The flagship asset is the Lance Projects in Wyoming, US, which includes the Ross Central Processing Plant (CPP) and is held in PEN’s 100%-owned US subsidiary, Strata Energy Inc.
Euroz Securities has initiated coverage on PEN with a Speculative Buy recommendation and a 60 cents per share price target.
Following is an extract from Euroz Securities’ research report:
The operation employs an in-situ recovery (ISR) mining method, which is a common, low-disturbance method of uranium recovery used throughout Kazakhstan and the US.
The Ross CPP is one of three uranium ISR plants currently operating in the US.
Alkaline ISR operations at the Lance Projects commenced in late 2015, however by mid-2016 uranium recovery rates continued to be meaningfully below expectations, suggesting that the orebody was not amenable to alkaline leaching.
The resultant sub-economic operating performance compelled PEN to investigate the use of a low pH strategy on the orebody.
Early lab test results were promising, recovering more than double the uranium of alkaline lixiviants, driving PEN to pursue the low pH ISR strategy in earnest.
The resultant September 2018 Feasibility Study points to a low pH ISR operation with a three-stage expansion that ultimately targets a 3Mlbpa output with a very competitive LOM AISC of US$31.77/lb.
Alkaline ISR operations have been curtailed to around 90klbpa as the Lance Projects transition towards a low pH solution.
PEN has long term contracts in place for delivery of up to 6.3Mlbs of U3O8 out to 2030 at a weighted average sales price of US$51-53/lb.
In the current suppressed uranium price environment, these contracts are able to be partially filled with spot material allowing a profitable arbitrage trade.
PEN has contracted to purchase 150klbs in 2019/2020 at US$23.69/lb which likely generates US$2-4m of profits alone.
We expect this arbitrage will continue to be profitable for PEN until operations are successfully converted to lower cost low pH ISR, bringing production costs below contract pricing.
From a uranium macro standpoint, the market has largely been frozen over the past 12 months as utilities await direction from the US Section 232 investigation into uranium imports to the US.
The resulting lack of utility contracting has led to a directionless uranium price drifting lower as spot purchases wane.
Regardless of the investigation outcome, we expect utilities to restart contracting activities once direction is given as to contracting requirements, particularly for US domestic utilities.
With the curtailment of 30% of primary uranium supply globally in 2017/2018 and the widely advertised restart incentive price of US$40- 50/lb for lower cost projects, we expect recontracting will ultimately drive uranium pricing towards our US$60/lb long term forecast.
Notable for PEN is that any protectionist outcome from the US Section 232 investigation will likely result in a bifurcated US and non-US market, with US uranium production likely attracting premium pricing.
A successful transition to lower cost, low pH ISR production would magnify PEN’s margins and should allow profitability throughout the cycle.
Our valuation of $0.55/sh is based on our 55% risk-adjusted post-tax DCF (10%) of PEN’s Lance Projects under low pH ISR operations.
Our risk adjustment relates to uncertainty around uranium pricing, operational recovery rates and project delivery timing and costs.
We have assumed granting of the Source and By-product Material Licence (SML) is imminent.
We have ascribed zero value to PEN’s Karoo Project in South African assets as they are currently being relinquished by the company and have been impaired by the company to zero value.