Investing in Uranium Companies

Transcription

1 RBC Dominion Securities Inc. Adam Schatzker (Analyst) (416) H. Fraser Phillips (Analyst) (416) Jamie Riff (Associate) (416) Robin Kozar (Associate) (416) Royal Bank of Canada Sydney Branch Chris Lancaster (Analyst) 61 (2) Michael Chandler (Associate) 61 (2) Royal Bank of Canada Europe Limited Georges Lequime (Analyst) 44 (20) Andre Kroupnik (Associate) 44 (20) All values in U.S. dollars unless otherwise noted. Priced as of market close March 21, 2007 EST (unless otherwise stated). For Required Disclosures, please see page 6. March 26, 2007 INDUSTRY COMMENT Profiling Producers and Potential Emerging Producers - Summary Event Following the sharp increase in the uranium price over the past 24 months, there has been an increased incentive to explore for uranium and a number of explorers have emerged. In our full report, dated March 23, 2007 we have undertaken a brief review of selected publicly traded uranium exploration, development and production companies. In addition to brief company summaries, we have prepared a series of data tables that provide various valuation metrics for companies currently under coverage as well as ones that are not covered. Companies Profiled In the full report, we have provided summaries of 21 publicly listed uranium companies and summary data, including the companies enterprise value per pound of reserve and/or resource (in US$/lb). While we believe there is some utility in using the EV/lb metric for the valuation of exploration and preproducing companies, we would caution that this metric does not capture much of the important, fundamental information that should be analyzed in the investment decision process. Outlook for Uranium and Uranium Producers, Developers and Explorers We continue to believe that we are in the middle of a uranium bull market. The current market deficit, which is exacerbated by supply disruptions, continues to point to higher prices. For 2007E, we are forecasting an average uranium price of $100/lb; however, depending on how events unfold in the coming months, prices could exceed that forecast. With these higher prices, many uranium exploration and development projects are being advanced by numerous companies. It seems inevitable that some of these companies will successfully bring their projects into production in the coming years something the market will need in the future to bridge the supplydemand gap that we expect to exist after Investing in Uranium In the full report we not only profile uranium companies, we review what we believe are some of the key, fundamental valuation drivers. We think it is important that investors understand why there is a significant spread in EV/lb values we do not think it is prudent to simply buy a company with a low EV/lb without considering why it is low. There are many strategies that a uranium explorer or developer can use to drive shareholder returns. Of these strategies, we feel the two best are becoming a producer and positioning the company for acquisition. Other strategies include land/area plays or simply the acquisition of as many pounds in the ground as possible regardless of the asset quality but we believe these are inferior strategies. In our full report, we profile 21 companies listed on the TSX, AIM and ASX. We provide EV/lb metrics for comparison purposes for all companies; however, we have provided ratings for only the five companies that are covered by RBC Capital Markets.

2 Investing in Uranium Stocks There are many ways of valuing mining companies and, depending on the type of the company, we have chosen from several different methodologies. For uranium companies with existing operations, we use forward EPS or CFPS multiples to reflect valuation relative to peers and the market cycle. For companies developing new projects, we often use a net asset value (NAV) approach, sometimes coupled with a forward EPS multiple. For exploration companies where it is too early to calculate an NAV, we look to the enterprise value per pound of U 3 O 8 in resource. The EV/lb metric is easy to calculate and provides a number that is easily comparable to peer companies. While the EV/lb metric has some utility, we believe it must be used with caution, and additional fundamental research must always be carried out to support the underlying valuation. Additionally, we believe that the EV/lb metric is of limited use for existing producers (as evidenced by the very large range of EV/lb values). Exhibit 1: Uranium Comparables Market Capitalizations and EV/lb U 3 O 8 Cameco Energy Resources Australia Paladin Resources UrAsia Denison Mines sxr UraniumOne UraMin First Uranium Aurora Energy Metals Mega Uranium Laramide Resources Forsys Metals Corp. Ur-Energy Tournigan Gold Strathmore Minerals Khan Resources Western Prospector OmegaCorp Berkeley Resources Uranium Power Corp Denison Mines UrAsia Mega Uranium Paladin Resources Forsys Metals Corp. Cameco Average Energy Metals Ur-Energy Uranium Power Corp UraMin Laramide Resources OmegaCorp Tournigan Gold Aurora Energy Resources Australia sxr UraniumOne Western Prospector Khan Resources Strathmore Minerals First Uranium 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 Market Capitalization Source: Company reports, RBC Capital Markets estimates EV/lb (US$/lb U3O8 All Compliant Resources) Exhibit 2: Uranium Comparables Price/NAV and 2009E P/E Multiples sxr Uranium One ERA Paladin First Uranium First Uranium Paladin Cameco Cameco ERA sxr Uranium One 0.0x 0.5x 1.0x 1.5x 2.0x Price/NAV Source: Company reports, RBC Capital Markets estimates 0.0x 5.0x 10.0x 15.0x 20.0x 25.0x 30.0x Price/2009E EPS March 26,

