Strateco Resources Inc SRSIF

Dundee target $1.80

[insiderinfocan]

Strateco Resources Inc.
(RSC-T: C
.93)
Update
January 21, 2010
BUY, High Risk*
12-month target price: C$1.80 (was C$1.85)
David A. Talbot / [phone]
[e-mail]
Julia Carr-Wilson / [phone]
[e-mail]
Debt Financing with Warrant Raises C$15 Million
RiskHigh52-Week RangeC$ 0.65-C$ 1.35Shares Outstanding (MM)122.7 Fully Diluted Shares (MM)140.6 Market Capitalization (MM)C$ 120Ave. Volume (000 shares/day)401 Working Capital (30-Sept-09) - (MM)12.0$ Value Cash, ST Inv. (30-Sept-09) - (MM)4.2$ Dundee Assumptions 2008A 2009E 2010E Long TermU Term(US$/lb)85667060U Spot(US$/lb)63475760U Realized(US$/lb)00060FX Realized(US$/C$)0.940.880.960.90Valuation (C$/share)2011E - 10% DCF Corporate ValueC$ 1.412010E Year-end Cash etc.C$ 0.212010E Additional Resource ValueC$ 0.18NAVC$ 1.80DCF Multiple1.0TargetC$ 1.80Earnings and Cash Flow (C$/share)2008A2009E2010E2011EEPS-0.02-0.02-0.01-0.01CFPS before WC-0.01-0.02-0.01-0.01All Figures in C$ Unless Otherwise Noted
Source: See Note 1
RSC-T: Price/Volume Chart
Source: Thomson ONE
Company Description
Strateco Resources is a Quebec-based uranium exploration and development company. Its flagship project is its 100% owned Matoush project in the Otish Mountains region of Quebec. The project hosts 16.8MM lbs U3O8.
Conclusion: Strateco announced that it is raising $15 million via convertible debt. While we understood that RSC required funds to continue with its exploration and development plans, we believe that this deal, with its half warrant and unit based transaction fee, is ultimately more dilutive than we had had previously modeled. We are therefore are decreasing our target price to C$1.80 from C$1.85 per share. We continue to recommend the stock at BUY.
This debt arrangement follows closely on the heels of a $2.5MM flow through financing that closed last month. The combined deals totalling $17.5MM are in line with our expected capital raise and should help RSC cover its aggressive exploration expenses through 2010. At least until it decides to go underground to explore, following the expected receipt of those permits by mid-year. Hard dollars were required for equipment purchases in the meantime. We expect budgets of ~$27MM in 2010E and ~$40MM next year.
$15 million raised to fund exploration and development
•
Convertible debt and units. The Sentient Group has agreed to subscribe to 100,000 units at
.95 per unit for $95k; and $14.905MM of convertible notes accompanied by common share purchase warrants.
•
The notes are convertible into shares at
.95 per share. The notes are interest free, unsecured and mature in five years plus one month after closing. The unit and conversion prices represent a 15.8% premium to the average RSC price over the past 30 days. Each unit consists of one common share of RSC and one-half of one warrant. Each $1,000 note is accompanied by 527 warrants. Each warrant allows the purchase of a common share of RSC at $1.00 for 24 months and for $1.05 for the subsequent period of 24 to 36 months. Closure is expected around 27-Jan-10, subject to regulatory approval.
•
Financing detrimental to our valuation. Units sold at
.95 are at a discount to what we had modeled for an expected Q1/10 equity raise. The estimated $8.3MM raised through warrant exercise (including warrants from the deal, warrants from transaction fees and warrants that accompanied the notes) would likely be exercised and offset future equity that we assume would be issued at higher prices. We assume warrants are exercised in 2012 and notes converted to shares in 2015.
Forming strategic partnership
•
The Sentient Group has technical experience and deep pockets. This may help leverage future negotiations when RSC seeks financing or deals with suitors as begins development of its Matoush uranium project.
