(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. This article has been updated to reflect the subsequent ticker change and rollback. I am long now PLU.V and U.TO)
Buy Low, Sell High: Getting Big Uranium for a Small Price
If there’s one thing I like about buying stocks when almost no one else likes them, it’s the amazing deals that can be had from time to time. When apathy, boredom, distressed shareholders, and general market/sector malaise all join forces, assets can attain valuations that can seem ludicrous in hindsight. When a rational look at the value of an asset relative to comparable peers, historical transactions, and potential economic value reveals something that looks like it’s trading for pennies on the dollar, I tend to like to see if something fundamental is broken or it it’s a case of “collateral damage” in the market.
In this case, it’s roughly 100 million pounds of uranium located in one of the world’s most well established mining jurisdictions that has my attention. The project is located on the Macusani Plateau in Peru and is adjacent to the InterOceanic Highway, which provides a link to Peru’s coast on the Pacific. There is good access to water and labor, and the site is roughly a 2.5-3 hour drive from the Juliaca airport where daily flights run to Lima and Cusco. Project elevations are high, at roughly 4400m, but that is well within the range of a number of operating projects globally; including well-known mines like Yanacocha and Collahuasi. In terms of access and infrastructure it’s hard to ask for much more. On top of that, the Pacific Rim location is ideal for any number of the existing and up-and-coming consumers in the uranium market (China, Korea, Japan, and India to name a few).
Using Friday’s closing price of C$0.32, Plateau Uranium (PLU.V on the TSX Venture, or MCYWF on the OTCBB in the U.S.) has a market cap of just $10 million and it controls 100% of a resource on the Macusani Plateau that totals 97.2 million pounds of U3O8. As a result of its amalgamation strategy since 2011, the company’s landholdings now completely dominate the region. In a sector that usually values “pounds in the ground” in dollars when market conditions are more normalized, PLU investors are paying just 10 cents per pound right now. That is the definition of leverage in my books.
Just to put it in perspective, Russian-backed ARMZ bought uranium market-darling Mantra Resources in 2011 (post-Fukushima) for roughly $1 billion (yes, billion). In that case, ARMZ paid over ten dollars per pound of resource. PLU can be had for 10 cents per pound of resource. Believe it or not, the scale and unit economics of Mantra’s project (Mkuju River) were not actually all that dissimilar from the indicated economics at PLU’s project on the Macusani Plateau. When it was bought, Mantra had a resource of roughly 85 million pounds with expected production of around 4 million pounds of U3O8 per year at a cost of around $25/pound on capex of ~$300 million. Compare that to the metrics shown below for PLU…
A 43-101 compliant preliminary economic assessment (PEA) completed late in 2013 on a portion of PLU's resource indicates the potential for a low-cost, large-scale operation that would rank within the top 10 uranium mines in the world by annual production.
Relative to other development projects still in the market, Macusani also finds itself at the low-end side of the cost curve...
So why is it valued at pennies on the dollar with indicative economics like this?
My point is that, before it was cut short by a freak event in Japan, the PLU story was making the all-important transition from obscurity to the mainstream and – make no mistake – that’s where a lot of great wins come from in the mining sector. Take Paladin Energy for example… In January of 2004 it was trading around A$0.05-0.06/share. Just over a year later, it was trading at around A$1.00/share. Two years after that, it was trading at A$8.00/share. Paladin went from obscurity, to the mainstream, to mania. With respect to PLU, if I can buy what I think is a good project while it’s still in obscurity, I believe I can capture almost the entire range of sentiment in front of me, as no one could ever argue that there is anything but apathy priced into the asset at present – particularly in light of the fundamentals of the project detailed above.
Starting in back in October of 2014, some large blocks of PLU stock have been sold in the market, which I would characterize as capitulation and/or distressed selling. That characterization is somewhat underscored by the fact that, since its pre-Fukushima trading level of over $1/share, PLU has only ever shown an increase in resource size, has only given more clarity on potential project economics, and has only better defined metallurgy and recoveries. Typically these are project milestones that would increase a project's market value, not decrease it.
So what’s the problem? For one, there are very few players from the investment side in the uranium sector; meaning that when market apathy has set in, there isn’t a large pool of buyers to draw on… especially in a microcap. Large overhang from one or two distressed sellers can also scare might-be buyers away. On top of that, when a company’s share price is falling, selling begets selling, which leads the few buyers left to scale back their bids. It’s a vicious circle.
There’s a bit of market psychology that goes something like this: The higher an asset’s value goes, the more people believe that it’s worth, and the lower an asset’s value goes, the less people believe it’s worth. In PLU’s case, it seems to me that the “reset” button has been pushed. Large holders that had to sell have sold with very few (and likely strong) hands picking up the slack. Insiders have been soaking up stock at current levels (click here for recent transactions) and the company is working on completing a new resource estimate by mid-March, with a new PEA to follow in Q3 2015. People often talk about getting in on “the ground floor”. I can’t say that this is the ground floor for certain, but it feels pretty close to it. The company will clearly need more capital, but the more important point in my mind is that it has succeeded in getting to this point with no debt. To put it another way, PLU's ability to attract new capital hasn't been impaired by the kind of debt burdens that plague so many other junior resource companies. That’s an important distinction for a bottom-fisher like me, as no one wants to get behind a big pile of debt.
