The investment bank continues to forecast upside with a A$1.75 price target supported by Peninsula’s long term uranium contracts continuing to provide healthy margins.
An extract from the report is below:
On June 14, 2017, Peninsula provided an update for its operations at the Lance Projects.
The firm is expected to produce 30,000 pounds of uranium in the quarter ending in June, which would be a 20% improvement over the prior quarter ending in March.
Operations have improved, with the daily average rate of production increasing almost 40% from the prior quarter.
We note that the average daily rate of production in the current quarter was above 400 pounds per day, in part due to additional Header houses.
Header houses 5 and 6 were activated in 2017, and production has improved at each since they were brought online.
In May, header house 7 was turned to the Central Processing Plant (CPP) and also began contributing to total production.
Overall, operating wells have responded favorably to multiple improvement initiatives implemented by the company in the current quarter.
Additional production options are expected to come online.
Construction at Header house 8 is now complete, and the house has began operating in re-circulation mode.
The company anticipates turning header house 8 towards the CPP in July. At the same time, the company plans to continue with the roll out of header houses 9 and 10 as well.
While we do not expect the additional capacity to be used to ramp up production in the near future, we do think it may provide increased flexibility in allowing optimization of average uranium grades among the various header houses and a shorter-term ramp-up of operations once prices improve.
Lower production to continue in the near term.
We note that current production target levels should remain subdued as additional production isn't needed to fulfill the company's sourced delivery commitments under existing contracts.
The company has contracted sales for 7.7 million pounds of uranium through 2030 at a weighted average delivery price of $54 per pound.
In addition, the company has contracted to purchase 900,000 pounds of uranium over the next three years at an average cost of $25 per pound.
We think that limiting the company's exposure to the current weak uranium price environment by making additional purchases at the current spot price makes sense.
Long-term contracts should help to maintain healthy margins.
Given that Peninsula has a number of long-term contracts totaling 7.7 million pounds at an average price of $54 per pound, we believe that substantial margins should continue to be realized despite the current weak uranium price.
With spot purchases over the next few years around $25, the company could maintain margins above 50%, which is extremely impressive in today's market.
We still envision the Stage 2 expansion beginning in 2019 with the incremental Stage 3 expansion beginning in 2022.
However, until these expansions are initiated, we expect the company to maintain healthy margins by producing less and purchasing more at the spot price.
We are reiterating our Buy rating and A$1.75 per share price target.
Our valuation remains predicated on a DCF of operations at the Lance Projects utilizing a 10.0% discount rate and average uranium sales price of $53 per pound in 2017 and $55 per pound thereafter in-line with PEN’s long-term contractual commitments.
We continue to view Peninsula as a defensive uranium name, primarily due to the existence of higher-priced, long-term contracts.
In our view, these contracts should not only allow Peninsula to survive the current downturn, but position the firm to thrive once prices increase and expansion plans are moved forward.
Risks. 1) Financing risk; 2) uranium price risk; 3) operating and technical risk; 4) political risk.