Dundee Securities: Buy rating and $3.40 target price for Uranium Energy Corporation
According to Dundee Securities:
BUY, High Risk*
Dundee target: US$3.40
February 28, 2013
Initial Resource at Burke Hollow - Advancing Towards Production
Conclusion: We reiterate our BUY rating for UEC, with a price target of US$3.40. An initial 2.89 MM lb U3O8 resource estimate for the Burke Hollow ISR project was announced this morning. This may be the first of the "next generation" of uranium projects to be advanced in South Texas. The project is quickly moving into the company's project pipeline, adding to its hub-and-spoke model. Permitting activities have already started, with a drainage study already completed last month. While Burke Hollow, located just 50 miles from the Hobson Plant (Figure 1), foreshadows long life production in South Texas, UEC remains focused on the near term - Goliad construction and production ramp-up at Palangana, particularly Production Area #3 which was recently permitted.
While grades seem modest for a US ISR deposit, it's important to note that porosity can be a factor just as important as grade. Burke Hollow's fluvial sand/silty sand facies could compensate for the modest grade as this geology bodes well for fluid movement - a key component of ISR mining. Solutions must be able to successfully permeate the sandstone host, dissolving uranium as it percolates through the ore body, and successfully brought back to surface to maximize recovery, regardless of grades. UEC seems confident that this Burke Hollow resource is only the beginning. Very confident actually as only 30% of the property has been explored to date. Management believes further upside may be in the order of 1.8 and 7.2 MM lbs in two areas identified to the southeast of the current resource.
- Two zones identified. Drilling defined a resource of 2.89MMlbs grading 0.047% U3O8 at a 0.02% cut-off (Table 1) along a well defined red-ox boundary. The resource is split by an upper and lower zone, hosting 2.35MMlbs and 0.54MMlbs respectively. Grades were modestly better in the upper zone at 0.048% compared to 0.046% for the lower zone. Exploration began on 22-May-12 with four drill rigs. UEC added two more in June drilling a total of 39,037m in 268 holes by the end of 2012. Two rigs continue to drill.
- Resource expansion likely. Based on wide spaced drilling, well logs and mapping, management is confident that mineralization will be found elsewhere on this massive property. Only 30% of this 17,510 acre property has been drilled, and it could represent a new sub-region of the Goliad district. The company is now moving from known deposits to relatively grassroots showings and occurrences. One lease was added to the north end of this property. Management has history here with Mobile Oil, discovering a red-ox front that has yet to be followed-up.
- Moving towards development. UEC is collecting pre-operational air sampling data, and installing regional baseline monitor wells. A drainage study is complete, and several other studies are scheduled to begin in Q2/13. An ecology assessment to be completed by Q4/13. A Radioactive Material License and Mine Permit application should also begin in Q2/13.
- Valuation. We value UEC using a 10% DCF model, 1.0x multiple, and our own uranium price assumptions. UEC is 100% un-hedged, producing uranium from three units at its Palangana mine. We expect 250,000lbs production in FY/13 (year-end July), with an eventual ramp-up to steady state of 1.3MMlbs pa in FY/16. Goliad added in FY/14 will help. Total cash costs are expected to average at US$21/lb. We add resources from Burke Hollow but make no changes to our target price.