URNM - Global Atomic Corp.: Poised To Ride The Wave Of Uranium Price Appreciation

2023-07-10 09:15:35 ET

Summary

• Energy security is of growing importance, and nuclear power can provide large amounts of non-intermittent, low-carbon, baseload electricity production.
• Uranium mine operations around the globe are not producing enough yellowcake to satisfy demand, driving up the price of uranium.
• Global Atomic’s Dasa mine has significant, high-grade uranium deposits that could meet a few percent of global uranium demand for about a decade.
• Global Atomic is priced appropriately and is poised to ride the wave of uranium price appreciation in years to come.

Global Atomic (GLATF) is a small cap, publicly traded company that has two business segments: (i) discovery and harvesting of uranium resources for carbon-free, baseload power in support of the world's trend toward electrification, and (ii) recovery of zinc from electric arc furnace dust from selected Turkish steel mill. In light of recent international events, governments are more than ever prioritizing energy security, and nuclear energy can meet this need by providing significant amounts of non-intermittent, baseload power with minimal carbon emissions. Global Atomic is executing a plan to mine uranium and produce yellowcake (U ₃ O ₈ ) in large quantities by 2025, and investors hope to be enriched by the swelling price of uranium. Global Atomic appears to be fairly valued based on a discounted free cash flow model, and it has strong government backing from Niger. However, significant risks that are out of stakeholders' control, making a 'hold' rating prudent.

Energy Security and Baseline Power as Primary Uranium Price Drivers

International conflicts in the 21st century tend to be connected to securing energy resources. The Ukraine Conflict is no exception with elements of fossil fuel supply at its root including Gazprom's loss of its ability to control the price of natural gas and through Russia's forceful annexation of Crimea that secured its access to oil and natural gas developments with the Black Sea. Now, with Europe importing less natural gas from Russia, EU nations are grappling with how to secure their own energy supplies, while, at the same time, the EU economy is aiming to be carbon-neutral by 2050.

The main premise of this investment thesis: nuclear energy represents a realistic pathway for countries to achieve reliable and secure baseload electric power while simultaneously lowering carbon emissions. Primary risks of nuclear energy are real and include: (i) the possibility of accidents or events that release radioactive material, and (ii) long-term storage of nuclear waste. However, these risks can be mitigated through engineering safeguards, and they should be compared to the risk of war associated with oil and gas resources.

One may argue that less expensive solar and wind power are alternatives that avoid the risks of nuclear power. However, large scale implementation of solar and wind energy infrastructure will require significant amounts of land and impact vegetation and wildlife habitats. Furthermore, the problem of intermittent power remains, and nuclear energy avoids this by providing a large amount of electrical baseload power (about 1GW) for years at a time.

Nuclear power plants are slated to begin construction predominantly in Asia in countries such as Bangladesh, China, India, and Korea, where demand for electricity is surging. In the US, the Infrastructure Investment and Jobs Act will fund about $6 billion to encourage the continued operation of about seven nuclear plants that are at risk of closing down. Europe is very split on the nuclear issue with the main confrontation between pro-nuclear France, who wants nuclear-derived hydrogen to be classified as 'green', and Germany, whose green energy agenda, Energiewende , has resulted in 46% of electricity generated by renewables. Despite these differences, it's increasingly clear that nuclear energy will play an important role in meeting the world's growing appetite for electricity.

From Rock to Rods: How Uranium is Purified and Prepped

With the expectation established above that nuclear power will play a growing role in our future, we turn to the question of how the power plants will be fueled. Let's briefly describe how the uranium in fuel rods is obtained from natural deposits and is purified.

The process begins with mining and milling of naturally occurring uranium ore. While uranium is found all over the world at low levels, in some countries sites of natural deposits can exceed 2,000 parts per million (ppm) of uranium, or, equivalently, 0.2%. At these locations, mining operations can obtain enough uranium at low enough operating cost to be profitable. The table below shows countries with the most productive uranium mining operations.

