Peninsula Energy Ltd (ASX:PEN) has received a Speculative Buy and $1.20 target price from Perth broker Patersons.
Peninsula last traded at $0.69. The following is an extract from the report.
URANIUM PRODUCTION TRENDING UP
Investment Highlights
Peninsula Energy (PEN) is in the process of ramping up uranium production at its Lance In-Situ Recovery (ISR) project in Wyoming.
Significantly, since commencing production, grades have continued their upward trajectory which should allow the operation to reach Stage 1 production levels during 1H/CY17.
Importantly, PEN expects to finalise funding for Stage 2 production over the next quarter, which is expected to bring costs down towards US$30/lb.
We see PEN’s key advantage over other uranium producers is that it has secured several long term uranium contracts with fixed pricing close to US$60/lb that is significantly above the current spot price (cUS$26/lb).
We see a number of short term catalysts that could positively impact the stock including a NYSE MKT listing and further developments at its Karoo project in South Africa.
We rate PEN a Speculative Buy with a price target of $1.20/sh.
Uranium Production Ramping-Up:
PEN recently provided an update on its operations which demonstrated that uranium production is moving in the right direction. Since commencing production at the end of last year, uranium grades are gradually increasing and are currently in the 35-40mg/l range. They are expected to peak at around 40-45mg/l over the next half.
This should allow Stage 1 production levels of 500-700klbpa U3O8 to be achieved.
For July, uranium production has effectively reached an annualised rate of 230,000lbpa with production continuing to ramp-up with contributions from Header Houses 3 & 4.
Significant Long Term Uranium Contracts:
In our opinion, PEN’s biggest advantage over its peers is that it has secured five long-term uranium contracts.
In total, PEN has 8.1Mlb contracted at a weighted average price of US$55/lb over the next 10 years.
This demonstrates that the PEN management team has significant relationships with the end-users.
Four of these contracts are with US utilities and one with a large European utility.
We expect PEN to continue to build these relationships with one more contract expected to be concluded over the next 2-3 months to further de-risk Stage 1 production.
Valuation $1.20/sh:
Our valuation for PEN has decreased to $1.20/sh (from $1.90/sh). The key driver has been revisions to our uranium price forecasts.
We have incorporated the US$15m convertible note and have also made some minor adjustments to the production ramp-up which has been delayed due to a significant loss of drilling days during the 2015/6 winter and delays in obtaining the initial production permits.
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