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GEM – Pele Mountain Resources - calculation

[loparn]

example : At this point there are huge uncertainties of how much uranium Pele Mountain Resources will be able to produce per year, which year full scale mining would commence and what the costs could be including initial capital costs etcetera. Now look at this simple example: The management is not especially experienced as uranium miners, but a team of industry experts has been assembled by Scott Wilson RPA to lead the technical, economic and environmental studies such as the prefisibility. The company has a big NI 43-101 compliant inferred mineral resource of 33 million pounds uranium on their Elliot Lake uranium project in Ontario, Canada. There is an additional potential mineral deposit of some 25-30 million tons with grades as 0.04 to 0.05 % of uranium, corresponding to over 20 million pounds of uranium even if the true resource magnitude is not known at this point. Drilling will be made there to try to upgrade the ”potential mineral deposit” to the inferred category. Most infrastructure such as power and roads is already there. Elliot Lake produced over 270 million pounds of uranium between 1955 and 1989. The most effective mining method is not decided yet. My assumptions in the calculation are USD 80 long term uranium price, production 2-3 million pound per year from 2010 or 2011, stock dilution from 80 to 120 million shares for capital costs not debt financed for the uranium project, total production costs of USD 50 per pound uranium produced (a bit lower than the USD 65 figure circulating but maybe 50 is more realistic ), taxes 35 % , discounting the future stock potential by 25 % a year due to high risk in these juniors, p/e 10 and USD = 1.16 CAD. Then you would get Pele Mountain Resources 2010 or 2011 earnings per share of CAD (2 to 3)(80-50)x 0.65 x 1.16/120 = CAD 0.38-0.57 P/e 10 gives GEM a 2010 or 2011 potential CAD 3.77-5.66. Discounted to 2007 with 25 % per year that would correspond to a 2007 price target of around CAD 1.54-2.90, thus giving GEM a very fine fundamentally based potential, and the higher the sooner the production reaches the target level and the higher the production level. CAD 1.54 corresponds to 2 million pounds per year in 2011, and CAD 2.90 to 3 million pounds in 2010. Higher costs would require a likewise higher uranium price assumption, and lower costs would just add to the potential. The real outcome though could be better or worse of course, making GEM a very speculative high potential/risk buy now without knowing more of the production costs and the annual production rate. Pele Mountain Resources has many other canadian exploration projects dealing with gold, diamonds and base metals, and some of the projects are in form of joint ventures. The value of these other projects is probably significant but is not included in this simple calculation example. Together they should be worth a lot if you take a closer look at them.