CA - Fission Uranium: The Devil Is In The Details

Summary

• Fission Uranium released its FS on the PLS project, demonstrating 71.5% increase in the estimated NPV from the PFS.
• However, the long-term uranium price in the FS was significantly increased.
• While Initial CAPEX didn’t go up, projected operating costs rose 36%.
• Funding the project remains a challenge.

A month ago I wrote an article about Fission Uranium ( OTCQX:FCUUF )( FCU:CA ) where I expressed concerns of a potential CAPEX blowout in their upcoming Feasibility Study [FS]. Now that the FS is out, it turns out that I was wrong or at least when it comes to the initial capital. So in this follow up piece I’ll discuss the results from the FS as well as their implications for Fission. Overall, the company may appear more attractive and de-risked to a certain extent, but the question about funding remains.

What happened

On 17 January, Fission Uranium released the main highlights from the FS on its PLS project in Canada’s prolific Athabasca basin. The title of the release was trying to convey a very positive message about the results, stating that both NPV and IRR have increased, while initial CAPEX came in lower compared to the PFS done in 2019. The last point was quite surprising to me, as there has been a lot of inflation between 2019 and the end of 2022, so I was expecting a considerable bump, instead of a decrease. The increase in the estimated NPV is also very substantial, so I decided to do a head to head comparison of the two reports. For that purpose, I summarized the main highlights from the 2019 PFS as well as the 2023 FS in the following table:

*prepared by the author using data from Fission Uranium

While indeed initial CAPEX fell slightly by 1.9%, the indicated sustaining capital expenditures soared by 83.4% to CAD$384M. Operating costs have also increased substantially by 36.1% to CAD$13.02/lbs of U ₃ O ₈ . So it could be the case that some expenses were shifted from the initial capital requirements to sustaining CAPEX or operating costs. Still, the cost profile of the project looks very respectable, given the price increases of various materials and labor in the last few years.

Another changes that weighed in on the NPV estimate were the resource expansion by 15.1% to 93.7Mlbs and the increase of the uranium price assumption from US$50/lbs to US$65/lbs. For comparison, the current market price of uranium is around US$50/lbs. As a result, the estimated after-tax NPV jumped 71.5% to CAD$ 1,204M, when using a discount rate of 8%.

Looking at the 2019 PFS sensitivity, the project had estimated after-tax NPV of CAD$1,015 discounted at 10% with U ₃ O ₈ price of US$65/lbs, which would be very comparable to the 2023 estimate, when accounting for the higher discount rate.

Implications on valuation

Generally, the completion of a FS is an important step in de-risking a project and moving it towards production. This is no exception and is a milestone for Fission. The current EV of the company is around CAD$540M, calculated using the latest share price of CAD$0.84/share. This amounts to around 44.8% of the estimated NPV of the PLS project. Such a large discount is rather rare as most uranium developers trade north of 70% of the indicated NPV of their assets. While this may create a speculative buying opportunity, I’m quite reluctant to consider the stock a buy. The reason for this is mainly the very low liquidity position of Fission compared to the initial capital outlay. Also, the project should get a nod by the local indigenous community, which is a serious hurdle in some cases. In that regard, Fission has reported that it began a collaborative process with the locals of the Métis Nation of Saskatchewan.

In my opinion, the best outcome that shareholders can hope for is takeover. However, I consider the prospects of that happening in the foreseeable future quite low. One reason would be the small pool of potential buyers. The decision of Canada to limit Chinese investments into lithium could be a sign that more strategic minerals are to follow including uranium. The only western uranium miner with sufficient financial position to acquire new projects seems to be Cameco ( CCJ ). However, they appear to be more interested into vertical integration as evident from the Westinghouse deal.

Takeaway

Fission has achieved a milestone with the completion of the FS on the PLS project. At first glance, the FS demonstrates far superior economic profile of the projects in comparison to the 2019 PFS. However, looking at the details, the improvement is primarily due to higher uranium price assumption. But to management’s credit, the resource pool was also increased, while initial CAPEX came in slightly below the one from the PFS, despite the inflation in the meantime. Still with just CAD$32.8M of cash and equivalents on the balance sheet as of Q3’22, the initial capital required to put the PLS project into operation is quite high at CAD$1,155M. Therefore funding may prove to be a challenge and eventually lead to further dilution.

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