3 Exhibit 3: Uranium Comparables Basic Market Information Current A$ C$ ZAR UK Euro Exchange Rates (US$ =): Primary Ticker Current Share Price Rating Risk 12-Month Target Price Share Currency Price (US$) Basic Shares (MM) Fully Diluted Shares (MM) Market Cap Producers Cameco TSX-CCO $45.08 TP AA $60.00 C$ $ ,743 Energy Resources Australia ASX-ERA $24.28 SP AA $20.00 A$ $ ,742 Paladin Resources ASX-PDN $9.04 OP AA $12.00 A$ $ ,659 UrAsia TSX-UUU $7.04 nr nr nr C$ $ ,930 Denison Mines TSX-DML $12.98 nr nr nr C$ $ ,112 sxr UraniumOne* TSX-SXR $15.88 SP AA $18.00 C$ $ ,042 Explorers/ Developers UraMin TSX-UMN $5.70 nr nr nr C$ $ ,320 First Uranium TSX-FIU $10.18 OP AA $12.00 C$ $ ,072 Aurora TSX-AXU $14.05 nr nr nr C$ $ Energy Metals TSX-EMC $13.00 nr nr nr C$ $ Mega Uranium TSX-MGA $5.72 nr nr nr C$ $ Laramide Resources TSX-LAM $12.15 nr nr nr C$ $ Forsys Metals Corp. TSX-FSY $8.62 nr nr nr C$ $ Ur-Energy TSX-URE $4.30 nr nr nr C$ $ Tournigan Gold TSX-TVC $2.71 nr nr nr C$ $ Strathmore Minerals TSX-STM $4.18 nr nr nr C$ $ Khan Resources TSX-KRI $4.00 nr nr nr C$ $ Western Prospector TSX-WNP $4.34 nr nr nr C$ $ OmegaCorp ASX-OMC $1.12 nr nr nr A$ $ Berkeley Resources** AIM-BKY 0.64 nr nr nr GBP $ Uranium Power Corp TSX-UPC $1.09 nr nr nr C$ $ * sxr Uranium One target assumes UrAsia merger is completed on terms announced ** Berkeley also ASX-listed Source: Company reports, RBC Capital Markets estimates March 26,

4 Exhibit 4: Uranium Comparables Cash, Debt, Gold and Adjusted Enterprise Value Current A$ C$ ZAR UK Euro Exchange Rates (US$ =): Primary Ticker Reporting Currency Cash Debt Net Debt EV Gold Resources Adjusted EV (MM oz) (***) Producers Cameco TSX-CCO C$ (510) 11,282 (**) - 11,282 (**) Energy Resources Australia ASX-ERA A$ ,709-3,709 Paladin Resources ASX-PDN US$ ,642-3,642 UrAsia TSX-UUU US$ ,869-2,869 Denison Mines TSX-DML C$ ,052-2,052 sxr UraniumOne TSX-SXR US$ , ,792 Explorers/ Developers UraMin TSX-UMN US$ Aurora TSX-AXU C$ Energy Metals TSX-EMC C$ Mega Uranium TSX-MGA C$ Laramide Resources TSX-LAM C$ First Uranium TSX-FIU C$ Forsys Metals Corp. TSX-FSY US$ Ur-Energy TSX-URE C$ Strathmore Minerals TSX-STM C$ Tournigan Gold TSX-TVC C$ Western Prospector TSX-WNP C$ Khan Resources TSX-KRI US$ OmegaCorp ASX-OMC A$ Berkeley Resources AIM-BKY A$ Uranium Power Corp TSX-UPC C$ ** Less value of Centerra Gold at market and estimated value of Bruce Power *** Gold resources valued at $50/oz, except for South Africa at $10/oz and deducted from EV to arrive at adjusted EV Source: Company reports, RBC Capital Markets estimates March 26,

