{"id":87144,"date":"2016-03-24T16:06:44","date_gmt":"2016-03-24T20:06:44","guid":{"rendered":"http:\/\/countingpips.com\/?p=87144"},"modified":"2016-03-24T16:06:44","modified_gmt":"2016-03-24T20:06:44","slug":"even-after-run-nexgen-energy-ltd-shares-have-big-upside-potential","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2016\/03\/even-after-run-nexgen-energy-ltd-shares-have-big-upside-potential\/","title":{"rendered":"Even After Run, NexGen Energy Ltd. Shares Have Big Upside Potential"},"content":{"rendered":"
March 24, 2016<\/div>
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By<\/strong>\u00a0Peter Epstein, CFA, MBA \u00a0epstein.peter4@gmail.com<\/a>\u00a0 \u00a0http:\/\/EpsteinResearch.com<\/a><\/span><\/p>\n

\u00a0<\/span><\/div>\n
NexGen Energy\u2019s<\/a><\/b>\u00a0(TSX-V: NXE) \/ (OTC: NXGEF)<\/em>\u00a0tremendous\u00a0Maiden\u00a0<\/b><\/a>Inferred resource<\/b><\/a>, both its size & grade\u00a0(202 mm Inferred lbs. at\u00a0<\/em>2.63% U3O8 with a 0.25% cut-off, including a\u00a0higher-grade core of 120.5 million lbs. at 13.26%\u00a0U3O8<\/em>)\u00a0<\/em>caught participants off guard. The most highly anticipated, scrutinized number in the uranium space, wildly underestimated. 202 million pounds vs. a reported range of 60 to 173.5 million! In the week following the, \u201cnumber<\/em>,\u201d NexGen shares soared 52% to $1.48, more than triple last March\u2019s levels in the low-to-mid $0.40s.\u00a0 Why did conventional wisdom miss the mark by so much?\u00a0<\/span><\/div>\n
<\/div>\n
Did the contours of the\u00a0Arrow deposit<\/a>\u00a0make it difficult to assess the initial number? Did the low number of dill holes (82) trigger doubts about drill hole spacing? Did some rely too heavily on computer modeling? Did analysts gravitate towards consensus estimates? Were investors content to err on the side of caution?<\/div>\n
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I believe a combination of i) group-think, ii) a failure of imagination and iii) an abundance of caution, was a key factor in the significant underestimation of the maiden resource.\u00a0As a result, eminently realistic upside scenarios were\u00a0relegated to outlier status. With this in mind, I believe the Company\u2019s valuation\u00a0could\u00a0increase very substantially, without becoming egregious, as NexGen advances Arrow this year and next.\u00a0<\/span><\/p>\n

The implications of an ongoing skew in the conventional wisdom is that factors upon which the valuation hinges are unwittingly, and wittingly, too conservative. Looking at the widely cited, Enterprise Value (\u201cEV\u201d)\/lb. ratio,\u00a0NexGen is trading at US$1.45\/lb. (on a\u00a0pro forma<\/u>\u00a0225 million lb. resource & 335 fully-diluted (\u201cfd\u201d) shares<\/em>). I strongly believe that the Company\u2019s true value is substantially higher.\u00a0<\/span><\/p>\n

\"Screen<\/p>\n

Please consider the following,\u00a0<\/span><\/p>\n

++\u00a0With zero debt & $31 million in cash (plus $9 million in warrant proceeds<\/em>), NexGen is not only funded well into 2017, covering winter & summer drilling, a first resource upgrade and other milestones, it\u2019s funded through a potential takeout. A takeaway here is that without an equity raise, institutions have to buy shares in the open market.\u00a0<\/span><\/p>\n

++\u00a0This year\u2019s aggressive drill programs could produce another blockbuster outcome. NexGen clearly has a world-class technical team. 82 holes got us 202 million Inferred lbs., how much might\u00a080 more\u00a0find? 25-50-75 million lbs.? Why not 100-125-150 million? Especially with winter drilling already delivering very promising results. [March 8th PR<\/a>,\u00a0March 15th PR<\/a>]<\/span><\/p>\n

