ENERGY METALS CORP (TSE: EMC-C$4.19; OTC: EMCKF-US$3.60)
(62mm P.F. F.D. Shrs; US$221mm cap; 75% Float; $US exc. ind.)
"Bird Nests On the Ground--The Next Kerr McGee"
Energy Metals was sold out to Uranium One Inc. on 8/10/07 for stock for $1.6 Billion—a sevenfold gain.
We recommend EMC because:
1. EMC is selling at less than $1/pound of uranium reserves and resources, by far cheapest of any uranium company at a time when strongly rising uranium prices suggest in-ground values of $10+/pound. As the uranium price keeps rising (up at a 67%/year rate since our 10/04 CCJ report, to $37.50/lb now), so will in-ground values and, with a huge potential catchup, EMC stock.
2. A Texas in-situ-leaching (ISL) project is planning for 2Q07 startup at 1mm lb/year, followed by 4mm lbs from two ISL projects in Wyoming and 5-7mm lbs in 3-5 years. We estimate EPS on $51/lb+ prices, at $19/lb costs and $32/lb+ margins, of $0.52/share by '08 and $3.46/share by '08-'09.
3. Whereas large conventional new mines are 8-12 years to production, EMC's 24-30 advanced-stage U.S. ISL projects have short regulatory times of TX-2 years, WYO-3-3.5 years, and NM-5-7 years; low capital costs enabling delayed contracting in a rising market; and total and cash costs of $19/lb and $13/lb--for dramatic EPS gains.
4. EMC has amassed at low cost 100+ U.S. mostly ISL projects; most of the major mining companies' data on them; the industry's leading ISL experts; via pending mergers 2 other leading U.S. U308 firms; up to US$65mm cash; and a strong and visionary management.
LARGEST U.S. IN-SITU LEACHING URANIUM PLAY
ISL: Uranium is the fifth most abundant element in the earth's crust. It is water-soluble, and thus extremely ubiquitous. But, this ubiquitousness means that it rarely occurs in economic grades.
Its water-solubility, however, has permitted a low-cost method of jump-starting many smaller, lower-grade deposits into production: in-situ-leaching (ISL). Oxygen-enriched water is pumped down into the orebody and then back up, giving 70-80% recovery, vs. 95% with conventional underground mining, but with minimal: (a) underground mine development costs; (b) surface mill capital costs; (c) reclamation costs; and (d) hence, permitting requirements.
Negatives are that output may fall short of expectations, production must be at a measured pace, and mainly roll-front, vs. major trend deposits lend themselves to ISL. But, positives beyond the above are that sub-economic conventional deposits can be mined, and usually lots of historical drilling and other geological work--representing years of time and money--has already been expended, leaving historical resources often very nearly ready to mine.
Whereas grade is key to conventional mining, grade and ability of water to percolate through the deposit are equally important in ISL. Grades down to 0.07% are typical, whereas 0.2%--plus 10 years for a mill--are needed for conventional mining. Capital cost is low at $6/lb at TX, and in larger facilities such as WY possibly $4/lb.
In a simple plant, the surface uranium-bearing water is run through ion-exchange resin beads to attract the uranium onto the beads. The beads are then taken in resin tanker trucks to a central facility where an elution process strips the uranium from the beads to produce yellowcake, the "pay dirt," which is dried, drummed, and shipped. Several smaller nearby deposits can be harvested in this manner, obviating the need for a very large deposit for production; while having modest capital costs, reclamation, and permit times.
U.S. Uranium Industry: The 1904 Webster's Dictionary defined uranium as "a rare metal not found in the U.S." By the late '70s the U.S. military and then civilian booms gave the U.S. 30% of world reserves and production.
However, the discovery of close to pure uranium (up to 25% grade vs. 0.24% world average) in Saskatchewan, and the fall in world demand and prices, throttled the U.S. back to just 2% of world output now. The U.S.'s vast mines were virtually all thrown away; for instance, Kerr McGee's legacy uranium reserves--70% of the U.S. total--in New Mexico, were abandoned, to go under water.