•
The Sentient Group may ultimately gain 16.48% interest: Sentient would hold 16.78MM shares or 11.98% interest assuming the notes are fully converted. That interest would increase to 24.87MM shares or 16.48% assuming the warrants are also exercised (and we are).
•
Sentient has the right to name a person to Strateco's board and retains the right to participate in future financings to maintain its interest in RSC.
Strateco Resources IncRSC-TC$ 0.98RatingBUYC$ Target$1.80Shares O/S (MM)122.7Risk*HighC$ Close
.98Float (MM)122.712-month return84%Basic Mkt. Capitalization ($MM)C$ 120.2All figures in C$, unless stated otherwiseYear-end December(000$)EVALUATION DATABALANCE SHEET2008A2009EQ309Year-end Dec.2008A2009E2010E2011EAssetsEPS(0.02)$ (0.02)$ (0.01)$ (0.01)$ Cash & ST Investments10,699 2,883 4,173 P/EN/AN/AN/AOther Current Assets11,077 9,543 9,543 CFPS before changes in WC(0.01)$ (0.02)$ (0.01)$ (0.01)$ Current Assets21,776 12,426 13,716 P/CFN/AN/AN/Amarket cap/reserve lbNAMineral Properties11,481 13,618 10,667 enterprise value/reserve lbNAOther non-current Assets26,505 34,911 34,911 market cap/resource lb5,554$ Total Assets59,761 60,955 59,294 enterprise value/resource lb5,348$ ASSUMPTIONS2008A2009E2010E2011ELiabilitiesU Price RealizedUS$/lb0000Current Liabilities1,397 1,699 1,699 ExchangeUS$/C
.940.880.960.98Capital lease / LT Debt- - Dundee Modelled Reserves and Other Mineralization (MM Lbs)20.2Other non-current Liabilities2,736 1,535 1,451 RESERVES & RESOURCES (as of 30-Sep08)Total Liabilities4,133 3,234 3,150 TonnesGradeOwnershipMM t% U3O8100% BasisRSC ShareCapital Stock55,580 58,866 56,366 Proven and Probable ReservesRetained Earnings49 (1,144) (220) Matoush100%- Total Shareholder Equity55,629 57,721 56,145 Apple100%- - EARNINGS SUMMARY2008A2009E2010E2011ETotal Reserves0.00.00%0.0- RevenueMeasured and Indicated ResourcesUranium- - - - Matoush100%0.40.78%7.5 7.5 Other446 52 - - Apple100%- Total Revenue446 52 - - - Operating costs- - - - Total Measured and Indicated Resources0.40.78%7.57.5 NSR- - - - Inferred ResourcesExploration- 125 500 300 Matoush100%1.1570.50%12.8 12.8 G&A1,288 1,321 1,200 1,200 Apple100%- DD&A5 12 - - Total Inferred Resources1.20.50%12.8 12.8 Other 1,712 482 - - Historical ResourcesInterest and Financing Costs5 2 - - Matoush100%FX - - - - Apple100%8.50.05%10.1 10.1 EBT(2,563) (1,891) (1,700) (1,500) Taxes(620) - - - TOTAL COMPLIANT RESOURCE1.60.58%20.220.2 Minority Interest/Other- (10) - - Net Income(1,943) (1,881) (1,700) (1,500) PRODUCTION ESTIMATES (lbs)EPS-0.02-0.02-0.01-0.01Year-end Dec.2008A2009E2010E2011E2012EAverage shares (MM)116.0119.9127.3141.4Matoush00000Apple00000STATEMENT OF CASH FLOWS(000$)Pacific Bay-Matous000002008A2009E2010E2011ESub total00000Net Income (000's$)(1,943) (1,881) (1,700) (1,500) TOTAL CASH COST ESTIMATES (US$/lb)DD&A5 12 - - Year-end Dec.2008A2009E2010E2011E2012EFuture income taxes(620) (223) - - Matoush00000Writedown of min. properties357 - - - Apple00000FX - - - - Pacific Bay-Matous00000Change in working capital(212) 11 - - Wt. Ave.NANANANANAOther Operating1,090 231 - - NET ASSET VALUE0% NAVC$/share10% NAVC$/shareTotal Operating CF(1,323) (1,850) (1,700) (1,500) (beginning 2011)(C$MM)(C$MM)Short term investments- - - - Corporate DCF3212.521791.41Mineral Properties7,274 (16,155) (12,174) (18,503) Cash and other270.21270.21Acquisitions(300) (96) - - Exploration & unmodelled Resources230.18230.18Increase in Investments- (81) - - Total3712.912291.80Other