Canaccord sees the potential for a robust development opportunity for Peninsula’s Lance Projects in Wyoming, US assuming a recovery in uranium prices.
The following is an extract from Canaccord’s initiation report on Peninsula:
US uranium leverage
Peninsula Energy (PEN) is focused on transitioning to a low pH operation at its uranium Lance Projects located in Wyoming, US which currently has a Mineral Resource totalling 51Mt at 479ppm U3O8 for 53.6Mlb U3O8. PEN is planning on increasing its production via a three stage development that will ultimately increase production to 3Mlb/year; it is currently awaiting results from its demonstration program and improvement in U3O8 prices prior to sanctioning conversion to low pH operations at Lance. We initiate coverage of PEN with a SPECULATIVE BUY rating and $0.15/share risked price target.
Low capex, short lead time restart potential
While not at the bottom of the cost curve, PEN's feasibility study highlighted a robust development assuming a recovery in uranium prices. Key highlights included:
- Capex of US$5.3mn in Stage 1, US$40.0mn in Stage 2 and US$73.4mn in Stage 3.
- Stage 1 AISC US$40.6/lb, LOM AISC US$31.8/lb.
- NPV8 of US$156.5mn at US$49/lb.
- 17-year life of mine (heavily dependent on conversion of inferred resource).
We model a US$47/lb breakeven for Stage 1 predicated on a 10% cost of capital.
No longer just Biden our time
In August the US Democrats endorsed nuclear energy for the first time in 48 years as part of its 'technology neutral' approach to decarbonising the power sector. This position appears to have been further strengthened by the US Senate Committee on Environment and Public Works passing a bill which approves the establishment of a national uranium reserve which could benefit US based supply projects. While this reserve would only add 3-4Mlb of incremental annual U3O8 demand (global demand is ~170Mlb) the fact that it received bipartisan support is likely, in our view, to encourage US utilities to feel more confident regarding political support and thus start contracting material volumes (inventory levels have dwindled to ~2.5 years coverage).
Positioning for a uranium recovery
After almost a decade of underinvestment, frailties in U3O8 supply are becoming evident, a situation which has been accelerated by COVID-19-related shutdowns (we forecast a 28Mlb deficit in 2020), just as the demand outlook for nuclear improves. All up we expect U3O8 demand to grow to 252Mlb (+45%) by 2035 on the back of tailwinds from three key megatrends:
- Electrification of everything: Major forecasters expect electricity demand to grow an incremental 55% by 2035 as electric vehicle penetration (CGe 14% by 2030) shapes as an emerging influence.
- Decarbonisation: With many countries below Paris-ratified targets, we expect there to be a renewal of interest in nuclear as a viable source of emissions-free energy. We note that many nations are now targeting COVID-19 recovery infrastructure funds that include carbon-free sources of energy.
- Non-OECD demand growth: We expect China (currently at 4% nuclear) to have a significant nuclear reactor build-out to meet its 2030 clean energy target of 20%.
Valuation and balance sheet
We have valued PEN using a SOTP methodology, deriving a price target of $0.15/ share which has been risked for the staged development of Lance (75% Stage 1, 50% Stages 2 and 3). We have applied a discounted cash flow (DCF) valuation for Lance, the contract book and the company’s corporate costs. Nominal value has been applied to exploration potential. We utilise a LT U3O8 price of US$50/lb (inflating at 1% p.a.). The company has US$12.7mn in net cash.