Peninsula Energy Ltd (ASX:PEN) has attracted a A$2.25 price target from Rodman & Renshaw, a subsidiary of H.C. Wainwright & Co.
The broker has reiterated its Buy Recommendation. Peninsula last traded at A$0.55 per share. The following is an extract from the report.
Fifth Long-Term Contract Provides Price Stability
Production at Lance starting to ramp-up.
Since commencing production at the Lance Projects in December 2015, three of the seven header houses envisioned for Stage 1 have come online as management continues to ramp towards full-scale production.
We expect the remaining header houses to come online during 2H16, which will complete Stage 1 of the production ramp-up.
We expect the completion of Stage 1 to provide the firm with production capabilities totaling 600,000 - 800,000 pounds per year, which we think should serve as a springboard towards completion of Stage 2.
The $35 million Stage 2 expansion, which includes an additional seven header houses, is expected to bring total production capacity to 1.2 million pounds per annum.
Moreover, while the firm has yet to provide production guidance for 2016, we continue to expect approximately 300,000 pounds of production and expect to receive greater visibility with respect to production once results from CY2Q16 are announced.
Funding for Stage 2 expansion ongoing.
During the first quarter, Peninsula announced the closing of a $15.0 million convertible loan with existing investors (RCF and Pala) in addition to a term sheet for a $25 million streaming facility.
Combined, these funds should allow the company to complete the approximate $35 million Stage 2 expansion at Lance.
While the streaming facility has yet to close, due diligence is well underway and we expect this facility to provide a portion of the capital required to complete the Stage 2 expansion.
Not only is the Stage 2 expansion expected to increase production capacity to 1.2 million pounds per annum, it should also drastically reduce operating costs.
The expansion should bring processing in-house, rather than through a toll milling agreement.
This, coupled with the realization of economies of scale, leads us to believe all-in sustaining costs (AISC) could fall from $41 per pound to just over $30 per pound—a greater than 25% decrease in costs at the site.
Long-term contracts to provide price stability.
With the addition of another long-term sales agreement with a European utility company, Peninsula now has five contracts in place totaling 7.9 million pounds over the next decade.
We highlight the average price of $56 per pound under these contracts, which is significantly higher than current spot prices of around $27 per pound.
In short, we continue to believe Peninsula’s higher-priced contracts should provide investors with downside protection with respect to spot uranium prices, while the firm's staged development strategy provides upside through an increased production profile.
We are reiterating our Buy rating, while modestly lowering out PT to A$2.25 from A$2.60.
We note that our slightly decreased price target is primarily a reflection of accounting for the firm’s recent capital raise below our prior valuation.
Our valuation remains predicated on a DCF of operations at Lance utilizing a 10% discount rate, which we expect to revisit following additional long-term production
details from Peninsula.
We continue to view Peninsula as a defensive uranium name, primarily due to the existence of higher-priced longterm contracts.
In our opinion, these contracts ultimately should allow Peninsula to not only survive, but thrive in the current uranium price environment.
Risks.
1) Financing risk;
2) uranium price risk;
3) operating and technical risk; and
4) political risk.
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