Investing(22,098) 8,055 - - Dundee DCF Target Multiple1.0xTotal Investing CF(15,124) (8,277) (12,174) (18,503) Share Price Target1.80Equity financing8,253 2,500 26,240 - Debt Issue- - 14,905 - NAV & Price Target Sensitivity to Long-term Uranium Price AssumptionDebt Repayment- - - - Other financing(358) - - - NAV (C$/share)4050607080Total Financing CF7,895 2,500 41,145 - 0% Discount1.162.193.194.195.19Foreign Exchange effect- - - - 5% Discount0.891.642.363.083.80Change in cash(15,124) (8,277) (12,174) (18,503) 10% Discount0.711.271.802.342.87Cash & ST Inv., end of year10,699 2,883 30,154 10,151 15% Discount0.591.011.421.832.23Long Term Uranium Price Assumption (US$/lb)Cont U3O8 (MM lbs)050010001500200025003000350020122013201420152016201720182019202020212022000's lb010203040506070US$/lbUranium ProductionTotal Cash Cost0.05.010.015.020.025.02006200720082009MM lbsReservesM&I (excl reserves)Inferred0501001502002006200720082009lb /
000 sharesInferred / 000 sharesM&I (excl reserves) / 000 sharesReserves / 000 shares
Source: Bloomberg, Dundee Securities Corp, Company Reports.
Strateco Resources Inc. January 21, 2010
Page 3
Disclosures & Disclaimers
Dundee Securities Corporation is an affiliate of Dundee Corporation, DundeeWealth Inc., and Goodman & Company, Investment Counsel Ltd.
Research Analyst Certification: Each Research Analyst involved in the preparation of this Research Report hereby certifies that: (1) the views and recommendations expressed herein accurately reflect his/her personal views about any and all of the securities or issuers that are the subject matter of this Research Report; and (2) his/her compensation is not and will not be directly or indirectly related to the specific recommendations or views expressed by the Research Analyst in this Research Report.
U.S. Residents: Dundee Securities Inc. is a U.S. registered broker-dealer and an affiliate of Dundee Securities Corporation. Dundee Securities Inc. accepts responsibility for the contents of this Research Report, subject to the terms and limitations as set out above. U.S. residents seeking to effect a transaction in any security discussed herein should contact Dundee Securities Inc. directly.
This Research Report is not an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. The information contained in this Research Report is prepared from sources believed to be reliable but Dundee Securities Corporation makes no representations or warranties with respect to the accuracy, correctness or completeness of such information. Dundee Securities Corporation accepts no liability whatsoever for any loss arising from any use or reliance on this Research Report or the information contained herein. Any reproduction in whole or in part of this Research Report without permission is prohibited.
Dundee Securities Research is distributed by email, website or hard copy. Dissemination of initial reports and any subsequent reports is made simultaneously to a pre-determined list of Dundee Securities' Institutional Sales and Trading representative clients and Retail Private Client offices. The policy of Dundee Securities with respect to Research reports is available on the Internet at www.dundeewealth.com.
The compensation of each Research Analyst/Associate involved in the preparation of this Research Report is based upon, among other things, the overall profitability of Dundee Securities Corporation, which includes the overall profitability of the Investment Banking Department.
