Global Uranium and Enrichment (ASX:GUE)

Investment Memo:

Global Uranium and Enrichment (ASX:GUE)

- LIVE

Opened: 20-Feb-2023

Shares Held at Open: 2,633,334

What does GUE do?

Global Uranium and Enrichment Limited (ASX:GUE) (formerly Okapi Resources (ASX:OKR)) is a uranium explorer and developer with projects across four uranium districts in the USA & Canada.

GUE is also acquiring a cornerstone stake in a uranium enrichment technology company.

GUE's enrichment technology uses a chemical process which could make uranium enrichment more efficient, safer and cheaper than other enrichment technologies.

What is the macro theme?

According to Reuters: U.S. uranium enrichment capability has dwindled to nothing in recent decades as it leaned on other countries to supply the fuel.

The USA is desperate to secure domestic energy sources, and not rely on other countries such as Russia and China, specifically for uranium enrichment capabilities.

Russia controls ~38% of the world’s enrichment capacity. China controls ~25%.

The US is most vulnerable to supply chain shocks in the uranium industry because it has the world's largest nuclear reactor fleet - nuclear power accounts for ~20% of electricity production in the US.

The USA has recently introduced several bills and significant funding to support its nuclear industry by securing uranium and uranium enrichment capability domestically.

We believe this will drive significant demand, investor attention and financing to uranium companies with USA based projects plus enrichment capabilities.

Our Big Bet for GUE Big Bet Tooltip

OKR re-rates to a +$250M market cap by achieving a major technological breakthrough with its uranium enrichment technology and/or is acquired at multiples of our Entry Price by a US focussed uranium major looking to gain access to its assets and technology

Why did we invest in GUE?

The US is completely dependent on foreign uranium and uranium enrichment. It’s making domestic uranium assets and enrichment a national priority

OKR has projects across four North American uranium districts, in addition to its 19.9% stake in an enrichment technology company. We think the combination of technology and assets will make OKR attractive to acquisitive uranium majors and governments as a target of funding.

The only other ASX uranium peer with enrichment technology is capped at $1BN with 51% ownership of its technology

Silex Systems is OKR’s only “uranium enrichment peer” on the ASX.

Silex has re-rated from a market cap of ~$35M to a ~$1BN in the space of two years on the back of US government initiatives, technical advancements and geopolitical factors.

Silex owns a 51% stake in an enrichment technology JV with Canadian uranium major Cameco (who holds the other 49%).

OKR is set to own 19.9% of its enrichment technology and is currently capped at ~ $25M.

If OKR is able to validate, scale up, and get regulatory approvals for its tech, we think it could follow a similar trajectory to Silex over time as the enrichment technology matures and is proven to work at scale.

OKR has a 49.8Mlbs uranium JORC resource in the USA - development potential

Located in Colorado, USA, OKR’s most advanced US uranium project has a JORC resource of 49.8Mlbs at a grade of 540ppm. Should future drilling be successful here, we think this project could move into a scoping study down the track.

Low EV relative to other uranium peers, and none have enrichment exposure

Following completion of OKR’s February 2023 capital raise ($5M) and subsequent payment for its stake in the enrichment technology ($3.1M), OKR will be trading on an Enterprise Value (EV) of ~$23M (assuming a 15c share price).

OKR currently has a total JORC resource base of 49.8Mlb. On a pure “pounds in the ground”/EV basis, this compares favourably with other ASX uranium peers such as Peninsula Energy (53.6Mlbs, ~$170M EV) and Alligator Energy (53Mlbs, ~$113M EV). While these two peers are more advanced in developing their assets, OKR is the only one with exposure to uranium enrichment.

Highly prospective uranium exploration ground in Canada’s largest uranium producing district

The Athabasca Basin in Canada is home to some of the worlds highest grade uranium projects and produces ~20% of the world’s uranium. We see drilling success in Canada as a significant source of upside if a major discovery is made here.

Strong Management and Board, with North America focus

We are impressed with Managing Director Andrew Ferrier’s background in private equity where he was focussed on managing US uranium assets and investments, as well as his degree in chemical engineering. We think this makes him well suited to understanding the significance of the enrichment technology, and how to get uranium deals done in the US.

OKR Chairman Brian Hill has 35 plus years experience, including a stint as Executive VP Operations at Newmont Mining Corporation (US$36BN market cap).

We also note the OKR management team’s significant US mining experience and in-country team - this is important for getting projects advanced as quickly as possible.

Tight, loyal register

With a relatively low number of shares on Issue, we think the capital structure of OKR is set up well for a re-rate if the company can deliver milestones and/or macro factors bring more market attention to uranium. We think OKR has been flying a little under the radar up until now and the story is going to get bigger in 2023.