5 Exhibit 5: Uranium Comparables Reserves, Resources and EV/lb Measures Adjusted EV Reserves (MM lbs) Measured & Indicated Resources (MM lbs) MI&I Resources (MM lbs) Historical Resources (MM lbs) (*) EV/ Reserve US$/lb EV/Reserve & MI Resource US$/lb EV/ All Resources US$/lb EV/ All Resources & Historical US$/lb Status Producers Cameco Producing 11,282 (**) Energy Resources Australia Producing 3, Paladin Resources Producing 3, UrAsia Producing 2, Denison Mines Producing 2, sxr UraniumOne Producing 1, Average Explorers/ Developers UraMin Feasibility na Aurora Exploration na Energy Metals Development na Mega Uranium Feasibility na Laramide Resources Feasibility na First Uranium Development na Forsys Metals Corp. Exploration na na Ur-Energy Development na Strathmore Minerals Exploration na Western Prospector Feasibility na na Tournigan Gold Feasibility na na Khan Resources Feasibility na OmegaCorp Exploration na na Berkeley Resources Exploration na na na 6.8 Uranium Power Corp Exploration na na Average (*) Neither , SAMREC nor JORC compliant Modified Averages (excluding +/- 1 Std. Dev) (**) Less Value of Centerra Gold at market and estimated value of Bruce Power Producers (***) Gold resources valued at $50/oz, except for South Africa at $10/oz and deducted from Expl/Dev na EV to arrive at adjusted EV Source: Company reports, RBC Capital Markets estimates Arithmetic Averages Producer Developer na Feasibility na Exploration na Cameco Valuation We value Cameco based on a combination of our forecast 2007 and 2008 uranium and power earnings with target P/E multiples of 25x and 15x, respectively, in line with historical trading ranges, and then add to that the company s 53% interest in Centerra Gold at market. We rate the shares Top Pick, Above Average Risk. Target Price Impediments The key impediments to reaching our target price are the outlook for uranium prices and electricity rates in Ontario, developments at Cigar Lake and uncertainty regarding possible future acquisitions. Also, as with all mining companies, world economic growth, commodity prices and currency fluctuations could have a material impact on revenue, while energy, people and environmental costs have the potential to materially affect the overall cost structure. Energy Resources Australia Valuation Our 12-month price target of A$20.00 per share is formulated by applying a 50/50 weighting between our base case NAV and 25x forecast F2009 EPS. As part of our upside NAV estimate, we have introduced an NAV component for the Jabiluka project, for which a decision on its approval is still pending. March 26,

6 Target Price Impediments The key impediments include fluctuations in the uranium price, currency, and project capex and opex (energy, material and manpower costs). Environmental and rehabilitation considerations could also affect operating costs. Variations in any or all of these represent risks to our earnings and equity performance expectations. First Uranium Valuation Given that the company has no prior corporate history, no meaningful comparisons in the market and no meaningful short-term cash flow, we believe that the market will value the company on its perceived NAV over the next two years. We have suggested a 20% premium to NAV, which is in line with the premium that similar-sized uranium producers are trading at and the current premium to NAV of the Tier II gold equities. Target Price Impediments The key target price impediments are management s ability to bring both projects in on time and on budget, and the risks to our commodity/exchange rate forecast. In order to achieve the forecast production rate at Ezulwini, the company plans to extract the gold reserves contained in the shaft pillar, which should generate early cash flow and stabilize the region. Shaft pillar extraction is seen as a high-risk mining operation, with the potential to jeopardize the medium- to longer-term production outlook at the mine. Paladin Resources Ltd. Valuation Our price target of A$12.00 is formulated by applying a 50/50 weighting between our base case NAV of A$9.96 and 25x our forecast F2009 EPS of A$0.54. We use an NAV component to derive our price target because PDN is still in the development phase with construction (Kayelekera) and commissioning risks (Langer Heinrich). Target Price Impediments Impediments to our price target include start-up and commissioning hurdles to overcome at the company s Langer Heinrich operation. In addition, it is subject to capital cost and timing overruns at its second project at Kayelekera. Operating cost increases could also negatively influence cash flows and profits if mining conditions are more difficult than expected, or if plant throughput or recoveries are lower than anticipated. Perhaps the greatest risk to the company is if the uranium market suddenly suffers a pullback, thereby reducing the potential for the company to achieve premiums in pricing. sxr Uranium One Valuation Our target for SXR of C$18.00 per share is derived using an equal weighting of its net asset value of C$10.13 per share and a 21x multiple on our 2008E EPS of US$1.06. The EPS and NAV used to calculate our target price incorporate our valuation of UrAsia and assume that the deal proceeds as announced. Target Price Impediments The key impediments to reaching our target price are expected to be SXR s ability to bring Dominion and Honeymoon into production on time and on budget. Subsequent to that, the successful technical commissioning of the projects will be an important driver of the share price performance. We believe SXR will enter into contracts in 2007 that will determine a significant portion of the company s value; the ability of the company to successfully complete these contracts at the prices we forecast will likely be reflected in the share price. Required Disclosures Explanation of RBC Capital Markets Rating System An analyst's "sector" is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned to a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative to the analyst's sector. Ratings Top Pick (TP): Represents best in Outperform category; analyst's best ideas; expected to significantly outperform the sector over 12 months; provides best risk-reward ratio; approximately 10% of analyst's recommendations. Outperform (O): Expected to materially outperform sector average over 12 months. Sector Perform (SP): Returns expected to be in line with sector average over 12 months. Underperform (U): Returns expected to be materially below sector average over 12 months. Risk Qualifiers (any of the following criteria may be present): March 26,