But there are numerous "boneyards" of former hugely profitable mines, advanced-stage as well as earlier-development projects, all over the U.S. west--and with them, extensive, detailed data bases compiled by the major mining and oil companies during that era. EMC became one of the first companies to amass these abandoned properties: 30 advanced uranium projects and 110 projects in total.
EMC's U.S. ISL Play: Armed with its knowledge of ISL, which was developed after most of this conventional mining exploration-development; the negligible value of properties; and general public information; EMC was one of the very earliest to acquire the claims on some 100+ projects as their claims went fallow. Most of these had once been held by such majors as Kerr McGee, Union Oil, Union Carbide, Pioneer Natural Resources, Sonoco, Gulf, Cameco, Cogema, Union Pacific, and U.S. Energy . . . all "brand-name" U308 properties.
EMC then swooped to acquire the companies' detailed databases and files when the uranium price made a final dip to $7.10/lb in 2000, causing a total capitulation and database disgorgement by the major players. These were some of the largest databases, including those of Union Carbide, United Nuclear, World Nuclear Co., Ranchers Exploration, and Hecla Mining. It would take upward to $1 billion to replace this data, with 100 professionals working over 30 years.
Presto: 113mm lbs for EMC pre-mergers, and potentially the "next Kerr McGee" of U.S. uranium! Recall that KMG's uranium reserves--a third of the U.S. total--gave it a 15x P/E in a 10x group and a 12x S&P, and an aurora unmatched by other oil stocks.
Continuing its visionary ways, EMC is now merging with two other companies, to become more than twice Kerr McGee's former 100mm lbs of uranium, plus early production and strong financing:
|Placement EMC at Mkt
|Total P.F. EMC Shares
*Includes Texas ISL plant to produce 1mm lbs/yr starting 2Q07E.
Each Quincy (TSXV: QUI; OTC: QCYE) gets 0.2 share EMC, and each Standard Uranium (TSXV: URV; OTC: STURF) gets 0.64 share EMC. EMC is also private-placing 2-3mm shares at the market.
With the two mergers, to be completed by March, EMC will then have 46-47mm shares outstanding, with C$35mm cash. Fully diluted will then be 57-59mm shares, including 12-13mm warrants and options--all in the money over $5--for potentially another $C30mm.
A 2-3mm share at-market placement should net another C$12mm, giving 62mm total potential shares, and cash of C$77mm, or US$65mm--US$1.05/share. This makes EMC one of the best financed juniors for further acquisitions plus development of existing properties.
EMC will then have 230mm lbs of historically indicated uranium reserves and 300mm+ potential reserves, giving it by far the lowest market cap of uranium resources of any uranium company:
EMC will also get (1) Standard's early production in TX; (2) benefits of consolidating its already dominant portfolios in WY (Horse Creek and South Powder River Basin Project) and AZ (20 breccia pipes), and (3) expanding in NM by adding the Hosta Butte and Crown Point Projects, and in CO with the Maybell Project.
EARLY TEXAS, SUBSEQUENT WYOMING, AND EVENTUAL NEW MEXICO PRODUCTION
TX: EMC will now have Standard Uranium's Texas Palangana Project and Hobson Plant. This produced 2.7mm lbs until low prices closed it in '88, and now has 5.7mm lbs of regulation-compliant proved reserves. Standard has already spent C$7mm, out of C$20mm, (US$17mm) to upgrade the plant from 750,000 to 1,000,000 lbs/year. The plant is fully licensed and targets 2Q07 startup (2H possible).
WY: This will catapult EMC toward another 4mm lbs/year in WY in late '08-/09, and total of 5-7mm in 3-5 years. Timing for permits is typically: 2 years in TX, 3-3.5 years in WY, and 5-7 years in NM. Thus, Standard merger fills in TX before output in WYO in '08.
WY has been EMC's focal point before the mergers, because of its blend of regulatory/mining friendliness and richness of reserves. EMC plans two WY production centers, both targeting 2008 startup, in the Great Divide and in the Powder River Basin. The plants will cost about C$35mm (US$30mm) each, vs. C$20mm for TX, but will also produce about 2mm lbs each, vs. 1mm lbs for TX. Funding is already on hand for the bulk of these plant outlays.
