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Forsys Metals: Uranium Optionality

|Includes: Forsys Metals Corp. (FOSYF)

While Uranium may not go up for a while, I'd rather be too early than too late.

The Norasa Project in Namibia will produce over 5M pounds of uranium per year for 15 years according to the definitive feasibility study.

The company's low cash burn reduces the dilution risk.

Forsys Metals (OTCPK:FOSYF)(FSY in Canada) is my favorite uranium play at the moment. The company is sitting on nearly 100M pounds of uranium reserves in Namibia, my favorite uranium jurisdiction. The ore is low grade at 0.02%, but should be economic to mine above $50 per pound uranium.

It will cost USD$430M to build the mine, but the company has made it clear that they will conserve their cash and do nothing until the uranium price rises, which makes it the perfect optionality play. The company has promised to keep the cash burn to $50,000 per month, and it appears they are keeping their promise quite well as they spent just CAD$200,000 in Q1 2017. Forsys will probably have to raise more money very soon as they had just over CAD$200,000 on March 31st which should be mostly gone by now. Their last financing a year ago was just CAD$660,000 with half warrants attached, so the dilution wasn't too painful. I'm hoping this next financing won't raise much more than CAD$1M. With a fully diluted market cap just over CAD$20M, any more than that is a bit too dilutive at the current depressed share price.

If the financing goes as I expect, the company should have just under 180M shares outstanding fully diluted, and enough cash to fund the company to Q2 2019. If the uranium price recovers by then, we should see pretty spectacular gains in the share price. Assuming the all in cost of producing uranium at Norasa is USD$50 per pound, the project will make USD$5M in free cash for every USD$1 increase in uranium above USD$50 (not accounting for the 32% corporate tax). That's USD$50M in free cash at USD$60 uranium, USD$150M at USD$80 uranium, and USD$250M at USD$100 uranium. We're looking at a 10 bagger at least in any of those scenarios and possibly even a 100 bagger above USD$100 per pound uranium.

The big question of course is the uranium price. While I'm not optimistic in the short term, I think it's just a matter of time. This company's fiscal discipline reduces the risk of too much dilution as we wait for the uranium price to improve, so it's my preferred play.

Disclosure: I am/we are long FOSYF.