Peninsula Energy Ltd (ASX:PEN) has received a Buy Recommendation from broker Dundee Capital Markets, with a $1.50 target.
Peninsula last traded at $0.65. The following is an extract from the report.
Cash Management Important as Lance Production Ramps
We recommend Peninsula as a BUY, but reduce our share target to A$1.50 from A$1.80/sh on deferred production for FY16 and FY17.
We apply a 0.9x multiple to our 10% DCF model. We also upgrade our risk rating to High from Speculative, given that production rates at Lance have begun to accelerate.
We watch Peninsula's cash balance as Stage 2 capital spend nears; particularly as early stage mine costs are higher, and U3O8 deliveries are fewer, smaller and sporadic. Uranium prices are less of an issue due to an extensive suite of industry leading high priced contracts.
Though sales of 105,000 lbs were made over the past two quarters, most of this material was sourced from purchases on the spot market.
Nevertheless, an exceptional production growth profile in the US coupled with a high-priced contract portfolio makes Peninsula one of our top defensive picks in the sector, provided that ramp-up continues as scheduled.
PEN trades at a P/NAV of 0.39x versus developers at 0.33x, producers at 0.38x.
Q4/16 production, sales pre-released.
Production was 29,000 lbs, and deliveries were 55,000 lbs at US$62.80/lb with cash received post-Q.
Production was sourced from Header Houses 1 and 2, now producing at 105% of target. Flow rates have also achieved targets at 18-20 gpm, and combined head grade now exceed the LOM average of 38 mg/L. We are impressed with the 130% premium over average spot.
This contract book is one of the best in the sector. It has 8.1 MM lbs sold forward at an average of US$55/lb U3O8 for the next ten years. Expect further off-takes to cover Stage 2 and Stage 3 production.
Production step change in July.
Header houses 3 and 4 have helped increase production by ~70%, post quarter, and 16,800 lbs was produced by July 27th.
There are no bottlenecks in the plant. This suggests an annual run rate of 228,000 lbs, which is roughly 1/3 of scheduled Stage 1 capacity. Stage 1 production guidance previously moved back.
We now expect 200,000 to 300,000 lbs in CY16, and a run rate of 600,000 to 700,000 lbs by CY17.
Cash management is important.
Cash is somewhat hand to mouth. We also expect lag time between production, deliveries and payment.
Including recent payments we estimate US$10.4 MM cash on hand, with plans to spend US$8.3 MM in FQ1/17. US$11.5 MM is available from a US$30 MM facility.
A $25 MM Revenue Streaming facility is nearing completion to help fund $35 MM Stage 2 Capex. Due diligence is completed and the agreement is being finalized.
Stage 2 development set to begin.
Initial development has started. This would be another step change, doubling production capacity to 1.2 MM lbs pa, bringing final processing in house.
Significant cost savings are expected, with total cash costs due to drop from US$41/lb U3O8 to US$31 to 32/lb.
NYSE listing now expected H2/16.
This should improve liquidity and provide access to new capital. Management believes the main issues are covered, namely using resources, not reserves, for qualifying technical studies.
It has also moved to US$ reporting which should help reduce A$:US$ FX sensitivity.
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