Berkeley Energia (AIM:BKY) is focussed on bringing its 100% owned world class uranium project into production. The mine will be the only European Uranium producer and is strategically important to the EU in order to reduce its reliance on Russia, Kazakhstan & Niger for current supplies. These three countries currently supply 75% of the OECD demand.
Rare combination of Low Capex and Low Opex
BKY has a very rare combination of low capital expenditure (CAPEX) to build the mine and low operating costs (OPEX) when in production. This is because of the location of the mine and a world class deposit which is very shallow and described by the CEO more like gardening the deposit than mining – it is that shallow
Spain has benefitted from major inflows of EU cash which means massive infrastructure is already in place. This chops $150m off the project build costs relative to competitors, reducing it from $250m to $100m. This makes the project one of the lowest costs in the world to build and therefore has a massive impact on returns, generating 60% IRR
The company is a fantastic play on the forecasted Uranium price time bomb
• BKY is able to make money at $15/lb which will be the lowest cost producer in the world. Its core deposit ‘Zona 7’ has OPEX costs of just $9.9/lb which is world class
Uranium is rebounding from a 10 year bear market from a low of $17/lb to $20/lb. Supply is being cut and demand is forecast to rocket and Uranium will soon be entering a supply/demand shortfall
• Due to the forward price curve, BKY is currently signing offtake agreements with utilities at $43/lb providing eye-watering margins but these are set to RISE as the supply problems hit
• Uranium last peaked at $140/lb in 2007 but then collapsed 88% to $17/lb following Japans Fukishima disaster which caused a massive over-supply, but Japan is now turning their nuclear plants back on at the same time as China are ramping up their nuclear power plants
Huge financial forecasts
BKY forecasts annual cash generation to be $226m per year, generating a Net Profit after tax of $116m. However, this is at current depressed Uranium prices and with costs nailed down to $15/lb, it presents a MASSIVE opportunity on a Uranium recovery if you worked with reasonable Uranium numbers let alone anywhere near the previous highs of $140lb.
The Investment Case
OK, so let’s get into the meat and drink of this exciting company whilst keeping this as simple as possible.
Firstly, a quick run-down on the assets:
BKY is the 100% owner of the Salamanca project, but before we explore that project, it’s worth noting that this project accounts for 7% of the company’s 1,160 km2 of landholding within a highly prospective uranium region which remains largely underexplored. I’ll cover this in more depth later on.
The Salamanca Project
In July 2016 Berkeley published the results of a Definitive-Feasibility Study (DFS) confirming that the Salamanca project will be one of the world’s lowest cost producers, capable of generating strong after tax cash flows through the current low point in the uranium cycle.
The project has a Net Present Value of US$531.9 million with an internal rate of return of 60% based on a discount rate of 8%.
The DFS has reported that over an initial ten year period the project is capable of producing an average of 4.4 million pounds of uranium per year at a cash cost of US$13.30 per pound and a total cash cost of US$15.06 per pound during steady state operations. With operating costs almost exclusively in Euros and a revenue stream in US dollars the project is expected to continue to benefit from the effects of deflationary pressures within the EU. The project benefits greatly from the well-established EU funded infrastructure in the region with an initial capital cost of only US$95.7 million which is low by international standards for a project of this size.
The company is now fully funded for this.
The Company has established a good neighbour and business partner relationship with the local community. In addition to the creation of 450 direct jobs and up to 2,000 indirect jobs in a community hard hit by long term unemployment, the Company will actively support the local businesses and the activities of the local municipalities. As ever with Uranium mines, the ‘greenies’ are fairly active in the area but not in any meaningful numbers or support are ineffective (this will be covered later)
Salamanca is a world class uranium project and will be a top 10 global producer. The mine will be the only European Uranium producer and is strategically important to the EU in order to reduce its reliance on Russia, Kazakhstan & Niger for current supplies. These three countries currently supply 75% of the OECD demand which is an obvious concern and one that needs addressing.
Salamanca is positioned in a historic Uranium mining area about 3 hours west of Madrid and is therefore not only in a safe, stable location, but an abundance of infrastructure already in place and is what drives the CAPEX costs so low.
In August 2016, the Company entered the development phase and began initial infrastructure work on site. Development work commenced on the road realignment and power line upgrade ahead of main construction.
Following the last year's US$30 million equity raising (4th Nov 2016 at 45p) and the recent $120m strategic investment in Auguest 2017, the Company is now fully funded through to production and accelerating the development of the Salamanca project, including construction of the crushing circuit and other infrastructure items. Production is forecast for end 2018.
Amec Foster Wheeler, which is carrying out the front-end engineering design, made contractual enquiries for the key equipment for the crushing circuit and plant construction commenced in April 2017.
What makes Salamance world class?
It has taken BKY 10 years to get to this stage and a breakthrough came with the discovery of an ore body they call ‘Zona 7’ in 2015. This transformed the economics of the project simply because the grades were ‘outstanding’ and were so shallow, the CEO often regards this as more akin to gardening than mining! The Zona 7 announcement can be found here.
