Berkeley Energia could be nuclear powerhouse

The world's population is growing fast. There'll be another 1.2 billion of us by 2030, according to forecasters, and 9.7 billion in 2050. It's inconceivable that fossil fuels will provide all our energy needs, so alternatives are required. Wind and solar are great, but only nuclear power can fill the gap. That requires uranium, more specifically uranium from a small region of western Spain.

About three hours west of Madrid sits Salamanca, a project developed by AIM and ASX-listed miner Berkeley Energia. The shallow, high grade Zona 7 deposit, discovered just over 18 months ago, contains more than 30 million pounds of uranium and was a game changer for the company.

In July, it made public the results of a Definitive-Feasibility Study (DFS) which confirmed it will be one of the world's lowest cost producers, able to generate strong after tax cash flows through the current low point in the uranium cycle.

Over a 10-year period, the project could produce an average of 4.4 million pounds of uranium per year at a cash cost of $13.30 per pound (/lb) and total cash cost of $15.06.

That Berkeley can get uranium out of the ground far more efficiently than rivals is crucial following the fall in the price of uranium this year. It's currently down 20% at a decade low, and big mines like Cameco's Rabbit Lake in Canada are shutting down. They're just too expensive, and they're not the only ones feeling the pinch. Many projects are being shelved.

Of course, that begs the question why Berkeley is hell-bent on putting its 100%-owned project into production. Well, there are two answers. Firstly, the company has ploughed $60 million into the project over the past decade and it's ready to be developed. It's already started pouring concrete and the mine should be up and running in 2018.

Berkeley has been, and continues to be a huge beneficiary of European Union generosity, which sees millions available to incentivise regional projects on the continent. Unemployment around the mine area is high, and Berkeley offers locals great job opportunities.

Secondly, Berkeley has a rare combination of low capital costs - infrastructure is already in place, so very little spend there - plus operating costs at half the current uranium price. The current spot price is $26/lb and long-term contract price of $41/lb. After the Fukushima nuclear disaster in 2011, the uranium price plunged from around $68/lb to $48/lb

"High cost producers can't live at these costs," says managing director Paul Atherley. "We can produce at less than $15/lb. Others are at $30/lb. Utilities will likely move from high cost producers to low cost producers because they need certainty of supply."

Getting Salamanca up and running puts Berkeley in a great position for an anticipated uptick in demand in a few years' time. Whilst uranium prices may remain flat in the near term, from 2018, when Salamanca is scheduled to come into production, the market is expected to be dominated by US utilities looking to re-contract.

These utilities will also be competing with Chinese and Indian new reactor demand; both countries are commissioning 14 new reactors every year, which may lead to higher spot and term contract prices.

As the only uranium mine in the world currently being developed, demand for Berkeley shares has also increased dramatically. They were worth under 20p less than a year ago, but things took off when the company moved into the development phase mid-March and hit highs of 55p earlier this month.

After the July DFS, which predicted an average annual net profit after tax of $116 million, the shares rose by almost a third and just kept going. They currently sit near a five-year high, but analysts believe that there is more upside to come. Dave Talbot, Dundee Securities analyst, recently raised his target price to 135p following the results from the exploration drilling programme.

And it's not just Dave, sentiment is positive across the analyst community: "We see considerable near-term upside to this target price, driven by a combination of project de-risking and by the expectation that uranium prices should start to recover in the near future," says Martin Potts, an analyst at broker finnCap. "Current and planned exploration has the potential to add further value."

Potts thinks Berkeley shares will be worth 113p, and argues that there are clear catalysts for the short, medium and long term that would reduce the risk discount applied, triggering a revaluation of the shares.

In September alone Berkeley had an impressive amount of positive news flow. Its deep drilling programme at Zona 7 revealed high grade uranium intersections which point to a resource upgrade. The company signed a Letter of Intent with a leading European commodities company, Interalloys, for the first million pounds of production from the Salamanca and is in discussions with another potential off-taker in relation to a sales contract with similar terms.

Finally, Berkeley appointed Amec Foster Wheeler for the execution phase of the project, when the overall engineering and process design is translated into equipment procurement packages and awards to specialist subcontractors.

It's safe to say this good news has not gone unnoticed by the market. Fidelity International is clearly a fan. The fund manager has just bought an extra 2.2 million shares, taking its stake to over 12.2 million shares, or 6.1% of the company.

There's no doubt that Berkeley Energia is a high-risk resource play. Most miners are. But this particular jigsaw looks easier than most and the pieces are falling into place nicely. If the newsflow continues, and it must to retain investor interest, broker price targets look realistic.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.