Patterson Lake Project Valuation: Using History As A Guide

Includes: ESOFF, FCUUF
by: Malcolm Shaw


Once again, Fission Energy (FSSIF.PK or FIS on the TSX Venture) and Alpha Minerals (ESOFD.PK or AMW on the TSX Venture) have released what may be their best hole yet from drilling at the Patterson Lake Uranium project (see press release dated March 13th, here) . PLS13-053 was drilled 15m west of hole PLS-13-038 and encountered 67 meters of uranium mineralization, including 18.9 meters of off-scale mineralization, which is the most off-scale seen in a drill hole on the property to date. Assays are pending. This hole extends the strike length of the 390E Zone to 30 meters, and the zone remains open to expansion in 3 directions. This hole was drilled within the 240 meter-long radon anomaly identified earlier this year, and the holes drilled in the area to date have tested only 30 meters of the associated strike length.

I think that prior articles have covered my thoughts on the geology and potential deposit attributes. Once again, this latest hole correlates well with the others and my expectation would be that further strike extensions are a distinct possibility. This latest drill hole further confirms the exploration model and the prospectivity of the SW-NE trending PL-3B conductor trend. Uranium deposits are typically on the order of tens to hundreds of meters along strike and can occur as "pearls on a string" or more linear continuous bodies. For comparison, I have included an updated cross-section of the three holes along the 390E Zone that show strong, correlative mineralization. Additional drilling will continue to shed light on the orientation and size of the zones encountered to date.

Figure 1: Gamma Logs of PLS13-053 (left), PLS13-038 (middle), and PLS13-051 (right)

(Click to enlarge)

A Note on Valuation

As I have mentioned before, valuation of exploration projects is tricky, as any such valuation attempt is dependent on inference and assumptions. Without delving into discussions regarding untested strike length, zone thicknesses, and speculations on grade, perhaps history is the best guide. I apologize to Fission holders for using Alpha as the example here, but given it's "pure play" status, it makes the math easier.

Hathor Exploration's (HAT-TO) Roughrider Zone [sold to Rio Tinto (NYSE:RIO) for $650mm in 2011] is the most recent market comparable that can be reasonably compared to Patterson Lake. I am not saying that we are there yet by any stretch, but what I can say is that in the early stages of that company's history at Roughrider, it was extremely comparable to Patterson Lake today.

After Hathor received assays from its first hole in March 2008, which graded 5.29% U308 over 11.9 meters, the company had a market cap of $160 million for 90% of it's project, which translates into about $180 million on a 100% basis. Two-and-a-half months later, when all of the data was in from their winter drill program (12 holes with assays were reported in this press release), the market cap was about $210 million, or $230 million on a 100% basis. By September of 2008, part way through the summer drill program, Hathor's market cap was about $320 million, or $350 million on a 100% basis before the financial collapse in 2008. I would point out that uranium was not in favor at the time as a sector. The 2007 price bubble of $140 per pound had popped, and sentiment in the uranium sector was poor.

During these early days, the extent, geometry, and continuity of the Roughrider deposit were unknown. I point this out because this is arguably a very comparable situation to where Alpha and Fission are today at Patterson Lake. Arguably at this stage Patterson Lake offers more running room that Roughrider ever did in its early days, simply due to the scale of the property and length of the mapped conductors. So what does this mean? Well, I would argue that it gives some reasonable goal posts for valuing Patterson Lake today. On the low-end the market cap of Hathor's project was $180 million on initial assays and it was $350 million mid-way through their summer program.

Assays are not likely that far off for Fission and Alpha based on a standard 4-6 week assay turnaround. Also, consider that Patterson Lake mineralization is anywhere from 1/2 to 1/5 as deep as mineralization that was encountered at Hathor's Roughrider. This makes a huge difference in terms of a potential strip ratio. This means that while 5-10% U308 was enough to keep Hathor investors happy, 1-2% U308 at Patterson would likely do quite nicely. If Patterson delivered anything close to 5% U308 at such shallow depths, I believe the implications in terms of potential economics would be significant.

It is also important for investors to distinguish between the "on-land" Zone 00E and the "lake" Zone 390E. On land (at Zone 00E), the mineralization is not as pervasive, with the thickest off-scale interval totaling 4.35 meters. On the lake (at Zone 390E), the three holes drilled in the zone so far have shown much heavier mineralization based on the gamma logs, with off-scale intervals totaling between 10.5 meters to 18.9 meters. In general, I would expect on-land holes to be lower grade than lake holes, based on the data released to date.

Alpha is trading at C$3.80 as I write this, which means that the project is valued at about $150 million on a 100% basis (Alpha's current share count is about 20 million shares outstanding). At a $180 million project valuation, Alpha would be trading at $4.50/share for its 50% interest. At a $350 million valuation, Alpha would be trading at $8.75/share.

Both of these comparable valuations are based on using the trading history of Hathor as a guide and making some qualitative observations about the projects of the respective companies. I present this historical context as food for thought, given that there are no current comparables in the market.

It's up to investors to decide for themselves whether or not to use history as a guide, but given the shallow depth and low costs of drilling out the Patterson Lake property, I believe Alpha and Fission have a chance to look a lot like Hathor in fast forward if the assays come back with good numbers.

Disclosure: I am long ESOFD.PK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.