Peninsula Energy Ltd (ASX:PEN) has been ranked as BM Capital Markets top uranium pick.
The following is an extract from a research report.
How to Bake a Yellow Cake
Peninsula (Top Pick) rated Outperform (Speculative); Target Price A$1.00.
Its favourably priced contract book brings with it protection from lower near-term spot uranium prices, with production growth in stages offering the main catalyst, together with attractive trading multiples.
Peninsula offers production growth, which should drive higher trading multiples, backed up by its favourable sales contracts, as well as attractive exploration upside, which is not fully reflected in its share price.
Key Pros and Cons
+ In production and ramping up to Stage 1 of 500–700klbpa U3O8 permitted to 3Mlbpa, but plans currently to Stage 3 of 2.3Mlbpa.
+ In situ leach mining has a relatively low environmental impact. Staged expansions allow market flexibility. Technically competent management.
+ Well contracted production at an average price of US$56/lb covering 75% of the first stage of production, reducing downside risk.
+ Could be a regional consolidator.
+ Comps well on EV/EBITDA and P/E multiples.
− Higher-cost operation in initial phases, but costs more than covered by uranium contract price. Mid costs longer-term.
− Limited scalability, beyond 2.3Mlbpa U3O8 Stage 3 target at this point without further wellfields.
− Funding for Stage 2 expansion contingent on conversion of convertible bond and streaming agreement/additional debt.
Protect Margins Though Contracting
Focus on companies with favourable contracts: Much of the world’s uranium supply is contracted between the supplier and utility in advance of delivery, which insulates producers to some degree from fluctuations of the spot price and protects profit margins if higher than spot.
The upside: Margins for the well-contracted companies are relatively well protected, particularly given >50% of the global total cost curve is currently under water at spot price of US$28/lb U3O8.
On this basis, Peninsula and Cameco score the best, with both companies generating attractive multiples even in the lower price environment.
For this reason, both companies are lower-risk investments than non-contracted companies.
Target Price Methodology
Our target price of A$1.00 for Peninsula reflects a 75/25 blend of P/NPV (long term – 0.9x) and 2017E EV/EBITDA (short term – 9x) multiples.
We estimate that Peninsula is likely to receive the highest uranium price out of the producers under our coverage, remaining at ~US$50/lb or more on our forecast.
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