Peninsula Energy (ASX:PEN) has been rated a Buy and given a A$2.60 price target after New York based Rodman & Renshaw initiated research coverage on the uranium producer. Current share price is $0.935.
Here is a summary of the report:
Emerging ISR Producer with Scalability
Peninsula Energy presents a unique opportunity. Peninsula, based in Australia, owns the Lance Projects located in Wyoming and is focused on developing an In-Situ Recovery (NYSEMKT:ISR) uranium powerhouse.
In our view, the low cost ISR processing technique, coupled with high priced long-term contracts positions Peninsula as a viable uranium producer despite spot uranium prices hovering around $35 per pound.
Management began signing long term contracts for production at Lance in 2011 when uranium prices were significantly higher than today. The firm currently has contracts in place totaling 7.8 million pounds at an average price of $59 per pound through 2020.
Therefore, the average price Peninsula is expected to receive throughout the remainder the decade is significantly higher than the current long-term price of approximately $45 per pound, which we feel locks in margin and de-risks operations as a whole.
In our view, Peninsula's long-term contracts and low cost ISR operations position the firm to thrive despite lower spot uranium prices.
First production was reached in 2015. In December 2015, the firm brought its Ross Permit Area (located within the Lance Projects) online with ISR production commencing.
We currently estimate average cash costs of just $22 per pound during Stage 1, generating an impressive gross margin of approximately 63%. Further, Lance hosts a significant resource base totaling 53.6 million pounds, including 4.5 million pounds in Measured, 12.6 million pounds in Indicated and 36.5 million pounds in Inferred resources.
We note that while the majority of resources are Inferred, the firm currently has six drill rigs operating, which we feel could ultimately increase resources while upgrading the existing resource base.
The Lance Projects are scalable. The Lance Projects are currently being developed in a three-stage approach with Stage 1 recently completed. Moreover, Stage 1 provides Lance with production capabilities totaling 600-800,000 pounds per year, which is expected to be sourced from the Ross Permit Area.
Stages 2 and 3 are expected to bring total capacity to 1.2 and 2.3 million pounds per annum, respectively. In our view, the staged expansion approach at Lance should allow the firm to not only smooth out capital requirements but finance a portion of Stage 2 ($35 million) and Stage 3 ($78) million with cash flow from operations. We view this strategy as prudent as capital requirements for incremental expansions can be completed depending on market conditions at the time.
We are initiating coverage on Peninsula Energy with a Buy rating and A$2.60 per share price target. Our valuation is based on a DCF of operations at the Lance Projects utilizing a 10% discount rate and an average uranium sales price of $59 per pound (per PEN's long term contracts) through 2020 and $60 per pound thereafter.
Further, we add in-situ value for resources at Peninsula's Karoo Projects in South Africa. Additionally, we utilize a staged approach with respect to expansion at Lance with Stage 2 coming online in 2018 and Stage 3 following in 2020.
We view Peninsula's average long-term contract price of $59 per pound as significant, and believe the firm should enjoy the benefits of strong margins relative to peers without contractual commitments despite weaker uranium prices.
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