Digging Deeper – Berkeley Energia

In the last issue of DIY Investor Magazine we helped to celebrate the 21st anniversary of the London Stock Exchange’s Alternative Investment Market – AIM – and considered the ways in which it had evolved in becoming one of the world’s pre-eminent small cap exchanges.

The last year has been difficult for AIM with a large number of it’s ‘diggers and drillers’ delisting due to low oil and commodity prices and there have been fewer IPOs than at any time since the financial crisis.

The need for quality has never been greater and in this article we take a closer look at Berkeley Energia (www.berkeleyenergia.com), a uranium mining company that has been receiving conspicuously positive attention from analysts and look at some salient factors that should be considered by any potential investor.

Describing itself as a ‘high impact, clean energy company’, Berkeley Energia Ltd, listed on AIM and the Australian Stock Exchange, is focused on bringing its wholly owned Salamanca uranium mine in Spain into production. Located three hours west of Madrid, the mine now has all the EU and national permissions it requires and earlier this year broke ground, following the award of initial infrastructure contracts in March.
 

Investors can look forward to a strong pipeline of newsflow including potential off-take contracts with major utilities, deals with strategic partners for the full mine financing, and results from exploration drilling at the exceptional Zona 7 deposit which could point to increased production potential.
 

The Salamanca mine’s initial capital requirement is a modest US$95.7 million which, coupled with its extremely low operating costs of $13.30/lb, means the company is capable of generating strong after tax cash flows, even at the current low point in the uranium cycle. As one of the only companies able to go into development in the current market, Berkeley will be well placed to capitalise on the expected increase in demand for its product from the US, India and China from 2018 onwards.

‘[We have] the only uranium asset of any size in Europe … Europe has 160 nuclear reactors in total and they currently have one very small uranium mine feeding them’

Because of its Australian listing Berkeley Energia (BKY) is permitted to include analysts’ reports on its website and whilst they may differ in terms of the way in which they value the business, there is general agreement that its share price could rise making it one of the few mining stocks currently in favour.

Discovery of the high grade Zona 7 deposit just over 18 months ago was a game changer for the company; it contains more than 30 million lbs of uranium, lying just four metres below the surface, and when it is in full production it will rank in the top ten producers and one of the lowest cost mines in the world, including the only significant source of supply in Europe.
 

An exploration programme, aimed at making new discoveries and upgrading the significant base of Inferred resources into the mine schedule is now ongoing and has the potential to maintaining annual production at over 4Mlbs a year on a continuous basis as well as extend the mine life beyond the 14 years currently expected.

Paul Atherley, Managing Director, Berkeley Energia Ltd explains how Salamanca’s low capital requirements and low operating costs can deliver strong, sustainable earnings, even when uranium prices are low.

In terms of valuing any junior mining business, and assessing it as a potential investment, its feasibility study is critical. In July 2016 BKY published the results of its Definitive Feasibility Study which confirmed that the Salamanca project will be one of the world’s lowest cost producers of uranium. The study reported an after tax NPV US$531.9 million and an internal rate of return of 60% based on a discount rate of 8%. These are highly impressive economics by any measure, and reflect the ultra-low operating cost nature of the mine, coupled with low upfront capital and a significant production base.

Over an initial ten-year steady state period the project is capable of producing an average of 4.4 million lbs of uranium per year at a total cost of US$15.06/lb and is expected to generate an average annual net profit after tax of US$116 million.

With operating costs predominantly in euros and revenue in US dollars the project is expected to continue to benefit from the effects of deflationary pressures within the EU. Additionally, due to its location, it benefits greatly from the well-established EU funded infrastructure in the region.

To read the announcement of the Definitive Feasibility Study click here

‘We are very strongly positioned to get this asset going at the very lowest point in the cycle, once in production we’ll look to capitalise on the very large demand from Chinese and others building new reactors that will transform the uranium price’

Berkeley has established a good neighbour and business partner relationship with the local community with the latest skills training programme for potential employees being heavily oversubscribed; in addition to the creation of 450 direct jobs (up more than five times as many indirect jobs) in a community hard hit by long term unemployment, it will actively support local businesses and the activities of the local municipalities.

The mine design incorporates the very latest thinking on minimal environmental impact and continuous rehabilitation such that land used during mining and processing activities is quickly restored to agricultural usage.

