Hartley’s latest report on Peninsula Energy (PEN) begins with what seems like an unusually frank admission. It says PEN’s Wyoming uranium projects are not viable at current spot prices. This seems grim until shareholders see that the “Speculative Buy” is based on the fair assumption that the power utilities will not want to take the risk of remaining “uncovered” for too long in case the spot price turns up in the near term.
More of that in a moment but for those new to the Peninsula story the projects in question are on the north east flank of Wyoming’s Powder River Basin, once the scene of many bloody Indian battles and now the home of high plains beef producers. These ranchers and certainly the Wyoming legislature, support any extension of this underground method mining which has been in the region used on and off since the sixties. There are issues about Indian reservations but as far as the region’s struggling ranchers are concerned it adds needed farm income and, if the standards of previous operators are maintained, will leave little trace on the land in the down years.
In fact Peninsula had trouble identifying previous drill holes when it picked up the exploration licences, but after a cache of data was finally located, it was able to move faster and re-plot many of the underground channels which carry uranium in solution through sands and gravels to “roll fronts” where concentrations occur.
So far Peninsula has proved up a resource of 53mlbs and is planning production of 1.2m lbs a year. Recent work on costs and extraction efficiencies allowed the mine plan to change from three units to two operating simultaneously for the same output which allows capital to be deferred for 5-6 years.
This explains the apparent contradiction of the report. As uranium “solvent mining” methods are well tested over more than 50 years (the Beverley and Honeymoon uranium mines in South Australia use the process) capex and opex modelling are likely to be based about fairly stable assumptions about trenching, the solvents used, piping, pumps and the ion-exchange system used to lift out the uranium dioxide and other dissolved minerals from the solvent stream.
From the way Peninsula has gone about the exhaustive approval process basically on or ahead of times, it seems to have a fairly good handle on all the controllable aspects of the planned operations, but investors and traders are more interested in the $64 million – no make let’s make than $64 billion question – when does the spot uranium price recover? Hartley’s analyst Trent Barnett prudently doesn’t venture too far on that score, but given the importance of the issue it is worth some limited ruminations at least.
First, mine closures globally are weakening supply. Shortly before this report was produced Paladin put its Malawi operations on care and maintenance after reporting its realised average price for the year was below cost at $38 per pound. ERA’s $54m loss last year was also discouraging and the ASX uranium sector has been virtually blasted away after large price dives which may mean that many may not recover from this point. At the very least many will be struggle as capital raisings at these prices will be massively dilutive unless power utilities come to their rescue with bankable contracts. One Canadian specialist estimates that of an expected 85-90 m.lbs of new supply expected over 2007-2013 but only 25% materialised. Then there is the missing supply of Highly Enriched fuel from the post Soviet “megatons to megawatts” agreement which was extended but finally ended last year.
Tighter environmental restrictions and the difficulties of raising funds will depress the penny end of the market for some time. Share prices have collapsed and even fairly advanced projects will be lucky to survive. This is good news for PEN with its approvals all achieved ahead of time, a seven year supply agreement signed with Exelon struck three years ago at $76 lb and debt support from one of the world’s largest investment groups, Blackrock.
PEN shareholders would be wise to remain cautious however as Cigar Lake, the world’s largest and richest uranium deposit (excluding expensive low grade Olympic Dam), is likely to be operational by in months with toll treated ore on the market by the end of the year. Cigar Lake is ultra high grade and production is slated for 18m lbs pa using water jets to mine and create a slurry. Its 50% owner Cameco is weathering the down turn reasonably well at the moment as its average realised price from its global operations was $47 lb while operating costs fell from $28 to $26.
Abe government impatient
All the same in the short term demand could tick up fairly soon as the Japanese government has signalled that after 19 months of worsening trade deficits that the pain of $27 billion monthly trade deficits is hurting largely caused by sharply rising coal and LNG imports. Japanese are not saving as they were and if the trend continues Japan will be eating into reserves.
Japan is clearly impatient with its own Nuclear Regulatory Agency’s slow safety checks and has called the NRA to fast-track some of the 17 applications it has for restart approvals. The first two to three may possibly coincide with the release of a revised energy plan by the end of March. The government is likely to use this to build on the election victory of the very popular Yoichi Masuzoe who easily defeated anti nuclear candidates in the recent election for the governorship of Tokyo. While opinion polls in Japan are 75% for the phasing out of nuclear power, when the questions are put differently Japanese turn out to be pragmatic with the majority supporting well regulated nuclear power for the mid-term.
There is a similar attitude in Switzerland where polls have changed emphasis with 62% wanting to retain nuclear power and almost 80% wanting energy self-sufficiency.
In Germany opinion is entrenched against nuclear power, but the realities of the cost of subsidised solar and wind and combining with the escalating cost of decommissioning 22 nuclear plants. There is also the bizarre contradiction that Germany is expanding its lignite production to meet the short-falls after the closure of eight reactors. The fact that nuclear power provides the stable base to supporting the grid through ebbs and flows of renewables is also becoming more evident. As in other regions Germany has still evenings when neither wind or solar make a contribution.
Climate change is also a sharpening issue. In the recent big freeze across North America some parts of Canada were colder than Mars as the Polar vortex wandered deep into the continent as it did under the pressure of Hurricane Sandy. This January Chicago was called Chiberia. Oil and coal supplies froze and gas pipelines choked unable to keep up with demand. The 98 strong nuclear reactor fleet held the grid supply together and operated at 95% capacity which gives some indication of the problems ahead.
So to return to Hartley’s report the likelihood that Peninsula can negotiate a reasonable supply contract is now improving. The broker says the Lance projects still require another $90m in equity and capital to complete all approvals and start mining and this will require a supply deal around the $50 level. It may be a close to the wire negotiation, but on balance Peninsula will have some negotiating power the moment one or two Japanese nuclear operators are allowed to press the button.
In summary Hartley’s Trent Barnett is cautious, but there is more than a glimmer of hope. With some prospect of negotiating satisfactory contracts by the end of March he says, “We believe that PEN is one of the best placed uranium developers given its advanced stage, relatively low capital costs, high grades and low cash costs.”
His valuation and the 12 month price target price is 3.8c or 60% up on the current price. Some final gratuitous advice would be for the Board to do a major share consolidation to drive out the traders who have buzzed around Peninsula for several years adding to volatility and making its solid endeavours look vaguely suspect to the serious energy investor.