Patterson Lake South - Nothing Else Like it
In just eight short months, Patterson Lake South (PLS) has evolved from an ‘interesting prospect’ to one of the most excitinguranium projects in the world. Although it is still early days, we believe PLS could become the centerpiece of a world class, longlivedproduction center in the western Athabasca Basin on its rare combination of open-pittable depths, high grades, and sizepotential. PLS is jointly-owned by Alpha Minerals Inc. and Fission Uranium Corp. and with this report, we are launching researchcoverage on both companies.
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Serious Grades and Size Potential. Based on drilling to date, we estimate 19 Mlbs grading 2.3% U3O8 has been definedwithin two of three identified zones – an impressive feat with only one field season completed since discovery. Forreference, at RJL long-term price forecasts, this grade would equate to an in-situ rock value of US$3,080/t or on a goldequivalentbasis, 80 g/t. Given the intensity and extent of alteration, structure, and mineralization; a drilling ‘hit rate’ over80%; numerous compelling geophysical targets; and world class analogies on the east side of the Basin, we view explorationupside as excellent: our notional target resource is 60 Mlbs. In the longer-term, we believe potential is north of 100 Mlbs.
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Rare Open-Pittable Depths. The majority of pounds are within 100 m of surface – likely well above the depth threshold foreconomic open pits. The scarcity of such a shallow project cannot be overstated; with the lowest-hanging fruit alreadyplucked, PLS is arguably the only high-grade (>1%), open-pittable uranium asset left unmined in the world. Further, uraniumis hosted in clean, competent, water-resisting basement rocks, implying easier mining, processing, and waste management.
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Top Jurisdiction. We view the Athabasca Basin as the world’s premier jurisdiction for uranium mining, with supportivepolicies, geopolitical stability, an experienced workforce and infrastructure – three mills are operating and 2012 productionwas 23.4 Mlbs (15% of world). While PLS is likely to need a new mill given its west Basin location, we believe requisite capexcould be justified as regional resource pounds quickly approach critical mass (i.e., augmented by Shea Creek, Centennial). Potential Suitors and Valuation. The consolidation flurry continues, with six large deals in the last 12 months furtherreducing the availability of ‘good’ pounds, and in light of PLS’ quality and scarcity, it is very likely that the majors – e.g.,Areva, Cameco, nuclear utilities in Asia – are watching the project closely. We value PLS using the dollar-per-pound methodand ascribe US$7/lb to our notional 60 Mlbs target for US$420 mln in project value. Our metric reflects recent high-gradetakeouts (Roughrider US$10/lb; Waterbury US$9/lb; and Millennium US$8/lb) and peer trading valuations, adjusted forgrade, depth, location, etc.
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Potential Catalysts. We expect continued steady news flow from PLS over the remainder of the year. Key milestones includestart-up of the ~C$7 mln summer drill program in early-July, initial scintillometer results by mid-July (and continuingthroughout the program), with initial assays by mid/late-August. We expect a maiden resource estimate in mid-2014.
We are initiating coverage on the two companies that share ownership of the PLS project:Alpha Minerals Inc. (AMW-TSXV) – Outperform, $7.80 target – Alpha is run by Ben Ainsworth (President, CEO) and MikeGunning (Chairman), both instrumental in the development and sale of Hathor Exploration Ltd. and its 57.9 Mlbs Roughrider toRio Tinto for C$654 mln last year. We estimate current cash at C$18.0 mln (C$32.5 mln, fully-diluted).Fission Uranium Corp. (FCU-TSXV) – Outperform, $1.40 target – Fission is led by Dev Randhawa (Chairman, CEO) and RossMcElroy (COO), the team responsible for discovering, developing, and selling Fission Energy Corp. and its 13.0 Mlbs WaterburyLake to Denison Mines in April 2013. We estimate current cash at C$16.0 mln (C$26.5 mln, fully-diluted).