A recent research report by Canadian securities firm Octagon Capital has revealed some interesting anomalies in the way uranium companies are valued in the market, on a compliant pounds-in-the-ground basis.
According to their model, - relative enterprise value to in?\situ pounds in the ground (??EV/LB RVM??) -, the average exploration EV/lb valuation is higher than that of a company that is profitably mining the product - $7.17/lb vs. $6.87 - when you would expect it to be lower to reflect the longer journey to profitability.
Now, not all junior uranium exploration companies are trading at high valuations. Octagon??s most recent weekly uranium update, for example, shows Uracan Resources (URC-TSXv) radically undervalued, trading at an EV/LB RVM of 45 cents, or 1/16th of its peer group average. Several other juniors ?C in good jurisdictions also have deep valuation discounts. The Octagon report shows Uracan should be trading at $1.09 ?C a 443% premium to its current stock price of $.20.
The average Enterprise Value of a Uranium Producer is $6.87 per in situ pound ?C almost twice that of a Developer. As we would expect, the higher valuation reflects the lower risk involved in a company that is already pulling uranium out of the ground.
But the EV/lb range of the companies that are developing ($3.09 EV/lb), conducting feasibility studies ($3.35 EV/lb), or pre-feasibility studies ($2.53 EV/lb), are much tighter than logic would dictate.
Given a static amount of uranium in the ground, the enterprise value of a company only increases 22% moving from pre-feasibility to mine-building.
The Octagon Capital analysts believe that companies in this middle ground attract fewer speculative investors since the attention of the company has shifted from resource expansion to mine development.
Uranium exploration companies provide investors with a likelihood of positive surprises that could push stock values higher, whereas surprises for developers are typically negative in nature, such as development delays, environmental lawsuits, or budget overruns.
Companies in this ??development period limbo?? would not be advanced enough for more conservative investors, since these investors would prefer cash?\flow?\generating producers.
In the simplest possible terms, the evidence suggests that investors will pay a premium for a company that can generate a stream of positive news (based on real geology). And conversely, they will shy away from a company that is doing its business quietly, with little to say other than: ??The construction of our mine is proceeding on schedule??.
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