Once mined, the ore rock is pulverized into fine fragments, water is added to create a slurry, and uranium is extracted chemically by leaching with sulfuric acid or an alkaline solution. Normally about 95 - 98% of the uranium can be recovered from the host rock. The leachate solution is then precipitated to form yellowcake, U ₃ O ₈ . Yellowcake is packaged, sold, and shipped to an enrichment facility. There, it is converted chemically to uranium hexafluoride, UF ₆ , which is a gas and can be centrifuged to enrich the amount of fissile Uranium-235 from the non-fissile Uranium-238. The natural abundance of U-235 must be increased from about 0.7% to about 3-5% for power generation. Following enrichment, the uranium is converted to uranium dioxide powder which can be pressed and heated to form pellets. Those pellets are loaded into zirconium alloy fuel rod cylinders, and the rods are packaged into fuel assemblies that operate in a reactor's core for years.

Uranium's Supply-Demand Gap

The World Nuclear Association represents the global nuclear industry and has compiled extensive data on uranium mining, production, and consumption. Figure 2 compares, globally, the tonnes of elemental uranium (in the form of U ₃ O ₈ ) mined annually to the tonnes of elemental uranium ((U)) consumed. Over the past decade, it is clear that the world is using more uranium than it is mining, placing upward pressure on the price of uranium.

The over-the-counter prices for 250-pound contracts of U ₃ O ₈ , taken from the New York Mercantile Exchange and compiled by tradingeconomics.com are plotted in Figure 3. In addition to the supply-side constraint just mentioned, the rising price may also be attributed to (i) recent shunning of Russian uranium by governments and utilities and (ii) global plans to grow nuclear energy capacity. Many expect that the price of uranium will remain above $50 per lb.

Global Atomic's Uranium Enterprise

There are several high quality Seeking Alpha articles that highlight Global Atomic's outlook as an investment opportunity, and these include an Editors' Picks by Laurentian Research and a nice overview by ZMK Capital. I'm more or less in agreement with the sentiment offered by these articles. In the current article, I hope to bring the following perspectives: (i) a brief, broad-brush picture of the Dasa mining operation that includes recent developments as summarized in the company's last quarterly report; (ii) an analysis to show how the correlation between Global Atomic's share price and the price of a mining ETF has evolved in recent years, and (iii) a simplified, discounted free cash flow model that arrives at an intrinsic value of the stock.

Global Atomic's Summary and Recent Developments

Global Atomic's primary venture is the planning and execution of their Dasa mine, a sub-surface mine being developed in central Niger. This project has acquired most approvals and permits, and the Republic of Niger is on-board as 20% stakeholder in Global Atomic. The deposit in Dasa is believed to contain high-grade uranium-exceeding 5,000 ppm (i.e. >0.5%). Their planned Phase I of the mine is expected to yield 44.1 million pounds of U ₃ O ₈ over a 12-year period beginning in 2025. This figure is significant; when it is converted to tonnes of U ₃ O ₈ on an annual basis, the mine will yield about 1,400 metric tonnes of elemental uranium ((U)) per year- i.e. about 2% of the current global uranium consumption rate.

The Dasa mine's capital expenditure is estimated to be $208 million, and the company estimates an 'all-in sustaining cost' of $22.13 / lb of U ₃ O ₈ that includes mining, milling, chemical processing, royalties, and off-site costs. This number can be directly compared to the expected price of uranium from Figure 3 to estimate profit margins and free cash flow as will be done later.

As of April, 2023, the company reported their primary mine shaft tunnel has progressed 325 meters and is 40% complete before reaching the targeted ore. Further, in May 2023, Global Atomic reported a definitive agreement with a North American utility company to sell 2.1 million lbs of U ₃ O ₈ from Dasa. This is about 5% of the total mine's estimated capacity, and the bidders probably got a good price.

Share Price Correlation to Sprott Uranium Miners ETF

Global Atomic's potential to be profitable is indicated by their share price which, as expected, is highly correlated to the price of uranium. To explore this idea, Figure 4 shows a plot of Global's share price against the Sprott Uranium Miners ETF (URNM). This fund includes exploration and mining firms, but it also includes holders of physical uranium.

