Comparison to Trekkopje
Areva is developing Trekkopje having acquired Uramin in July 2007 for
US$2.5bln dollars. Areva effectively paid US$15.86/lb uranium in the ground for
a project with a measured indicated and inferred resource of 563mt at a grade of
130-140ppm, or 158mmlbs of uranium.
Discounting by 90% the theoretical uranium in the ground at Warmbad shown in
table 1, and using the figure paid by Areva or Trekkopje, then Warmbad could be
worth US$7.175bln to a major uranium producer such as Areva.
Comparison to Valencia
Forsys is developing the Valencia uranium project, and currently has a market
capitalisation of around US$260-270m. With total resources of 60.2mmlbs of
uranium (measured, indicated and inferred), then the market value’s it at
US$4.4/lb in the ground.
Using the same basis as the comparison to Trekkopje, then we could assume that
Warmbad could be worth US$1.973bln once it has completed significant
exploration and prepared Environmental Impact assessments and technical
reports for development. It would probably require a spend of around US$40-50m
on exploration and analysis at Warmbad to get to the same stage as Valencia.
Note that this is discounting the theoretical uranium content (4.5billion pounds)
shown in table1 by 90%.
The Warmbad license area also has many advantages over Valencia e.g. water,
nearby power lines and potentially much larger.
Peer Group Conclusion
On the measures discussed previously, it is clear that to either a major or the
market there is clearly significant upside to come from the Warmbad licence area
if drilling results return economic grades. However, it should be emphasised that
very little drilling has been done to date, and no results have been published.
Consequently making the above assumptions carries risk. A recent site visit, the
two diamond drill holes demonstrated the presence of significant intersections of
uraniferous alaskite from Big Yellow and Gaobis.
The results of ongoing exploration will drive the potential value within these
properties as work confirms economic grades of uranium within the alaskites.
Theoretical Mine Development
As a further method to demonstrate the possible value at Warmbad, we have
modeled two scenarios for the development of a mine. One is for a major
operation milling around 100mtpa of ore, and the other of 25mtpa of ore. The
larger we have assumed mines at lower grades. Both use a discount factor of
12% and start producing in mid 2011.
Our base case assumptions used for both mines use a long term uranium price
of US$65/lb. Both developments envisage positioning a milling and processing
center located near to big yellow that is fed by a number of different alaskite ore
bodies near by (see map on page 2). Such a strategy would allow selective
mining, and therefore good grade control. We have used low strip ratios, starting
at 0.5, and rising to 1, since it appears that there is plenty of resource at surface.
Large Mine Scenario (100mtpa)
For our larger hypothetical mine at Warmbad, that mines 100mtpa of ore, we
have assumed grades of 200-130ppm, producing around 30mmlbs per year. This
would be a major mine, possibly the largest pure uranium mine in the world. It
would produce a similar amount of uranium as BHP’s expanded Olympic Dam
mine that is expected to produce around 33mmlbs pa (15ktpa), as well as
500ktpa of copper.
For this scenario we have assumed a capital cost of just over US$2bln (inclusive
of US$60m exploration spend) to get into production, which we feel is a
conservative number, but does include the use of contract mining. The capex has
been derived largely from using the Forsys June 2007 technical report on
Valencia which was written by Snowdon. The report assumes a capex of
US$230m to develop 13mtpa of ore to plant operation. We have assumed that
there will be economies of scale with a larger operation.
Concerning, operating costs we have used assumptions similar to Valencia which
uses US$10.34/t of ore mined. Although we expect economies of scale to once
again offer some potential for savings and are using a figure closer to US$8.5/t
of ore mined, or US$25/lb of U3O8. We have also modeled a 4 year tax holiday
before a 30% tax rate comes into affect. We have assumed that the operation
continues into perpetuity, since even at 100mt of ore mined per year, we think it
will take decades to deplete the ore within the property (refer to table 1 for
potential tonnages or ore).
Using these assumptions and a long term uranium price forecast of US$65/lb, we
derive a value for the project if all debt funded of US$1.327bln to share holders,
if all debt funded. The property will need to be extensively drilled to confirm
uniformity of grade etc.
