Opening the World’s Next Major Uranium Supply in United States: Initiating Coverage with Strong Buy Rating and 3.5X Upside with $5 Target for 2013
Investment Conclusion: We are initiating coverage of Uranerz Energy Corporation with a Strong Buy Rating and $5.00 target price on 92.4 million shares fully diluted on a $3.50 NAV and 1.5 DCF multiple to represent M&A premium.
Investment Thesis: Uranarerz Energy Inc. is now with a few months of opening the world’s next significant uranium mine at their Nichols Ranch facility in Wyoming…and it’s just in the nick of time.
URZ has all the approvals and agreements to begin mining - except the Deep Disposal Well UIC. Uranerz has all other approvals from the State and NRC, including the UIC for the injection wells in the well-field. URZ does have a permit for a 2 MM lbs U3O8 ISR plant which it won't immediately be using, and permits from the BLM are not required at Nichols Ranch.
But the Underground Injection Control (UIC) permit is required before Uranerz could start using a deep disposal well to inject fluids back underground.
For ISR to work properly, about 0.5-1% of the groundwater must be removed from the system and these liquids need to be disposed of in order to make sure that proper convection occurs within the well fields.
Preparing for Plan B. Currently it appears Uranerz is preparing for Plan B. While it holds out hope it will get UIC permits for the deep disposal well, an alternative option is to bring that excess liquid to surface and have it evaporate in ponds, rather than sending it down a disposal well. This method is NOT much more environmentally invasive. Construction of the evaporation ponds would take three to four months so we aren't yet in a position where production would be delayed, although amendments to existing permits would have to be made to allow surface evaporation.
The company is suggesting that it may go the evaporation route first to keep production on schedule, and then follow it up with deep disposal wells following approval. NOTE: The Plan B route could cut water disposal Capex in half as compared to the cost of drilling a deep disposal well, and operating costs shouldn’t be materially impacted. The deep disposal wells are each about $2.5-$3 MM (two required), whereas the evaporation pond cost would be about $2 - $2.5 MM.
Total Capex remaining is about $35-38 MM for which URZ has about half the cash in the bank and ample capacity to raise additional equity or capital in the Canadian capital markets.
No ISR plant required. Currently Uranerz are drilling the production and extraction wells at its Nicholas Ranch property. The company does not require an in-situ recovery or ISR plant at this point because it has toll milling arrangement with Cameco’s Smith-Highland ranch literally next door.
We currently forecast URZ production to begin towards year-end 2012, but further delay of the UIC permit or amending existing permits to allow evaporation ponds could potentially delay production into next year.
And given the massive major transition in world uranium supply/demand balance…this new plant coming on is JUST in time.