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

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Canada Research | Page 6 of 87UraniumCompany SnapshotsExhibit 5: Summary Comparison of our Target Valuation MetricsTarget MetricsCurrent MetricsTicker Company Price Rating Target Return W eighting P/NAV NAVPS W eighting P/CF CFPS '13E P/NAV P/CF '13ECCO Cameco 22.34 Outperform 2 28.00 25% 50% 1.3x 19.50 50% 14x 2.26 1.1x 10xDML Denison 1.33 Market Perform 3 1.80 35% 100% 0.9x 1.95 0% nm -0.04 0.7x nmPDN Paladin 1.12 Outperform 2 1.80 61% 100% 1.0x 1.79 0% nm 0.07 0.6x 15xURE Ur-Energy 0.67 Strong Buy 1 1.50 124% 100% 0.7x 2.02 0% nm -0.05 0.3x nmUUU Uranium One 2.46 Outperform 2 3.60 46% 50% 1.0x 3.43 50% 10x 0.35 0.7x 7xU Uranium Participation 5.78 Strong Buy 1 8.00 38% 100% 1.0x 8.00 0% nm -0.03 0.9x* nm*Note: Our current P/NAV for U is calculated using our current NAVPS of C$6.66, not our target NAVPS of C$8.00Source: Raymond James Ltd.We are resuming coverage of Cameco (CCO) with an Outperform rating and $28.00target. We view Cameco as one of the lower risk ways to gain exposure to the uraniumspace, with an industry-best balance sheet, top producer status, low cash costs, lowgeopolitical risk jurisdictions, and diversification within the supply chain via its verticallyintegratedbusinesses. The company is entering a critical phase, with expiry of the HEUagreement spelling an end to the annual receipt of ~7.0 Mlbs in low cost material.Though we anticipate a healthy ramp-up in organic production, we see flat mediumtermgrowth in sales/earnings and would not be surprised by near-term M&A. Weestimate the company has over C$4 bln available in working capital, lines of credit, and arecent C$1 bln shelf. Our target is based on a 50/50 weighting of (i) 1.3x P/NAV appliedto the project component of our C$19.50 NAVPS (8%) and (ii) 14x P/CF and our C$2.262013E CFPS.We are resuming coverage of Denison Mines (DML) with a $1.80 target and MarketPerform rating. Denison’s main focus is its Wheeler River exploration project, which boastsexcellent exploration upside, high-grades at mineable depths, in elephant country – theeastern side of Saskatchewan’s Athabasca Basin. The project still requires further drillingsuccess to reach critical mass, in our view. We are cautious on the name, given financingrisk in the current environment for cash-burning juniors, as well as limited visibility onproduction, costs, and timing at the company’s other projects. That said, we view Denisonas one of the most compelling takeout candidates in the uranium space – which could helpRio Tinto expand its presence in the region, or allow Cameco to protect its dominant landand mill position. The recent sale of Denison’s US assets also makes any acquisition cleaner,in our view. Our target is based on a 0.9x P/NAV applied to the project component of ourC$1.95 NAVPS (8%).We are resuming coverage of Paladin (PDN) with an Outperform rating and $1.80target. Although production and costs have been inconsistent in the past two years(leading to some shareholder fatigue), we believe operations have finally turned thecorner. Recent strong F4Q12A operational results, higher than expected guidance forFY2013 and on-going measures to lower costs should underpin an improved outlook onfuture performance, provide comfort on the company’s ability to settle mounting debt,and spark a rebound in the share price. The return of Paladin’s takeover premium is alsolikely, now that major hurdles are in the rear-view mirror and the company is still theonly major producer without any large equity control blocks. Our target is based on a1.0x P/NAV applied to the project component of our C$1.79 NAVPS (8%).We are resuming coverage of Ur-Energy (URE) with a $1.50 target and Strong Buyrating. Ur-Energy is focused on developing its state-of-the-art, 100%-owned Lost Creek(LC) ISL project in Wyoming, which features minimal capital costs, near-term start-up(2H13E), and potential lowest quartile cash costs within a low-risk, mining-friendlyjurisdiction. The company trades at 0.33x – the lowest P/NAV in our coverage universe,but we believe as start-up approaches, the stock should begin to trade closer to theproducer group average (0.83x); receipt of the last major permit required forCCO – world’s top publically-listedproducer, with good growth insafe jurisdictionsDML – financing risk and limitedvisibility to production offsetstrong exploration upside andtakeout potentialPDN – faced struggles gettingmines to nameplate, butoperations have turned thecorner; should add comfort onrecently growing debt and boosttakeout potentialURE – developing a low cost minein a safe jurisdiction, but tradingat explorer valuationsRaymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Uranium Canada Research | Page 7 of 87construction – the Plan of Operations from the US BLM (due 3Q12E) – could be a criticalcatalyst. The main hurdle for the company is the current mine plan’s relatively smallreserve and production rates, but growth is likely, given recent exploration momentum,high prospectivity of nearby ground and further potential M&A. Our target is based on a0.7x P/NAV applied to the project component of our C$2.02 NAVPS (8%).We are resuming coverage of Uranium One (UUU) with an Outperform rating and a$3.60 target. Uranium One is a top producer, owned 51.4% by Russia’s ARMZ, withlowest quartile cash costs from its Kazakhstan-dominated ISL mine portfolio. Ramp-upplans are aggressive (24 Mlbs – 26 Mlbs/year at steady-state, implying +125% – 144% vs.2011A), but largely achievable, in our view, as the company expands at currentoperations and diversifies into new jurisdictions. Expected earnings growth is equallyimpressive, bolstered by the highest exposure to spot prices amongst our coveredproducers. The critical question mark is Mkuju River, Tanzania, which comprises onethirdof planned growth; our estimates suggest Uranium One may be better offforegoing its option to buy the remaining 86% interest from ARMZ, given significantexternal capital required to complete the deal and develop the project. The upcomingfeasibility study (DFS; due 3Q12E) is a key catalyst, which should shed more light on themost important project parameters. Our target is based on 50/50 weighting of (i) 1.0xP/NAV applied to the project component of our C$3.43 NAVPS (8%) and (ii) 10x P/CF andour C$0.35 2013E CFPS.We are resuming coverage of Uranium Participation (UPC) with an Outperform ratingand $8.00 target. Uranium Participation is the world’s only physical uranium fund,offering investors exposure to uranium prices with minimal operational risk. There arethree primary reasons to invest in UPC: (i) UPC is trading at a 0.87x P/NAV and implyinga value of US$44.55/lb for its 13.4 Mlbs U3O8e inventory (vs. spot at US$50.15/lb); (ii)we are bullish on uranium prices moving forward – our 4Q12E, 2013E and 2014E pricesare US$56/lb, US$63/lb, and US$73/lb, respectively; (iii) we view takeout potential ashigh – we believe many market participants could benefit from acquiring UPC at currentlevels. We derive our target by valuing UPC’s current inventory at our 2013E uraniumforecast of US$63/lb, net of current assets and liabilities.UUU – impressive, low costgrowth likely to continue, evenwithout remainder of Mkuju RiverUPC – physical fund trading at a13% discount to NAV and implyinga uranium price of only US$45/lb(vs. our 2013E forecast ofUS$63/lb)Raymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
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Clock - Uranium Supply Crunch and Critical ... - Andrew Johns

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