Jee, this stockboard has been very quiet for a long time! Given that investors are being asked to consider a rights issue, I thought I would give a little overview of how I see things. Although I have had some discussions with MEY management, the views are my own, and I welcome any feedback or other insightful views you may have. For those who are not as familiar with MEY as an invesmtent but, nevertheless, curious about the evolving story, I have included a brief background which most investors will be familiar with. It is purely to add a brief historical perspective as to how the company has arrived at its current position, and can be skipped.
I have been an investor in MEY (then WME) since its IPO. In light of current terrible market conditions in U3O8 and other commodity market segments, I have given time to consider the risks of continued investing in MEY and have decided to take up my rights. There are heavy odds stacked against the company as well as other junior U3O8 companies, but on balance, given its recently-announced metallurgical breakthrough, it looks to have identified a more plausible way of unlocking shareholder value in the future than many of its peers if, and when, we return to a more favourable pricing environment.
Finally, I offer no individual insight as to the dynamics which shape the U3O8 market, when the market may turn for the better or what the catalysts may be. There are many excellent research pieces out there which cover the subject amply, and I encourage you to read them in conjunction with this to help form an opinion .
As ever, this is not an inducement to invest; they are personal views, and all the usual risk caveats about investing should be considered and understood here.
Background:
The original rationale for investing in MEY: After years of exploration, MEY had drilled what appeared to be a reasonably attractive and sizeable low-grade deposit, not atypical of the kind of deposits found elsewhere in Namibia (Langer Heinrich, Rossing, Etango, Trekkopje etc.). Higher share prices a few years ago reflected three key components (a) higher U3O8 prices; (b) prospectivity that MEY had found a deposit that would one day be suitable for takeover or developed in its own right; but most importantly (c) that Areva, the French-government nuclear conglomerate, had purchased and developed the nearby Trekkopje project, and given the proximity of the two projects and similarity of rock, some form of collaboration could make sense, thereby alleviating MEY of the need to embark on building its own expensive plant-building program.
What went wrong: Fast forward. A number of events conspired to cause MEY’s share price to collapse by over 95% from 2008, some of which are general to U3O8 explorers: e.g. the financial crisis of 2008 and depressed prices in the wake of Fukushima. However, the important company specific reasons are as follows: (a) According to a scoping study report made by SRK Consulting in 2010, MEY had outlined 648MT of U3O8 at 97ppm for a total of 138Mlbs, with room to grow further. However, when MEY subjected these figures to further scrutiny, using more conservative assumptions and robust constraints, it found that the resource was actually less than half of this amount: 276MT of U3O8 at 94ppm for a total of 57MLbs. Obviously, resource size is an attractive deposit characteristic, and the market did not take kindly to this sort of announcement! (b) In addition, Areva’s Trekkopje project was sidelined: quietly, with little fuss. Despite spending billions to purchase Trekkopje and building all the relevant infrastructure, Areva have not been able to operate Trekkopje economically at current levels of U3O8 pricing. Areva is relatively unique in the U3O8 world in that it is both a producer of U3O8 and a builder of nuclear power plants. When it signs an agreement to build a plant, it also enters into a contract to supply that plant with the relevant U3O8. In this respect, supply matters to Areva, and having to sideline a project of the size and nature of Trekkopje clearly represents a massive blow to its prestige. Though Areva has confirmed that it is still able to honour its delivery commitments, the recent terrorist attack at Areva’s Somair uranium mine in Niger, can have done little to dissuade management of the need to guarantee supply from more stable political environments in future.
Marenica today:
The bad news: With just shy of 750MM shares outstanding and a market capitalisation of AUD3.0MM at a share price of AUD0.004, Marenica is a company with an above-average sized, low-grade deposit which has fallen off the radar. It appears that its project is uneconomic to develop at current U3O8 price levels and there is little optimism in the current environment to suggest that it could raise the relevant level of cash required to move its project forward on a stand-alone basis. However, to give additional perspective to this, it is not entirely alone in this state of affairs: other junior companies with higher head grade projects have witnessed similar share price maulings.