© Dundee Securities Corporation
Note 1: All historical data including financial and operating data on the issuer(s) mentioned in this report come from publicly available documents including statutory filings of these issuer(s). Data may also be sourced from Bloomberg, Baseline, Thomson ONE.
A Research Analyst/Associate involved in the preparation of this report has visited certain material operations of the following issuer(s): Strateco Resources Inc. The details are contained in current and/or prior research.
The Research Analyst/Associate and/or Dundee Securities Corporation has been partially reimbursed for expenses by the following issuer(s) for travel to material operations of the issuer(s): Strateco Resources Inc.
Dundee Securities Corporation and/or its affiliates, in the aggregate, own and/or exercise control and direction over greater than 10% of a class of equity securities issued by: Strateco Resources Inc.
Explanation of Recommendations and Risk Ratings
Valuation methodologies used in determining the 12-month target price(s) for the issuer(s) mentioned in this report are contained in current and/or prior research. Target Price N/A: a target price is not available if the analyst deems there are limited financial metrics upon which to base a reasonable valuation.
BUY: total returns expected to be materially better than the overall market with higher return expectations needed for more risky securities. NEUTRAL: total returns expected to be in line with the overall market. SELL: total returns expected to be materially lower than the overall market. TENDER: the analyst recommends tendering shares to a formal tender offer.
*Risk Ratings: risk assessment is defined as Medium, High, Speculative or Venture. Medium: securities with reasonable liquidity and volatility similar to the market. High: securities with poor liquidity or high volatility. Speculative: where the company's business or financial risk is high and is difficult to value. Venture: an early stage company where the business or financial risk is high, and there are limited financial metrics upon which to base a reasonable valuation.
Medium and High Risk Ratings Methodology: Medium and High risk ratings are derived using a predetermined methodology based on liquidity and volatility. Analysts will have the discretion to raise the risk rating if it is determined a higher risk rating is warranted. Securities with poor liquidity or high volatility are considered to be High risk. Liquidity and volatility are measured using the following methodology: a) Price Test: All securities with a price <= $3.00 per share are considered high risk for the purpose of this test. b) Liquidity Test: This is a two-tiered calculation that looks at the market capitalization and trading volumes of a company. Smaller capitalization stocks (<$300MM) are assumed to have less liquidity, and are, therefore, more subject to price volatility. In order to avoid discriminating against smaller cap equities that have higher trading volumes, the risk rating will consider 12 month average trading volumes and if a company has traded >70% of its total shares outstanding it will be considered a liquid stock for the purpose of this test. c) Volatility Test: In this two step process, a stock’s volatility and beta are compared against the diversified equity benchmark. Canadian equities are compared against the TSX while U.S. equities are compared against the S&P 500. Generally, if the volatility of a stock is 20% greater than its benchmark and the beta of the stock is higher than its sector beta, then the security will be considered a high risk security. Otherwise, the security will be deemed to be a medium risk security. Periodically, the equity risk ratings will be compared to downside risk metrics such as Value at Risk and Semi-Variance
Strateco Resources Inc. January 21, 2010
Page 4
and appropriate adjustments may be made. All models used for assessing risk incorporate some element of subjectivity. Risk in relation to forecasted price volatility is only one method of assessing the risk of a security and actual risk ratings could differ.
SECURITY ABBREVIATIONS: NVS (non-voting shares); RVS (restricted voting shares); RS (restricted shares); SVS (subordinate voting shares).
Ideas of Interest
Dundee Securities Corporation from time to time publishes reports on securities for which it does not and may not choose to provide continuous research coverage. Such reports are published as Ideas of Interest.
Dundee Securities Equity Research Ratings 15%10%69%8%22%43%0%11%22%33%44%55%66%77%BuyNeutralSell% of companies covered by Dundee SecuritiesCorporation in each rating category% of companies within each rating category forwhich Dundee Securities Corporation or itsaffiliates have provided investment banking servicesfor a fee in the past 12 months.
As at December 31, 2009
Source: Dundee Securities Corp.