Peninsula Energy (PEN) - Solid DFS and Only 6 Months Construction Time

Peninsula Energy Limited is an ASX-listed company that owns the Lance Uranium Project in Wyoming, the USA which is in transition from an alkaline to a low pH in-situ recovery operation, with the aim of achieving the operating performance and cost profile of the industry-leading uranium projects.

Matt Gordon caught up with Wayne Heili, CEO and Managing Director, Peninsula Energy.  Mr. Heili has spent the bulk of his 30+ year professional career in the uranium mining industry. Before joining Peninsula Energy, he served as President and CEO of Ur-Energy, Inc., where he successfully oversaw the design, construction, commissioning, and ramp-up of the Lost Creek in-situ uranium project in Wyoming USA.

Prior to joining Ur-Energy Inc, Mr. Heili served as Operations Manager of the Christensen/Irigaray in-situ uranium mines in Wyoming. He also has experience in ISR (in-situ recovery) and conventional uranium mines in Texas. His educational credentials include a Bachelor of Science degree in Metallurgical Engineering from Michigan Technological University. He is a past President of the Uranium Producers of America.

Company Overview

Peninsula Energy is an advanced uranium developer with projects based in the United States. The company was founded in 1993 and is headquartered in Australia. It is listed on the Australian Stock Exchange (ASX: PEN) and the OTC Markets (OTCQB: PENMF). Peninsula Uranium Limited, Beaufort West Minerals (Pty) Ltd, Strata Energy, Inc., PM Prospecting Pty Ltd., Tasman Pacific Minerals Limited, Tasman Mmakau JV Company (Pty) Ltd, Imperial Mining (Fiji) Ltd., and Tasman RSA Holdings (Pty) Ltd, are the company’s subsidiaries.

Peninsula Energy’s flagship asset is the Lance project located in Wyoming, USA. The company is a uranium developer with a strong balance sheet, and a highly-experienced team proven in uranium production. It is gearing up for efficient project execution on the restart of the Lance Project.

Recently, the company published an updated DFS (Detailed Feasibility Study) on the Lance project. The company is now looking to make an FID (Final Investment Decision) for restarting the Lance Project in the second half of 2022. The project is perfectly positioned to play a larger role in the US nuclear fuel markets which are moving towards a western focus for production. It is important to note that as the company gets closer to an FID, it needs to realise all the impact of the project including the externalities such as the change in project pricing, and capital expenses. Previously, the company carried out a Sensitivity Analysis on capital, including the current capital costs.

The current sulphuric acid prices are now twice the 2018 numbers. The increase in sulphuric acid prices was factored in the company’s Feasibility Study. The company ended up digesting all the inflationary price pressures including the cost of capital materials and the suppliers needed for operations. It also added the technical basis for the field demonstration outcomes. The original Feasibility Study was conducted in 2018. Since then, the company has continued to de-risk the project. All these aspects are included in the updated Feasibility Study.

The company has received an increasing number of inbound inquiries by nuclear utilities for production availability. In order to determine future pricing, the company saw an updated Feasibility Study as the ideal strategy. According to the company, the coming period will observe an increase in uranium sales and the number of contracts signed. In order to determine the ideal margins, the company has been working on a DFS, which will help the company resume production at the Lance project and sell the supply to the market.

Production Metrics

As per the updated Feasibility, Peninsula Energy is looking at a 14-year mine life on a scaled-back project which is expected to generate 14.5Mlbs over the life of mine. The project has a $125M pre-tax NPV (Net Present Value) at a discounted rate of 8% with a 43% IRR (Internal Rate of Return). According to the in-depth analysis, the company expects to achieve a positive cash flow by year 2 of operations. At this point, the project will transition from an 820,000lb/year production capacity, which is the first stage of operation into stage 2, where the company seeks to ramp up production to 2Mlbs/year. In order to increase production, the company will invest about $60M in the first 2.5 years of the project’s lifecycle.

The company will fund the project through a portion of its corporate treasury which currently stands at $20M. In order to increase production, the company will need to fund the stage 2 capital requirements. It has developed a highly capital-efficient plan for the Lance project. The current plant is constructed with an 820,000lb/year production capacity, which is down from the previous levels. The company is currently in the process of changing the ion exchange circuit. In order to optimise the plant’s capture efficiency, the company is looking to increase the 2 column trains to 3. The company is also reducing the flow capacity, which is expected to directly impact the 1.15Mlb annual production rate.

