GEM calculationGEM – Pele Mountain Resources - calculation example for their uranium project only
Disclaimer : I take no responsibility whatsoever for any errors, bad conclusions, important facts missing etc that might affect my analyses and their readers in any respect, but I always try to keep the facts accurate, as well as the calculations with their usually simple mathematics. Sometimes even the companies analysed deliver false information which could be impossible to detect for me and many other interested parties. In general I trust the corporate information and use it for my analyses. The future can´t be predicted 100 % and the stock market in particular is associated with considerable risks on the company level, but also on branch-, country- and world market level, implying that each person has to take their own full responsibility of the consequences of buying this particular stock.
Do your own due diligence !
Presentation https://pelemountain.com/pdfs/Pele_presentation.pdf
All time high CAD 1.62 as of Jan 2007. CAD 0.88 April 26.
2007 price target CAD 1.50-2.82
At this point there are huge uncertainties of how much uranium Pele Mountain Resources will be able to produce per year if and in that case when the Elliot Lake uranium project is permitted, which year full scale mining would commence and what the costs could be including initial capital costs etcetera. In any case Pele Mountain Resources has a huge leverage to an increased uranium price.
The management is not especially experienced in uranium mining, but a team of industry experts has been assembled by Scott Wilson RPA to lead the technical, economic and environmental studies. A prefeasibility study probably will be released 2008 or somewhat earlier . Pele Mountain Resources 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 inferred mineral resource to the indicated category, and the potential mineral deposit to the inferred category.
The Elliot Lake area produced over 270 million pounds of uranium between 1955 and 1989. Some infrastructure such as power lines and access roads are there. The most effective mining method is not decided yet, and my calculation stipulates that they can reduce costs to a reasonable level. There are rare earth oxides found in the property, and therefore there may be a potential for some cost reducing credits from rare earth element production.
Now look at this simple calculation example:
My assumptions in the calculation are USD 80 long term average uranium price, production 2-3 million pound per year from 2010 or 2011, stock dilution from 80 to 120 million fully diluted shares for capital costs not debt financed for the uranium project, total production costs of USD 50 per pound uranium produced ( lower than the USD 65 mentioned in the Scott Wilson RPA report, but maybe USD 50 is more realistic after choosing the most cost effective mining methods and a possible rare earth elements credit ), taxes 35 % , discounting the future stock potential by 25 % a year due to high risk in these juniors, p/e 10 and USD = 1.13 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 1.13/120 = CAD 0.37-0.55
P/e 10 gives GEM a 2010 or 2011 potential to CAD 3.67-5.51 with my assumptions.
Discounted to 2007 with a very high riskadjusted interest rate of 25 % per year that would correspond to a 2007 price target of around CAD 1.50-2.82, 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. The low extreme price target CAD 1.50 corresponds to ”only” 2 million pounds per year in as late as 2011, and the high extrem price taget CAD 2.82 corresponds to 3 million pounds in as early as 2010. Higher costs would require a likewise higher uranium price assumption for indifferent price targets, and lower costs would add to the potential. Due to the high assumed production costs the GEM stock has a rather extreme leverage to any higher uranium price expectations and vice versa, thus making GEM to a very fine uranium price play.
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 total expected value now of all those other projects together is probably significant but is not included at all in this simple calculation example which is just dealing with the uranium project. All together they could be worth a lot, but to find out that you should take a closer look at all of them.
The real outcome of this play though could be better or worse of course, making GEM a speculative very high potential/risk buy now without knowing more of e g the uranium production costs and the annual production rate.