UComps: Uranium Development Stage Projects: Show me the money?

EXCLUSIVE TO SIGHTLINE U₃O₈: The development of a deposit does not necessarily lead to a commercially viable project and opening a new uranium mine is not a simple or fast process. It takes a lot of time and effort. In fact, it can take a decade or longer to go from discovery to extraction.

As an investor in the mining industry, one should be aware of key investment fundamentals:  understanding mineral exploration and resource development and the relationship to stock prices.

The early stage exploration, which can take anywhere from 3 to 14 years, can also be marked with major oscillation in stock price leading up to a discovery. Since this is the most speculative phase of the mining cycle, raising funds can be the biggest challenge for companies, however, if exploration is successful, that investment can lead to a discovery.

Around the beginning of the feasibility phase, companies reach the peak of speculation phase.

As feasibility study is being tabled, reality sets in and stock prices usually decline. We call it the “Development Stage Death Zone”.  Stocks are typically weak after an economic study, as financing is sought and production decisions are evaluated.  Subsequent mine construction can then take up to a couple of years.

Stock prices should start to rise as production starts to become a certainty. Once in production, stocks, generally, continue to rise as risk is removed and earnings commence.

It has been estimated that less than one in one thousand exploration projects will lead to a commercially viable mine and project financing is seen as the single largest obstacle to getting a mine built.   We examined the 15 uranium developers SightlineU₃O₈currently follows (view list here) that are considered to be in the “Death Zone” with an eye to evaluating the financial likelihood of building their respective mines.

The first glaring issue when reviewing current projects is the commodity price used. The companies who have issued technical reports assume uranium prices of between $50 to $81/lb U₃O₈in the calculation of the project’s economic viability, with an average of around $63/lb U₃O₈. That means that commodity prices need to at least double and stabilize before any financing is possible, let alone reaching a construction decision.

The second issue is the size of the required investment necessary to put the project into construction – the Capital Expenditures or “CAPEX”. Below is the stated CAPEX for each of our companies alongside their respective market values.  In most cases there is a serious disconnect between the value of the Company as a whole and the size of the investment they need in order to construct their projects.  How does a $40 million Company raise $400 million to build their mine?

One way that projects are successfully financed is by committing some production to a vendor or even “pre-selling” some of their production in return for construction financing.  Two such situations are Berkeley Energia with its Salamarca Project in Spain and Fission Uranium’s PLS Project in the Athabasca Basin. Both companies have been able to successfully fund their exploration and development phases and more importantly, both of them have already secured offtake agreements, with large financial backers giving them a leg up on the other projects currently being developed.

Berkeley Energia announced a Definitive Feasibility Study in July 2016 reporting that over an initial ten year period, the project is capable of producing an average of 4.4 million pounds of uranium per year at a cash cost of US$13.30 per pound and a total cash cost of US$15.06 per pound during steady state.

The company secured a strategic investment of up to US$120 million from the Oman sovereign wealth fund to fund the project to production and has committed to them 2.75 million pounds of U₃O₈ under contract for the first six years, with a further 1.25 million pounds of optional volume. They will continue to progressively build its offtake book and has granted the Oman sovereign wealth fund the right to match any future long-term offtake transactions.

Fission Uranium announced a Preliminary Economic Assessment (“PEA”) on its Triple R Deposit in 2015,  with production of an average of 13 million lbs U₃O₈per year for 6 years, followed by an average of 3 million lbs U₃O₈per year for 8 yearsat a cash cost of $16.50/lb.

Fission also enjoys a Strategic Partnership with China’s CGN Mining, who invested $82.2 million into the Company’s private placement in early 2016 to earn 19.9% of the company’s shares plus executed an offtake agreement whereby CGN Mining would purchase 20% of the annual U₃O₈production with an option to purchase up to an additional 15% U₃O₈production from the PLS property (which includes the Triple R Deposit), after commencement of commercial production. A pre-feasibly study is expected within Q4 2018 as well.

Vimmy, Bannerman and Azarga publicized their marketing efforts for offtake agreements, however there have not been any agreements announced to date. In the last two years, they have been able to raise $33 million, $12.7 million and $6.5 million in equity respectively.

In the absence of completed agreements, some companies have been able to secure senior equity partners capable of seriously backstopping or assisting in construction financing.

Although NexGen Energy has no formal financing agreements in place, the company is financially backed by a global investor base of long-term capital, including CEF Holdings (Li Ka Shing), Global X Management, CI Investment amongst others which increases their likelihood to bring their Arrow deposit, situated in the Patterson Uranium District, southwest of the Athabasca Basin into production. In the last two years, NexGen has raised just over $220 million.

Goviex also enjoy a strong shareholder base, with just over 32% of its shares outstanding being held by Denison Mines, Invanhoe Industries and Cameco Corporation. Goviex raised just over $21 million in the last two years to fund its definitive feasibility study for its Madaouela Project which is schedule to be completed this quarter.

Unfortunately, we found that eight of the Developers have not announced their intentions or plans regarding financing their projects. These projects average approximately $440 million each in required construction costs but an average of $50 million in corporate market value each.  Hopefully we will see higher equity values and financing plans from these companies in the future as uranium prices recover.

Two of the more optimistic companies here (Aura Energy and Forsys Metals) have already gone as far as to announce construction decisions and production dates. In the absence of a funding plan, these announcements may be premature.

The remaining companies on our list (Anfield, Laramide and Western Uranium) are still working on the delivery of economic reports and we are all looking forward to those results.