Investment recommendation
We are removing Fission Uranium Corp from the
Canaccord Genuity Focus List to reflect the increasing valuation gap with Alpha Minerals (AMW : TSX-V | Spec Buy) prior to the vote on the proposed plan of arrangement (
Nov 28). However, we maintain our SPECULATIVE BUY rating as we still are strong believers in the potential value of the Patterson Lake South uranium project in the SW Athabasca Basin. We await the results of the upcoming vote to resolve the uncertainty on the plan of arrangement.
Investment highlights
- Given the recent share performance after shareholders were notified of a litigation matter where the plaintiffs include Fission Uranium Corp., Fission Energy and Chairman/CEO Dev Rhandawa, a valuation gap was created between Alpha Minerals and Fission Uranium Corp. The matter was disclosed in the information circular filed with respect to the Plan of Arrangement between Fission Uranium Corp. and Alpha Minerals which will be voted upon at a special shareholders meeting on November 28, 2013.
- Fission Uranium proposes to transfer its rights and interests in the Claim to the Fission Spinco. And Fission Spinco has agreed to indemnify Fission Uranium Corp. to the extent if it incurs any costs in connection with the litigation.
- Currently, AMW trades at a ratio (AMW : FCU) of just over 5.0:1 due to the uncertainty created by the litigation on the proposed plan of arrangement. This represents a not insignificant (13-15%) discount to the current offer (5.725:1) and lies below the original offer of 5.3:1. The discount in valuation drives us to favor Alpha Minerals over Fission Uranium Corp. in the near term until the plan of arrangement is resolved one way or another.
Valuation
The Patterson Lake South’s near surface and high grade uranium mineralization can potentially be extracted with lower relative technical risk (open pit mining) than other major projects in the basin. It is one of the most attractive uranium projects in the hands of a junior since Hathor Exploration’s Roughrider project (57 Mlbs grading 4.7% U3O8) which was acquired by Rio Tinto for C$654 million, and valued the resource at ~US$11/lb U3O8. We suggest that the PLS area has the potential to delineate an equivalent critical mass (~50 Mlbs U3O8) to justify a stand-alone plant on the western side of the Athabasca Basin for a potential suitor. The project has almost completed (>95% complete) its summer drill program (C$9.2mm, 14,700m) which has successfully extended the potential of the ENE trending PL3B conductor to 1.7km and added additional pods of U3O8 mineralization for further testing.
We have not ascribed a target to Fission Uranium Corp. as the underlying asset does not have a 43-101 compliant resource. However, our estimates suggest that at our current resource estimate (28-30 Mlbs, 100% basis), Fission Uranium Corp.’s stake (50%) values the company at C$0.80 (US$7/Mlb U3O8) to C$1.20 (US$11/Mlb U3O8) which ranges from a 32% discount to a 2% premium. With a visibility to a critical mass of 50 Mlbs U3O8, we arrive at a valuation range of C$1.30 to C$1.90, which ranges from a premium of 10% to 61%.