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Malcolm Shaw
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A retired sell-side analyst and hedge fund VP focussing on companies where technical understanding matters. With a MSc in Geology and 12 years of experience spanning the resource and investment industries, my focus is on companies where digesting data and looking at underfollowed companies can... More
  • A Monster In The Making 32 comments
    Aug 15, 2013 10:28 AM | about stocks: FCUUF, ESOFF

    Update

    Fission Uranium (OTCQX:FCUUF) and Alpha Minerals (OTCPK:ESOFF) have released an update on their ongoing Patterson Lake drilling program. The companies have identified a 4th zone of mineralization on line 945E and have extended the total mineralized strike length to over 1 kilometer.

    A link to the full press release can be found here.

    The stocks will resume trading at 10:30am EST.

    The results continue to confirm that the mineralizing system at Patterson Lake is robust and extensive in terms of strike length and depth extent. For them to have hit on their first hole into a totally new target should tell investors something. The JV partners are either extremely lucky or they are dealing with what is potentially a very large system. Once again, a hole like the one they have just drilled at PLS13-084 simply cannot occur in isolation.

    It's hard to assess just what "very" large might mean at this stage. As mentioned before, all of Hathor's mineralization at Roughrider was contained within about a 350m strike length, and that was a 57 million pound resource when it was bought by Rio Tinto in late 2011 for $650 million. PLS is now over 1 kilometer in strike length and still open to expansion. I will not mince words, the potential is enormous. It's still relatively early days in terms of delineation, but results consistently confirm the robust and extensive nature of this mineralizing system.

    I believe that the 50 million pound "potential target" that the street is focused on right now is but a formality at this stage, which should easily be attained through even partial success on infill drilling of existing known zones. I also believe that comparisons may soon be drawn between Patterson Lake South and other world class deposits like Key Lake and perhaps eventually even something as big as McArthur River. The footprint of PLS is already huge and continues to grow.

    Many investors will not have the skill sets to evaluate this data, but the majors in the sector and those who understand mineral deposits will.

    On yesterday's close, using AMW's 31.4 million shares outstanding and a fully diluted cash position of over $33 million, the project is valued just over $300 million on a 100% basis, which I believe is a very attractive valuation for what appears to be one of the best mineral discoveries in recent memory in terms of the miner's holy trinity of scale, grade, and depth.

    I would expect both Fission and Alpha to be materially higher on this news today. I believe their days may be numbered at this rate. I believe that the target on their backs just got even bigger in terms of takeout potential.

    As always, I encourage readers to do their own due diligence. These views are merely my opinions and are not meant as investment advice. Best of luck to all as this impressive discovery continues to be drilled.

    Disclosure: I am long OTCPK:ESOFF.

    Stocks: FCUUF, ESOFF
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Comments (32)
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  • bobbafett38@yahoo.com
    , contributor
    Comments (143) | Send Message
     
    On the takeover speculation going around-- would the majors want to see a NI 43-101 before making a bid? I didn't trade Hathor until after the first offer in the bidding war, but wasn't their resource estimate already out? Expectation is for a Patterson Lake JV NI 43-101 around mid 2014 I believe? Anyway, if this deposit is a monster the majors may have to offer stock and cash, given the size of deposit to swallow and the currently grim state of the uranium market cycle.

     

    I did notice a comment in a chat room (stockhouse.com) that the delineation hasn't shown much width yet, just "strike." Any thoughts on the geology there? To me it doesn't seem that the deposit is just like a thin pencil dropped in the earth, but it seems a question worth asking about: http://bit.ly/18xLfY6

     

    Malcom you've also pointed out that the market likes to "pay for information" - and I am definitely that person, that "market." I keep buying Fission and Alpha stock, with the view that 25 million pounds (i.e., $250 million market cap on takeover) is a decent backstop. At $300 million market cap today (August 15th, 2013), with a fourth zone announced, the risk/reward still appears favorable and I'll keep buying.

