pala-blackrock: what price a takeover?

It’s easy to get depressed about the present state of the Uranium market. Sentiment is about as low as it has been since Chernobyl, and if you allow the 24hr media whirlwind to sweep you away then you may think there is no light at the end of the tunnel.

Sometimes it’s worth coming back to a few basics to provide some balance.
If you think about the Uranium media circus, then I’d say my first gut reaction is that 80% of what I read (selective perhaps?) suggests we’re in for an upswing in U prices of 2-3 multiples over the next 5yrs. If you believe that they you’re probably already investing in Uranium assets. I don’t believe the carbon emission hot potato will really kick the Nuclear renaissance into top gear – there simply is not the quality of leadership in any government anywhere in the world right now. Political cycles are too short for real accountability on this front, so they’ll continue to skirt around the real issues and avoid inducing any pain on electorates during their short terms in office.

I have to turn to simple economics associated with 1) supply-demand. Forgetting the present surpluses, if you consider capacity coming online then there is little doubt U fuel will be in short supply soon enough. Who knows where pricing will get to then, but the spike to the $130’s per lb during 2007 was driven by supply-demand fundamentals. Many of the large supply factors remain out of play (Olympic Dam, Cigar Lake etc) and the consumption of fuel is known to exceed production by something of the order of 20million lbs per annum. Incentive prices are too low etc. It will happen.

2) My second peg in the ground is what the “smart money” is doing. Recently I did a simple exercise to provide some rational basis for the minimum expected takeover price for PEN based on the return large investors like PALA and Blackrock would expect. We’ve all seen the $/lb numbers; usually in the $8-11/lb range for measured and indicated JORC (Mantra et al). This assessment of value is problematic for PEN without enough M&I to equate to fair value in my view, so I can’t use that.

What I did is create a simple xls sheet noting the investments and time they were made, then ran that out to 2020 just for the heck of it. I arbitrarily applied a 15% interest rate compounded annually since I believe these guys won’t even get out of bed in the morning for less – likely they’ll look for even better returns given the risks taken! 15% is conservative enough for my purposes.

I can’t/don’t know how to post the xls here so here are the headlines:
PALA puts in $21.5M in Dec 2010 and then another $2.9M in Dec 2012.
Blackrock put in $11.7 in Dec 2012.
Run the no’s by year compounding with 15% p.a.
Let’s assume those with the acquisition money don’t get serious till the SML is issued and the infrastructure is built; circa end 2014?
The value expectation of PALA’s holding is then something of the order of:
2014 - $41.6M = $0.10 per share
2016 - $55M = $0.155
2018 - $73M = $0.20
I used PALA’s target since they call the shots. At any point along this timeline, Blackrock makes a spectacular profit given the price they paid to get in. It also leads me to believe BR would want a larger investment in due course…..no doubt more on that later.

So what I’m saying is that should some large player like Cameco come along, then our white knight investors won’t give it up at less than these values, and likely much higher if supply-demand begins to bite and sentiment has swung.

If you believe like I do that PEN will be a producer at end 2014, then buying stock now provides a great opportunity to leverage the explorer-producer evolution, U pricing escalation, potential acquisition scenario, and if the stars align and all those roll up into a single force then you’re going to need your seatbelt fastened real tight in the next couple of years.