RFC Ambrian retains buy recommendation with a target price of A$1.60

Peninsula Energy††
ASXEN | A$0.83 | US$110m | Buy | TP : A$1.60
Enters Long-term Contract for 4Mlb of U3O8 with Major European Utility
Peninsula Energy has announced that it has entered into a long-term uranium sale and purchase agreement with a major European utility. The agreement covers 4.0Mlb of U3O8 to be supplied from the Lance Project over ten years from the end of 2020. The agreement comprises scope for the delivered amount to increase to 50% of annual Lance mine production from 2026.

COMMENT: Having mentioned that a term sheet for this long-term contract was in place in the company’s quarterly (at the end of January 2016), we view the finalisation of this contract as a vote of confidence in the Lance Project, particularly given that it comes after several years of negotiations and extensive due diligence. The contract also adds geographical and off-taker diversity to the sales portfolio.

As is typical of many term uranium contracts, the name of the utility, the price and annual volumes are subject to commercial confidentiality, making the economic impact of the contract on the project value difficult to quantify. However, in addition to the positive aspects already mentioned, we consider that the certainty of off-take and a defined revenue stream offered by the contract will help to underpin the Phase 2 expansion planned for Lance.

We retain our Buy recommendation, with a target price of A$1.60.

Lance ramping up to 2.3Mlb pa U3O8 in three stages — The Lance Project is currently ramping up production from the Stage 1, Ross Permit Area, which is planned to build to a rate of 0.6-0.8Mlb pa U3O8 through 2016. The US$35m Stage 2 expansion is planned to increase the production capacity to 1.2Mlb pa during 2018, and the US$78m Stage 3 development to increase capacity further to 2.3Mlb pa in 2020.

New contract should account for just under 20% of Stage 3 production on an annualised basis — This assumes the off-taker does not take up the option to expand the contract volumes to 50% of mine production from 2026, whereby we estimate the total quantity of U3O8 covered by the contract would reach around 7.5Mlb. At a rate around 20% of annual Lance output, we consider that the sales agreement provides a measure of revenue security, whilst allowing for access to price recovery upside from production available for future contracting.

Declining LoM all-in-costs to US$29/lb by 2020 — Company guidance is that sustaining cash costs for Phases 1, 2 & 3 will be US$41/lb, US$30/lb and US$29/lb, compared to the current long-term uranium benchmark price of US$44/lb U3O8.

New contract increases total long-term volumes to 7.85Mlb — The company has been successful in securing term contracts for 1Mlb at a WAP of US$73-75/lb U3O8 for 2016-2020 delivery, and a further 2.85Mlb contracted at fixed term prices for 2016-2024 delivery. The company has indicated that the WAP for delivery under term contracts between 2016 and 2020 is US$59/lb U3O8, 70% above the spot price of US$35/lb.