With such high grades at shallow depths, the OPEX costs are therefore extremely low (Zona 7 itself has OPEX of $9.90/lb which is simply the lowest in the world). The location, being near the Santander port and with low cost grid power is driving the low CAPEX figures some $150m lower than competitors. It’s this rare combination of low set up costs and low running costs that makes it so special. It’s Zona 7 that drives much of that $532m NPV and production of Salamanca is now just 12 months away (end Dec 2018), and it will be highly profitable (financials covered later).
Can they find more Zona 7 deposits?
Salamanca accounts for 7% of the 1,162km2 BKY acreage in a historic Uranium area - what are the chances of them discovering multiple Zona 7 deposits? This is where it gets interesting because they have identified multiple targets on their acreage that have the characteristics of Zona 7.
As you can see, BKY have identified a high impact exploration programme targeting multiple deposits which are close to the plant. BKY have a lot on their hands building the mine but are also keen to explore their acreage and have announced a 2017 exploration programme focussed on two specific areas totalling 100km2. The programme will use the latest Uranium exploration techniques and started on 5th June 2017. The recent announcement can be found here.
It’s important to note that there are two types of pricing structures in the Uranium business; Spot price (currently $23/lb) and Term Price (currently $43/lb). Think of a UK mortgage to get a feel of the difference here. You get a standard variable rate or the option to choose a ‘locked-in’ fixed rate. Term rates are far higher with Uranium than spot prices simply because the market mechanism is pricing in the supply crunch in years ahead. (Which is covered below).
The interesting thing is that BKY are coming into production just as that supply crunch will hit and it takes years to build a mine, so if competitors aren’t building mines now (which they aren’t – BKY is the only mine in the world under construction) they will miss the upturn. BKY is in the right place at the right time with the lowest costs and a world class asset.
BKY have already secured two off-take contracts at $43/lb and they expect to secure more as Term prices increase. The announcement can be seen here.
BKY are expecting a mix of 50:50 Term/Spot mix in order to manage risk by having a secure, high income term contacts whilst leaving 50% of production uncovered to take advantage of the higher spot prices expected when in production.
BKY forecast’s that it will produce average cashflow over a ten-year period of $226m pa with a net profit after tax of $116m. It’s important to note that these forecasts are taken using very conservative Uranium prices at the bottom of the cycle and these figures ramp up when factoring in higher prices, simply because all costs are nailed down and higher income from a higher Uranium price would flow straight to the bottom line profit.
This makes BKY a stunning investment opportunity as it has the right mix to mitigate risk, and term prices which carry huge margins and also has exposure to the U price upturn.
Looming Uranium Supply Crunch
There are two drivers for the looming crunch.
1) US & EU fixed term contracts are due to expire and need re-contracting and these coincide with the second driver…
2) The world is moving to cleaner energy and de-carbonising - Nuclear will need to be the base energy with renewables topping that up. The likes of China are building a huge number of Nuclear power stations and at the same time Japan is in the process of switching its reactors back on, following the Fukushima disaster (which caused massive damage to Uranium prices in 2011)
Here is a slide of the US & EU declining coverage and the need to re-contract
As you can see, they are covered nearly 100% at the moment which means very little demand for the spot price (hence so low)
However, this will soon change and you can’t simply shut nuclear power station on/off easily so they will need to come to market to secure further term contracts (and are doing so now, forcing term prices up to $43/lb)
China Nuclear expansion and Japan Restarts
China is spending US$570bn on nuclear, targeting 10% of its electricity generation from Nuclear.
That alone will cause a supply deficit as shown in the pic, simply because Uranium mines aren’t being built and they can’t be built overnight to cope with the demand.
Because of the demand on Uranium and reduced supply, prices react violently and the last time this happened in 2007, prices rose to $140/lb. If prices repeated that, the NPV of BKY rockets to eye-watering levels
To put this into some kind of scale, if China invest US$570bn in nuclear, they will need to DOUBLE its capacity by 2020 and then DOUBLE again by 2035 … that is a huge programme of expansion and on its own will transform the Uranium market.
They need to do this for a variety of economic and climate reasons which can be found in this report here
Japan Nuclear Restarts
Following the Fukushima disaster, the Uranium price plummeted as Japan effectively shut down its nuclear power stations. The impact caused an oversupply of Uranium and utilities were happy to buy spot prices as they were cheaper and they knew of the growing stockpiles.
This is going into reverse and Japan is switching back on and coinciding with US & EU requirements to re-contract and China’s nuclear development programme
As you can see there is an awful lot of demand growth coming to a market where supply is currently shrinking. Cameco, the world’s second largest Uranium producer has struggled through the downturn and has been curtailing production, shutting mines and trying to divest its poorly performing assets (see here)
BKY is shielded from Cameco’s problems as it is not in production, but as I’ve already covered, it is due to come on stream in 18 months which will be perfectly timed to ride the Uranium price wave.
