broker client note

From my broker:

BOE owns 80% of the Honeymoon uranium project in South Australia. This is a significant asset due to:

• Honeymoon is 1 of 4 fully permitted uranium mines in Australia. HM can export up to 3.3mlbs pa and is located in South Australia.
• Existing owners, Uranium1 and Mitsui spent $170m on developing the Honeymoon project, including plant and associated infrastructure. HM has been on care and maintenance since 2013
• Recent completed PFS supports a stage 1 production of 880klbs (CAPEX US$10m) , stage 2 production of 2mlbspa @ AISC $23.64/lb (CAPEX US$58m), stage 3 production of 3.2mlbs pa @ AISC US$23.36/lb (CAPEX US$78m). stage 1 offers a low capex, short lead time to production should uranium have a short term jump
• Recent well field leach trials have de risked the project significantly. The FLT now show that BOE can produce at prices estimated in the PFS and have overcome previous technical shortcomings. Uranium1 achieved a tenor in the pregnant leach solution of 53mg/l. the plant was designed to operate at 75mg/l. recent results have peaked at 377mg/t, however, have consistently achieved rates in the 75-80mg/l range. The high grade results will result in either lower capex, higher production or lower operating costs.
• The higher rates of tenor have been achieved due to incorporation of new iron exchange resin technology, which was not available to the previous owners

Why buy uranium?

Supply constraints

• We are finally seeing supply side restraint and discipline. Cameco have recently announced they will suspend operations at their McArthur River and Key lake Processing facility in Canada by the end of January 2018 for approximately 10 months of 12mlb production. This equals ~10% of world supply. We have witnessed a jump in uranium spot from $20 to $25/lb off the back of this cut, announced on the 9^th of November.
• A significant amount of world production is currently underwater, estimated to be greater than 50% of production is uneconomic at current spot prices
• Very little new supply is available on a short term basis. Average lead time to bring into production is 5-7 years.
• Kazatprom, the Kazakhstani national atomic company has confirmed they have implemented the planned 10% cuts to their production announced earlier this year. They have also advised a further 10% may be reduced if the uranium price does not recover.
• The current structural deficit between demand and supply is currently being met by secondary supplies. By 2020 this supply will be tapering and by 2021 will be significantly reduced. Utilities relying on secondary supply will experience a crunch around here.With increasing demand
• Demand is set to rise with new reactors coming on stream. An estimated 65mlb of annual production by 2025 is needed to meet additional demand and net supply decline
• We are seeing an increasing number of uranium miners stepping into the spot market to buy supply to honour long term contracted price agreements. Eg Peninsula Energy (PEN) currently relies on the spot market for 50% of its supply demand to meet a contract portfolio price of $54/lb, as a means to conserving its in ground resource and taking advantage of a weak spot price. This practice will only grow, with Cameco announcing it is reviewing its purchasing policies. This will only provide further support to the uranium spot price.
• Uranium is massively price inelastic for nuclear power plants. Uranium input for a reactor is circa 2% of total operating costs, with utilities typically wanting security of uranium supply to ensure a steady state of production. A doubling or tripling or uranium prices has little impact on an operating nuclear power plant. Scarcity of supply does. Typically a utility will pre purchase minimum 12 months of uranium consumption. Security of supply is paramount, price is not.
• There are 64 new reactors being built globally, 22 in China. 173 are being planned. A new reactor requires on average 4 years of annual uranium consumption demand for a start up. An additional 390mlbs of uranium will be required for new additional cores.
• Approximately 7 million people die per annum from air pollution. Governments will continue to favour clean energy sources to reduce emissions going forward. Nuclear power will continue to be the solution for consistent, cheap, clean power generation. India has announced it will build 10 new reactors to double its nuclear fleet and the Philippines recently hosted a delegation from Russia to develop national policies for the development of nuclear energy.

Euroz research note published 9/11/2017 calls for price target of $0.13 per share and Speculative buy.