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Berkeley Energia: THE INVESTMENT CASE

Berkeley Energia underlines Salamanca's quality with US$120mln finance package

Shares jump 12% as Oman's sovereign wealth fund heavily backs Salamanca project
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INVESTMENT OVERVIEW: BKY The Big Picture
Work is already underway on mine construction at Salamanca

In March, Berkeley Energia PLC (LON:BKY) said it was considering a range of options to finance  the Salamanca uranium mine in Spain.

It has now made its decision and a 12% rise in the share price on the day of the announcement suggests the market is more than happy with the plan.

To minimise dilution, Berkeley always indicated it wanted the sale of a minority interest to a strategic partner for a price that reflects the NPV (net present value).

And that is what it has arranged, but with a very big-hitting partner.

Oman sovereign fund to take 28% stake

In a deal with the Sultanate of Oman’s sovereign wealth fund, Berkeley will receive US$120mln through a convertible loan and option package that will fund Salamanca through construction and into production.

As well as Oman becoming a substantial shareholder in the company it has an option to become an offtake partner.

Terms will see the fund provide Berkeley with an interest-free and unsecured loan of US$65mln convertible at 50p per share, a near 11% premium to last night’s closing price.

WATCH: Berkeley Energia inks 'phenomenal' US$120mln strategic financing deal

If converted, the wealth fund will take a 28% stake in Berkeley, which can be increased by a further 9% through the exercise of three further tranches of shares at 85p.

These will trigger later on in the mine’s development and raise a further US$55mln for the company.

Tim Keating, private equity manager for mining and resources at Oman’s State General Reserve Fund said: "The Salamanca mine matches our investment criteria of being a long life, low cost mine development opportunity with outstanding economic fundamentals.”

READ: Berkeley Energia on-track to be one of world’s top uranium miners

Paul Atherley, Berkeley’s managing director, told Proactive he was thrilled with the finance package.

“It is a phenomenal.  An equity financing at a premium to market is a great vote of confidence in the mine plan and asset when uranium prices at 10 –year low.”

Berkeley already has an offtake agreement in place at double the curent spot price but the Oman fund can match any future agreements, which was another plus for the deal said Atherley.

“We have a long term strategic investor that is investing at a premium and is also a potential offtake partner.”

Salamanca in the top rank

Salamanca is one of the only handful of major uranium mines currently in development and will rank among the globe's top ten producers and among the lowest cost, able to generate cash even with the current low uranium price.

A full study in 2016 showed that over an initial ten-year period, Salamanca can produce an average of 4.4 million pounds per year at US$13.30 per pound and cash cost of US$15.06 per pound (compared to current spot of US$26 per pound).

It is expected to generate an average annual net profit after tax of US$116 million.

The DFS placed a net present value (NPV or future cash flows) on the operation of US$532mln, and upfront capital costs to build the mine were slated at US$96mln.

Operating costs are almost exclusively in euros but revenues will be in US dollars.

The initial mine life of 14 years was based on measured and indicated resources of 59.8mln pounds, but exploration is aimed at converting some of the inferred 29.6mln pounds into mineable material.

Speaking to Proactive at the time of the study, Atherley said: "We are able to build this project, produce uranium, right at the bottom of the uranium price cycle and we are the only mine in the world that's able to do that."

Offtakes underway and a price rise?

Berkeley signed its first offtake deal in November.

The AIM-listed mine developer has a binding contract with trader Interalloys to supply two million pounds of the metal annually over five years, with the potential to extend that to three million pounds.

The average fixed price to be paid under the off-take agreement is US$43.78.

Why the price mis-match? Salamanca is slated to come on stream in 2018, which is expected to coincide with a sharp upturn in demand for the silver-white metal.

Analysts say at that point US utilities will be looking to re-contract supply, but will likely run up against competition from Chinese reactors, which ought to push up prices.

 “We intend to build our uranium sales book by entering into long term offtake contracts from now until the commencement of production,” said Atherley.

What the brokers are saying

After confirmation of the Oman deal, analysts at Liberum Capital said: “Market will be happy that a deal has been done in such weak uranium market conditions and that the strike for note is not lower than the previous equity placing of $30m at 45p in Nov’16.”

Numis, meanwhile, repeated a ‘hold’ rating on the stock with a price target of 60p.

Brokers have always been keen on the Salamanca project, but interest has warmed this year following a seeming change of attitude by Kazakhstan, the major player in the market.

Kazakhstan has a 40% share of the global market and is the lowest cost producer, but has dropped hints that its land grab is over and now it will look to build stocks rather selling immediately.

Peel Hunt, the house broker, says that Salamanca’s costs are similar to the in-situ leach production in Kazakhstan, which is widely acknowledged as the lowest cost uranium address currently.

Being located within an OECD country such as Spain, though, makes it a highly attractive proposition for utilities that require security of supply.

On the likely margins, cash flow in each of first five years will be US$150mln said the broker.

In late afternoon trading, shares in Berkeley Energia were up over 12% at 51p.



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