Some Common Questions
It’s fair to say that I’ve spent a fair bit of time looking into PLU's Macusani project. I’m by no means an expert, so weigh my opinions with a grain of salt (especially given that I am long the stock), but I have read through the majority of the PEA and resource reports at one time or another since they were published. In that time, I have asked for feedback from a variety of sources (who have varying levels of knowledge of the project) that I’m listing below, along with my comments. In general, the pushback I have heard seems to come more from lack of knowledge about the project details than it does from any fundamental flaws.
1) “It’s too remote” – I’m not sure what to say to this. It’s not that remote. Access and infrastructure are quite good. It is adjacent to a major highway and power lines and is about a three-hour drive from an airport with daily flights to Lima and Cusco. The project area is an 8-hour drive from the port at Matarani on Peru’s southwest coast.
2) “It’s too high altitude” – Unless something is different about the air at other existing mines operating at similar altitudes (e.g., Yanacocha or Collahuasi, to name two) Macusani is not “too high”. Further to that point, my read of the publicly available data shows that leach kinetics have been evaluated at both sea level and site conditions.
3) “The mineralization is too sporadic” – The mineralization can be concentrated along natural fractures and the adjacent pore spaces in a soft volcanic host rock best characterized as an ignimbrite (that’s just a classification of a type of volcanic rock deposited, usually rapidly, at surface). Some disseminated mineralization also occurs within the host rock. With respect to the (often visible) mineralization that occurs on (and close to) fracture surfaces, I would think that is a positive, as it is far more likely to be exposed on the surfaces of even coarsely-crushed material. The resource estimators did note and consider the prevalence and orientations of the fractures in their calculations.
4) “The grade is too low” – Grade needs to be considered in the context of strip ratio, metallurgy, and the mechanical properties of the host rock. People are often amazed by the fact that gold mines in Nevada can be profitable while running oxide ores that run only 0.2-0.3 g/t Au. It's no different with uranium. Macusani mineralization is generally flat lying, with a very low waste-to-ore ratio. In comparison to mines in Namibia with higher strip ratios, harder rock, and often lower grades, Macusani actually compares quite favourably.
5) “There’s no uranium mining law in Peru” – This is more of a statement of fact rather than pushback. There was no uranium mining law in Tanzania when Russian-based ARMZ paid $1 billion for Mantra in 2011. While this would be first uranium mine in Peru, the government has already engaged with experts in the field with respect to drafting a uranium mining law, potentially mirroring that of Canada. Given Peru's long and established mining history, I see no reason why establishing such a law would be a significant obstacle.
6) “Acid consumption is high” – Column leach testing (using 15 g/L H2SO4) on 8-foot high, 16.5” diameter columns at ambient site conditions (using locally sourced water) showed recoveries of ~75% after 14 days, ~90% after 30 days, and ~91-98% after 50 days. Crush sizes were 1” and 2” with head grades of 85-359 ppm U. Acid consumption generally ranged from 10-25 kg/t with higher consumption seen in higher-grade samples. Bottle roll tests (200 mesh) showed higher acid consumption and variable recoveries, likely due to acid consumption of the host rock at smaller crush sizes. More work is needed, but early work suggests the potential for favorable leach kinetics, especially in coarser crush (i.e., cheaper crush) scenarios.
A Final Word
Congratulations if you’ve read this far. Remember, this is by no means an exhaustive summary of every detail of the project, but I do hope that it’s a decent jumping off point for those looking for a potential bottom-fish candidate in the uranium sector. Uranium Participation Corp (U.TO) has been trending higher as of late, and while I don’t know when spot uranium prices will start to move enough to catch broader market attention, I do believe it is a “when” and not an “if”… particularly in light of recent mine outages and the publicly discussed nuclear fleet expansion plans of a number of countries.
Does PLU still have work to do? Certainly. But how much cheaper can the asset get? Given that a project like Mantra’s was able to attract a $1B takeover offer in 2011, is it crazy to think that a major player might kick the tires on PLU, especially considering the similar scale, capex, and projected cash costs on the Macusani Plateau? And if that tire-kick were to happen, do I think that today’s $10 million valuation will look ridiculous in hindsight? I think there’s a decent possibility that may be the case on both counts, and at 32 cents, I think that I’m only paying for a fraction of a “decent possibility”. Should the sentiment pendulum start to swing back anywhere in the positive direction for PLU, I may look back at this and wish I’d bought more of the cheap stock. But then again, I’ll only know that in hindsight…