Reinstating coverage of Uranium One Inc. (UUU.TO) at Outperform.
"After a period of restriction, we reinstate coverage of UUU with
an Outperform rating and 12-month target price of
Stronger reserve base and another year of production growth.
"UUU is targeting another year of production growth with FY12
attributable share of 11.6Mln lbs U3O8 (+9% YoY) at an average cash
cost of $19/lb sold. FY13 attributable share of production is
estimated to grow a further +7.8% YoY to 12.5Mln lbs U3O8. With
average cash costs around $20/lb, UUU remains in the lowest cost
quartile of the uranium cost curve and as a result, maintains a
strong relative position on EBITDA margins on a per pound (sold)
Seeking an inflection. "We believe we are in the early stages of
a positive turn in market sentiment towards uranium and uranium
equities that would see a return to the historical valuation range
on P/NAV of 1.2-1.4x (peak valuation 1.6x) based on: (i) partial
restart of Japanese nuclear capacity; (ii) resumption of approvals
for new nuclear reactors in China; (iii) expiry of the HEU supply
agreement in 2013; and (iv) slower production growth from
Kazakhstan. Relative valuations are rich on traditional metrics
(P/NAV, EV/EBITDA) vs. peer group metals; however, we believe
uranium equities will continue to trade at premium based on
scarcity value, lack of investment alternatives and the relatively
high barriers to entry associated with uranium mining."
Valuation: "UUU well-positioned for recovery in uranium prices.
We believe the current spot price of $52/lb is fundamentally
supported and a staged recovery in prices more reflective of
incentivized supply pricing, in our view between $65-70/lb, will
occur over the next 18-24 months. We currently assume $55/lb in
2013, $65/lb in 2014, and $75/lb in 2014. Our 12-month TP for UUU
of C$4.50/share is based on a 1.2x our NAV estimate of
C$3.57/share. Our target multiple for UUU reflects the low-end of
the historical range (1-1.6x)."