Uranium equity idea - Global Atomic

My second largest Uranium holding

*$ = USD, C$ = CAD

Overview

Global Atomic (GA, OTCQX:GLATF, TSX:GLO) is a zinc producer and uranium developer with exploration upside. It has 174.9M shares outstanding, 7.8M warrants at average exercise price C$4.77, 12.5M stock options at average exercise price C$1.085, for fully diluted 195.2M shares. Market cap is $393.6M/C$512.2M. It has C$92.8M in total assets (C$24.2M cash/C$54.5M property, plant and equipment/C$9.4M in Zinc joint venture), and C$4.1M in total liabilities.

Zinc production

GA owns 49% of a plant in Turkey which recycles steel dust from local steel mills into zinc. Total capacity is 110k tonnes of steel dust for 60M lbs of zinc. In 2021, it processed 70k tonnes for 34.8M lbs of zinc at average realized price of $1.36 per lb for net income C$4.1M. Zinc prices will likely go higher as zinc smelters in Europe shut down due to the energy crisis. Growing Turkey steel production and protectionist policies will bring the plant to full capacity (110k) in Q2 2022. Conservatively, we model 100/70 x 4.1 = ~C$5.86M net income for coming years.

Uranium development

GA owns 90% of the Dasa deposit, which has >250M lbs U3O8. They are permitted and are constructing the Phase 1 mine, which will begin production in 2024 and yield 45.4M lbs of U3O8 over 13 years. Phase 1 has $208M capex and $21.93 per lb post tax all in sustaining cost (operating costs+sustaining capex+G&A+exploration costs). The schedule is as follows:

Valuing DASA:

The net present value at 8% discount, internal rate of return and cumulative cashflow of Phase 1 is $885M, 68.7% and $2.18B at $70 per lb. The peak cashflow in 2028 would be $288.4M. In the last cycle, without an imminent supply deficit, long term price peaked near $100, and Japan contracted a large portion of material between $80-120. These numbers are not inflation adjusted. $70 per lb is very conservative.

Source: Cameco, UxC, TradeTech

Phase 1 only represents 20% of DASA’s total resource. Concentrations >750ppm are usually considered ore, and Dasa has ~147.9M lbs above 1200 ppm at average 4483 ppm. Management found that grades were consistent across Dasa and NPV of whole project is likely 5x of Phase 1, with total mine life 50 years.

Financing:

A fear is that significant dilution will be needed to fund DASA’s $208M capex.

Management is aligned (management+board ~15% ownership, CEO 7.6% - highest in industry) and is trying to debt finance the project. GA just formed a financing syndicate of North American financial institutions including Canada’s Export Development Contract which unilaterally signed a letter of interest to provide up to $75M in project financing at typical greenfield mining rates. GA just received a letter of intent from a US utility for 2.1M lbs over 6 years starting 2025, with revenue potential over $110M. These and upcoming contracts will help underwrite debt financing. Exercise of 2.85M warrants with exercise price below $3 will bring in C$8.5M with slight dilution. It is likely Phase 1 will be financed by zinc operations, current warrants and debt only.

Risks:

- Jurisdiction risk: Niger looks dangerous. But in fact, they are a top tier jurisdiction, being the world’s 5th largest uranium producer, with 50 years of uranium mining history. It has infrastructure, excess milling capacity and trained workforce from depleted mines (e.g. Akouta mine). The mine is deep in the desert, surrounded by NATO bases, and uranium can only be sold to utilities, making it an unattractive target. China is looking to acquire uranium mines, and Niger is a prime location vs hostile western jurisdictions. Finally, all jurisdictions are risky (e.g. permitting is much harder in the west due to NIMBY).

- Incorporation of Niger mining company. To start mining, a Niger entity has to be incorporated. The government can purchase (not seize) up to 40% (currently 10%) of the asset. However, in Aug 2021, the Niger mines minister issued a formal letter stating it would not seek to acquire beyond 10%. Doing so would greatly damage Niger’s reputation as a mining jurisdiction, built up over 50 years.

- Cost inflation: Will raise the entire cost curve and can be passed on to utilities.

- Currency risk: Operations are completely in USD.

- Operational risk: Possible but management is skilled and Niger has expertise and infrastructure.

Uranium exploration

GA holds six uranium exploration permits in the Republic of Niger covering 729.8km^2. Work carried out by Exploration since 2007 has found resources in 3 areas ex DASA: Tin Negouran (10M lbs), Dajy (17M lbs) and Isakanan (34 M lbs).

Summary

Take $70 NPV at 8% discount of $885M at 90% ownership, subtract (208-24.2) = ~$183.8M of debt financing, we have $631.1M, which is ~1.6x market cap of $393.6M. Shares would only be worth 10% less with full dilution (which would also bring $39.05M proceeds).

This does not include the zinc asset (~$4.5M annual net income), 80% of DASA’s uranium (estimated ~147.9M lbs economic ore above 1200 ppm at average 4483 ppm), further exploration and other discovered resources (61M lbs so far), and pricing upside due to the enormous uranium deficit.

At these valuations, Global Atomic is a strong value play. The worst bear case is a huge acquisition by Niger government, but that is unlikely.

Possible Catalysts:

- Rerating of equities due to increased contracting activity and upward moves in the spot and term market prices

- Conclusion of debt financing to fully fund Phase 1 capex

- Conclusion of Niger entity incorporation with no or moderate increase in stake by Niger government

- Smooth continuation of construction and good progress to production by 2023.

- Entry into production by 2024

Disclosure:

I am personally long 12400 shares of TSX:GLO at cost basis C$2.462 each share.