Description

Introduction and Valuation

Uramin (UMN on the AIM exchange in London) is the cheapest junior uranium mining company, trading at a 40-90% discount to the EV/lb valuations in its comp universe.  Near term catalysts (such as a listing on the TSX, where its comps trade) and longer term catalysts (such as the 2007 completion of its 1^st project feasibility study or its 2008 start of uranium production) ensure that the stock has plenty of upside from here.

 

First, the comparison of Uramin to its peers:

 

						Net		Total	EV/LB
Company	Symbol	Status	Stk Price	Shr	Mkt Cp	Debt	EV	Resources	Resource
			USD	MM	USD MM	USD MM	USD MM	MM LB	USD
Uramin	UMN	Explor	$1.95	258.5	$504	($127)	$377	236	$1.59
Cameco	CCO	Prod	$40.63	377.3	$15,329	$202	$15,531	962	$16.15
Aurora Energy	AXU	Explor	$11.76	65.3	$767	$0	$767	39	$19.47
Paladin Resources	PDN	Prod	$5.75	493.9	$2,839	($69)	$2,770	177	$15.65
SXR Uranium One	SXR	Prod	$11.76	133.0	$1,565	($149)	$1,416	268	$5.27
UEX Corp.	UEX	Explor	$4.73	180.6	$854	($82)	$771	48	$16.23
UrAsia Energy	UUU	Prod	$3.51	480.2	$1,685	($85)	$1,600	104	$15.39
Western Prospector	WNP	Explor	$3.84	42.8	$164	($33)	$131	56	$2.34
Laramide Resources	LAM	Explor	$6.41	50.5	$323	($7)	$316	54	$5.86
Energy Metals	EMC	Explor	$8.20	66.3	$544	($66)	$478	111	$4.31
Group Simple Average							$23,781	1,819	$13.08

 

By 2010, Uramin should be producing 5000 tons of Uranium annually, which would make it the 4^th largest producer in the world based on current production rates.  Its increasing visibility to a ramp in production in 2008 should start to help it close this valuation gap.

 

Brief Background on the Uranium Market

Uranium has certainly had quite a run, even in the context of strong overall commodity markets.  Uranium prices were under $10/lb a few years ago, $40/lb in spring of 2006, and currently hover around $63/lb.  The bull logic for uranium has been discussed thoughtfully and at length on this site in the write-ups and discussion boards on Strathmore and Western Prospector.  I would refer you to those write-ups and discussions for a more detailed description of the supply-demand outlook than the brief introduction that follows.

 

In the face of rising fossil fuel costs, as well as rapidly growing power generation needs in developing countries, the outlook for nuclear power plant growth has improved considerably.  Based on current projections of demand growth that take into account all the reactors in various stages of planning and approval, it seems likely there will be a supply shortage of uranium in future years.  This supply-demand imbalance is further exacerbated by the fact that current production levels only supply 50-60% of annual uranium consumption needs of the existing global nuclear reactor installed base.  For several years, the shortfall has been made up by the now rapidly depleting stockpiles at the utilities as well as the “Megatons for Megawatts” program in which the uranium in Russian and American nuclear warheads is de-enriched and converted from weapons grade to utility grade.  The “warhead inventory”, like the stockpiles, is however expected to run out in the next couple of years.  The long-term fundamental outlook for uranium therefore remains very strong given:

1.        the long lead times and regulatory hurdles associated with bringing on new capacity

2.        the current supply shortage absent the nuclear warhead de-commissioning program, and

3.        the likelihood of strong demand growth over the next decade fueled by new reactors currently in the planning stages

 Short-term factors also supporting the price of uranium include the flooding at industry giant Cameco’s Cigar Lake mine as well as the interest from non-utility (financial speculator) buyers.

 

Uranium prices can be found at www.uxc.com.