9th November 2017 update: The U3O8 daily spot price jumped 11% to $22.75/lb Thursday from $20.40/lb Wednesday following Cameco's decision to suspend uranium production from its McArthur River conventional uranium mine and Key Lake Mill for 10 months starting in late January. The uranium production cutback may well remove sufficient material from the market to buoy prices.
This announcement will accelerate the process of supply/demand by reducing the supply of Uranium until the process of increased demand kicks in during 2019. This is a very significant development and is extremely positive for BKY should Uranium prices continue to march higher.
Details on the announcement can be found here.
A must view presentation on the dynamics of what will drive the next Uranium bull market:
Fully funded following the August 2017 $120m Strategic Investment
BKY are now fully funded for the full construction of the mine and even better, have funding agreed for the second phase of production from Zona 7. BKY have, and will continue to have no debt which is an amazing achievement.
BKY had approx. $26.3m cash as at 30th June 2017, supported by the oversubscribed $30m placing in November with no debt.
They openly stated there was still about $70m in fresh funds required to complete the construction of the Retortillo mine and approx $59m to finance the Zona 7 second phase production and this has been achieved through a ground breaking $120m at a premium to the prevailing SP and with clean (no warrants, no debt) equity financing.
Even better, it provides the Oman investors with the ability to match any future offtake agreements secured by BKY and on the same terms.
The BOD have done a superb job in protecting shareholder value and by retaining 100% of the project, it means all of the future profitability will belong to shareholders.
Full details of this excellent funding package can be found
A useful CEO/CFO interview explaining the deal and the amount of due diligence completed
BKY have attracted a significant Institutional shareholder register and now 67% of the equity is in sticky hands of London’s blue chip institutions.
NB: This % of institutional holding will increase significantly once the $120m is converted leaving a small free float %.
In November 2016 when BKY approached the city to raise $20m at 45p, they were offered $50m and decided to take $30m. Institutions have been openly buying in the market to increase their stake
As I’ve already covered, BKY takes its corporate social responsibility very seriously, and reinvests in the Salamanca community. Its programmes include rejuvenation of the local community, a land regeneration programme by restoring land to a higher agricultural value, free Wi-Fi for the local community, planting 30,000 trees and local training schemes. The local population welcome BKY and the Salamanca project as it has suffered badly over recent decade forcing residents to move away for work.
As with any Nuclear mine, there will be some protests and BKY has its own. These are not of concern to the company as they are small time protests and they have all the major EU permits in place but what unnerves some private investors is that the permitting process is always ongoing. This is because they have to permit as they go. The EU are well behind the project as can be seen here
Also, as at April 2017, the company is in the process of providing a shareholder document allaying concerns here see April presentation at 10 mins 45 secs
I’ve pretty much covered a lot of ground, so where do I see the valuation of BKY going forward?
Well let’s begin with the financials. If BKY can generate $116m (£90m) after tax when in production (at todays Uranium price) then this provides some element of forecasting forward valuations using standard metrics such as Price Earnings.
Following the fundraise, there will be four batches of shares issued to Oman Sovereign fund:
100,000,000 shares ($65m at 50P/share)
12,934,134 shares ($10m at 60p/share)
15,520,961 shares ($15m at 75p/share)
19,401,201 shares ($25m at £1/share)
Exchange rate of $1.3/£1 assumed
Total shares in issue will be 402,239,630 following all tranches providing clarity of the future MCAP today which at 52p would be £209m
Coming back to the forecast earnings of £90m after tax and applying a P/E ratio of 8 on would provide a valuation £720m or 3.44 x £209m MCAP which equals £1.80 a share.
That is of course using depressed Uranium prices and as we can see, there is a supply crunch looming so any attempt at speculating on those profit figures using a much higher Uranium price would leave a valuation so high it would make eyes water so I won’t bother.
What I will do is suggest a 2017 valuation which will be within striking distance (12 months of going into production)
The project is clearly undervalued and now fully funded, I believe that fair value at this stage is 96p per share. That then leaves for much more room in 2018 as the company progresses towards production in late 2018. That’s the point the valuation metrics such as PE ratios will kick in.
Also, this prices in zero exploration upside which would be huge if they find another Zona 7 style deposit.
To sanity check my numbers there are a number of analysts I could draw your attention to:
This report is from three of the top mining experts, providing analysis of valuations over £1 per share.
There is plenty of news flow to drive sentiment in the near term so I expect a return to the 2017 highs of 70p and beyond.
Must view presentations
Paul Atherley (CEO) is an active PR CEO and regularly attends presentations and interviews. Here are the two latest interviews (April 2017) and I would highly recommend viewing them
UK Investor Show click here
Shares Magazines click here
For the latest company presentation, click here
Finally, if you have any questions about this blog, please contact me direct via Twitter on @162shares