Peninsula Energy Ltd (ASX:PEN) has received a Buy recommendation from Rodman & Renshaw, who have reiterated their A$2.25 price target.
Peninsula last traded at $0.69. The following is an extract from the report.
Rodman & Renshaw / PEN-AU: Stage 2 Development On-Deck; Reiterating Buy
On July 29, 2016, Peninsula Energy announced 2Q16 financial results.
During the quarter, Peninsula produced 28,858 pounds of uranium at the Lance Projects, primarily from header houses 1 and 2.
Although header houses 3 and 4 are currently operating, they did not come online until July, which leads us to believe Peninsula can increase QoQ production in 3Q16.
Overall, the firm sold a total of 55,000 pounds of uranium at an average price of $62.80 per pound—significantly above the current spot price of below $30.00 per pound.
Given the current ramp up of production at Lance, we think a 600,000 - 700,000 pound per annum run rate should be achievable by 1H17.
Eventually, Stage 1 at Lance is expected to host seven header houses that should all be online by the end of 2016.
Development of Stage 2 expected.
While the ramp up of Stage 1 continues to move forward as expected, Peninsula has begun initial development activities for Stage 2 of the project, while final financing arrangements are ironed out.
The funding package for the expansion remains underway as the due diligence process proceeds with respect to securing a revenue streaming facility.
While the terms of the envisioned financing package have yet to be released, we think this non-dilutive financing should provide approximately $25.0 million towards the total capital cost of Stage 2, which we estimate to be approximately $35.0 million.
We view the development of Stage 2 as critical, since the expansion expected to increase production capacity to 1.2 million pound per annum while also reducing costs substantially to approximately $30 per pound on an AISC basis.
Long-term contracts allow for profitability.
Given that Peninsula currently has five long-term contracts totaling 7.9 million pounds at an average price of $56 per pound, we believe substantial margins should be realized despite a floundering uranium spot market.
With AISC expected to drop to the $30 per pound range following the Stage 2 expansion, we expect Peninsula to enjoy margins of approximately 45%-a luxury in today’s uranium market.
While we expect Stage 2 to be constructed by 2018, we continue to believe flexibility with respect to this timeline remains.
While we do not view the scenario as likely, should spot uranium stay below the firm’s AISC of production, management could choose to purchase uranium at spot and sell it into its higher-priced long-term contracts rather than moving forward with the expansion.
While we fully expect the Stage 2 expansion to occur, this potential provides management with greater flexibility to tailor operations depending on market conditions.
We are reiterating a Buy rating and $2.25 per share price target on Peninsula Energy.
Our valuation remains predicated on a DCF of operations at Lance utilizing a 10% discount rate, which we expect to revisit following the completion of the Stage 2 expansion.
We continue to view Peninsula as a defensive uranium name, primarily due to the existence of higher-priced long-term contracts.
In our opinion, these contracts should allow Peninsula to not only survive, but thrive in the current uranium price environment.
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