 

Uramin Company Specifics

 

Uramin’s management is made up of seasoned mining execs and includes Sam Jonah, the former CEO of Ashanti Goldfields, Stephen Dattels, formerly of Barrick Gold, and Ian Stalker, also of Ashanti Goldfields.  It is worth noting that non-executive Chairman Sam Jonah is a black African with deep political connections in the continent, which is important given Uramin’s three primary properties are all in sub-Saharan Africa.  Mr. Jonah’s influence will likely be important to the company as they navigate the governmental permitting process in three African nations.

 

Over the last few years, management has acquired mining rights for 5 to 10 cents / lb on undeveloped fields explored by XOM, Elf and others in decades past during the last uranium boom.  Management put in $12M themselves, did several private financing rounds in 2005-2006, and then quietly went public last year when they registered the previously private shares, which began trading on the AIM in April.  Because they bypassed the traditional IPO route (and the fanfare of road shows and press coverage), the company remains fairly “under the radar”.  Their profile was just raised recently when they completed a secondary to give themselves the cash cushion to start producing on their first project.

 

UMN has the advantage of 3 areas of production, which are outlined below:

 

Project	Location	Share	Start	Ann Tons	M Lbs U3O8	Notes
Trekkopje	Namibia	100%	2008 end	1500	157.6	43-101 Compliant
Ryst Kuil	South Africa	65%	2009 end	1500	41.6
Bakouma	CAR	90%	2010 end	2000	37.2

 

 

Trekkopje is the first project slated for production and it's an open pit mine offering lower grade (avg grade 0.0127%) uranium.  Capex was initially planned at $220M, but a leaching process now being tested may significantly lower the required capex to get Trekkopje started.  Management has hinted that they are very confident that they will be able to announce significantly lowered capex requirements and a speedier schedule for Trekkopje in the next few months.  The new cost (using heap leaching) may be as low as $165M.

 

The recent secondary is intended to give management the capital needed to get Trekkopje started.  Management’s assumptions of a $60 Uranium price, a $7.34 Rand fx rate and conservative Vanadium credits give the Trekkopje mine a NAV of $2.22 / share at a 10% discount rate.  This is conservatively assuming a production cost of ~$14 / lb – the leaching process may significantly lower the cost side of the equation here.  The open-pit nature of the project makes it economical even though it is low grade and allows the project to be profitable even at much lower uranium prices (if such a move in prices were to occur).  Additionally, higher grade areas have been identified to allow Uramin to maximize cash flow at the beginning of the mine life.  It is also worth nothing that while uranium prices could conceivably settle into the $40s (or even the $30s) longer term, once Trekkopje is at or close to production, management will have an opportunity to lock in then-current prices by signing long-term supply contracts with utility buyers.

 

Trekkopje is adjacent to Paladin’s Langer Heinrich mine.  Paladin trades at over $15 EV/lb versus Uramin’s $1.65 EV/lb.  If you only count the Trekkopje reserves in the calculation, Uramin still only trades at a $2.50 EV/lb valuation, still a huge discount to their Namibian neighbor, Paladin.  Langer Heinrich is inarguably higher grade than Trekkopje, however the valuation difference seems to compensate for the grade differential and then some.  For those nervous about the Namibian exposure, it is worth nothing that when consulted, country risk insurance underwriters at a leading UK firm noted that in their opinion, within sub-Saharan Africa, Namibia ran second to South Africa in terms of business friendliness, legal protections, and infrastructure.

 

SRK has been hired to complete the Trekkopje definitive feasibility study (due 2007), and the column leach tests should be completed in the next few quarters to determine whether heap leaching can be used to significantly reduce the mine’s required capex.