++\u00a0Key attributes that make Arrow a spectacular deposit might be obscured in the shadows of Cameco\u2019s uranium mines. Arrow is entirely land-based (no resource under the Patterson Lake<\/em>) and\u00a0basement-hosted\u00a0(very easy\u00a0to mine<\/em>). Avoidance of mineralization in the sandstone could,\u00a0(if the deposit is\u00a0<\/em>developed<\/i>), make Arrow far less technically challenging, easier to permit and less costly to build and operate than Cameco\u2019s\u00a0sandstone-hosted\u00a0McArthur River\u00a0&\u00a0Cigar Lake, which require sophisticated and costly, ongoing ground freezing techniques.<\/span><\/p>\n

++\u00a0The possibility of a large takeout premium may not be on investor\u2019s radar. One need not turn to\u00a0Rio Tinto\u2019s\u00a02011 takeout of Hathor Exploration Ltd. at a valuation of about US$11\/lb. for inspiration. Why not use US$5 \u2013 US$6\/lb., for one of the best NI 43-101 compliant resources on the planet?<\/span><\/p>\n

\"Screen-Shot-2016-03-18-at-3.35.11-PM\"<\/p>\n

++\u00a0The value to an acquirer of a monumental, globally significant, strategic asset, situated in the\u00a0most desirable jurisdiction\u00a0in the World, cannot be overstated. New entrants to the Athabasca could hardly do better than to pick off the gem of the Basin.<\/span><\/p>\n

The usual suspects\u00a0BHP, Areva,\u00a0Rio Tinto &\u00a0Cameco\u00a0are\u00a0no doubt\u00a0monitoring NexGen\u2019s progress very closely, but they are not alone.\u00a0Others like China\u2019s\u00a0CGN Uranium Resources Co., Ltd.\u00a0Japan\u2019s\u00a0Sumitomo Corp., South Korea\u2019s\u00a0Kansai Electric Power\u00a0(\u201cKEPCO\u201d)\u00a0and\u00a0Russia\u2019s\u00a0Rosatom\u00a0could be interested. In my opinion, a number of Sovereign Wealth & Private Equity funds would want to kick the tires as well.\u00a0<\/span><\/p>\n

That still leaves State owned or sponsored\u00a0Chinese<\/a>\u00a0&\u00a0Russian<\/a>\u00a0enterprises. Nor would approaches by companies like\u00a0POSCO\u00a0or\u00a0Teck Resources\u00a0surprise me. Teck\u2019s market cap has more than tripled off its 52-week low.\u00a0Presumably there are a number of E&P \/ Oil Sands giants contemplating investment alternatives.\u00a0<\/span><\/p>\n

Arrow will grow in size, and possibly in grade, with (in my opinion<\/em>) new zones of mineralization identified this year or next.\u00a0One of the six drills turning on site is testing regional, high-impact targets along trend from Arrow. NexGen will take full advantage of its liquidity runway to maximize shareholder value ahead of a takeout. The Company has another year+ to draw additional interested parties to the table.\u00a0<\/span><\/p>\n

\"Screen<\/p>\n

The valuation per U3O8 lb.\u00a0in the ground attached to NexGen should be higher, to properly reflect how unique Arrow is. One look at the new\u00a0corporate presentation<\/a>\u00a0shows that the resource is shaping up as a deposit that could rival the deposits at\u00a0McArthur River\u00a0&\u00a0Cigar Lake.\u00a0<\/span><\/p>\n

In many important ways, the Arrow deposit is already world-class. What EV\/lb. takeout valuation is appropriate? M&A metrics change significantly over time and jurisdiction. If one agrees that (eventually<\/em>) a takeout is likely, isn\u2019t it fair to surmise that the EV\/lb. ratio would be a strong one? I asked Cantor Fitzgerald\u2019s\u00a0Robert Chang\u00a0that question, his response,\u00a0<\/span><\/p>\n

\u201cI think in the current environment, a premier uranium deposit like Arrow should command an EV\/lb. ratio of US$5 -US 7\/lb.\u201d\u00a0<\/em>\u00a0<\/span><\/p>\n