This and expansion from smaller/other mines will raise total '08-'10 output to 5-7mm lbs., with a 50 year life (250-350mm lbs).
The Powder River Basin project will serve three advanced stage projects: Moore Ranch with 5.2mm lbs (0.07% grade), Peterson with 2.5mm lbs (0.07% grade) and Nine Mile Lake with 9.0mm lbs (0.05% grade). Kerr McGee and Conoco previously owned Moore Ranch; Arizona Public Service and Cogema owned Peterson Ranch; and Union Pacific (Rocky Mountain Energy) and Mono Power owned Nine Mile Lake. Reserves are now being upgraded to Canadian compliant stndards, to be followed by hydrological testing, ISL trials and production.
The Great Divide will serve up to 14 pre- or 20 post-mergers advanced-stage projects, all in a 25 mile radius and all thought amenable to ISL. The Antelope, with 15mm lbs (0.07% grade), will probably be the central deposit, with many 0.7-12mm lb satellites.
WY has produced 200mm lbs. EMC has 85-90mm historically indicated lbs in WYO: 60mm Great Divide in 20 deposits and 30mm Powder River Basin in 20 deposits; plus Shirley Basin holdings.
NM: NM produced 400mm lbs--70% of past U.S. reserves. Quincy brings two major NM deposits: Crown Point, with 21.6mm lbs (0.10-0.20% grade), on which United Nuclear had spent $25mm, being taken to regulatory compliance in 1Q06; and Hosta Butte, with 11.6mm lbs (0.15-0.20 grade), being taken to resource compliance by 2Q06.
EMC already had Section 32 of Nose Rock, with 8mm lbs (0.14% grade), previously owned by Philllips; and land near Ambrosia Lake and Rio Puerco (Kerr McGee's major former areas). While NM likely has 5-7-year permitting times, it could double TX and WY by '10-'12, taking EMC to 10-12mm lbs--the promise always held out by KMG.
Other: Quincy also brings 18.3mm lbs in OR, 12.8mm lbs (0.10-0.11%) in Hansen Creek, CO, 9mm lbs in Horse Creek, WY, and the Rose Pipe in AZ with a 400 foot high-grade hole; while Standard brings 8 advanced-drilled Powder River, WY properties, 40mm+ lbs at Maybell, CO--now being expanded--and 11 high-grade AZ breccia pipes, which now total 50 for EMC, plus detailed data on them.
The OR deposit is on the surface and may be heap-leached 2-3 miles away in NV, possibly at 2mm lbs/year, in 4-5 years. This low-cost project would be EMC's only 100%-owned non-ISL operation. Maybell, a "companymaker" in itself, will be heap leached in a JV.
The AZ pipes are 800-2,000 feet deep, 300 feet in diameter and 1,000 feet of vertical mineralization; have rich grade up to .75%; could be milled 270 miles away at an International Uranium mill; and will be joint ventured as a conventional operation. The Wade AZ pipe has been thoroughly explored, and Rose is now drilling.
Quincy has NV and other gold and silver properties that will be spun off (EMC possibly keeping a portion), possibly worth $10-40mm, based on companies with similar properties. It has 20mm lbs at Elliot Lake, Ontario, and UT deposits, which will be sold off.
WY's Great Divide alone has 200mm lbs of historically indicated resources, and EMC controls 60% of the Great Divide's deposits thought amenable to ISL. This and the Powder River may occupy the next few years, after TX begins producing in '07, then followed by NM, with OR and AZ perhaps mined in tandem with NM.
Cash Flow, EPS: EMC estimates ISL total costs at $19/lb, with cash costs at $13/lb. For TX, we have seen estimates by others of total costs of $16/lb, so we feel comfortable with EMC's estimates.
EMC may not contract output until prices spike, vs. the controlled rise to date, given the lower capital costs for ISL. If prices are now $37.50 and rising about $16.50/year (the arithmetic rate since our 9/04 recommendation of CCJ), EMC might thus receive $51/lb+ prices for 2H07 on; $32/lb profit and $38/lb cash margins; and $32mm net ($0.52/share) and $38mm cash flow ($0.61/share).