 

Ryst Kuil and Bakouma are higher grade projects, but more complex mines that run deeper or require more infrastructure capex to get started.  When Trekkopje gets started, however, UMN should be producing roughly 3.6M lb / year, likely yielding  $30+/lb margin and $100M+ in mine cash flow which will allow Uramin to borrow or raise funds to develop its other projects (in the unlikely event that the company has not been sold by then).  While the challenges of establishing infrastructure and operating in the CAR are undeniably great (it’s one of the poorest countries in the world and not particularly stable politically either), there is the opportunity for great reward at Bakouma because of the extremely high grade of the uranium deposits there.  The Bakouma grade, according to a 1970 non-compliant study, is estimated to be 0.27%, more than 20 times the grade at Trekkopje.  If they can get Bakouma up and producing, it will be an extremely valuable asset that many of their competitors will want to have.

 

When you are buying UMN here, you are essentially getting Ryst Kuil, Bakouma, and management’s other greenfield projects in Canada and Africa for free (remember that Uramin management have been very savvy property acquirers in the past).  Just on the three announced projects listed above, with $60 uranium and conservative cost assumptions Uramin’s per share NAV is $6.20 at a 10% discount rate (about three times the current quote).

 

In reality, management, who are significant holders of the stock, have hinted that they would like to complete the Trekkopje bankable feasibility study with SRK and then hold a “beauty contest” for the company.  They believe they could fetch prices well over double the current quote and have already been contacted by several possible suitors.  The field of potential buyers for uranium mining companies has expanded considerably in recent years.  Traditionally, the list of potential buyers for a company like Uramin would have been limited to a handful of Western companies such as Cameco and Denison.  Recently, interest in locking up uranium supply has been growing in the emerging markets that are worried about meeting their future power needs (most notably China), as well as at existing utility companies around the globe that have an interest in vertically integrating to ensure their access to the uranium they will need in the future.  It is worth nothing that uranium is a far cheaper means of power generation than either natural gas or coal, and that the cost of uranium, even at today’s elevated prices, is a very small part of the cost to run a nuclear power plant.  Nuclear power plants are extremely expensive to build and have a high upfront investment cost/low consumable energy cost model.  They also consume a lot more uranium in their start up phase than in future years.  For these reasons, locking up uranium supply ahead of plant construction is important for a utility company looking to reduce their risk as they embark on a significant capital expenditure.

 

The stock was listed around 70 pence, ran up about 20% initially, and dropped about 50% over the summer and bottomed in the 40s.  The sell-off was partly explained by some license issues that they had with their properties which have since been resolved.  Additionally, Uramin had three “top down” reasons for institutional hatred (as a energy/commodity stock, a small cap, and an emerging markets stock).  Uramin was fortunate enough to fall into all three (temporarily) detested asset groups.  Uramin also had the least liquidity and visibility as it was not listed with its peers on the TSX.  Liquidity for the stock has improved substantially since the most recent secondary.

 

 

Catalysts:

1.        TSX listing – which should be imminent now that 43-101 compliance has been achieved.

2.        Increased coverage by Canadian sellside firms who will likely highlight the valuation differential (should be happening soon, possibly coinciding with the TSX listing).

3.        2007 release of the feasibility study and the heap leaching tests that will make Trekkopje cash flow quantifiable, imminent, and compelling.

4.        Eventual sale of the company…this management team does not hide its intention to sell once the studies that will confirm the value of the properties are completed.

 

Risks:

1.        Surprises in the Trekkopje feasibility study (unlikely but not impossible).

2.        Uranium prices start going down before they can either sell forward production or sell the whole company (unlikely but not impossible).

3.        Large scale, business-impeding political unrest in Namibia or South Africa (not impossible but not likely either), or in CAR (it’s a dicey country although there is nothing specific brewing).

4.        Concentrated stockholder base and limited liquidity.

Catalyst

1. TSX listing – which should be imminent now that 43-101 compliance has been achieved.

2. Increased coverage by Canadian sellside firms who will likely highlight the valuation differential (should be happening soon, possibly coinciding with the TSX listing).

3. 2007 release of the feasibility study and the heap leaching tests that will make Trekkopje cash flow quantifiable, imminent, and compelling.

4. Eventual sale of the company…this management team does not hide its intention to sell once the studies that will confirm the value of the properties are completed.