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Berkeley Energia: THE INVESTMENT CASE

Berkeley Energia lines up final duck with financing talks

Salamanca, says the group, will be one of the globe's top ten producers and among the lowest cost producers
Berkeley Energia and its Spanish uranium story
INVESTMENT OVERVIEW: BKY The Big Picture
Salamanca will become a low cost uranium mine

Berkeley Energia PLC (LON:BKY) is down to the brass tacks stage of financing at the Salamanca uranium mine in Spain.

Berkeley “is considering a range of options while remaining focused on its aim of minimising dilution in order to protect the equity value of its shareholders,” it said in March.

As one of the notable features of the (rapid) progress so far has been Berkeley’s ability to attract both high level investors and offtake partners, news may come sooner rather than later.

Salamanca in the top rank

A reason for this is that Salamanca 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 tie of the study, chief executive Paul 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 or almost double the current spot.

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.

Full financing route

A number of number of potential groups are said to be interested in financing the mine, with the site's attractive low operating and capital costs part of the appeal.

“The company continues to progress discussions with various potential strategic partners and financiers interested in taking a minority stake in the Salamanca mine, all of whom are currently undertaking detailed legal, financial and technical due diligence,” added the March statement.

Having banked US$30mln from London institutions in an over-subscribed fundraise, the company is looking to secure the remainder of the US$96mln investment required to complete Salamanca.

Its preferred method, to minimise shareholder dilution, is the sale of a minority interest to a strategic partner for a price that reflects the NPV.

What the brokers are saying

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

Kazakhstan now 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.

If so, the effect on the uranium price will be dramatic believes Justin Chan at Numis.

Peel Hunt, the house broker, adds 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.

But being located within an OECD country such as Spain makes it a highly attractive proposition for major utilities that want security of supply.

On the likely margins, cash flow in each of first five years will be US$150mln or more than the current market value, says the broker.

At 53p, the company is valued at around £139mln.

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