Peninsula Energy Ltd (ASX:PEN) has received a Buy recommendation from the London based Numis Securities Limited.
Numis initiated coverage with a A$1.20 per share price target, or around double the current valuation.
The following is an extract from the report.
Cashflow as Lance ramps up, growth from Karoo
Peninsula is a growth focused uranium miner which is ramping up production at its Lance ISR project in Wyoming, which should produce up to 2.5Mlb/year at an AISC of US$29/lb once fully developed.
PEN have remaining forward sales of 8.0Mlbs at an average price of US$56/lb, a premium to the spot price of US$26/lb, and, as a US producer, is well positioned to secure further agreements.
The company also owns the Karoo project in South Africa that hosts a high grade Resource of 56.9Mlb that should be developed into a 2.5Mlb-3Mlb mine over the medium term.
We initiate coverage with a BUY recommendation and a target price of A$1.20/share.
Ramping up Stage 1 at Lance, with 8.0 Mlb of long term deliveries secured at US$56/lb.
Peninsula commenced production at its In Situ Recovery Lance project in Wyoming in late 2015.
Stage I should hit design capacity of 600-700klb of U3O8 in H1 2017.
The development of Stages II and III of the project should increase production to 2.3Mlbs/year by 2020 and mgmt have put in place a series of long-term off-take agreements (8.0Mlbs remaining, 8.2Mlbs originally signed) at US$56/lb with European and US-based utilities.
AISC at the project should decline from US$41/lb during Stage 1 to US$29/lb once Stage 3 is developed due to greater economies of scale and vertical integration.
This should place the company in the lowest quartile on the cost curve.
Karoo should double production over the long term.
The Karoo project in South Africa has a current Resource of 56.9Mlb at 1,108ppm U3O8, however, it occurs within a far larger series of mineralised palaeochannels, which could host a far larger Resource.
In line with BEE legislation Peninsula holds a 74% interest and has entered into an agreement with DRA to complete a PFS.
We assume that Karoo enters production in CY2020 with capex of US$150 million (plus a US$45 million payment to Areva) to develop a 2.5-3Mlbpa project with AISC of US$31/lb.
Uranium pricing not sustainable at current low levels.
The spot uranium price has come under stress post-2011 due to the idling of Japanese reactors, reduced contracting, and supply increases due to underfeeding and increased Kazakh ISR production.
Notwithstanding this, the majority of natural uranium is transacted between producers and energy utilities through long term contracts whose prices are more stable than the spot price.
The current contract price of US$38/lb is above the US$26/lb spot price and we believe that contract prices will move upwards due to improving demand factors and is currently too low for producers to be willing to transact long term contracts.
We expect contracting activity and prices to increase as utilities replace the contracts and volumes signed in the 2008-2010 period.
Initiate coverage with a BUY recommendation and A$1.20 target price.
We initiate coverage with a target price of A$1.20 based on 1x our 7% NAV for Lance and 0.5x our 10% NAV for Karoo.
Over the short term we expect the shares to re-rate as Stage 1 production at Lance is completed in H1 2017, further long term supply contracts are secured and the PFS for Karoo is completed.
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