Good One to Listen, page-75

Hi Billt5 thanks for this, but for me, it isn’t anything new apart from a faithful regurgitation of known information. Indeed it was this same information that I used to form the basis of my assessment and subsequent commentary. Same information, two opposing views of what it all means. Why? I think it’s because you have taken everything at face value; you trust implicitly, everything announced by PEN without the need for critique. I take a different position and look for the discrepancies between what is announced and what has actually transpired since start-up. Despite the rosy picture presented in the PEN announcements over the last 12 months, the very real truth, confirmed by the production data, is that production ramp-up has been mediocre, if not downright poor. As they say, “You can have your own opinion, but you can’t have your own data.”

With regards to the injection/production wells, apart from the grade of the hole and its location (one would hope they are drilled in the correct spot), three design parameters need to be achieved to meet annual production guidance; 1) lixiviant flow rate (consequence of roll front porosity/permeability) and chemistry; 2) extraction extent and 3) rate of extraction.

HH 1 and 2 flow rates are claimed by PEN to be operating “as designed” although I do not words like “substantially” and “partially” when these claims are made. HH 3 and 4 are taking longer to ramp up as you state. Why the non-performance and what is being done to resolve the issue? Can anything be done or is it terminal and PEN move on to the next set of HH’s? I suspect it is terminal and this uranium will be written off or it will take much (much) longer to recover. Obviously additional HH’s will be required to replace this lost uranium so capital expenditure per recovered lb will increase. Not good for the financial metrics. HH 5, 6 and 7 unknown at this time but the outlook is not good. Why else would PEN want to bring on HH 8, 9 and 10 ahead of schedule? I have noted, as have you, that there is no more talk of HH 4. I suggest HH 4 has failed and has to be replaced – simple. According to PEN HH 4 is smaller due to its proximity to the MU boundary. So what? This has always been known and would have been factored into any production guidance calculation. Nonsense explanation.

Apart from very early one-liners, there is very little information to confirm that both extraction extent and rate of extraction is being achieved as per the design intent. It is not correct to draw the conclusion that the life-of-well performance will be above design based on initial results. It takes time for wells to exhibit problems. Many moons ago (2009 and 2012 IIRC), a modest amount of test work was done to investigate leach characteristics. This was discussed on the PEN forum at the time (post title was Truth, the Whole Truth, or something like that) but the one thing that wasn’t discussed was the massive variation in extraction for the tests that were done. The only way to counter variation of this magnitude is to add data points, many more data points, i.e. more tests. I have always felt that the amount of test work done was woefully short even considering the fact a field leach trial was carried out by previous owners. One consequence of insufficient test work is over-prediction of design parameters and I think that extraction (extent and/or rate) has been overestimated in the design or under-achieved in practice. If the extent is not being achieved, that is a big problem and very little can be done to rectify this without mods to the process chemistry and plant design. More capital. If rate is the issue, this is not a fatal flaw but requires more HH’s to be in operation for the same uranium production. It’s my view that a combination of both is the primary reason for the less than stellar performance since start-up – this was before PEN revised guidance to “align with contract commitments.” The following statement from your post. “CY2016 production target in 2 June was stated as being 200,000 to 300,000 lbs. On 30 September this was revised down to 135,000 to 160,000 to align with delivery commitments. Was this alignment forced upon them due to unexpected lower production rates or was it intentional? Hard to say for sure.” I think you know what my answer is and I don’t think it is too early to say so. A question for you. How does adding more header houses lower operating costs? The only way this statement is true is if the cost of header houses is capitalised (sustaining capital) rather than allocated to the operating budget. And that’s exactly where PEN (and all ISR projects) allocate their wellfield development costs? There’s a reason why reported operating costs (C1) for ISR plants are always lower than hard rock plants. Accounting trickery but if you look at the all-in cash cost, the picture is very different. On a side note, someone recently asked “What are PEN’s production costs.” Another poster answered “US$41 per lb.” At this stage, the all-in cash costs are closer to three figures but admittedly they will come down as fixed costs are spread over more pounds – pity PEN has decided to reduce production. I will have a crack at the current production cost over the next few days but current costs are easily in excess of revenue and I suspect will remain so until production guidance is lifted to the 600/700k lbs level.

It’s a pity you did not look at the actual production data. For then I think you would have realised that something is not right with the rhetoric coming from HQ. Below is a post I made in mid-October. I think the content demonstrates emphatically my point that the evidence does not fit the commentary.

“Unfortunate signs of production ramp-up issues in my opinion – “Each header house experiences slightly different rates of ramp-up and we are currently seeing header houses 3 and 4 taking longer to ramp-up than originally projected.” No explanation for this. This is borne out by the mediocre (poor) ramp-up of production since start-up in Dec 15. For those interested, below is a summary.

1 Jan to 31 Mar – 9,134 lbs at 100 lbs/day
1 Apr to 30 Jun – 28,858 lbs at 317 lbs/day (up)
1 Jul to 10 Jul – 7,000 lbs at 700 lbs/day (up)
11 Jul to 27 Jul – 9,800 lbs at 576 lbs/day (down)
28 Jul to 31 Aug – 21,030 at 601 lbs/day (up)
1 Sep to 30 Sep – 16,170 at 539 lbs/day (down)

Daily production should be increasing as more wells are brought on line. 539 lbs/day average for September is 28% of design (1,913 lbs/day @ 700,000 lbs for 2016). Not where production should be after 10 months of ramp-up. I expressed concern with production ramp-up a few months back – the production data, and the above statement from the announcement, only reinforces this concern. Assuming a 25% improvement in daily production each month to the end of CY16, I reckon declared production for the year will be circa 170,000, significantly short of the 200,000 to 300,000 lbs announced by management in July. By the end of the year, the plant will be at 55% of capacity, not good for 13 months of operation.

For my money, these production stats do not augur well for the SP. The further delay in resolving the NYSE listing and the revenue streaming agreement will only exacerbate the problem. Not to mention the small issue of capital required for Stage 2 and development of Karoo in the short to medium term. Of course this is only my opinion.”

In summary Billt5, I commend your research effort but since you fail to present any subjective analysis to define your position I see no reason to agree (or disagree) with your post. It certainly hasn't convinced me to alter my position.

A final comment/question to all. PEN signed a resin toll treatment contract with Uranium One (Irigaray CPP). I have read the non-confidential terms of this agreement (available in the public domain). There are penalties (or is it different $/lb costs?) if delivered uranium-on-resin) is below a threshold quantity – both the penalties and the threshold are confidential. I’m wondering if the revised production guidance of 135k to 165k triggers these penalty clauses and if so what is the effect on all-in costs?