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By Steve Moore,

Berkeley Energia (BKY) describes itself as “a high impact, clean energy company focused on bringing its wholly owned Salamanca project into production”. This is a uranium project being developed in a historic mining area, in the Province of Salamanca in Western Spain.

The Backstory

Already listed in Australia, the company joined AIM in December 2006 to “broaden Berkeley’s shareholder base, offer investors in the UK and European markets easier access to the company’s securities and service an existing large portion of the company’s register”. It added “we believe our strategy of focusing on European uranium is both unique and strategically advantageous” and soon updated including “drilling commenced on the Salamanca I project with very encouraging initial results confirming the presence of uranium mineralisation at Retortillo”.

Current Managing Director Paul Atherley was appointed with effect from 1st July 2015 – the company noting he “is an accomplished mining executive with over 30 years resource industry experience in UK, Australia and China… he has completed a number of acquisitions and financings of resource projects in Australia, South East Asia, Africa and Western Europe, and has well-established relationships with European and Australian capital markets” and stating his “immediate focus will be the integration of the high grade Zona 7 deposit into the project’s development plans, thereby potentially increasing the scale of the project and to arrange the project’s development finance. He will also be marketing the company to investors in Europe, Asia and Australia as well as to potential strategic and off-take partners”.

The shares were then 12.25p but were soon on the rise – spiking in November 2015 as the company emphasised a pre-feasibility study saw “Zona 7 transforms Salamanca project economics”. In July 2016 a definitive feasibility study derived a post-tax net present value at an 8% discount rate of $531.9 million based on UxC Annual Mid Long Term Base Price Projections, with initial up-front capital cost $95.7 million. In July 2017 a Front-End Engineering and Design study reported up-front direct costs 1% below the definitive feasibility study estimates and in November 2017 the company announced “Strategic Investment & Director Appointment” – including that “all conditions precedent have been met and the company has now received the initial US$65 million tranche of funding”.

The Financing

This was from the sovereign wealth fund of the Sultanate of Oman and saw Deepankar Panigrahi, Investment Manager in the Private Equity division of the State General Reserve Fund of Oman join the board as a non-executive director. The $65 million is an interest-free and unsecured loan convertible at 50p per share – with “the company may convert all or part of the note into ordinary shares in the company any time after Technical Completion (once key commissioning tests have been successfully completedof the centralised processing plant at Retortillo has occurred”. The investment agreement then also saw 10,088,625 options with an exercise price of 60p, 15,132,937 options with an exercise price of 75p and 25,221,562 options with an exercise price of 100p – each tranche vesting and exercisable on conversion of the loan note and respectively expiring 12, 18 and 24 months from the date of vesting. The agreement was also noteworthy as the shares had previously closed at 45.25p.

The agreement thus has the potential to take the company into production and its most recent quarterly report updated that a focus has been on “conducting a detailed project review, aimed at ensuring that the optimal capital and operating costs are achieved. This was finalised during the quarter and a further €9 million of potential capital cost savings have been identified. The company, which already sits at the bottom of the cost curve, will continue to identify any further areas for potential cost savings as it continues towards construction”.

The Current Position

Initial production has been targeted for 2019, though the company now awaits key remaining approval; this, with the mining license, environmental license, prior plant authorisation and the authorisation of exceptional land use already granted, the urbanism license and construction works authorisation for the radioactive facility (which has already obtained the prior authorisation) and the final operating authorisation for the treatment plant as a radioactive facility. Recently a notice has been issued recommending that the Urbanism License should not be awarded until two outstanding items regarding the license are resolved – which the company “will respond to immediately”. However, it is admitted “the timing of the award of the Urbanism License continues to remain uncertain, is outside of the company’s control, and is unlikely to be received imminently”.

Permitting thus remains a risk, though it is noted the company’s investment is being seen to rejuvenate a local community which is suffering from long term depopulation and some of the highest levels of unemployment in the EU, especially amongst young people – and has significant support. It is noted, for example, the government of the region recently rejected a resolution requesting that the company’s investment be halted. There are then though also, of course, usual mine development-related risks and in this case currently also the further-out financing agreed being in options. There is then the price of uranium.

The Uranium Price

This has averaged only around $22 per pound during 2018 – far below the previously noted UxC Annual Mid Long Term Base Price Projections. However, the company has previously achieved some contracted and optional volumes above $42 per pound and notes “recent long term contract pricing, which is generally trading at a $10-20 per pound premium over spot prices, and higher in some instances. Consensus Economics’ long term spot price projections as at October 2017 show a recovery to around US$42.73 per pound in 2021”.

Additionally noted is that the top two producers in the world, Kazatomprom and Cameco, are taking a meaningful amount of production out of the market and the company also noting existing nuclear utilities having to consider supply from 2019 onwards, where there is significant uncovered requirements, and Asian and Eastern European countries embracing nuclear power generation in view of reducing greenhouse gas emissions. It particularly notes “the Salamanca project, the only major uranium mine in construction in the world today, is scheduled to reach production as the market enters a supply/demand deficit that industry experts have called both fundamental and unavoidable”.

The Conclusion

Having headed towards 70p last year, the current situation sees the shares at just above 40p – capitalising the company at just over £100 million (currently circa $132 million). There is the likely loan conversion and share options to consider, but also that the definitive feasibility study was based solely on Measured and Indicated Resources, not incorporating Inferred Resources and with also their exploration to further increase the mineral resource base. The most recent quarterly report included; “exploration focused on identifying additional targets with similar characteristics to Zona 7 continued during the quarter; and the anomalies found in the soil sampling programme carried out during the previous quarter were confirmed and a drill programme targeting the main anomalies is now being designed”.

The company has also recently moved its listing to the main market (albeit the lesser standard listing segment), as well as listing on the Spanish stock exchanges – believing such listings will provide increased liquidity and access to significant new pools of capital including large Spanish institutional shareholders, mutual funds and pension funds as well as retail shareholders in Europe. Together with the under-valuation suggested by the feasibility study, there thus look catalysts to see the shares back to the previous approaching 70p – and beyond.

Steve Moore owns shares in Berkeley Energia

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