The following table summarizes our base case:
Table 3: Major mine scenario earnings summary
2008 2009 2010 2011 2012 2013 2014 2015 2016
U3O8 price US$/lb 80 80 80 70 65 65 65 65 65
Uranium Produced mmlbs 0 0 0 22 40 37 33 33 33
Grade Mined ppm 0 0 0 200 180 170 150 150 150
Capex spend US$m -20 -294 -953 -778 -16 -16 -16 -16 -16
Revenue US$m 0 0 0 1,235 2,192 2,192 1,935 1,935 1,935
Royalty US$m 0 0 0 -25 -44 -44 -39 -39 -39
Opex US$m 0 0 0 -432 -851 -851 -851 -851 -851
D&A US$m 0 0 0 -199 -200 -202 -205 -207 -210
PBT US$m 0 0 0 580 1,097 1,095 840 838 834
Tax US$m 0 0 0 0 0 0 0 -251 -250
PTP US$m 0 0 0 580 1,097 1,095 840 586 584
Free cash US$m -20 -294 -953 0 1,282 1,282 1,029 778 779
Smaller Mine scenario (25mtpa)
The size and potential of the Warmbad license lends itself to supporting a
major mining operation of strategic importance to a major mining company.
However, it is worth investigating the development of a smaller operation that
could be undertaken by a junior. For this we have developed a scenario of a
25mtpa of ore being mined at a higher grade of 300-200ppm, leading to
production of 11-15mmlbs per year of U3O8. A smaller operation should be
able to mine more selectively, hence the higher grades used.
We have once again used information from the Forsys technical report on
Valencia to come up with our assumptions that leads to an operating cost of
US$8.7/t (US$17-22/lb U3O8), and a capital cost of US$550m. Other
assumptions concerning tax, royalties etc remain unchanged between the
different scenarios.
Table 4: Smaller mine scenario earnings summary
2008 2009 2010 2011 2012 2013 2014 2015 2016
U3O8 price US$/lb 80 80 80 70 65 65 65 65 65
Uranium Produced mmlbs 0 0 0 7 15 15 14 14 13
Grade Mined ppm - - - 300 280 270 250 250 235
Capex spend US$m -20 -86 -248 -196 -4 -4 -4 -4 -4
Revenue US$m 0 0 0 370 853 871 806 806 758
Royalty US$m 0 0 0 -7 -17 -17 -16 -16 -15
Opex US$m 0 0 0 -88 -217 -217 -217 -217 -217
D&A US$m 0 0 0 -50 -50 -51 -52 -52 -53
PBT US$m 0 0 0 225 569 586 522 521 473
Tax US$m 0 0 0 0 0 0 0 -156 -142
PTP US$m 0 0 0 225 569 586 522 365 331
Free cash US$m -20 -86 -248 79 615 633 569 413 380
Our valuation for the above scenario using our long term price of US$65/lb gives us
a DCF of US$1.4bln.We have assumed that the operation continues into perpetuity
mining 200ppm ore. Again the deposit needs to be drilled to confirm grades.
Sensitivity Evaluation
Two key elements that will have the most effect on the value of a project being
developed are uranium prices, and grade, the following table summarizes the
possible NPV using different grades or uranium prices to illustrate the sensitivity
and possible values in developing such a project.
Table XX: Smaller mine scenario Table 5: Valuation Sensitivity of Major Mine scenario US$000’s
Uranium Price US$/lb
55 Base case 65 75 85 95
Grade change -10% -761 469 1600 2780 3960
Base Case -39 1327 2583 3895 5206
10% 682 2185 3567 5009 6452
20% 1403 3043 4550 6124 7698
Percentage impact to base case
Grade change -10% -157% -65% 21% 109% 198%
Base Case -103% 0% 95% 194% 292%
10% -49% 65% 169% 277% 386%
20% 6% 129% 243% 361% 480%
Table 6: Valuation Sensitivity of Smaller Mine scenario US$000’s
Uranium Price US$/lb
55 Base case 65 75 85 95
Grade change -10% 652 1121 1562 2016 2471
Base Case 930 1452 1941 2446 2952
10% 1208 1782 2320 2876 3432
20% 1486 2112 2699 3305 3912
Percentage impact to base case
Grade change -10% -55% -23% 8% 39% 70%
Base Case -36% 0% 34% 68% 103%
10% -17% 23% 60% 98% 136%
20% 2% 45% 86% 128% 169%
The above tables demonstrate that the riskier but potentially more rewarding
development would be a major mine. The major mine shows a possible 480%
upside versus our base case if grades are 20% higher than modeled and long
term uranium prices are at US$95/lb. In comparison the same assumptions for a
smaller mine reflect only 169% upside to the base case.