     

    Lastly, on a side note, Alpha Minerals may trade at a persistently slight discount to Fission (maybe as wide as 5%? though 11% the other day was far too much as you noted http://seekingalpha.co...) -- given the thought that Fission may have more value beyond the Patterson Lake JV with its various exploration properties, airborne technology, and management's record of successful spinoffs.
    15 Aug 2013, 01:00 PM Reply Like
  • Malcolm Shaw
    , contributor
    Comments (188) | Send Message
     
    Author’s reply » I've seen deposits get taken out well before initial resource calculations. As I say, the market pays for more data, and so would any acquirer. The data is fairly clear about the potential. A 3D model can be viewed here: http://bit.ly/18xLfY6

     

    The "width" question was addressed long ago. For context, the average width of McArthur River is "only" 12.4 meters and you can link to a copy of the McArthur River 43-101 here: http://bit.ly/13nFZIv

     

    It's worth doing more work on AMW's other properties. I think they are AT LEAST comparable to FCU's in terms of prospectivity.
    15 Aug 2013, 01:19 PM Reply Like
  • bobbafett38@yahoo.com
    , contributor
    Comments (143) | Send Message
     
    great, reading up on these now thank you
    15 Aug 2013, 01:23 PM Reply Like
  • phaedo2000
    , contributor
    Comments (230) | Send Message
     
    I know your original goal posts were 100-200 million pounds. Now it seems as though you feel there may be more upside potential?
    17 Aug 2013, 01:10 AM Reply Like
  • Energize
    , contributor
    Comments (22) | Send Message
     
    How about SP on a potential buy out ? It would appear the $8 is now too small (which is a good thing). Im guessing this thing is already worth north of $10, with that number increasing on further drilling. Not to mention a bidding war always lingering. Do you think $15 is a reasonable possibility now ?
    17 Aug 2013, 05:36 PM Reply Like
  • Daniel oaklandpark
    , contributor
    Comments (291) | Send Message
     
    When do the assays start coming in??
    17 Aug 2013, 05:59 PM Reply Like
  • Greenfire87
    , contributor
    Comments (657) | Send Message
     
    Malcolm,
    Thanks for the info. wish I found it earlier.
    Adding FCUUF. to the portfolio. Trying to keep it below $1.10.
    Wouldn't be surprised to see a buyout w/in 3mo.
    19 Aug 2013, 12:29 PM Reply Like
  • Malcolm Shaw
    , contributor
    Comments (188) | Send Message
     
    Author’s reply » My apologies for the delayed response. I believe all of my prior commentary covers my views on the project in terms of size potential and valuation per pound as per the most recent article relative to other global projects. In my view, this is a premium asset in a premium jurisdiction, which should fetch a premium valuation. Some large resource numbers are being thrown around, which I would prefer not to speculate on. What I will say is that I am very comfortable in saying that 50 million pounds is looking quite comfortably achievable. I will also say that I believe there may be significant upside to that number. More drilling is required to definitively "prove up" the potential resource, but the data is highly encouraging. Drilling and delineation takes time, but certainly PLS has delivered everything I have wanted to see. My personal base-case target is $500 million in enterprise value for the project on a 100% basis, which would place AMW at C$9/sh and FCU at about C$1.65/sh after netting out each company's fully diluted cash. Some will say this is too conservative, but I prefer to evaluate positions based on base-case scenarios as opposed to upside scenarios. The corollary is of course that I see little fundamental downside from current levels over the medium to long-term (market forces and black swans aside). In the short-term, markets can be unpredictable, which is why I refer to only the medium and long-term. Based on C$7/sh AMW, the EV of Alpha is about $190 million, implying a $380 million value for the project on a 100% basis. If my base-case involves arm-waving visibility on 50 mmlbs, then I think my valuation outlook is clear in terms of the potentially skewed nature of the risk-reward profile if one believes there is upside to my 50 mmlb base-case. I believe that PLS is transitioning from the speculative realm to the value realm (as much as a resource discovery can do so, as they are speculative by nature) and as a result I think the shareholder base will gradually rotate into longer-term holders who understand what they own and why they own it. In my experience, that is a unique situation among resource stocks, but is not unexpected given the quality of the project based on the drill data to date. Again, I offer these opinions not as investment advice, but as the opinion/perspective of an investor who has been following the story since discovery. I would encourage all readers to continue to do their own due diligence, consulting with investment professionals as required. For those looking for additional information, there is a fair amount of research available on PLS via Canaccord, Raymond James, Cormark, and Cantor Fitzgerald to name a few.
    20 Aug 2013, 04:49 PM Reply Like
  • bobbafett38@yahoo.com
    , contributor
    Comments (143) | Send Message
     
    thank you for the insight as always. I don't think I would have stayed in this large a position this long if not the articles Malcom. Some widening of the mineralized zone today (August 22nd)...