The good news: The company is now run on a shoestring budget by competent and credible personnel. The new CEO, Murray Hill, was also a consultant metallurgist to Extract Resources. The team is further fleshed out by experienced project developers and other metallurgists/specialists, including Gary Johnson, ex-Rossing, who developed and commercialised Activox® nickel leach technology. The team has combined some traditional metallurgical methods with amendments to the traditional flowsheet and discovered some major costs savings which can be applied to carnotite formations for the commercial extraction of uranium. A patent has been lodged for this technology, known as U-pgrade. As the combination of rising U3O8 prices and the lowering of CAPEX and OPEX costs are both critical to Marenica becoming economically viable, at least MEY has a team in place which is best equipped to comprehend and influence factors on the cost side. In addition, in an announcement to the ASX recently, MEY indicated that Areva and Deep Yellow, owners of other low-grade carnotite deposits, have agreed to supply some rock samples to Marenica’s team for “proof-of-concept” testing. A very encouraging summary of these results can be obtained from the most-recent quarterly report: • Uranium upgrade testwork results point to a significant improvement in the potential Marenica project economics. • Beneficiation testwork has produced a concentrate with a grade of >60 times that of the ore at a recoveryof >65%. • The plant feed grade of 94ppm U3O8 (resource grade estimate) was upgraded to over 5,500ppm U3O8 during the testwork. • The beneficiation circuit, at a feed rate of 20Mtpa of ore is estimated to produce a concentrate of only 200,000tpa, which could then be fed to an acid tank leach circuit. • The most recent testwork has produced similar beneficiation results from seawater and desalination plant water, which is expected to materially reduced the OPEX.
U3O8 Pricing: According to TradeTech, the current U3O8 spot price is about USD40/lb, and the corresponding long-term price is USD60/lb. Recently, JP Morgan has forecasted spot prices of USD58/lb in 2014, USD70/lb in 2015 and USD90/lb in 2016. Typically, in recent years, the long-term contract price has been about USD20/lb higher than the spot price. However, given the current abject state of the market, and little visibility as to when a catalyst will finally project it higher, I have conducted the bulk of the following assessment using long-term prices between USD60/lb and USD90/lb. In light of the JP Morgan forecasts, this seems prudent and reasonably conservative.
Share Price: Prior to the recent rights issue announcement, MEY was trading in a range of around AUD0.008-0.01. Certainly with the pullback to the rights pricing of AUD0.004, and on the basis of the valuation outcomes below, it is hard to see how Marenica is not deeply undervalued, if not already at rock-bottom levels, if taking a longer-term view of things.
Attempting to put a valuation on MEY:
Considerations: 1. Discount Factor. To be conservative, I have used 10% in all calculations. One could argue that in today’s very low interest rate environment, 8% would be sufficiently demanding. 2. Long-term U3O8 price. If JP Morgan forecasts of the spot price prove to be accurate, the evaluation of economic possibilities below becomes conservative. Most of my comments are based on how economics look at long-term pricing between USD75-85/lb 3. CAPEX and OPEX/lb numbers are based on management experience and estimates, but do include “contingency”. These would require further scrutiny under feasibility study conditions but are a useful starting point, nonetheless. 4. Assumptions: Throughput = 20MTpa, Head Grade = 94ppm, Recovery = 65%, Mining and Processing Costs = 42$/lb (recent announcement), Life-of-Mine = 14 years, CAPEX = USD391MM and Working Capital =USD45MM (Management estimates but need feasibility study level of scrutiny) 5. Eventual shares outstanding: 2 Billion (After the rights offering, MEY will have approx. 1.25BN shares in issue)
1): Is there any potential value contained in Marenica’s project at higher long-term prices? Yes there is.
Observation: In a market environment of long-term pricing of $80/lb and above, the economics of MEY’s project begin to look viable. Assuming 2 billion shares outstanding, a valuation NPV of $300-400MM would equate to around 10-14cents per share (assuming 30% tax), which represents huge upside from where the shares are currently trading. That, at least, is a comforting starting point. However, in the current environment, it would still require a leap of faith to assume that investors would readily invest $391MM on a standalone project.
2): Are there other potential ways in which shareholder value could be unlocked? Yes there are.
