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  • Peninsula Energy: Canaccord Initiates Buy With Target Of $0.07 0 comments
    Mar 26, 2014 6:39 PM

    Peninsula Energy (ASX:PEN) has received a Buy recommendation with a price target of $0.07 from Canaccord on its offering near-term production exposure to the increasingly optimistic uranium market.

    The company's Lance Uranium Projects in the Powder River Basin of Wyoming have low cost and technical risk with the key Source Material License due to be received within two weeks.

    This will allow the company to produce and sell uranium and is expected to trigger debt funding and long-term uranium sales contract agreements.

    The following is an extract from the research report.

    Investment Thesis

    - The right commodity. We believe we are at the turning point in the uranium price cycle. Uranium producers are buying uranium on the spot market to satisfy contracts and the market is still yet to react to the impending uranium shortfall forecast created by extensive global reactor construction driven predominantly by China and Russia;
    - Near-term production. Pre-financing construction at the Lance project commenced in Oct'13. We expect to see first uranium production during the MarQ'15;
    - Low cost. The Lance project will be a low cost operation, with initial capex of US$68m and LOM AISC of US$32/lb U3O8;
    - The technical aspects of The Lance ISR project are sound. Mining at Lance will be done via In-situ Recovery (NYSEMKT:ISR), a proven mining method which produces approximately 45% of global uranium. The Powder River Basin produces 50% of the USA's mined uranium and several other ISR operations in the vicinity of Lance are in production;
    - Long life assets. The current mine life of Lance based on the existing schedule is 18 years at a full run rate of up to 2.3Mlbpa using the three current resource areas. There are 10 additional known historical resources on the Lance tenements which have strong potential to raise the mine life of the project to +30 years. The Karoo project provides the next leg of growth, which has a 15-year life base on the completed scoping study. The JORC resource covers 15% of the mineralised strike and PEN's exploration target is 5-6 times the current resource; and
    - Funding is well advanced. Negotiations to secure debt funding with several specialist resources banks are at term sheet level. We believe the granting of the final project permits (SML) will be the funding catalyst.

    Company strategy

    PEN's ongoing strategy is to become an 8-10Mlbpa uranium producer with multiple low cost, low technical risk, mid-tier operating mines in geographically diverse and friendly mining jurisdictions.

    The short to medium term development pipeline is relatively strong with the Lance project (NYSE:USA) to commence production (ramping up over 3 years to 2.3Mlbpa) in late 2014/early 2015 and the Karoo project (South Africa) at Pre-Feasibility stage.

    Further down the development pipeline, PEN is seeking early stage development projects in stable jurisdictions with strong mining codes ie. Australia, Canada, Peru, Chile etc.


    We have based our valuation for PEN on risk adjusted DCF analysis of the Lance and Karoo uranium projects.

    Our project NPV8% for Lance and Karoo is based on post-tax cashflows, using a US tax rate of 35% and South African rate of 28%.

    We have derived a Net Asset Valuation for PEN of $526m, comprising our risk adjusted project NPVs, a nominal amount ascribed for exploration and net cash/(debt). Our target price of A$0.07/share is based on our NAV.

    The shares currently trade on a P/NAV of 0.48x, and we initiate coverage of Peninsula Energy Limited with a BUY recommendation.

    Peer Comparison

    We draw attention to the relative dearth of new mid-small projects expected to reach production in the near term, with most of these projects not expected to commence production until at least 2017.

    We also highlight PEN's relatively modest initial capital cost and the Lance projects production costs. At a LOM average total cost of US$32/lb, the Lance project is placed in the lower end of the peer group, providing for solid operating margins at expected long term contract prices.

    Lance is expected to have among the longest mine lives of the peer group, with total uranium production of 28Mlb ranking it among the largest ISR projects in development.

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