     

    On a side note- Dev said in an interview he'd originally intended to sell all of Fission to Denison-- but held on to PLS after Ross called and said they hit on a PLS hole. If there is a takeover of FCU, it will thus be interesting to see if management wants to keep any of the exploration properties outside of PLS as a stub equity yet again. Especially given the confidence level Dev expressed in their airborne technology: http://bit.ly/17MRXZg
    22 Aug 2013, 09:00 AM Reply Like
  • Energize
    , contributor
    Comments (22) | Send Message
     
    Morning Malcolm,

     

    Any insight or comments on FCU actions this morning? I cant help but view this as negative. Focus is lost.
    26 Aug 2013, 10:11 AM Reply Like
  • Malcolm Shaw
    , contributor
    Comments (188) | Send Message
     
    Author’s reply » Consolidation into a 100% vehicle was/is viewed as necessary by many holders. It's certainly not a negative in my view. PLS is now in play. I'd bet that this isn't the last we hear from either company on the matter.
    26 Aug 2013, 10:58 AM Reply Like
  • Greenfire87
    , contributor
    Comments (657) | Send Message
     
    Fission to buy alpha for $7.26/.36 a share.
    26 Aug 2013, 10:49 AM Reply Like
  • phaedo2000
    , contributor
    Comments (230) | Send Message
     
    Why would they do a hostile bid? Are they trying to drum up better offers? What do you think the odds are that alpha shareholders take the deal? It's seems far fetched.
    26 Aug 2013, 12:17 PM Reply Like
  • mbcowboy
    , contributor
    Comments (41) | Send Message
     
    I hold a lot of FCU shares and im not happy. this is just way to early to sell out, this time next year we would have seen $5 bucks with no take out... add a premium to it and then things start looking good.
    26 Aug 2013, 08:10 PM Reply Like
  • Greenfire87
    , contributor
    Comments (657) | Send Message
     
    I doubt they will accept the offer as is.
    28 Aug 2013, 09:23 AM Reply Like
  • bobbafett38@yahoo.com
    , contributor
    Comments (143) | Send Message
     
    The 5th zone announced today makes this graphic even more interesting:
    http://bit.ly/18xLfY6

     

    I'm curious how much funding will be required if Fission/Alpha remains a stand alone company for the next couple years (even though I think there is a high probability a major buys up the merged company sooner).

     

    The Summer 2013 program of 44 holes cost $6.95 million- I would imagine to delineate the zones and drill enough to produce a NI 43-101 would require a lot more holes & money. Probably more cash than Fission & Alpha currently have-- and thus require an equity raise. Such an offering would probably be oversubscribed given the excitement in the stock, but whats a reasonable amount of money they would need to raise? How much potential dilution could shareholders expect? thanks
    23 Sep 2013, 10:21 AM Reply Like
  • Malcolm Shaw
    , contributor
    Comments (188) | Send Message
     
    Author’s reply » The combined fully diluted cash position is around $50 million as of the latest financials. Post-merger, assuming it is voted through, I believe the combined cash would be in the $40 million range after cash is distributed to the spincos and once fees are paid. I don't think they'll need to raise money for some time. The current cash would come very close to getting them to a pre-feasibility study, perhaps even feasibility. Like you, I believe there will almost certainly be some capital raised sometime over the next 2 years, but I can't see it being a lot... maybe 10-15% dilution max to carry this through to sale. A lot of that depends on the general health of the equity markets, but the bottom line is that i don't expect much dilution from here on to get to feasibility. It is one of the advantages of being so shallow... the drilling is fast and cheap.
    23 Sep 2013, 12:19 PM Reply Like
  • bobbafett38@yahoo.com
    , contributor
    Comments (143) | Send Message
     
    thank you
    25 Sep 2013, 07:14 AM Reply Like
  • xxclaymanxx
    , contributor
    Comments (3) | Send Message
     
    Any thoughts on the new R585E zone, Malcom? Sure looks like continuous mineralization from my eyes.
    24 Sep 2013, 11:11 PM Reply Like
  • bingolittle
    , contributor
    Comments (60) | Send Message
     
    Joe Mazumdar of Canaccord Genuity on 9/23/2013 says that as the project is further derisked that valuation could rise to $10-11 lb U308 implying a value of CA$1.90-2.10.