Conclusion
In summary despite Xemplar’s rapid improvement (almost 8 fold) over the course of
2007 we think that there remains significant upside in the share price from the
Warmbad assets. As shown above this is viewing the assets from three perspectives:
1. What a major uranium producer is prepared to pay for a world class asset
e.g. Trekkopje.
2. What the market is prepared to value a small independent miner developing
a project to feasibility level e.g. Forsys.
3. Theoretical DCFs on just one mine operating, and this region has the scope
to support at least one, and possibly two or three significant operations.
The biggest risk at the current time is that the grades from the exploration
programme at Warmbad will disappoint and make the deposits uneconomically
viable. However, we feel that the potential of Warmbad justifies the risk. We have
tried to factor in grade risk in options 1 and 2 through the use of discounting the
theoretical uranium content by 90%.
In option 3, the two central plant models leave scope for selective high grade mining
from different ore bodies. It could therefore become possible to improve grades
above those outlined in the scenarios (see Sensitivity Evaluation on page 9).
Although our base case DCF valuation for the smaller mine at US$1.4bln is
slightly more than the large operation at US$1.327bln (the result of higher
grades), a major company will be keen on the larger operation due to the strategic
importance and securing larger market share and as shown in the comparison
tables. There is also greater potential for upside value (and downside) as shown
in the sensitivity analysis.
The potential of the Warmbad province is particularly appealing to major mining
companies since significant world scale uranium deposits are of strategic
importance to majors. They cannot sign contracts with uranium consumers, or to
build power stations unless they can guarantee supply.
An example of the need to secure supply is Areva’s US$12bln deal with China
Guangdong Nuclear Power Corp to build and supply two new nuclear reactors
with 600tpa of uranium, as well as a further 23kt of uranium. To get this contract,
Areva needed to buy Uramin. As part of this, the Chinese have agreed to buy
35% of whatever is produced from Trekkopje.
Warmbad also presents the opportunity for one or more major operations that
could be comparatively quick to develop. The ore bodies are at surface, large,
there is water, and power lines in the area, in addition the low political risk is a
further benefit. We feel there is a strong possibility that more than one major
could make a bid for the company in order to secure long term contracts with the
various nuclear power stations planned for the coming years.
Risks
Geological/exploration risk: We view grades as the greatest risk to Xemplar.
Should the exploration program disappoint and grades are too low to be
economic then Warmbad might not be developed. Initial indications are that there
should be enough economic alaskite on the property to lead to a mine, although
the results from the exploration program will be key in confirming this.
Commodity Risk: Uranium prices have performed well in recent years, and we
would expect ongoing strong prices as there has been insufficient development of
new resources over the years, and supply is struggling. Additionally there is growing
momentum to build new plants around the world as nuclear energy becomes
increasingly in comparison attractive to fossil fuels, and is the only alternative
currently available to support base load power demand. Uranium miners also tend
to lock in long term contracts as part of the development of new resources.
Political risk: Political risk in Namibia is low, the company has a well established
mining legislative structure, with diamond and uranium mining being the largest
contributors to the countries GDP. There is growing pressure for land reform, with
the acquisition of white owned farms starting in 2005 as the government aims to
resettle several thousand landless citizens.
Xemplar Projects
The following lists the various projects that Xemplar has in its portfolio.
Warmbad Province (approx 4,700km2)
This is Xemplar’s flag ship operation located in the South of Namibia along the
north side of the Orange River and has the potential to become a major uranium
mining district with 11 significant alaskite uranium occurrences, discovered to
date. Since the radiation signature for the deposits can be hidden by as little as
20cm of dirt, there could be more deposits in the area.