Berkeley Energia – Capital Network: Positioned to be Global Top Ten Uranium Producer

Writen by Sam Catalano

Berkeley Energia Ltd (LON:BKY) is a London AIM and ASX listed minerals development company. The firm is currently progressing the Salamanca Uranium Project in western Spain, aiming to commence production in the second half of 2018.


A strong, clear, straightforward story: Berkeley Energia Ltd (LON:BKY) possesses a low capex, low operating cost asset which it aims to bring to production in the near term (H2 2018), this should very swiftly (~2021), see the company enter the top 10 global uranium producers. The mining and processing methods planned, are well-established techniques which should present relatively little risk. The project has strong community support in a region with extensive established infrastructure. Furthermore, the company is likely to begin delivering their product into a strengthening uranium market; following its recent nadir, during which time there has been very little competing investment into new capacity.

A standout project: The project feasibility studies suggest the Salamanca project could comprise a 15-20 year operation, with some of the lowest operating costs and lowest capex intensity within the global uranium market. Wenote that current offtake agreements are being signed at average prices above US$42/lb, which (if Berkeley Energia Ltd (LON:BKY) were to average this pricing level over the life of mine) could suggest an asset value of ~US$480m (versus the US$170m current market capitalisation of the equity). Our analysis also suggests that the asset valuation has a sensitivity of ~US$25m for each US$1/lb change in the average uranium price received. Furthermore, once the initial build phase is complete, and the company reaches steady state production levels (~2021), the asset will likely be generating significant cash. In fact, at the same pricing levels as discussed above (i.e. ~US$42/lb), we could expect the asset to generate >50%pa average free cash flow yield after hitting steady state based on the ~US$170m market cap of the company (i.e. before financing costs, corporate overheads & additional exploration).

Leverage to structural changes in the Energy mix: With nuclear being an ultralow carbon emission source of power (i.e. comparable with renewable energy sources) it is important to note that initiatives to decarbonise the global energy system, along with relatively little investment into uranium capacity in recent years means we would anticipate that the uranium market is one in which new supply sources should be highly sought after in coming years. Anticipated Nuclear utility restarts in Japan, in conjunction with the expected commissioning of numerous new nuclear plants in China alone should see demand pick up in this market as we move forward.

Strong financing support: Providing strong evidence in support of the project economics, Berkeley recently announced that it had entered into an investment agreement with the Sultanate of Oman, for an investment of up to US$120m via the form of an interest free, unsecured convertible loan (US$65m), and options (US$55m). Maximum dilution if all financing is converted to ordinary equity is 37%. Again, referencing the ~US$170m market cap and the US$480m asset value detailed above suggests the outcome for equity investors remains highly attractive even after financing costs. Before this deal was announced, on a range of uranium price assumptions we believed the company needed US$120-130m to finance the complete development of the operation. Accordingly, it is relatively unlikely that Berkeley would require any further external funding unless uranium price drop well below recently contracted levels

Overall: Berkeley Energia possesses a fully funded, strong flagship project, with no obvious major hindrances. Asset level valuation presents upside on a range of input price scenarios. Uranium as a commodity is also well positioned to take advantage of the global structural transition to a lower carbon energy system.

.While we do not explicitly make forecasts of commodity prices (including uranium); it is important to note that global initiatives to decarbonise the global energy system, along with relatively little investment into uranium capacity in recent years (following the Fukushima reactor issues in 2011) means this is a market in which new supply sources should be highly sought after, in coming years.

The uranium market also tends to operate with significant volumes changing hands in both the spot price and long term contract markets. In recent years, many utilities have been slow to re-sign contracts as they have taken advantage of weakness in the spot price. In fact, we understand that (if we don’t see meaningful new contract agreements signed in the interim) within a 5 year period both US and EU utility ‘coverage’ (i.e. contracted uranium supply) could fall to around 20% of total requirements. With Japanese nuclear plant restarts gathering pace, and a large number of reactors being constructed in developing economies like China, we would envisage that many US and EU utilities will begin to grow increasingly nervous about their relatively high ‘uncovered’ uranium supply. Accordingly, we would anticipate that in the coming few years, as the market begins to tighten again, that nuclear utilities will look to re-enter the market for long term supply agreements.

The Company's view is that whilst uranium prices may remain flat in the near term, from late 2018, when the Salamanca mine is scheduled to come into production, the market is expected to be dominated by US utilities looking to re-contract who will at the same time be competing with Chinese new reactor demand, which may lead to higher spot and term contract prices. Furthermore, Currently over 75% of the world’s uranium comes from politically unstable jurisdictions such as Niger, Russia and Kazakhstan, whereas 60% of the demand comes from OECD countries. The Salamanca project’s location in an OECD country may make it popular with global utilities, many of whom are citing geographic security of supply as one of their primary concerns when looking to secure offtake contracts.


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