CA - Fission Uranium: No Doubt Cheap But Possibly For A Reason

2023-07-16 03:43:49 ET

Summary

• Fission Uranium offers a very attractive valuation, but the company has quite a bit of financing risk for the Triple R deposit.
• The projected operating cost for Triple R is among the lowest in the industry.
• The company has relied on its at-the-market program more than I prefer at these depressed levels.

Investment Thesis

Fission Uranium ( OTCQX:FCUUF ) is a Canadian uranium development company focused on the western part of the Athabasca Basin in Saskatchewan. The stock is listed in Canada ( FCU:CA ), it also has an OTC listing in the U.S., and the company reports in Canadian Dollars.

Most of the value for the company comes from the Patterson Lake South (“PLS”) project, which hosts the Triple R deposit. A feasibility study ("FS") was released earlier in 2023 on the deposit. That is what I will primarily focus on in this article, and I will exclusively use Canadian Dollars denoted as C$.

A lot of uranium equities, with some rare exception, have had a relatively poor performance over the last 18 months, even if we have seen a slight rebound lately. Fission has, however, not seen much of a bounce and continues to trade at a relatively depressed level. So, for those looking for a deep value stock in the uranium industry, Fission could be an interesting option, even if the path to production might be far from seamless.

Market Cap

Fission Uranium did according to the Q1-23 MDA in May have 722M shares outstanding. The company also has some options and warrants, but most of them are out-of-the-money and are anti-dilutive. So, I have only included the 6.3M options, which are in-the-money for the current share count. We then get a market cap of C$422M for Fission, using the latest share price of C$0.58.

The company has no debt and C$46M in cash as of Q1-23, which in turn gives us an enterprise value of C$377M.

Triple R Deposit

Fission has been working on the progressing the Triple R deposit for a while now and did earlier in 2023 release a feasibility study on the asset, with good economic figures.

The FS is projecting a mine life of 10 years and an average annual production of 9.1Mlbs of uranium, which means we are talking about a sizable deposit. The operating cost is estimated at C$13.02/lb and the all-in sustaining cost comes to C$18.06/lb, that would put Triple R among the lowest cost producers in the industry. The low operating costs are partly due to a good grade of close to 2% uranium in the indicated resource category and the relatively shallow depth of the deposit.

The after-tax net present value, using an 8% discount rate and a $65/lb uranium price, is estimated to C$1,204M. That is also a highly impressive figure.

However, the main concern with the project is the large initial capital cost of C$1,155M. This is both a sizable amount in dollar terms, but also in relation to the net present value, which is why the IRR is a little lower at 27.2%, at least lower in comparison to some of other high-grade uranium development companies in the region.

Another concern with the large initial capital cost is that it is presently 2.7 times the size of the current market cap. I do expect debt financing can partly be used for this project. Regardless, we are looking at a significant dilution to existing shareholders unless the market first recognizes the value of this company.

Now, if we see the stock price bounce substantially, financing the project by a combination of debt, equity, and possibly a stream should be feasible. However, the financing is still a substantial risk to Fission's shareholders. The permitting is also ongoing, which is likely to take a few years to finalize. Keep in mind that a construction project of over C$1B, that stretches for 3 years, in a northern climate is not without risks.

Valuation & Conclusion

With the figures mentioned above, we are talking about a market cap to net present value of only 0.35, in a $65/lb uranium price. Where I think a $65-70/lb uranium price is appropriate for development companies, even if the spot price is slightly below $60/lb today, given that we know that western producers have signed contracts with prices above $60/lb during the last year.

The market cap to net present value is very attractive, both in an absolute sense, but also compared to some other high-grade developers in the region. I would not be surprised if Fission was one of the better performing uranium equities if we saw more of price spike scenario for uranium.

I do however prefer the path to production to be less challenging, where a higher IRR offers more of a margin for error in the construction phase. So, while I do acknowledge that this is an interesting deep value investment in the uranium industry, the lower valuation is partly justified by the more substantial financing risk in my view.

Another slight frustration would be the use of an at-the-market ("ATM") program at these very depressed levels. A development company does need to finance itself, normally via the equity market during the development phase. So, an ATM program can be useful. However, I dislike the use of an ATM program when the sentiment is this depressed, where the company did for example think it necessary to issue 5.1M shares with an average price of C$0.62 following the end of Q1-23.

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