NexGen Energy's World-Class Uranium Project Impresses Again

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About: Nexgen Energy Ltd. (NXE)
by: Peter Arendas

Summary

The Arrow deposit contains inferred and indicated resources of nearly 350 million lb U3O8.

With an annual production of 29 million lb U3O8/year, NexGen Energy has a real chance to become the world's biggest uranium producer.

The after-tax NPV (8%) of the Arrow mine is around $1.09 billion at the current uranium prices and approximately $2.75 billion at an uranium price of $50/lb.

If everything goes well, the uranium production should start in 2023 or 2024.

NexGen Energy is a serious acquisition target for anyone who wants to play a major role in the future of the uranium mining industry.

NexGen Energy (NYSEMKT:NXE) released the long-awaited pre-feasibility study for its world-class uranium project. The company was not only able to increase the uranium resources notably but also to improve the economics of the project. Although at a first glance some of the PFS numbers are not too much better compared to the PEA, a second glance shows that various metrics of the project have improved notably. The PFS results were also very positively welcomed by the stock market, as NexGen share price grew by 15%.

Chart NXE data by YCharts

NexGen's Rook I property is located in the Athabasca Basin in Saskatchewan. The property contains several known uranium deposits, including Arrow, South Arrow, and Harpoon. Uranium mineralization was discovered also in the Bow and Cannon area. The recently released PFS is focused on the Arrow deposit.

According to the news release, the total inferred and indicated resources have grown by 15%, from 301.6 million lb to 348.3 million lb U3O8 (table below). Although the volume of inferred resources declined by 25%, the volume of indicated resources increased by 30%. Though the U3O8 grade of the indicated resources declined from 6.88% to 4.03%, it is still a very respectable number. Moreover, a meaningful part of resources is included in reserves now. The probable reserves contain 3.433 million tonnes of ore grading 3.09% U3O8. The U3O8 content equals to 234.1 million lb.

(Source: Own processing, using data of NexGen Energy)

Various parameters of the project were changed (table below). First of all, as the PEA envisioned processing of ore grading 1.73% U3O8 on average, the PFS is based on reserves grading 3.09% U3O8. It means that NexGen was able to reduce the extent of the mining operation without reducing the annual production capacity. The average daily throughput was reduced from 1,448 tonnes to 1,039 tonnes, or by 28%. This decision helped to limit the footprint of the mining operation, which, together with the elimination of ammonia from the metallurgical process, should help with the permitting process. Moreover, the lowered throughput rate is reflected also by lower initial CAPEX. Although the CAPEX presented by the PFS is slightly higher compared to the PEA CAPEX (C$1.25 billion versus C$1.19 billion), this increase was caused by the introduction of Provincial Sales Tax applicable to capital projects. Without this tax, the PFS CAPEX would be lower compared to the PEA CAPEX.

(Source: NexGen Energy)

Despite the lower throughput rates, the projected average annual production increased from 18.5 million to 25.4 million lb U3O8, or by 37%. Over the first 5 years, the production should reach the 29 million lb U3O8 per year level. With such a production volume, NexGen should become world's biggest uranium producer. The average annual production should be higher not only due to the higher feed grades, but also due to the slightly improved recoveries (97.6% versus 96%). Due to the higher production rate, the OPEX should be lower. The PEA estimated average annual OPEX at $6.7/lb U3O8, but it should be only $4.36/lb U3O8 according to the PFS. The OPEX is much lower despite the fact that the PFS moved the underground tailings expenses from sustaining CAPEX to OPEX. The AISC is estimated at $9.08/lb U3O8.

The higher average annual production volumes led to a shorter mine life (9 years versus 15 years), however, the PFS is based only on the indicated resources. Inferred resources of almost 92 million lb U3O8 are not included in the mine plan. Moreover, the deposit is still open, which means that there is a very high potential for mine life expansion. It is also important to remember that there are several other uranium deposits in the Arrow deposit area, and it is quite probable that they will be extracted as well. Therefore, the 9-year mine life should be only the beginning.

The after-tax NPV (8%) of the project equals C$3.66 billion, or $2.745 billion using the PFS CAD/USD exchange rate of 0.75. The IRR equals 56.8%, and the mine should generate an after-tax net cash flow of C$909 million ($681.75 million) per year on average. However, these numbers are valid for the base-case uranium price of $50/lb U3O8. At the current uranium price of approximately $27.5/lb U3O8, the after-tax NPV (8%) is approximately C$1.45 billion ($1.09 billion) and the IRR is around 32%.

As a meaningful uranium market deficit is expected to emerge in the coming years, especially due to the rapidly growing Chinese nuclear capacity and related uranium consumption, NexGen management doesn't want to waste any time. A huge drill campaign, including 10 drill rigs and 125,000 meters of drilling, should start in December. This campaign is aimed at converting the Arrow deposit resources into higher categories. The results should support the preparation of a feasibility study. The feasibility study should be completed in late 2019. It is possible to speculate that if everything goes well and the permits are granted relatively quickly, the Arrow mine construction could start sometime in 2020 or 2021. As the construction should take 3 years, the first production could be expected in 2023 or 2024.

Conclusion

NexGen Energy holds a world-class uranium project. After the Arrow mine gets into production, it should become the world-biggest uranium mine and NexGen has a real chance to become the world's biggest uranium producer. Moreover, the project is located in a safe jurisdiction, and it has the backing of a Chinese partner, which may turn out to be important during the process of mine development financing. It is also important to note that NexGen is a serious acquisition target for anyone who wants to play a major role in the future of the uranium mining industry. These are the reasons why NexGen's shares are not cheap. The market capitalization of more than $800 million is approaching the after-tax NPV (8%) that equals approximately to $1.09 billion at the current uranium prices. However, NexGen is a very good long-term investment for investors who believe that uranium prices will go much higher in the coming years, as well as for those who believe that the company will get acquired sooner or later.

Disclosure: I am/we are long NXE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.