Managing Director, Paul Atherley, commented: ‘The Salamanca mine will rank as Europe’s largest uranium mine, one of the world’s top ten producers and will be a long term, reliable supplier of clean energy fuel. It will rejuvenate a local community badly hit by long term unemployment by providing training and sustainable jobs and supporting local business and the community in general.

This positive impact the mining industry has on regional communities starved of investment and sustainable employment is something the Board and management team is proud to be associated with.’

BKY is fully funded through the initial development phase with A$16.3 million in cash (and no debt), having recently completed a $10m financing with global mining private equity fund RCF royalty.

Owing to the low operating and capital cost nature of the project and the extremely robust project economics, the Company has been approached by numerous high quality strategic partners and other financiers for the mine financing and is considering a range of financing options focused on minimising dilution.

The Company has been approached by a number of utilities looking to secure long term offtake agreements; these discussions are underway and offtake arrangements are being negotiated.

Berkeley Energia’s Salamanca Project at a Glance

• Low initial capital requirement – $95.7 million
• 4.4 million lbs of uranium per year at a low cash cost of $15.06/lb
• Shallow deposits of very high grade – 735 PPM – uranium
• 85% + recovery rate from ore, cost effective access to sulphuric acid
• Easy access to first world transport infrastructure
• Delivers solid returns even with uranium price low
• Increasing demand from EU, US, India, China in 2018 when price is expected to rise
• EU funding and support and profits buoyed by falling Euro vs USD
• Potential for further deposits in the area

Being in Spain is seen as a key advantage of Salamanca because of its ready-made infrastructure and construction and engineering expertise; such a development in a remote and inaccessible location such as parts of Africa and Australia could easily add $150 million to the initial capital requirement.

When asked what key points potential investors should know about Berkeley Energia, Mr Atherley said: ‘We have an outstanding project that offers near-term development with low upfront capital and low operating costs within a first world jurisdiction—the project, when built, will be worth many multiples of our current market capitalization and if you are in the uranium business you have to be looking at this project’.

Berkeley Energia does tick a lot of boxes and it is little wonder that it has secured a financing agreement with Resource Capital Funds, which is the largest private equity fund in the mining space.  The fact that Resource Capital Fund invested in BKY is significant given the highly stringent due diligence requirements of the fund covering technical, permitting and social and economic factors, and that it did so at a 15% premium to the shares’ 30-day average is a ringing endorsement. Other major shareholders include Anglo Pacific Group, and Majedie Asset Management and more recently BlackRock and Fidelity, adding significant weight to the register.

The share price has had an impressive run, going from 16p to 45p over the past year and analysts’ target prices show that they expect there to be more to come with real catalysts on the near term horizon including off-take deals, exploration results from Zona 7 and financing deals with strategic partners. The first profits from production are not expected until the end of 2018, so as is often the case, timing any investment will be crucial; some investors might be happy to ride out the long term performance by buying and holding, others might prefer to trade in and out during the mine’s (and therefore, probably, the share price’s) different phases.

‘Major milestones are right in front of us including off-take deals, financing deals and exploration results’

WH Ireland and Australian broker, Argonaut, suggest a target of 120p/share, with Numis suggesting 100p and Dundee Securities 110p, versus the current share price of 43p. Full analysts’ reports can be found here (http://berkeleyenergia.com/analyst-coverage)

Each of the four brokers forecast revenues starting at around $270m in 2018 rising to some $350m by 2020, by when annual net cash generated before further investment will amount to between $150m and $195m, with reported annual net profit of up to $170m.

Canadian Dundee Capital indicates 99p per share; it then applies a risk discount of 10% to produce a target of 90p. Numis uses a similar method to arrive at its 100p target, whilst GMP Securities uses a mix of methods to arrive at a 70p target; all comfortably ahead of today’s (16^th August) close of 49.25p.

Often key to the success or otherwise of a company is the quality of its management and in Paul Atherley, Berkeley Energia has a leader with a wealth of experience heading a team that has a proven track record in the space and on the ground in Spain.

Hopefully this rather more comprehensive look at an investment opportunity will suggest some of the considerations you may make – it is not a solicitation for you to invest in Berkeley Energia.

If you are not comfortable in making an investment or do not feel that you understand the risks you may be exposed to then you should take professional financial advice appropriate to your level of investment experience.

The Nuclear Review features an in-depth interview with Paul Atherley. To view the interview please click here

View the Berkeley Energia Salamanca Presentation