In stage 2, the company will increase the production to 2Mlb/year. This would require a $25 investment to expand the plant’s capacity. An additional $45 will be needed to expand the well field capacity which would fill the increased plant capacity.

Stage 1 of the operation has a fairly low capital intensity. The company would need to spend about $25M to transition the project to a low pH in-situ recovery facility. The company would also need $2.5 in upfront capital for operations, and The new well field is expected to cost around $16M. This investment will enable the company to achieve an 800,000lb annual production. Following this, the company seeks to quickly ramp up the production capacity to 2Mlb/year as part of the stage 2 expansion plans.

Peninsula Energy has designed the DFS in order to help the Board and Management understand the costs of putting the project into production during its early years. The Lance project is a large universal project with a 54Mlb resource. The company has always treated the asset as 3 separate projects. The Ross project is fully licensed. It has a uranium production facility along with 2 complete well fields and a potential for 2 or more additional well fields in the area.

Adjacent to the Ross project is the Kendrick project area, which is represented on the map in blue. Following the work on the Ross project area, the company will start working on the Kendrick project. These two project areas can attain a 2Mlb/year production without any difficulties. The Barber area is the third region which features a much larger green area that spans a 25-mile radius from north to south and a 5-mile radius from east to west. This area holds a large inferred resource.

The Barber area has around 32Mlbs resource, the majority of which is in the inferred category. While the previous studies included the Barber area, the company chose to exclude it from the current DFS. This was done because the company realised that including a high level of inferred resources would reduce the quality of analysis obtained from the Feasibility Study. The company was looking for a high-quality output Feasibility Study that could be reliable for the Board in the near term in order to gain insight into the project’s economics.

Peninsula Energy has a highly-qualified production team. The company’s goal is to return to project back into production. In order to achieve this, the company is focused on the drivers of good analysis, ensuring that the production and economic aspects of the project are well-understood. The company is well-positioned to take advantage of the better market opportunities to put the project back into production.

M&A Considerations

The company is open to a potential M&A (Merger and Acquisition) with UEC. It is currently reliant on partnership agreements with UEC for the near-term toll process. This aspect of the project was included in the updated Feasibility Study. Once Peninsula Energy reaches stage 2 of the plant expansion, it will become self-sufficient in the long-term, and will no longer need to rely on its competitors. The stage 2 expansion is set to be completed by the end of year 2 of operations.

Cash Position

As per the company’s analysis, the stage 2 plant expansion is expected to cost about $24M, enabling the company to produce 2Mlb/year of dry yellow cake on an independent basis. When compared to similar projects, the capital requirements for Peninsula Energy’s facilities are considerably lower. Following a cash-flow analysis, the company recognized that it would need up to $60M in capital investment in order to ramp up production capacity and expand the well fields in the first 2 years of operation.

Currently, the company has a 300,000lb uranium inventory that is valued at $15M. The inventory can fund the project in the near term. Peninsula Energy has $7M in current cash flow. It has the financial capability to kick off the project with confidence and consider raising additional funds in the future once an FID is made.

The company has been investing between $500,000-$1M yearly towards resource expansion and development in the Barber area. While the resources being consumed at Ross and Kendrick cannot be completely replaced, the Barber area has the potential to double or even triple the annual resources. The company has mapped across the Barber area roll front trends which host the uranium mineral. Additional drill holes and resource delineation is required in order to extract the material. The resource expansion in the Barber region will be carried out in a systematic manner, with continuous investment starting with the current fiscal year. By investing under $1M on a yearly basis, the company can drill between 100-200 holes in the Barber area.

Between 2012 and 2015, the company was focused on drilling the Ross and Kendrick areas. As a result, these regions have more resources in the M&I (Measured and Indicated) category. The majority of the project is based in these 2 regions.

These 2 regions are where the majority of the project is based. The company has the flexibility to systematically expand the drilling program and move it to the Barber area. The Barber region features a 50Mlb resource that the company can grow and enhance over time with a reasonable annual investment.

Utility Contracts

Due to a short production timeline, Peninsula Energy is interested in near-term domestic producers. Once an FID is in place, the company can effectively generate yellow cake from its facilities within 6 months. It has the capacity to supply new contracts as early as 2023, however, new contracts are expected to begin from 2024 onwards. According to a recent study, the company’s AISC (All-in Sustaining Costs) is $39.08.