If prices are another $13.50 higher at $64.50/lb in '08, EMC might then for WY receive prices of $64.50/lb; net margins of $45.50/lb; cash margins of $51.50/lb; and on 4mm WY lbs/year, net of $182mm ($2.94/share) and cash flow of $206mm ($3.32/share). Adding TX, total net could be $3.46/share and cash flow $3.93/share.
If incremental expansion boosts total output as high as 7mm lbs/year, net and cash flow could be proportionately greater at $4.85 and $5.50/share--plus any further escalation of prices.
As risks, the two WY projects could come on sequentially or a year later, in '09-'10. As the WY projects will cost US$30mm each, more dilution could occur, although EMC does have US$65mm liquidity to cover such needs. Finally, to finance the projects EMC might contract earlier, at a lower price in the rising price trend. Any or all of these could reduce profit; but the upside, in a uranium market that is dramatically underpriced, seems offsetting.
LONG TERM, THE NEXT KERR MCGEE
As New Mexico and other properties come on stream, with 5-7 year permitting times for NM, the outlook accelerates upwards. First, these much richer NM and other properties could readily double the above '08-'09 output to 10-12mm lbs/year in '10-'12.
Secondly, using the same arithmetic $13.50/lb/year rise, prices by then may be about $105/lb, net margins $86/lb and cash margins $92/lb. This doubled increment could thus throw off net of $7.25-8.70/share. Layered onto the TX-WY $5.00 range of EPS, total EPS could rise to $12-14/share, in the '10-'12 time frame.
Where does this "second stage" of the rocket come from? EMC's portfolio has 110 properties in total, including 30 advanced stage projects, with some of the richest in NM and AZ, including:
||.16%+ (joint venture)
|| .05,.03% (heap leach JV)
EMC is rapidly upgrading 91.5mm lbs of its 230mm historically defined resources to Canadian regulatory (NI 43-101) compliance (their version of Sarbanes-Oxley for reserves, after Bre-X). 40% will be compliance by 1H06:
||2.5mm lbs--Being expanded
|Nine Mile Lake
EMC has assembled a management team including 3 of the world's 5 leading ISL experts. Dennis Stover, Ph.D., will run EMC going forward. Stover holds 7 ISL patents; previously ran a 2mm lb/year ISL project in WY; was a senior consultant for CCJ's major Kazakhstan ISL project; was VP for Rio Algom, starting up Rio Algom's Smith Ranch Project in the Powder River Basin, now owned by Comeco; and has spent 30 years in the uranium industry.
William Sheriff, founder of EMC and founder of Quincy, is a geologist and leading prospect developer in the western U.S., whose vision and on-ground knowledge has established EMC's current U.S. position. He owns 14% of EMC, 14% of Quincy, 6% of Standard, and will own 12% of the after-merger EMC.
Paul Matysek, M.Sc.P. Geo., now President and CEO, developed 2.4mm oz. Costa Rica gold and 0.5 oz Turkey gold projects, and has been instrumental in raising $60mm to finance mining projects.
With the merger of Standard Uranium and Quincy Energy, EMC's total position is still stronger. EMC will go on the TSE after the merger in April, and be 20F OTC in May. And with US$65mm cash, it is in an excellent position to achieve its growth potentials. With in-ground resource values typically worth one-third the selling price, and uranium worth $10+/lb as prices clime to $37.50, EMC at under $1/l b cap seems at least a tenfolder, if not acquired first.
David G. Snow February 6 , 2006
The information contained in this report has been derived from sources we believe to be reliable, but we do not guarantee the accuracy or completeness of such information. This report is for informational purposes only and is not intended to be an offer to buy or sell the securities mentioned herein. David G. Snow, the President of Energy Equities, Inc., has positions in GWMGF and QSURF, may have positions in the other securities mentioned herein and may buy or sell such securities at any time. All rights reserved. This report may not be reproduced or distributed without prior written consent.