7 Average Risk (Avg): Volatility and risk expected to be comparable to sector; average revenue and earnings predictability; no significant cash flow/financing concerns over coming months; fairly liquid. Above Average Risk (AA): Volatility and risk expected to be above sector; below average revenue and earnings predictability; may not be suitable for a significant class of individual equity investors; may have negative cash flow; low market cap or float. Speculative (Spec): Risk consistent with venture capital; low public float; potential balance sheet concerns; risk of being delisted. Distribution of Ratings, Firmwide For purposes of disclosing ratings distributions, regulatory rules require member firms to assign all rated stocks to one of three rating categories Buy, Hold/Neutral, or Sell regardless of a firm's own rating categories. Although RBC Capital Markets' stock ratings of Top Pick/Outperform, Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis (as described above). March 26,

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9 In the event that this is a compendium report (covers more than six subject companies), RBC Capital Markets may choose to provide specific disclosures for the subject companies by reference. To access current disclosures, clients should refer to or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. References to a Recommended List in the recommendation history chart may include one or more recommended lists or model portfolios maintained by a member company of RBC Capital Markets or one of its affiliates. RBC Dain Rauscher Inc. Recommended Lists include a former list called the Western Region Focus List (1), a former list called Model Utility Portfolio (2), and the Prime Opportunity List (3) (formerly called the Private Client Selects), Private Client Prime Portfolio (4), a former list called Private Client Portfolio (5), the Prime Income List (6), and the Guided Portfolio: Large Cap (7). The abbreviation "RL On" means the date a security was placed on a Recommended List. The abbreviation "RL Off" means the date a security was removed from a Recommended List. March 26,

