. This is in line with where developer peers trade on an EV/lb basis of ($0.79/lb). Producers currently trade at US$1.91/lb (including UEC at US$2.31/lb). Explorers trade at US$1.09/lb.
• Accretive to our DCF model. We model the existing PFS assumptions beginning in mid-CY20 (FY21). We forecast an NPV of $108 MM for the project and our UEC NAV increases by $0.31/sh. Always buying quality projects on the cheap. Keeping to Uranium Energy's long term strategy of strengthening its lowrisk, low-cost project pipeline in preparation for a turn in uranium prices, it has acquired another quick-to-production uranium project on the cheap. One might argue that an acquisition cost of $0.82/lb U3O8 is the current going rate for development pounds. We'd argue that today's EV/lb trading metrics aren't indicative of expected uranium price appreciation over the next several years; nor does it reflect the quality and stage of the fully permitted and licensed Reno Creek Project, or that project in UEC's capable hands. About $60 MM has been sunk on the project already. At almost 23 MM lbs of uranium, largely within M&I resources, there are few available projects of this size in the market, let alone something that is ready to deliver should spot prices exceed $40/lb. With only 9% share dilution, this acquisition helps over double UEC's total ISR-amenable resource base during a time when many other companies are trying to keep the lights on using cash. UEC had US$27.8 MM cash at 31-Jan-17. UEC's strategy of remaining totally un-hedged has meant it has not been wasting its resources. Another acquisition demonstrates quite the contrary…it could come out of this period of low uranium prices with all of its resources intact and ready to benefit shareholders. Reno Creek is ready-to-go. Wyoming is a good uranium mining jurisdiction. A central ISR plant is fully permitted to 2 MM lbs U3O8. The project is large, modest grade and high quality being largely M&I.
It boasts relatively low initial capital, low costs and long life potential. We expect this acquisition to be met positively by many investors. This acquisition comes on the back of the news that the US Department of Energy will decrease uranium transfers over the next two years by roughly 40%. Our expectations of a positive impact on uranium mining (but not necessarily nuclear power) by Trump's Administration (see note), appears to be shared by many, including UEC. Low cost ISR production suggests that uranium mining in the USA may be kick started sooner than other projects world-wide. PFS complete. A 2014 study suggests an NPV (8%) of $150 MM after-tax (we estimate ~$108 MM at a 10% discount rate) and 32.2% IRR. The study contemplates 20.1 MM lbs production over 14.9 years, with annual production to 1.5 MM lbs pa. Recovery is anticipated to be 74.3%. Capex is $78 MM initially and $225 MM LOM during development of 16 mine units. Opex is estimated at $18.84/lb cash costs and $33.87/lb all-in. Resources total 27.47 MM tons 0.041% U3O8 for 21.98 MM lbs M&I at a grade-thickness (GT) cutoff of 0.20 within five deposits. There is an additional 0.3 MM lbs inferred. Plenty of development opportunities. It appears that UEC can start to mimic its own successful hub-and-spoke strategy of its flagship South Texas operations. A property boundary agreement with Energy Fuels' (EFR-T, BUY, C$6.00 target) Reno Creek North provides the ability to develop the necessary ISR infrastructure on this neighbouring property. And while a stand-alone operation appears doable at higher uranium prices (like many studies, the PFS was completed at US$65/lb U3O8 and in line with our long term target prices), toll milling is also an option. With its foot in the door in WY, we wouldn't be surprised if UEC begins to consolidate parts of the Powder River Basin.