Investors have the blahs for uranium stocks, understandably so: The metal's spot price is down about 20 per cent since November, leaving the outlook for prominent names like Cameco Corp. middling, at best.
What if there was a uranium stock whose fortunes depend not so much on winning over these disinterested investors, but on the major uranium players themselves?
That stock is, in all likelihood, Fission Uranium Corp., a Kelowna, B.C.-based company with a project near Patterson Lake in northern Saskatchewan, in the Athabasca uranium deposit. It's inaccurate to call the revenue-less Fission a miner, since all it's doing is drilling and conducting studies to verify what, exactly, it has its hands on.
The answer seems to be, as analyst David Sadowski of Raymond James Ltd. puts it, "the world's largest, high-grade, preproduction uranium asset." And although the company's shares are up nearly 40 per cent this year, there's plenty of room for further gains, particularly if one of the major uranium companies takes a similar shine to Fission's future.
Here's what's made Fission's 2015 so lovely: On Jan. 9, the company delivered its initial estimate of the uranium resources at the deposit. Analysts were expecting the number to come in at 50 million to 80 million pounds; instead, the estimate (from an independent firm) was 105 million pounds, also with higher grades than expected. The company dubbed the deposit "Triple R," based in part on the "Rs" used by the company in internal coding of the zones within the deposit. Dundee Corp. analyst David Talbot said "Triple R" should stand for "Real big. Rich grades. Ripe for the picking." It now ranks third in size in the Athabasca basin, he says.
Fission's shares, rising in the days before the announcement, have added another 20 per cent, to nearly $1.20, since. The eight analysts who cover the stock, who all have "buy" ratings, have an average target price of $2.31, implying nearly 100-per-cent upside.
An awful lot of the excitement is based on the idea that Fission will never actually spend the hundreds of millions of dollars necessary to mine and process the uranium. Instead, analysts suggest, one of the major players will pick off the company, either to build on an existing presence in the Athabasca region or make an entry to it.
"Yes, Fission Uranium is for sale," says Dundee's Mr. Talbot. "Its goal isn't to be a mining company, but wish to find, grow, and de-risk exploration projects. The goal is to benefit shareholders and start again at an ever-higher plateau than the last time."
(The company does not have a "for sale" sign on it, says company president Ross McElroy, but it does have financial advisers, including Dundee, and it's opened a data room "in case somebody was interested.")
Mr. Talbot looks at a list of comparable acquisitions and transactions in the Athabasca region since 2011 in which buyers paid $8 to $11 (U.S.) a pound for unmined uranium resources, and suggests $9.35 a pound leads to a project value of $1.08-billion. That in turns yields a net asset value of $3.04 (Canadian) per share for Fission; he then discounts it by 20 per cent, similar to Fission's peers, to produce a $2.40 target price.
Here, though, is a key part of that analysis – and something investors should consider before racing out to buy Fission shares. Most of the comparable transactions occurred when uranium was trading at $40 to $50 (U.S.) a pound or more, versus spot prices so far in 2015 of $35 to $38. And while analysts acknowledge uranium supply currently exceeds demand, they see rising prices in the coming years.
The Macquarie Capital Markets Canada Ltd. commodities team forecasts a gradual price increase to $53 through 2019, and assumes a long-term price of $60 a pound. When analyst Ron Stewart uses that $60 figure, he derives a net asset value for Fission of $2.73 per share. If he uses $35, however, he gets 95 cents a share. (A $30 spot price equals a 60-cents-a-share price for Fission, while $25 equals a 24-cent stock, in his valuation work.)
This suggests that investors are, on the whole, looking not so much at Fission's takeout potential, and certainly not at rising uranium prices, but at where the uranium market is right here, right now. Investors who think sub-$40 uranium is the new normal, and that the big players will have little appetite for expansion in that climate, will find Fission fairly valued. But if better days are coming in the uranium world, there may be no better stock to own than Fission.
David Milstead