     

    And these values are in a very cold U overall market. I hate to sound like a tout, but every week the value of PLS gets better and better. The recent drilling results are first rate.
    25 Sep 2013, 11:58 AM Reply Like
  • bingolittle
    , contributor
    Comments (60) | Send Message
     
    All prices are in US $ and I am excluding the spincos:

     

    Currently 9/26/13 esoff is trading at 7 - 7.04 and fcuuf is at 1.29 - 1.31
    The merger is to take place some time in Nov and I place the odds of merger taking place at around 95% (this is my guess other can differ at the percentage). So currently buying esoff at 7.04 will be worth about 7.38 (1.29 x 5.725) or about 5% more than currently trading. Yesterday that percentage was up over 7%. On an annual percentage basis these numbers (assuming 2 months to go) is about 30 - 40%.

     

    I find it interesting that the arbs have not really adjusted the price of esoff closer to fcuuf.

     

    In the Canadian market the price of amw.v was 7.25 and fcu.v 1.33 or about 5% too. And remember this is with interest rates being as low as they are.
    26 Sep 2013, 11:21 AM Reply Like
  • bobbafett38@yahoo.com
    , contributor
    Comments (143) | Send Message
     
    remember Bingolittle that if you own Alpha into the deal close, the value of the Fission shares you receive will be reduced by the value of the Fission spinco. So when you mention "1.29 x 5.725" that 1.29 number might be a bit lower, in fact the 1.29 part could be as much as 10-13 cents lower. We won't know for sure till the Fission spinco trades. I do own stock in both, but the real spread is not 5%. Arguably the Fission spinco is worth more than the Alpha one, so you probably won't have the Alpha spinco make up that 10-13 cents in Fission lost value.
    Most risk arbs won't play this deal-- because you can't hedge and short Fission (no borrow), the deal is too small and has a complicated spinco structure.
    26 Sep 2013, 03:43 PM Reply Like
  • phaedo2000
    , contributor
    Comments (230) | Send Message
     
    I think Bingo is right. Nobody knows what fcu shares will be trading at when the merger closes...but as of right now if you bought $1000 of each stock(fcuff and esoff)you would get more of fcuff in the end by buying $2000 in esoff. The spincos will be virtually identical in value according to everything I have read. I think Bobba mis-understands the merger structure... Dev has a picture here:

     

    http://bit.ly/15x57IC
    26 Sep 2013, 09:51 PM Reply Like
  • bobbafett38@yahoo.com
    , contributor
    Comments (143) | Send Message
     
    It really depends on how you value the spinco's, whether or not there is a spread. I'm not saying i'm right, but if Fission's spinco is worth considerably more than Alpha's, the risk arb spread is reduced. I am long both stocks and i'm playing the deal in the end as well, and I hope there is a great spread. I just don't want to get my hopes up too much.

     

    The only way the spread is really 5%, is if both Spincos are worth the same amount of money-- in a way, both stocks will go "ex dividend" the spincos on deal closing. Which stock will have the greater "ex dividend" spinco?
    27 Sep 2013, 07:42 AM Reply Like
  • bobbafett38@yahoo.com
    , contributor
    Comments (143) | Send Message
     
    I tried to add this in an edit but it got timed out-- basically;

     

    To be clear I'm not arguing a side or anything like that, i'm just trying to work through the numbers, potential scenarios and probabilities. I got excited at first about this spread too, and I started going through the numbers to make sure I wasn't missing something important. Its very possible that Bingolittle is right on the money here and that the market is mispricing this deal spread for a host of reasons.

     

    If Phaedo2000 is right that both spinco's have the same value, then we should be loading up on Alpha and playing the spread. I could be wrong that Fission spinco has more value, no one really knows for sure, and as they say, "that's what makes a market!"
    But you also have to be careful because if you assume the spinco's have the same value, and you are buying Alpha all the way up to a marginal discount to Fission, you could get burned if Fission spinco trades at a higher value. The market may have more confidence in a spinco led by Dev & Ross. Also for what its worth the Azincourt JV partner in Patterson Lake North trades at $5.5 million market cap.

