Fission Uranium Corp T.FCU

Dundee Capital Markets: Buy rating and $2.40 target for FCU

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According to Dundee Capital Markets:

https://app.box.com/s/zklrzy6ays9c4dv4ndcx0w36bci6ih6v

Fission Uranium Corp.

(FCU-T: C$0.73)

October 13, 2015

BUY, Speculative Risk, Top Pick

Dundee target: C$2.40

Denison Merger Cancelled: Aim to Grow PLS to Improve Economics

We recommend stand-alone Fission Uranium as a Top Pick with a BUY and C$2.40/sh target, but incorporate a 10% DCF using its PEA results rather than pounds in the ground valuation. Denison Mines and Fission Uranium have terminated their court approved plan of arrangement. DML shareholders were in strong support, while a majority, but not two-thirds majority of FCU shareholders voted in favour prior to the proxy deadline on Friday. Shareholder meetings scheduled for tomorrow have been cancelled. Break fees have been waived as per mutual agreement to cancel.

Fission Uranium's share price is likely to see short term lift on the cancellation of the deal - the stock is off 29% since the July announcement, and it can now trade freely of DML. Next steps include aggressive drilling of meaningful pounds including the R600W and parallel zones, with resource growth helping to directly improve its recently announced PEA, and potential strategic alliances at the corporate level as opposed to the asset level. We don't expect management changes, or any other merger or acquisition options to surface in the short term. Fission now returns to its position as a leading explorer with the largest undeveloped resource in the Athabasca Basin. There is flow-through funding for a 20,000m winter drill program (~$10 MM), although hard dollars to cover corporate costs might be lean and the treasury may require some topping up.

Longer term share price appreciation also expected. Realizing full value is likely possible, but may take time. Fission has largely passed the blue-sky investor or significant speculation stage which may mute volatility and cap what some might pay. FCU trades at an EV/lb U3O8 of US$1.89, less than half of what shareholders just turned down. Significant value was added with the resource estimate and R600W discovery, but the market didn’t respond. We expect another discovery and ongoing aggressive drilling may help. The 105.5 MM lbs resource estimate, and robust yet realistic PEA (very similar to our April 2014 assumptions), should help guide investors to value. Although we argue that both are simply points in time, value added resource growth is ongoing, and the PEA suggests that there is significant value in the project.

Focus on growing meaningful pounds. Management believes that aggressive PLS drilling should be continued, and that the R600W discovery is just the beginning. The goal is not to move PLS forward AS IS - but to add to resources in meaningful ways so that any subsequent PEA's are much improved. Adding high grade pounds could change the mine plan, act as a starter pit, defer underground development, and provide overburden material for use as the berm for a tailings pond location - all in an effort to decrease costs. Resource growth could include adding near surface resources along strike (R600W) and on parallel trends (4-500m north), following up on R780E summer drilling success at depth and to the east where the zone appears to be thicker than earlier anticipated. We speculate that the PLS mineral inventory is likely beyond 125 MM lbs U3O8 by now, with much of this likely to qualify for high confidence M&I resources. Not much metallurgical work is required at this stage.

New zones would be material. Fission has a team of exceptional explorers, and particularly in the shadow of PLS and other uranium discoveries, has good potential to find new zones. The R600W zone discovered in March probably needs 5 MM lbs to make a meaningful impact to economics, and with only 13 holes in the zone, it may come with further drilling. Fission is extremely excited about this land-based zone and it will be a focus this winter. Initial drill holes on a parallel conductor about 400-500m to the north is looking very interesting as well. Two holes have the right clay alteration, structure, occurrence of dravite, and radiometrics in the hole. However the anomalous radioactivity was lost from core - perhaps it was washed out during drilling.

DCF valuation based on PEA. Our C$2.40 target price is based on a stand-alone, open pit and underground operation as announced in the PEA in September. We forecast US$935 MM in Capex and US$19/lb U3O8 operating costs with pre-stripping beginning in 2022 and production in 2025. This compares very well to our April 2014 estimates of US$700 MM Capex and US$18.85/lb U3O8 total cash costs – versus $935 MM Capex (including C$200 MM indirect costs) and US$19/lb operating costs (incorporating taxes and royalties as a cost, not net from revenue). Since we last wrote on Fission Uranium on 29-Jun-15, prior to our restriction, we valued the project at US$9.35/lb U3O8. But it is clear that this is now a different uranium market, and a different junior exploration equity market. US$9/lb is unrealistic - the producer group averages US$2.40/lb in the ground, and while Fission investors balked at a US$4/lb acquisition (although I'd still suggest this isn't a take-over valuation but a merger of equals), only Cameco (CCO-T, BUY, C$22.75) trades higher at US$6.29/lb.

Retail got it wrong in our opinion. Fission's shareholders were dominantly (~85%) retail, while Denison's were dominantly institutional investors. Simple, one or two asset stories have gained attention in this market (Peninsula Energy (PEN-ASX), BUY, A$1.60 target; Ur Energy (URE-T), BUY, C$1.80 target), while more complex stories (Denison Mines; Energy Fuels (EFR-T), BUY, C$8.50 target; and even Cameco (CCO-T), BUY, C$22.75) have come under some pressure. Merging these two companies would certainly have added a layer of complexity. FCU and DML were not in the position to compare PLS and Wheeler River projects head to head, as the projects were at different stages (PLS more advanced), and the retail crowd loves blue-sky exploration. The market always suggested DML was worth more, and that was logically the basis of the deal. We also believe the Fission take-over wasn’t a take-over…it was a merger. We saw benefit from handing Denison's massive exploration package in the Athabasca Basin over to Fission’s highly successful exploration team. The US$4/lb U3O8 was not a take-over metric, but a pin in stock performance/valuation at that time - itself almost twice the value provided to the average of the entire producer peer group. Only Cameco is valued higher. We have long said that both companies have shown willingness to sell assets from its portfolio (FCU sold J-Zone; DML sold US production and Mongolia), and a merger wouldn't likely have precluded that from happening again. But that is in the past…we are looking forward and will continue to cover Fission Uranium and Denison Mines as part of Dundee's extensive uranium sector research.