Hi this is my own research.
ERONGO ENERGY ( ASX: ERN)
Erongo(ERN) is one of few uranium explorers in namibia. They have 4 tenements and 1 application in the proven Erongo province which contains Rossing a 4000tpa/yr mine.
It is targeting granite style uranium mineralisation. So far it has undertaken radiometric reprocessing and a desktop study incorporating historical data to better define drill targets and determine likely resource tonnages. The anomalies are very large, and are similar in scale to Rossing. The company’s conservative and experienced management all have extensive experience in African conditions, hence this will assist in the long term. Klaus eckhoff has good connections in Namibia. The management indicate that the tonnage potential is “large” at a low average grade.
Now on to the Erongo granites project, EPL 3454 (90% owned) that is the target of the upcoming drill program due to start in early April. Please refer to the map as in the presentation.
*Area 1 - Currently we know that 68 holes were drilled and two Diamond holes were also drilled. The picture of the diamond hole was attached in the previous quarterly reports and showed several zones of mineralisation. The percussion holes have considerably de-risked Erongo as it shows good 30m+ hits of uranium at some good grades, almost up to 350ppm. Remember historical grades can be upgraded, as historical equipment was not as reliable.
Moreover the company has described the zone as “25 to 35m thick” over an area of 800m by 250m and “potentially open for another 800m”. This suggests Area 1 resource is likely to be 800m by (250+800m) = 800m by 1050m.
The potential resource is thus 800m * 1050m * 3(Specific gravity) * 30m(average thickness- see historical drills) = 75mT from one area. The average grade will be conservatively 280-300ppm, say 280ppm which can be upgraded through modern drilling, but there is no guarantee.
75mT @ 0.028% = 21,000T contained u308.
in pounds = 21,000 * 2204 = 46,000,000
Note this Area 1 will be the main focus of the first 10,000m drill program, and the market has only priced in Area 1 into Erongo’s share price. I believe Klaus Eckhoff (consultant and shareholder of the company) has used his connections to source a drill rig-, which are extremely hard to find in this mining boom.
Importantly most of Area 1 hits are from surface and will prove extremely easy and low cost to mine.
Area 3 –
this is the 2nd priority area as per the reports. This potential here cannot be underestimated. The Radon Gas anomaly. Taken from Google “The presence of radon gas indicates a uranium ore body may be in the vicinity.” This area has not been effectively drill tested as all the holes kept caving. The potential tonnage of this area is extremely large considering the size of the anomaly: about 5000m by 2000m 6m thick * 3 (“a flat lying zone approx 6 m thick was identified”)
Area 3(potential) = 5000 *2000 * 3 * 6 = 180mT of mineralisation.
Area 2-
Good mineralisation has already been annotated and intercepted in 3 holes, and this fact itself suggests uranium mineral is present throughout the EPL, not just in Area 1. The probabilities of discovering other potential ore bodies are high. Supposing this is in the same style as Area 1, the tonnage itself is also large and could be bigger. The presentation highlights radiometric targets 1.5m by 1km, and another south of Area 2 4km by 0.5km. In short these anomalies are bigger in size than Area 1 (which was only 800m by 1050m and potentially 75mT).
Valuation and Peer comparisons
Erongo has 41.8 million shares on issue and 37.5 m options on issue. Therefore its fully diluted market cap is 47million dollars which is extremely low considering the potential. Erongo is therefore highly leveraged to any additional discoveries through their drill program and any upside in future drill programs.
Now other uranium companies based in Namibia generally command a premium. This is because the ease at which one can transition from explorer to producer. Namibia is the most friendly to uranium producers because of the lack of a strict approvals process. Hence it is uncommon to see $10/lb EV/lb valuations for Namibian upcoming producers, it normally closer to $20/lb.
*Uramin (TSX listed UMN). Market capitalisation 1500m AUD equivalent. Their primary project is the Trekkopje project(which is mainly what they are valued on). Trekkopje is a very low grade project. From its feasibility report: “Resources in the Measured and Indicated category increase over 200 per cent to 46.5 million lbs at an average grade of 146ppm U308 (using a cut-off of 100ppm):”
Sure Uramin has a lot of other projects, but its being valued on this primary project. Its average grade is only 140ppm and tonnage is about 190mT. So you can see that Erongo compares favourably with Uramin as it won’t have to process as much rock to produce uranium yellowcake. Erongo’s market cap is only about 45million.
*Forsys Metals (TSX listed FSY). Market capitalisation 1000m AUD equivalent. Forsys’s main project is the Valencia project. It has about 42million contained pounds, the average grade is only 200ppm and its not all at surface(some mineral deeper than 50m). A rumoured resource upgrade to only 50 million pounds has underpinned a share price increase from $7 to $10. It has other EPLs but by and large their main project is the 50million pounder @ Valencia. This just shows how even 50million pounds in Namibia justifies an over $1bn dollar valuation.
* Paladin resources (PDN) – Market capitalisation 5000m AUD equivalent. As we all know Langer heinrich makes up most of this valuation, about 3000m+ AUD in fact. it has a 100mT deposit at about 600ppm average grade or 60,000t or about 130million pounds at Langer heinrich.
* Deep yellow (DYL) – Market capitalisation 400 million. They have some QLD projects as well, but these have no resource estimates. They have about 50 million pounds of low grade uranium in Namibia but it is scattered throughout the country hence is not economic yet to process.
*Bannerman Resources(BMN) – Market capitalisation $400m. Indeed a potentially stunning resource they are sitting on at Goanikontes (another Rossing)– estimates range from 50 million pounds to over 200million pounds. It is still arguably undervalued at these levels.
* Extract Resources (EXT) – Market capital $169M. EXT does not have a resource, but have good quality tenements and some good historical drills at surface (alaskite style) similar to ERN. However the capitalisation gap between EXT and ERN is unjustified. Arguably ERN has better management and EXT management has so far gone slowly and is highly questionable.
*A-Cap resources (ACB) – whilst not in Namibia it is another African play based in Botswana. Their market cap is over $210M, and does not have any JORC resources and is an explorer like ERN. The market cap difference between ACB and ERN is unjustified.
*Xemplar Energy(TSX XE) – Market cap over $200m AUD dollars. Has a small 15mT resource at 0.03%, and numerous other high potential tenements similar in potential to Erongo. Again the price and market cap gap is unjustified as XE is mainly an explorer.
*Omegacorp (OMC) – Had an inferred resource of only 13 million pounds based in Zambia. Is in the process of getting taken over by Denison Mines for $180m dollars. So even a small jorc in a good jurisdiction (anywhere in Africa) will be valued extremely high. Ev/lb of this transaction is $14/lb on inferred resources.
CONCLUSION
ERN is one of the best value pure play uranium stocks not only on the Australian market, but in the world. A mere confirmation that the tonnage could exceed 100mT will act as a catalyst to possible extreme price gains. This is because the lead time to production in Namibia is extremely short. I am wary of Australian explorers as we won’t see production for several years due to red tape. Uranium price is increasing rapidly and at an exponential rate. The price gap between ERN($45m mkt cap) and others is unjustified and will likely close once we get good drills from their drill program, confirming possibly 50million pounds+ potential. Just at Area 1, its potential resources is close to Forsys Metals(which has a 1billion dollar market cap). ERN has over 100mT> potential, and the management’s comment that it has large tonnage potential is spot on.
Management have indicated they intend to keep the share structure tight to ensure leverage. Bear in mind ERN own 90% of these tenements ensuring good leverage and this is higher than BMN’s 80% owned.