     

    The last deal spread between Fission and Denison was wide, and there was a substantial pop after the deal. We could be in a similar situation here (again because risk arbs aren't playing a small, complicated deal)-- what would really be great is if Alpha sells off heavily at the deal closing and it doesn't matter who's right or wrong about the Fission spinco valuation :) I would definitely take the bet that the combined PLS company pops after this deal as well. That may make this discussion a moot point. It'll certainly be exciting to see what happens.
    27 Sep 2013, 08:15 AM Reply Like
  • bingolittle
    , contributor
    Comments (60) | Send Message
     
    Mr Shaw has valued the Alpha spinco at .30 a share. I realize that is a guess but it is as good a guess as any.

     

    I think if one was interested in buying into PLS, then currently the way to do it would be through Alpha.

     

    My posts where my wondering out loud on a deal that is almost surely going to close and close in a little over a month -- why the large spread. Yesterday that spread got to over 7%. If one figure that on a yearly return is works out to over 40%.
    27 Sep 2013, 10:39 AM Reply Like
  • Malcolm Shaw
    , contributor
    Comments (188) | Send Message
     
    Author’s reply » "Mr Market" is telling you that he values the FCU spinco higher than the AMW spinco (i.e., if the AMW spinco is worth $10mm, then the market is suggesting that the FCU spinco is worth $20mm), plain and simple. Whether or not this is warranted is a matter of opinion, but I think that is precisely what is happening.
    27 Sep 2013, 12:43 PM Reply Like
  • bingolittle
    , contributor
    Comments (60) | Send Message
     
    These are appox: AMW has about 30 million shares and FCU around 150 million.

     

    AMW spinco will have 3 mill in cash and some assets. That means it is worth at least 10 cent per share of AMW.

     

    FCU spinco will have 3 million in cash and some other assets. So FCU spinco is worth at least 2 cents per share of FCU. To get to the price of the AMW spinco those other assets have to be worth at least 12 million (12/150 = 8 cents). And since Mr Market is having this large spread between AMW and FCU those FCU other assets have to worth much more than 12 million.

     

    In less than two months we will see if this plays out as presented.
    28 Sep 2013, 10:34 AM Reply Like
  • mbcowboy
    , contributor
    Comments (41) | Send Message
     
    the market doesn't like the last news release of 8 holes but actually I think there is plan behind some of the drilling madness. FCU is planning a huge winter drill program, this way they can get more info on the geology and where to drill. If they kept to their close drill they would have to plan a limited drill and then figure out mid season on where to put the other holes. I would not be surprised to see 4 core drills and 2 rc drills working this winter on some 80 plus holes. The data they get from these holes will help them plan where to drill next. And all 8 were mineralized which means that the area is open all over.
    28 Sep 2013, 01:11 PM Reply Like
  • mbcowboy
    , contributor
    Comments (41) | Send Message
     
    Here is a pretty good interview with Commodity tv.
    http://bit.ly/19Z1oWP
    They are planning a huge drilling program this winter, some 100 holes starting in January.
    2 Oct 2013, 12:40 PM Reply Like
  • 10568891
    , contributor
    Comments (4) | Send Message
     
    Nice Article, good find! The Interview - to my surprise - was even held in my hometown munich!
    Good informations indeed. The projekct is definetly en route...!
    Steady newsflow is guaranteed in the next couple of months and while finishing the Merger hopefully in november, stock Prices should catch up towards the end of the year.
    3 Oct 2013, 07:16 AM Reply Like
  • mbcowboy
    , contributor
    Comments (41) | Send Message
     
    News out today, extended the drilling program from water to land west of 000 zone. Drilling on land is way cheaper than off barges. Test more target zones. Well do have to admit that FCU is very aggressive, weather is nice and why not drill on land now and see if this baby extends further than the 1 km. If the 11 land holes find more zones this play would be huge. The drill rigs will be busy this winter if they drill 100 plus holes. Do hope they find a couple of new targets, this way they can start drilling mid January on land before ice conditions permit ice drilling.
    7 Oct 2013, 11:39 AM Reply Like
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