1. The beauty here is that Areva’s infrastructure is largely in place already, but would require some additional modifications to the beneficiation plant and leach circuit as part of implementing the U-pgrade process which MEY is promoting. Based on similar calculations to the above, I estimate that IRRs and NPVs are very healthy for Trekkopje from a long term price of about $70 and above. While nobody likes sunk costs, it is clear that Areva stands to recover considerable value from the Trekoppje project and secure additional uranium inventory if the U-pgrade process can be proven and harnessed, even if it were to cost an estimated additional USD200-250MM in CAPEX modifications to do so. One might ask can it afford not to? From Marenica’s perspective, a restart of Trekkopje would present the easiest and quickest way of value enhancement if it could secure an attractive licensing and/or profit-sharing arrangement from the use of the U-pgrade process. For Areva, as much of the infrastructure is already in place, once a decision was taken to make the relevant modifications, the first production of uranium coming online would be in a reasonably quick timeframe. You could not say this of many other Namibian-based explorers, whose projects are largely under care and maintenance. Commissioning a uranium mine is a long and demanding process. Furthermore, given that the two resources are just 30KM apart, and of a similar carnotite-hosting rock, I gave consideration to the possibility of merging the two operations. The conclusion is that the combined project economics are super-healthy from a long-term U3O8 price of around $70+/lb and upward (possibly even lower, depending on the mix of debt/equity used to finance any modifications) and the ability to produce 8-10M lbs per annum from an otherwise dead project, and, therefore, be one of the largest producing projects of uranium in the world, must represent a very attractive prospect, should it be achievable. Note: this examination of a combination of resources is purely hypothetical, and is not based on any factual evidence that a combination is likely or will necessarily eventuate. 2. In its simplest form, once the technology is proven at a pilot-plant level, one believes that the proposed CAPEX and OPEX saved will make it attractive for an incumbent uranium project developer to avail of the technology through licensing royalty arrangements and/or profit sharing arrangements (depending on negotiation). As announced by the company, MEY is in discussions with Deep Yellow about testing some of its samples. These samples come with a higher head grade than the rock at Marenica, and the processing of higher head grade can ceteris paribus considerably alter the OPEX costs/lb in a favourable manner, to make those projects more economic. Should testing prove to be fruitful, this opens up another avenue of revenue generation for MEY through licensing arrangements. As of yet, these are hard to quantify, but are not likely to be insignificant.
Conclusion:
MEY is at a crossroads. Like other juniors, it can pray and hope that the U3O8 market turns in its favour and makes its project viable at higher prices, or it can try to forge a different path forward in order to secure its future and potentially deliver shareholder value enhancement over time. The current management team has chosen the latter course and must be applauded for being proactive. As the maths above suggests, the Marenica deposit will require higher prices for it ever to be considered worth developing on a stand-alone basis. Even then, it would probably be best merged with Areva’s Trekkopje project, which could be value enhancing for both firms. This need not be the end of the story for MEY, however. The company’s U-pgrade technology offers the possibility of initiating and diversifying sources of revenues through the granting of licensing arrangements to peers in Namibia and other countries, which face similar headaches over the viability of their low-grade carnotite deposits. If pilot plant tests prove their worth – and MEY management is confident that they will – U-pgrade could represent a game-changer in the low-grade uranium space.
A re-commissioning of Areva’s Trekkopje plant could provide a key source of potential value-enhancement for MEY. Areva’s potential supply recently came under attack in Niger, and having spent over USD2.5BN on buying and developing the Trekkopje plant, one could envisage a situation whereby the plant is re-commissioned as the additional CAPEX required to do so does not appear to be overburdening. For one thing, Namibia is a more peaceful environment than northern Mali/Niger; for another, the estimated USD250mm is a relatively small additional sum to pay in order to secure pounds for delivery to purchasers of new power plants. At conservative average long-term prices of between $75-85/lb, the IRRs and NPVs of a restart are very convincing.
It is difficult to envisage the U3O8 market going much lower from current levels. Advanced exploration projects have been sidelined in recent years to curb costs until better times, and this will eventually accentuate the demand/supply crunch in the uranium market when it comes to a head. While the timing of this crunch is hotly debated; what is not usually questioned is the sense of inevitability that it will happen one day. Therefore, for somebody with patience looking to invest with a 2-3 time horizon, 2013 is probably not a bad starting point. Once uranium prices start to rise, one will likely see a revival of activity among would-be producers. However, it takes a long time to move a uranium project through feasibility, finance raising and project development. In this respect, Areva’s Trekkopje plant is in a relatively unique position: with a little modification to its beneficiation plant and leach pads, the plant could be up and running within one-two years. All it needs is a decision. If MEY’s pilot plant tests prove that its U-pgrade technology works on an industrial scale, and final cost assumptions are more-or-less similar to those used in this analysis, Areva will have compelling evidence that it can revive its plant, enhance its stock of inventory and regain some pride from a project that has otherwise constituted deep misgivings. For sure, a combination of the Marenica/Trekkopje resources would lead to one of the largest project annual supplies of uranium in the world.
From what I can determine, it looks as if Hanlong will take up its rights, which, as the single-largest shareholder, is a source of comfort. For other investors, while there remains a lot of “what-ifs” and imponderables in an evolving and uncertain story, taking up the rights gives you a cheap option on a two-pronged story (improved resource economics and potential licensing revenues), at a low, or potentially bottom-of-cycle point in the uranium market, with potential for multiple uplift as the uranium market turns and the U-pgrade technology gains commercial acceptance.
G
MEY Price at posting:
0.4¢ Sentiment: LT Buy Disclosure: Held
(20min delay)