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Berkeley's nuclear catalysts

A string of upcoming events provides grounds to renew our buy call in this low-cost uranium miner
July 13, 2017

Seven months after we first tipped shares in Berkeley Energia (BKY), we are refreshing our buy call. Why? Because the prospective uranium miner’s shares have started to disconnect from what we view as an increasingly positive flow of news. Last week, the final upfront direct cost of bringing the Retortillo deposit into production was lowered to €74.7m (£66.1m), putting Berkeley’s Salamanca project among the lowest cost sources of uranium in the world. Pending finance, its construction remains on schedule, with first concrete poured and the mine’s crusher ready for installation. Meanwhile, the Alternative Investment market (Aim)-traded company has added a former Rio Tinto uranium chief and co-founder of asset manager Majedie as non-executive directors, and Fidelity has increased its holding from almost 7 per cent to nearly 10 per cent. Discussions with additional offtake partners and an as-yet-unnamed strategic investor also continue apace, according to managing director Paul Atherley.

IC TIP: Buy at 45p
Tip style
Speculative
Risk rating
High
Timescale
Medium Term
Bull points

Project construction under way

Upgraded board

Potential strategic investment

Impressive offtake agreement

Bear points

Uranium price

Project execution

What remains in question - and most likely accounts for the softness in Berkeley’s share price - is the timing of the recovery in uranium markets. As with the oil market, oversupply means spot prices remain so low that major producers have been forced to shutter existing sources of production, cancel future projects and wait for inventories to unravel. It is an unsustainable situation: just a fortnight ago, Australian producer Paladin Energy filed for bankruptcy after its offtake partner sought more security for an upfront payment.

But for those with strong stomachs, the bottom of a commodities cycle is always the time to buy or invest. Uranium bulls’ confidence in an eventual recovery in prices rests on a number of sources. The most important is China, which plans to quadruple its nuclear capacity by 2035, spending $570bn to ensure a tenth of its electricity generation is sourced from reactors. Second, Japan’s nuclear reactor restarts are gathering pace. And, after 2020 EU-based utility companies’ contracted supplies of uranium are forecast to fall sharply leaving a supply gap to be filled.

Fortunately, Berkeley investors can afford to be agnostic, even with uranium spot prices at $20 per pound. That’s because an independent study of the project has shown that the company can reach steady state production of 4.4m pounds of uranium a year, for cash costs of just $15.39 per lb. Selling prices are likely to be higher than that, especially if last year’s $43.78 per lb average contracted offtake agreement with Interalloys is any guide.

Berkeley’s successful fundraising to date means that it needs around A$65m (£38.3m) to get the project “across the line” to production in 2019, according to Mr Atherley. While debt and equity financing have not been ruled out, we understand that a strategic investor from either the utility or mining worlds may be tapped up to take a stake in the project and guarantee Salamanca’s long-term production. News on this potentially major catalyst for the shares could prove as little as weeks away.

BEKERLEY ENERGIA (BKY)  
ORD PRICE:45pMARKET VALUE:£115m
TOUCH:44-46p12-MONTH HIGH:69pLOW: 37p
FORWARD DIVIDEND YIELD:NILFORWARD PE RATIO:NA
NET ASSET VALUE:23¢NET CASH:A$43.2m
Year to 30 JunTurnover (A$m)Pre-tax profit (A$m)Earnings per share (¢)Dividend per share (¢)
20141.2-7.4-4.0nil
20150.6-7.9-4.0nil
20160.0-13.6-5.0nil
2017*0.0-19.0-4.0nil
2018*0.0-19.3-4.0nil
% change----
Normal market size:3,000   
Market makers:10   
Beta:0.97   

£1 =A$1.69.

*Numis forecasts, adjusted PTP and EPS figures