As a frame of reference, a US$3\/lb. valuation on 250 million\u00a0pro forma\u00a0lbs. and C$1\/US$0.80 exchange rate, equates to a fd share price of $2.92,\u00a0+118%\u00a0above the current price. A valuation of US$5\/lb on 300 million\u00a0pro forma\u00a0lbs. is $5.72,\u00a0+327%\u00a0above the current price. If investors begin to focus more on the possibility, or even the perceived likelihood, of a takeout, price expectations in the $2.00s and $3.00s will be a thing of the past.\u00a0<\/span><\/p>\n

It\u2019s at this point that readers should let their imaginations run free. If one believes as I do that the fundamental downside from a\u00a0($1.45\/lb. valuation<\/em>\u00a0is minimal, it might be wise to embrace more exciting scenarios, unburdened by biases.<\/span><\/p>\n

In the wide range of M&A EV\/lb. values, various averages emerge. There\u2019s the post 2011 Fukushima average, the Athabasca-only average, an average excluding the Rio\/Hathor deal, an average excluding small transactions. These averages fall in the vicinity of US$5 \u2013 US$6\/lb.\u00a0<\/span><\/p>\n

The year forward has a number of visible milestones that could serve as valuation catalysts. In the end, this article is not about what should or will be, but about what could be.\u00a0NexGen Energy\u2019s<\/b><\/a>\u00a0(TSX-V: NXE) \/ (OTC: NXGEF)<\/em>\u00a0<\/em>shares could be a home run if\u00a0management continues to execute well.\u00a0<\/span><\/p>\n

Disclosures<\/u><\/em>:\u00a0Readers are charged with conducting their own investment due diligence and recognize that small cap stocks can deliver a 100% loss of investment capital. The author or interviewer as the case may be, Peter Epstein, CFA, MBA, believes that he\u2019s diligent and prudent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities. However, he cannot guarantee that his efforts will be successful.\u00a0Readers understand that Mr. Epstein cannot be held accountable or responsible for the accuracy of opinions, facts, estimates, forecasts and assumptions conveyed herein, or for investment actions taken.<\/em><\/span><\/p>\n

At the time this interview was published, NexGen Energy Ltd.. was a sponsor of EpsteinResearch.com.\u00a0Mr. Epstein owns shares in the Company. Readers understand that he is not a registered or licensed financial advisor. His article(s) and interviews on NexGen Energy\u00a0and other small cap companies should be considered very carefully\u00a0in this context. Readers are urged to consult with their own financial advisors before making investment decisions. This company,\u00a0and all small cap companies,\u00a0are highly speculative, not suitable for all investors.\u00a0<\/span><\/em><\/p>\n

Any\u00a0commentary suggesting that a particular stock is, \u201cunder valued,\u201d \u201cover-sold,\u201d a \u201ccompelling opportunity,\u201d is \u201cde-risked,\u201d could be \u201cre-rated,\u201d or similar words and phrases, are not directed at any individual or group and do not\u00a0constitute investment advice. Each individual and group must make their own determination regarding the suitability of any stock mentioned herein. Any comparisons between or among stocks are for illustrative purposes only and are not be taken as fact or relied upon. Nothing herein is to be considered explicitly or implicitly a part of full and proper due diligence.<\/span><\/em><\/p>\n<\/div>\n

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 <\/p>\n","protected":false},"excerpt":{"rendered":"

By\u00a0Peter Epstein, CFA, MBA \u00a0epstein.peter4@gmail.com\u00a0 \u00a0http:\/\/EpsteinResearch.com \u00a0 NexGen Energy\u2019s\u00a0(TSX-V: NXE) \/ (OTC: NXGEF)\u00a0tremendous\u00a0Maiden\u00a0Inferred resource, both its size & grade\u00a0(202 mm Inferred lbs. at\u00a02.63% U3O8 with a 0.25% cut-off, including a\u00a0higher-grade core of 120.5 million lbs. at 13.26%\u00a0U3O8)\u00a0caught participants off guard. The most highly anticipated, scrutinized number in the uranium space, wildly underestimated. 202 million pounds […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-87144","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/87144","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=87144"}],"version-history":[{"count":1,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/87144\/revisions"}],"predecessor-version":[{"id":87145,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/87144\/revisions\/87145"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=87144"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=87144"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=87144"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}