First Assays Returned from the Summer Program
On Wednesday morning (Sept. 4, 2013) Fission Uranium (OTCQX:FCUUF or FCU on the TSX Venture) and Alpha Minerals (OTCPK:ESOFF or AMW on the TSX Venture) reported assay results from hole PLS13-075, which returned 54.5 meters of 9.08% U3O8, including 21.5 meters of 21.76% U3O8. The market reaction can be described as muted for both stocks, which is perhaps reflective of the market's pre-determined expectations for this particular hole. I will say, however, that few holes have ever, or will ever, be drilled anywhere from the surface of the planet that will return assay results like that.
For context, 9.08% U3O8 equates to nearly 200 pounds of uranium per ton of rock, which is worth about $10,800/ton at the current long-term uranium price of $54/pound. The intercept is nearly as long as an 18-story building is high. True widths of the zone are not yet known and will only be determined through further drilling. In any case, a hole like that could be expected to represent 3 to 5 million pounds of U3O8 in the ground (I used a radius of 5 to 7 meters around the drill hole and a specific gravity of 4 tons per cubic meter), which is illustrative of the ability to build pounds quickly through drilling at Patterson Lake. A typical drill hole at PLS might cost $80,000 to $100,000 to drill, so resource definition comes at a quite an attractive price.
The drill program continues and I would hope that investors will not be "spoiled" by results like these, as this hole is truly remarkable. The hole yields a grade-thickness product of 495 starting at a depth of just 61 meters. Holes like these in the uranium business are about as rare as a hole-in-one on a golf course. They do happen from time to time, but not very often. Indeed it is just one hole, so it doesn't change my outlook on the project overall, but I can't say that I can recall ever seeing a hole like PLS13-075 at such a shallow depth. Enough said.
Patterson Lake Consolidation Proposed
Additionally, on Tuesday morning (September 3, 2013), Fission and Alpha announced that the companies signed a letter of intent to consolidate their respective 50/50 interests in the Patterson Lake South Joint Venture into one, pure-play, 100%-owned entity, which would continue under the name Fission Uranium Corp. Under the terms of the letter of intent, Alpha shareholders will receive 5.725 shares of Fission, which implied a share price of C$7.67 for Alpha based on Friday's close. There is a 10-day non-solicitation agreement and the proposed transaction is expected to be completed in November, assuming that definitive agreements are completed and that the transaction is approved by shareholders.
The merger reads as a takeover of Alpha by Fission and, if successful, shareholders can expect the Fission management team to continue their role as project operator going forward. Alpha would have the right to appoint two directors to a five-director Fission board. The agreement has the support of the Alpha board and management and I would expect shareholders of both companies to be supportive of the deal, as it is arguably the first logical step towards the ultimate buyout of the asset by a major. I say this because, as a general rule-of-thumb in the resource sector, corporate buyers often prefer to acquire 100% of a target asset if at all possible. The deal is somewhat reminiscent of when Hathor consolidated their Roughrider project into a 100% owned vehicle through the acquisition of 10% partner Terra Ventures in 2011 (Hathor was sold later in the same year to Rio Tinto for ~C$650 million after a bidding war with Cameco).
Additionally, shareholders in both companies should be pleased to know that they would be set to receive shares in their respective "spincos" on closing of a definitive agreement, with each spinco taking C$3 million as initial working capital, leaving the bulk of the cash in the proposed 100%-owned PLS vehicle (as of June 30, 2013, the combined fully diluted cash position of the companies was over C$50 million). The spincos will contain the assets in each company outside of the Patterson Lake South Joint Venture. After completing further due diligence on each company's non-core assets, I may have more detailed additional commentary on the prospective valuation of these spincos, but at this time I would simply point out that other junior players in the area have market capitalizations ranging from C$10 million to C$50 million for "potentially prospective" acreage in the area (i.e., they are in the general area of PLS). The highest end of that market cap range belongs to Nexgen Energy (NXE on the TSX Venture), which has property to the northeast of where PLS mineralization has been discovered to date. For now, I think that using a $10 million base-case valuation for each spinco is a good floor, particularly given the success of each management team in prior ventures. For Alpha and Fission shareholders, that means roughly 30c and 6c per share of incremental value respectively, as I doubt that the market previously ascribed any real value to either company's non-core assets.
In my opinion, the deal is attractive for four reasons:
1. Consolidation of Patterson Lake South into a pure-play, 100%-owned vehicle.
2. Continuity of operatorship (previously operatorship would have switched to Alpha in April 2014).
3. Spinco formation for non-core assets, allowing those assets to be valued and advanced independently of PLS.
4. Enhanced liquidity for Alpha shareholders and eventual elimination of a persistent market valuation discount.
Based on Fission's current share price of C$1.27/sh as I write this, the implied Alpha valuation is C$7.27/sh using a 5.725 share exchange ratio. After adding C$0.30/sh for Alpha's spinco, one could expect Alpha's "fair value" to be close to C$7.50, all else being equal.
On a combined basis, the "new Fission" would have roughly 350 million shares outstanding (fully diluted) and a corresponding market cap of roughly C$440 million, with somewhere in the neighborhood of $40 million in cash (fully diluted). If one assumes a 50 million pound prospective resource based on the data available to date, the combined project valuation suggests the asset would be priced at about $8-9 per "pound in the ground." Readers can refer to my prior article here for a more detailed breakdown of my view of the potential Patterson Lake South valuation metrics.
To summarize, I believe the market is discounting a potential PLS resource somewhere in the 40-50 million pound range today. I prefer not to speculate on the ultimate size of the resource at Patterson Lake, but with mineralization now proven at four "zones" spread over a distance of greater than 1,000 meters of strike length (within a shear zone that appears to have significant lateral continuity), investors may have enough information to start making their own inferences. As a reminder, the bulk of Hathor's 57 million pound resource was contained along roughly 350 meters of strike length. That is not to say that there is a linear relationship between strike length and ultimate resource size, but I think it is a useful data point to consider.
The only way to define the PLS resource more definitively is through expansion and infill drilling, which is something I would expect Fission to continue to aggressively pursue. Once again, I will remind investors that the only way to definitively "know" a resource's size is to wait for a NI 43-101 compliant resource assessment by a reputable independent consulting firm. In the meantime, investors should remember that at this stage all estimates of resource potential that are circulating out there should be viewed only as informed speculations based on drill data and comparisons with known analogues. I highly encourage readers to consult with investment and/or industry professionals as necessary in order to form their own opinions on the potential of the PLS project, which should include the evaluation of drill data from the ongoing program as it becomes available.
The summer drill program at Patterson Lake continues, and should run into October, weather permitting. I would expect assays to continue to trickle in well into Q4.
Disclosure: I am long OTCPK:ESOFF. 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.