The company is looking for prices that offer a fair ROI (Return on Investment). Its upfront investment is about $45.75 per pound. The company has no plans to sell uranium at $40. It is open to entering contracts priced in the mid-$50 range, however, the preferred price range is in the $60s. The company has defined its prices and is seeking a reliable near-term producer from a US source.

The company is cognizant that the utilities have been signing contracts with producers and near-term producers. The market appears to have shifted from the tier-1 top producers to layered contracts with the next generation of producers such as Peninsula Energy. The company is open to signing contracts with utility providers, however, it is looking for a full appreciation of its AISC in order to ensure a profitable project. It is ready to engage in detailed discussions with utility providers.

One of the company’s Directors, Mr. Harrison Barker is a former lead fuel buyer for a US nuclear utility. Mr. Barker is well-connected in the space and has used his network to enter discussions with utilities. These conversations are setting the stage for contract negotiations in the near future.

The Ross and Kendrick areas have a 14Mlb production capacity, out of which, one-third of the production has already been committed to long-term contracts. These contracts extend to 2030 and fit nicely with the company’s production time frame. It is important to note that these contracts were signed in the high $50s/lb price range.

Following the completion of the DFS, the company is looking to layer additional contracts. It isn’t looking to contract the entire supply as it wants the shareholders to gain exposure to high-potential markets of the future. In the Feasibility Study, the company utilised Trade Tech along with a forward market price model, which was generated on a proprietary basis. Over the life of the project, the remaining two-thirds supply is expected to be sold at an average price of $65.5.

In order to better understand the rising cost environment, the company carried out cost sensitivity studies, which were analysed against the OpEx (Operational Expenditures), the CapEx, and the generated sales price. The analysis demonstrated a 5%-10% increase in OpEx and CapEx, each metric is expected to have a 5%-10% impact on the project’s NPV and IRR. A 10% change in the sales price of the uncommitted pounds will cause a $60M increase in the NPV, increasing it from $125M to $185M. This would have a major impact on the IRR as well. The analysis has helped the company in understanding the threshold of its inputs.

Targets 2022 and Beyond

Peninsula Energy has carried out a tremendous amount of work on the Lance project. It has successfully de-risked the project and has a full understanding of the regulatory environment. The company is authorised to move ahead with the low pH in-situ recovery. The company has also de-risked the project from a regulatory standpoint.

It has highly experienced and competent staff. The company has achieved 75% staffing for production at the Lance project. Its operators are experienced as they had worked on the project last year as well. The company has been circulating fluids from the existing mine units into the plant. It has all the key management personnel and maintenance staff in place. The company has successfully de-risked the project's staffing element.

The next step in the process is to stress test the model developed for the Feasibility Study. The company plans to look at all the worst-case scenarios in order to ensure that no mistakes are made. Taking all the possibilities into consideration, the company will determine the ideal timeline to re-enter production.

The company considers the current market conditions the best they’ve ever been. Nuclear utilities that operate reactors are now seeing full-scale government support to continue running the reactors. The operators have the flexibility to continue running the reactors, extend the project life, and source additional fuel. They have the option to acquire long-term fuel supply contracts, an element that was previously missing from the market.  While the future fuel requirements remain undetermined at this point in time, the company isn’t looking to over-commit to buying more fuel than required.

There have been several important developments in favour of nuclear energy including the Inflation Reduction Act which gives production tax credits for clean energy and for operating nuclear power plants. The high cases in the uranium demand and supply curves have become the norm. The new higher cases for the supply curves are expected to be much higher now. At the same time, there is a very strong demand in the market for nuclear fuel, uranium conversion, and uranium enrichment. The demand and market requirements were drastically different in 2021.

As the global production of oil and gas couldn’t keep up with the growing demands, the market went through an extraordinary period of price increases. Coal was losing its demand, but due to oil and gas shortages, the market’s coal requirements also grew substantially.

Peninsula Energy is a firm supporter of all forms of energy. The economy is reliant on low-cost electricity and fuel. In order for the economy to thrive, all forms of energy sources are needed. As the economy evolves towards nuclear, wind, and solar energy, the market interest is likely going to observe a shift.

To find out more, go to the Peninsula Energy website