10 Analyst Certification All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report. Dissemination of Research RBC Capital Markets endeavours to make all reasonable efforts to provide research simultaneously to all eligible clients, having regard to local time zones in overseas jurisdictions. RBC Capital Markets' equity research is posted to our proprietary websites to ensure eligible clients receive coverage initiations and changes in rating, targets and opinions in a timely manner. Additional distribution may be done by the sales personnel via , fax or regular mail. Clients may also receive our research via third party vendors. Please contact your investment advisor or institutional salesperson for more information regarding RBC Capital Markets research. Conflicts Disclosures RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request. To access our current policy, clients should refer to or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time. Important Disclosures The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated by investment banking activities of the member companies of RBC Capital Markets and its affiliates. A member company of RBC Capital Markets or one of its affiliates received compensation for investment banking services from Cameco Corporation; Paladin Resources Ltd.; sxr Uranium One Inc. and First Uranium Corporation in the past 12 months. RBC Capital Markets Corp. makes a market in the securities of Paladin Resources Ltd. and sxr Uranium One Inc. and may act as principal with regard to sales or purchases of this security. RBC Dominion Securities Inc. makes a market in the securities of sxr Uranium One Inc. and may act as principal with regard to sales or purchases of this security. RBC Capital Markets is currently providing Paladin Resources Ltd. with investment banking services. RBC Capital Markets is currently providing Cameco Corporation with non-securities services. RBC Capital Markets has provided Cameco Corporation; Paladin Resources Ltd.; sxr Uranium One Inc. and First Uranium Corporation with investment banking services in the past 12 months. RBC Capital Markets has provided Cameco Corporation; Paladin Resources Ltd. and sxr Uranium One Inc. with non-securities services in the past 12 months. A partner, director or officer of a member company of RBC Capital Markets or one of its affiliates, or an analyst involved in the preparation of a report on sxr Uranium One Inc. has, during the preceding 12 months, provided services for sxr Uranium One Inc. for remuneration other than normal course investment advisory or trade execution services. A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than investment banking services from Paladin Resources Ltd. during the past 12 months. During this time, a member company of RBC Capital Markets or one of its affiliates provided non-investment banking securities-related services to Paladin Resources Ltd. A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than investment banking services from Cameco Corporation; Paladin Resources Ltd. and sxr Uranium One Inc. during the past 12 months. During this time, a member company of RBC Capital Markets or one of its affiliates provided non-securities services to Cameco Corporation; Paladin Resources Ltd. and sxr Uranium One Inc. Additional Disclosures RBC Capital Markets is the business name used by certain subsidiaries of Royal Bank of Canada, including RBC Dominion Securities Inc., RBC Capital Markets Corporation, Royal Bank of Canada Europe Limited and Royal Bank of Canada - Sydney Branch. The information contained in this report has been compiled by RBC Capital Markets from sources believed to be reliable, but no representation or warranty, express or implied, is made by Royal Bank of Canada, RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report constitute RBC Capital Markets' judgement as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice. This material is prepared for general circulation to clients and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The investments or services contained in this report may not be March 26,

11 suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. RBC Capital Markets research analyst compensation is based in part on the overall profitability of RBC Capital Markets, which includes profits attributable to investment banking revenues. Every province in Canada, state in the U.S., and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, the securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. To the full extent permitted by law neither RBC Capital Markets nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of RBC Capital Markets. Additional information is available on request. To U.S. Residents: This publication has been approved by RBC Capital Markets Corporation, which is a U.S. registered broker-dealer and which accepts responsibility for this report and its dissemination in the United States. Any U.S. recipient of this report that is not a registered broker-dealer or a bank acting in a broker or dealer capacity and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report, should contact and place orders with RBC Capital Markets Corporation. To Canadian Residents: This publication has been approved by RBC Dominion Securities Inc. Any Canadian recipient of this report that is not a Designated Institution in Ontario, an Accredited Investor in British Columbia or Alberta or a Sophisticated Purchaser in Quebec (or similar permitted purchaser in any other province) and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report should contact and place orders with RBC Dominion Securities Inc., which, without in any way limiting the foregoing, accepts responsibility for this report and its dissemination in Canada. To U.K. Residents: This publication has been approved by Royal Bank of Canada Europe Limited ( RBCEL ) which is authorized and regulated by Financial Services Authority ( FSA ), in connection with its distribution in the United Kingdom. This material is not for distribution in the United Kingdom to private customers, as defined under the rules of the FSA. RBCEL accepts responsibility for this report and its dissemination in the United Kingdom. To Persons Receiving This Advice in Australia: This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN , AFSL No ). This material has been prepared for general circulation and does not take into account the objectives, financial situation or needs of any recipient. Accordingly, any recipient should, before acting on this material, consider the appropriateness of this material having regard to their objectives, financial situation and needs. If this material relates to the acquisition or possible acquisition of a particular financial product, a recipient in Australia should obtain any relevant disclosure document prepared in respect of that product and consider that document before making any decision about whether to acquire the product. To Hong Kong Residents: This publication is distributed in Hong Kong by RBC Investment Services (Asia) Limited, a licensed corporation under the Securities and Futures Ordinance. This material has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient. Hong Kong persons wishing to obtain further information on any of the securities mentioned in this publication should contact RBC Investment Services (Asia) Limited at 17/Floor, Cheung Kong Center, 2 Queen's Road Central, Hong Kong (telephone number is ). Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license. Copyright RBC Capital Markets Corporation Member SIPC Copyright RBC Dominion Securities Inc Member CIPF Copyright Royal Bank of Canada Europe Limited 2007 Copyright Royal Bank of Canada 2007 All rights reserved. March 26,