TORONTO (ResourceInvestor.com) -- The latest mammoth Endeavour deal is a play on uranium, a commodity in very tight supply and with excellent fundamentals going forward. The group has a track record of creating vehicles centered on specific commodities, which have the liquidity to become favourites of institutions looking for exposure. Also in keeping with the usual model preferred by Endeavour and friends is the massive nature of the deal, with handsome commissions and fees for everyone and a nice liquidity event for the original investors.
UrAsia Energy [TSXv:UUU] managed to raise C$504 million, the proceeds of which were used to fund the purchase of uranium projects in Kazakhstan, owned of course by a private company based in the BVI. So now we have a company with C$75 in cash, a market capitalization of about C$670 million and annual production of 1.4 million pounds of uranium oxide at a cash cost of less than $10/lb. Fortunately investors have a chance to undercut the institutions this time, with the stock trading now down about 13% from the offering price of C$1.80 a share.
As one would expect, the key to this story is going to be one of rising production and hopefully rising uranium prices. Clearly, Endeavour wants it to be the uranium vehicle of choice for investors, the undisputed “go-to” option. It is important to keep in mind that there are very few options in terms of listed pure uranium producers, especially ones without a hedge.
Valuation
Lets assume that uranium prices can average $40/lb in 2006 (trading around 33/lb today), and that UUU can make $32/lb on its 1.4 million pounds of production. That would equate to cash flow of just under $45 million. In other words, UrAsia is trading at roughly 15 times forward cash flow today.
Cameco [TSX:CCO; NYSE:CCJ] trades at about twice that multiple, has almost no exposure to uranium prices over $33/lb, and even in 2008, will only be about half exposed to upside above that price. From that point of view, UUU seems especially encouraging for uranium investors, with a strong balance sheet, excellent management team and solid unhedged growth in the pipeline.
It is estimated that the company can boost production to an annualized rate of 6.8 million pounds within two years and to over 10 million pounds by 2015 just with existing projects. If the 6.8 million figure comes to pass in a timely manner, one could well see a stock price a multiple of the current level by 2009, assuming uranium prices can hold in a $35/lb - $45/lb price range. Of course, if prices follow the trajectory some analysts are projecting, all bets are off. That said, it should be noted that all of UrAsia’s assets are in the same place (Kazakhstan), a place which, despite being misunderstood, seems destined to trade at a discount, especially where energy related commodities are concerned (witness PetroKaz’s recent woes).
Conclusion
It seems fair to say that the market isn’t currently attributing much value to UrAsia’s growth potential going forward. If strong production growth over the next few years is able to coincide with higher uranium prices, the vehicle will have done exactly what it was designed to do, and rewards for early investors in this play could be quite substantial. Uranium producers attract a high-multiple because there are so few listed options, and UUU has positioned itself to quickly become the household name for uranium investors.
Shares in UUU closed Wednesday at C$1.58, down two cents on heavy volume.
