CA - Global Atomic: Political Crisis In Niger Creates Buying Opportunity (Rating Upgrade)

2023-10-04 21:28:46 ET

Summary

• The market valuation has dropped by a quarter since the coup took place, and I think this seems unjustified since the development of Dasa is ongoing.
• In my view, a peaceful resolution to the situation could be around the corner, and this could boost the market valuation of Global Atomic.
• I think that the company should be worth over $470 million at $60 per pound of uranium.
• Yet, there are several major risks here, and it could be best for risk-averse investors to avoid this stock.

Introduction

Global Atomic (GLATF) (GLO:CA) is a Niger-focused uranium miner about which I’ve written two articles on SA so far, the latest of which was in June 2022 when I said that the company was starting to look expensive as development-stage mining stage mining companies rarely trade above 0.5x.

Well, spot uranium prices have soared over the past few months to over $70 per pound and are currently at their highest level since the pre-Fukushima disaster as the president of Niger was arrested on July 26 in a military coup. Niger is a major uranium supplier and rising uranium prices due to tensions in the country have lifted the share prices of most companies in the sector significantly. Global Atomic is among the few exceptions as its market valuation has dropped by a quarter since the coup took place. In my view, this creates a window of opportunity to open a position as a peaceful resolution of the conflict could be near and the company claims that its operations in the country are unaffected. Let’s review.

Overview of the business and recent developments

If you aren't familiar with Global Atomic or my earlier coverage, here's a brief description of the business. The company was founded in 1994 and its main assets include an 80% stake in the Dasa uranium project in Niger and a 49% interest in a zinc oxide recovery plant in Iskenderun, Türkiye. The latter produces a 65% to 70% zinc oxide concentrate for sale to smelters by recycling Electric Arc Furnace Dust ((EAFD)) containing 20% to 30% zinc which is sourced from local steel mills. The facility is 51% owned by European industrial services firm Befesa ( BFSAF ) and typically has sales of between 30,000 and 40,000 pounds of zinc per year. Global Atomic’s share of the EBITDA from the plant typically surpasses C$10 million ($7.3 million) during years with high zinc prices. Unfortunately, 2023 is shaping up as a challenging year as EAFD supply has been limited following the February 2023 Türkiye-Syria earthquakes.

Using a conservative valuation of 6x EV/EBITDA at about C$20 million ($14.6 million) EBITDA per year, the stake of Global Atomic in the facility would be worth around C$60 million ($43.8 million).

Moving on to Dasa, this is the highest-grade sandstone-hosted uranium deposit on the planet and the largest high-grade discovery in Africa in the last 50 years. It’s located near the city of Agadez in the Tim Mersoï Basin and it contains 109.6 pounds of uranium at an average grade of 4,926 ppm using a cut-off grade of 1,500 ppm eU3O8.

According to a feasibility study from 2021 that was based on reserves of 47.2 million pounds of uranium, Dasa is expected to produce 44.1 million pounds of uranium during a 12-year Phase 1 of mining at all-in sustaining costs ((AISC)) of just $22.13 per pound thanks to the high grades. Using an 8% discount rate, the after-tax net present value ((NPV)) is over $100 million even at $35 per pound of uranium, ranking Dasa among the lowest-cost uranium projects in the world.

The initial CAPEX for Phase 1 was estimated at $208 million, and construction of surface and underground mine infrastructure is already underway, with the ramp development now surpassing 600 meters (see slide 13 here ). Global Atomic expects to finalize financing for the project in Q4 2023 and commission the processing plant in Q1 2025. Yet, the company plans to release an updated mine plan and feasibility study in the first half of 2024 that will be based on the May 2023 mineral resource estimate, and I think that the initial CAPEX could surpass $250 million due to inflation. However, my expectations also include an increase in the NPV of at least 30% considering indicated mineral resources soared by 50% between the 2019 and 2023 mineral resource estimates. At $70 per pound of uranium, a 30% improvement translates into an NVP of $1.13 billion.

So, why has the uranium spot price been soaring lately? Well, the main reason seems to be the concerns about a supply deficit due to the coup in Niger considering the country is the seventh largest producer in the world according to the World Nuclear Association with a market share of about 4%. In my view, the fears seem overblown considering uranium mining in Niger is ongoing and the military has not announced plans to put restrictions in place. Looking at Global Atomic, the company has issued several press releases reassuring investors that its staff remains safe and that the development of Dasa continues. Yet, Global Atomic has prepared a contingency plan that could delay the commissioning of the processing plant by 6 to 12 months.

I think that there could be a peaceful resolution to the political crisis in Niger in the coming weeks as the military recently accepted a mediation proposal from neighboring Algeria. In late August, Algeria also proposed a six-month-long transition plan, overseen by a civilian. In my view, a peaceful resolution of the situation could drive uranium prices back to around $60 per pound but it could also be a catalyst for the share price of Global Atomic. Looking at the valuation of the company, the market capitalization stands at $323.1 million as of the time of writing. At $60 per pound of uranium, the NPV of Dasa stands at $330.5 million according to the 2021 feasibility study. Let’s assume it increases by about 30% with the updated feasibility study to $429.7 million. I can’t find a single uranium stock that is currently trading below 1x NPV, so let’s take this number as a reasonable valuation. Add $43.8 million for the Iskenderun zinc plant and we get to $473.5 million, which is 46.5% higher than the current market capitalization.

Looking at the downside risks, I think there are three major ones. First, I could be over-optimistic about a peaceful solution to the political situation in Niger. We could see a breakdown in talks, followed by a military intervention by a neighboring country. Second, if a peaceful resolution is reached, uranium prices could fall more than I’m anticipating, perhaps even below $50 per pound. This would put significant pressure on the valuations of uranium miners. Third, I could be overestimating the improvement in the NPV in the updated feasibility study. It’s possible that it remains close to the current levels as a result of a high increase in initial CAPEX.

Investor takeaway

The market valuation of Global Atomic has come under pressure over the past few months due to its exposure to Niger, but a resolution to the conflict in the country seems to be on the horizon. The development of Dasa is ongoing and I think that the company looks undervalued even if uranium prices drop to $60 per pound. Yet, there are several major risks here which is why I rate Global Atomic as a speculative buy. In my view, risk-averse investors should avoid this stock.

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