U.TO - Target Price Lowered on Weak Near Term Uranium Target Price Lowered on Weak Near Term Uranium Fundamentals
Event
We are resuming coverage of Uranium Participation Corp. after the closing of the $20.02mm financing. We have also updated our estimates to reflect a recent reduction in our near- to mid-term uranium price forecasts along with the company's most recent financial results (FQ2/17). As a result, our target price has decreased to $4.25 from $4.75, previously. Impact: SLIGHTLY NEGATIVE Spot uranium prices have declined 42% year-to-date and now hovers at 12-year lows of US$20.00/lb.
Uranium prices continue to be negatively impacted by oversupply issues driven by strong primary (mine) production, 'underfeeding' by enrichment facilities, and strategic and commercial inventory sales/drawdowns. Utility demand remains subdued with most utilities well covered over the near term (2016-2019 time period) and in no rush to enter the market in a meaningful way. A total of 35mmlb of uranium has transacted YTD on the spot market versus 40mmlb at the same point last year. Long term or 'term' demand is also tracking below last year at only 40mmlb versus >58mmlb at the end of October 2015. Although we believe the current prices are unsustainable in the long run, with spot prices well below the marginal cost of production, we do not expect the uranium market to rebalance before 2020. Furthermore, with utilities well-supplied, we expect demand to remain highly discretionary. We have reduced our uranium price deck from 2016 through 2022 and maintained our long-term price of US$55/lb. We expect the company to take advantage of the sharp downturn in prices and deploy proceeds from the financing and purchase uranium in the spot market. We assume the company will purchase 550,000lbs of U3O8 at US$21.50/lb in F2017.
Our $4.25 target price (rounded) is based on 1.0x of our $4.17 forward NAVPS estimate using a 12-month forward uranium price of US$25.00/lb (previously US $30.00/lb) and 0.77 CAD/USD exchange rate. TD Investment Conclusion In our view, UPC currently ranks among the best investments to gain exposure to the uranium commodity price movements, through its physical uranium holdings without traditional mining and development related project risks. However, given our uranium price forecast and only ~14% return to target, we are maintaining our HOLD rating.