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Peninsula Energy's Lance uranium projects to catch change in sentiment wave

Last updated: 13:03 06 Dec 2013 AEDT, First published: 14:03 06 Dec 2013 AEDT

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Peninsula Energy's (ASX: PEN) steady progress towards starting uranium production at its Lance Projects in Wyoming is looking well timed, given the sentiment tipping back towards nuclear energy in recent months.

Recently, Romanian national nuclear company Nuclearelectrica signed a letter of intent with China General Nuclear to develop two reactor units at its Cernavoda nuclear power plant.

China, which has plans to increase its installed nuclear-generated electricity generation capacity to 50 gigawatts by 2017 from the current 12.5GW, had late last month connected a new reactor – Hongyanhe 2 – to its grid.

Russia has also unveiled plans to build 21 new nuclear power generation units across nine power stations by 2030 as part of a regional and territorial energy planning scheme.

Even petroleum producing countries have flagged that they would use nuclear power with Qatar planning to use it to provide 25% of its energy needs.

Scientific Support

This move towards increasing nuclear use has received the support of leading climate scientists, who have asked environmentalists to support the development of safer nuclear power as renewable sources such as wind and solar cannot scale up fast enough to meet demand.

The scientists, who have played key roles in warning about climate change, said the world could not afford to turn away from any technology that had the potential to reduce greenhouse gases, adding that its risks were far smaller than the risk posed by extreme climate change.

An example of this has been Japan’s slashing its greenhouse gas emissions target due to its “zero” nuclear power plans.

It now aims to achieve a 3.8% cut in carbon dioxide emissions by 2020 versus 2005 levels, a sharp decrease from the original 25% reduction target.

Japan had shut its 50 nuclear plants following the March 2011 earthquake and tsunami, which wrecked the Fukushima facility northeast of Tokyo.

Supply Concerns 

To top of it off, Russia has shipped its last batch of weapons-derived uranium to the U.S., ending a cheap supply of fuel for the country’s reactors and possibly open the way for new supply to meet the demand.

This will take off about 24 million pounds – or 12 million pounds net due to low enriched uranium and underfeeding – of secondary U3O8 supply.

Russia will also stop development of uranium projects including Mkuju River due to low prices. This could reduce supply by between 4 million and 7 million pounds from Mkuju alone.

Kazakhstan, the world’s largest uranium producer, has also flagged that it would stop future development.

While this could represent about 13 million pounds of U3O8 supply, the projects in the country’s south are seen as being more technically challenging and higher cost.

All these factors have had an impact on prices, which had in the two weeks to 15 November 2013, increased US$1.50 per pound of U3O8 to about US$36/lb.

This could rise further with some expecting 2020 demand to hit 240 million to 260 million pounds versus supply of 200 million pounds.

Lance Uranium Projects

In light of these developments, Peninsula's share market valuation could well find a more receptive market when it brings the Ross Permit Area of its Lance Uranium Projects into production in the fourth quarter of 2014.

Site works are progressing well as the company awaits the issue of the final Source Material Licence from the U.S. Nuclear Regulatory Commission that would allow it to quickly construct the central processing plant.

It has already the required volumes of top soil from the central processing plant and administration areas in order to provide material for access roads, laydown areas and future site reclamation needs while offshore fabrication of long lead items has already begun.

The Lance Uranium Projects are envisaged as producing 2.3 million pounds of U3O8 per annum with an NPV of US$328 million and a capital expenditure of US$146 million to reach steady state production. Initial capital expenditure is US$68 million.

Steady state operating costs have been estimated at US$30.65 per lb U3O8, highlighting its commercial viability at the current long term contract price of US$56/lb and ranking Lance amongst the lowest cost producers.

The first production unit will be at Ross with a capacity of up to 1.2 million pounds per annum followed by Kendrick, ramping up over several years to a steady state 2.3 million pounds per annum.

It is expected to be cashflow positive from the fourth quarter of 2015 with payback within 3.4 years.

The Lance Projects have a JORC Resource of 54 million pounds of U3O8 with further exploration potential of 158 million to 217 million pounds.

Analysis

There is little doubt that nuclear power is here to stay and in fact is likely to see increased used in the future.

In light of this, Peninsula Energy’s progress towards production and the likely timing of first production is fortuitous and good management particularly once the Lance Projects ramp up to full production.

Key milestones prior to this include securing the Source Material Licence, construction of the processing plant and the start-up of production at the Ross Permit Area.

There will be a time when the share price of Peninsula has its day in the sun. To some investors, it could currently seem like buying straw hats in winter. We see if differently - a long term buying opportunity at a current market cap. and valuation of circa $67 million - which takes into account little of projected re-ratings from reaching milestones and moving up the curve toward production and revenue generation. For long term investors, at the current share price of $0.021 the rewards could be sweet.

Proactive Investors Australia is the market leader in producing news, articles and research reports on ASX “Small and Mid-cap” stocks with distribution in Australia, UK, North America and Hong Kong / China.

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