The correlation shows how Global is pretty much moving with the pack of uranium miners. The slope of the correlation has significantly increased from 2020 to 2023. This indicates the higher likelihood that Global Atomic will be profitable like the other miners-now Global Atomic is only two years out from producing yellowcake.

The data from year (red data) tell an interesting story. The data from early 2023 show GLATF's price was high, largely matching the correlation from year 2022. Then, following the earthquake in Turkey, shares dropped considerably. Global Atomic also recovers zinc from electric arc furnace dust that is generated by Turkish steel mills. This operation generates $5-10 million of EBITDA per year and will support investment in the Dasa mine. The operation was shut down following the earthquake for a few months, but now the zinc recovery business is fully operational, and one can expect that shares will eventually work their way back to the 2022 correlation as Turkish steel production recovers.

Discounted Free Cash Flow Model

A simplified discounted free cash flow model was developed, and results are summarized in Figure 5. Inputs are shown as green cells, and blue cells are calculated. The model assumes that revenue will be generated based on the amount of recovered zinc ($1.5 per pound) and the amount of yellowcake produced ($50 per pound). The schedule of Zn mass recovery assumes Turkish steel mills come back online the next few years, and the predicted yellowcake production is taken from the company's predictions for Phase I based on the mine's assessment. Another input is the cost of revenue for zinc operations which is assumed to be flat at $7 M (based on 2021). Sales and general expenses are assumed to be flat as well.

Calculations will be briefly summarized. The cost of revenue for uranium production is the all-in sustaining cost of $22.13 per pound multiplied by the uranium production rate. Depreciation is estimated to be 1/5 of the prior five years of cap ex investment. EBIT is calculated as the remaining revenue, and EBITDA is calculated by adding back depreciation to EBIT. Interest is assumed to be 8% of long-term debt, compounded annually, and tax is 25% of EBIT. The resulting free cash flow is calculated by subtracting interest, tax, and cap ex investment from EBITDA. Free cash flow is used to reduce long term debt, and, under this scenario, all debt from the $200M capex investment is paid by 2027. Half of the free cash flow that is applied to reduce debt is considered to be retained as beneficial to shareholders through useful company equipment and opportunities for more uranium mining that are associated with the $200M capital investment. Discounting future cash flow streams at a discount rate of 8%, the model projects Global Atomics intrinsic value to be about $2 per share which is in-line with today's share price.

Risks Cannot be Ignored

Large capital expenditures will be required to establish productive uranium mining at Dasa. If Global Atomic is unable to receive financing, they will have to raise capital by releasing more shares and diluting shareholder value. However, with a strong investment thesis, this risk may be small. The company expects to secure $75M of financing through a syndicate of North American financial institutions, but the deal is not yet secured.

An additional risk is that the anticipated presence and grade of uranium may not be realized. Mineral assessments are never perfect. Lower-grade uranium could result in less revenue from operations.

The most significant risk is that an unexpected event could stop mining operations or have a downward pull on the price of uranium. Mining accidents, geological cave-ins or landslides at Dasa are possible. Another disaster like Fukushima or, even worse, the release of radioactive material at the Zaporizhzhia nuclear power plant could impact the price of uranium, lowering the prospects for Global Atomic to be profitable.

Closing Remarks

The heightened demand for energy security is palpable, and nuclear energy can address this need by offering reliable, non-intermittent, and low-carbon electrical power. Global Atomic is only few years away from producing large amounts of U ₃ O ₈ for over a decade, and its share price is strongly correlated with the price of uranium. A simplified free cash flow model based on conservative assumptions suggests that Global Atomic is valued appropriately. While investors may realize large gains if the price of uranium continues to appreciate, this type of investment is not for the risk averse. Substantial risks include project financing, the potential for mining accidents, and, most importantly, the potential for international events that are simply outside of any stakeholders' control.

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