Advanced stage company

OKR is not just an exploration company - as noted above, it has a JORC stage Uranium project and a stake in uranium Enrichment technology. This fits with our 2023 Investment theme of adding exposure to more later stage companies to our Portfolio, which could begin production sooner in the current commodities supercycle.

What do we expect GUE to deliver?

Objective #1: Advance enrichment technology

We want to see OKR advance its enrichment technology with its partner to make it attractive and viable in the eyes of uranium majors and the US government and/or other friendly countries.

Uranium enrichment investment completed [24-Mar-2023]

Milestones

not done Further validation and extend the enrichment performance (show how well it works)

not done Achieve continuous operation at bench scale (scale up process)

Objective #2: Regulatory approvals - to let OKR and tech partner negotiate with multinationals

According to OKR, an enrichment plant currently cannot be built in Australia under current regulation and no government arrangements have been sought to export the technology. We think ultimately the US will be most interested in this technology and we want to see regulatory accommodation for OKR’s technology partner’s process.

Milestones

not done Regulatory approvals to conduction discussions with overseas companies

Objective #3: Drill at least two projects

OKR has a portfolio of US based uranium assets at different levels of maturity (3 projects across Colorado and Utah) it also has ground in the Athabasca Basin (6 projects), Canada, a prolific uranium region. We want to see OKR drill at least two of these projects. Drilling is what will ultimately build value and scale in its assets.

OKR starts geophysical surveys in world’s best uranium district [21-Mar-2023]
Okapi Resources completes geophysics [19-Apr-2023]

Milestones

not done Drilling campaign delivered

not done Drill results reported

Objective #4: Deliver at least one resource upgrade

We want to see OKR deliver a resource upgrade, which we think will most likely be at its most advanced project in Colorado, however priorities may change based on exploration success.

Milestones

not done Resource upgrade

Objective #5: Advance development studies on at least one project

We want to see OKR move at least one project into a scoping study or preliminary economic assessment - the first steps on the path to developing a project.

Milestones

not done Scoping study or preliminary economic assessment commenced

Objective #6: Acquire more prospective uranium projects

We think OKR has a keen eye for uranium projects and strong relationships in the US. We want to see OKR consolidate/expand its position at existing projects or acquire additional projects to build up its portfolio of North American uranium assets

OKR ups enrichment tech investment as U macro heats up [11-May-2023]

Milestones

not done Consolidation/expansion of existing projects (additional ground or rights acquired)

not done New project acquisition

What could go wrong?

Technology risk

It's possible that OKR’s stake in its technology partner doesn’t work out. OKR could fail to secure regulatory approvals, the technology could struggle to scale up, or the technology partner fails to validate the efficiency improvements it brings at scale.

Intellectual property risk

Via its stake in its technology partner, OKR has its hands on a piece of a highly regulated, classified technology. The technology could be the subject of intellectual property theft.

Exploration risk

There is no guarantee that OKR’s upcoming drill programs in North America are successful and OKR fails to find economic uranium deposits.

Permitting risk

OKR needs to acquire permits to drill its projects and maintain its social license to operate. Not getting permits could prevent drilling and local stakeholders will need to be engaged if it seeks to develop a uranium mine in North America. These stakeholders might not approve of a uranium mine in their area.

Market risk (macro)

The broader market could sell down or crash, impacting the risk appetite of market participants and hurt the OKR share price.

Commodity price risk

The uranium price could fall, or fail to rise enough to make OKR’s US assets viable.

Uranium and nuclear sentiment risk

A large nuclear incident (such as Fukushima in the past) could make nuclear power unfavourable for a period, and set back the industry.

Geopolitical/political risk

Friction between the major powers could decrease, in turn impacting the urgency of US initiatives to secure domestic uranium supply and enrichment capacity. Alternatively, key legislation could fail to pass.

Delay risk

Both technology and drilling progress could be delayed and the market could sell down OKR on a lack of material newsflow.

Funding risk

As a small cap, OKR is reliant on capital markets to advance its projects. If some, any or all of the risks above materialise OKR could struggle to access capital.

What is our investment plan?

Our plan is to hold the majority of our position in OKR for 3 to 5 years in the hope of an acquisition by a major company after the project is de-risked (see “our long term bet” above).

Over the next 12 months we will apply our standard de-risking strategy for early stage companies. We may look to sell 20% of our holding if the company delivers on one or more of the above objectives and the share price materially re-rates. Any sell downs will be in accordance with our trading and hold policy disclosure.

Disclosure: Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 2,633,334 OKR shares at the time of publishing this memo. The Company has been engaged by OKR to share our commentary on the progress of our Investment in OKR over time.