Clock - Uranium Supply Crunch and Critical ... - Andrew Johns

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Canada Research | Page 18 of 87UraniumProjects worth noting include the low cost of the Olympic Dam expansion, givenuranium is essentially a by-product of much more significant copper production;Jabiluka, though a significant deposit, is unlikely to start-up until the 2020s givenchallenges with traditional landowners; Husab is a near-certainty under Chineseownership and likely to move forward irrespective of the direction of market prices; lessclear is Trekkopje, with uncertainty surrounding the viability of a proposed heap leach ofvery low grade material and Areva’s consequent focus elsewhere (and thus is notincluded in our supply model); and finally, state ownership and significant domesticnewbuild plans compel us to include Russia’s Elkon underground mine in our supplymodel, despite purportedly substantial up-front costs.Uranium Price DeckPrices to Increase through 2015E. Exhibit 21 shows historical uranium prices, as well asour go-forward forecasts through 2017E. Our price deck is substantiated by our view of(i) a three-year supply deficit, starting 2014E and peaking 2015E, two years post-expiryof Russian HEU supply and coincident (ii) ramping demand, particularly inventory buyingand initial cores in China and India, and (iii) the higher prices required to incentivize newsupply by the middle of the decade, as production growth at existing centres slows.We see prices rising through2015E (to US$75/lb) on threeyearsof insufficient supply andhigh incentive costsExhibit 21: UxC Uranium Prices and RJL Price Forecast (US$/lb)1401301201101009080706050403020102014 201572.50 75.00 2016 20172012201370.00 70.0053.5063.0002005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017UxC Spot Price UxC LT Price RJL Price Forecast (Annual Average)Source: Raymond James Ltd., UxCRaymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Uranium Canada Research | Page 19 of 87Comparing our Covered EquitiesValuation MetricsAmongst our producers, Cameco trades at a premium to its NAV (historically typical),while Paladin appears most discounted to its NAV, as well as on an implied price basis.The fund, UPC, is discounting a uranium price of US$44.55/lb (vs. current spot atUS$50.15/lb). Also notable is Ur-Energy, which is heavily discounted at 0.33x NAV.Exhibit 22: Current P/NAV Multiples (x)1.2x1.0x0.8x0.6x0.4x0.2x0.0x0.33x0.63x0.68x0.72x0.87x1.15xExhibit 23: Implied Uranium Price (US$/lb)P/NAVImplied uranium price40Current Current to addURE PDN DML UUU U CCOSource: Raymond James Ltd., Company ReportsUS$/lb9080706050302010043 45In terms of P/CF and P/E, Paladin has limited data due to negative operating cash flowand earnings. Cameco currently trades at a modest discount relative to Uranium One onan earnings basis, reflecting in our view its weaker near-term growth profile. On a cashflow basis, we see the situation as reversed, given significant depreciation is added backto Uranium One’s earnings on account of high sustaining capital at its portfolio of ISLprojects.Exhibit 24: Current P/CF Multiples (x)25x20x15x10x5x0xP/CF2013Enm17.6x7.8x7.0x13.4xPDN UUU CCO2012 2013Source: Raymond James Ltd., Company Reports9.9x50URE U DML PDN UUU CCOSource: Raymond James Ltd., Company ReportsExhibit 25: P/E Multiples (x)150x145x140x135x 25x130x20x146.6xP/E2013EPer pound valuations vary widely. Uranium One trades at US$8.25/lb resources (vs.producer peers at US$4.74/lb) on strong production and earnings growth, low costs, andsignificant non-43-101 Russian resources, in our view. Meanwhile, Paladin’s discountlikely reflects high debt and recent operational struggles. Ur-Energy, at US$0.59/lb, isslightly discounted compared to the developer/explorers average at US$0.70/lb, whileDenison, at US$1.72/lb trades at a premium, likely reflecting higher grades and hightakeout potential. We do not currently use EV/lb as a valuation tool, but present currentrelative valuations for comparative purposes only.15x10x5x0x53628019.0x 18.0x14.5x12.9xPDN UUU CCO2012 2013Source: Raymond James Ltd., Company ReportsRaymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
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