Analysts believe Berkeley Energia (BKY:AIM) is worth four times as much as its current market value, assuming that it can successfully raise money to build a uranium mine in Spain. The project economics are very good for the Salamanca project; Berkeley is one of the few miners that could theoretically make a profit at current depressed commodity prices.

Is this a no-brainer stock to own or should you treat the story with the same caution applied to most other mining stocks in the current environment?

The share price has already enjoyed a re-rating, doubling in price since April 2015. We put that down to investors being reminded that the company still exists. Berkeley has spent many years hiding under a rock and failing to engage with investors. That changed with the appointment of Paul Atherley as managing director (MD) in June 2015, a gifted promoter and someone who could make even the worst quality company sound promising.

Fortunately Berkeley has high quality assets so Atherley doesn’t need to convince investors that there could be enough mineralisation to support a commercial mining business.

We already have confirmation there is adequate uranium-rich material in the ground to facilitate a mining operation. Instead, his role is to communicate that a) Berkeley exists as an investment proposition and b) to engage with government officials, potential financiers and offtake partners and take the business from explorer to producer status.

Atherley’s promotional work has put the stock back on many investors’ radars. The hard bit is to now get the project funded, built and operational. The MD makes it sound like a box ticking exercise, yet anyone familiar with the mining sector and project start-ups will know that is far from reality.

New team

‘We have added new management - myself, commercial manager Hugo Schumann and a Spanish team who have built three major mines in the country before,’ says Atherley. ‘We will have an opening ceremony in June and aim to have financiers and offtake agreement(s) in place before that date.’

Berkeley hopes to ‘break ground’ in June at the proposed mine site and begin main construction in September this year. It will take approximately one year to build the mine at a cost of $81 million. This will cover the section of the Salamanca project called Retortillo. This part of the mine is fully permitted.

The ‘prize’ asset within Salamanca is Zona 7, a shallow high-grade deposit that has grown in size following exploration over the past year or so and ‘transformed’ the overall project economics, according to Atherley. The company says the deposit increases Salamanca’s mine life from 11 to 18 years and reduces the operating costs from $24.60 per pound to $15.60 per pound. That is more than half the current uranium price ($34.5 per pound on a spot basis).

‘If we can optimise Zona 7, we could get to be one of the lowest cost producers in the world, and the biggest uranium project in Europe.’

Hurdles to clear

Zona 7 is much higher grade than Retortillo but Berkeley is not yet in a position to start production with the superior section of Salamanca. Atherley says that each section of the mine will need its own permits, in accordance with the Spanish mining system. That means more paperwork before Zona 7 can get the green light. Indeed, Berkeley also needs to undertake more metallurgical test work and publish a new feasibility study to factor in more detailed information on Zona 7.

Furthermore, the $81 million start-up cost does not include Zona 7’s development. Berkeley will need a further $50 million to get that section into production, according to Atherley.

The mining schedule is a bit erratic. It will mine Retortillo for one year and then move the mining fleet to Zona 7. The equipment moves back to Retortillo once Zona 7 is depleted. Another section called Alameda should start in the third year of Berkeley’s life as a producer, requiring $65 million start-up funds.

‘There are 160 nuclear reactors in Europe,’ claims the MD. ‘The obvious market for our mined uranium is Europe but China and India are spending significant amounts of money building nuclear reactors, so I am in Beijing talking to potential partners,’ he says by phone.

Atherley enthuses about Canada’s Fission Uranium (FCU:TSE) which in December 2015 struck a deal with Chinese uranium trader CGN Mining which will take a near-20% stake in the business at a 25% premium to the market price.

‘I have one approach a week from potential financiers. However, possible strategic partners are the most interesting approaches. We have a number of parties who have commenced detailed due diligence.’ He wants to get a partner to provide non-dilutive financing, essentially avoiding the conventional 60% debt, 40% equity route to fund the mine construction.

Under its previous identity as Berkeley Resources, the small cap miner was on the receiving end of a takeover approach from Russian steel group Severstal (SVST) in October 2010. That interest was short-lived and has been subject to a wide range of speculation as to why the deal didn’t happen. ‘The stories get more elaborate as time goes on,’ chuckles Atherley. ‘The business was considered very good then; it is a hell of a lot better now.’

He doesn’t divulge any of the gossip, merely saying the takeover didn’t happen because it was too close to the Fukushima nuclear disaster. That argument doesn’t stack up because the Japanese event happened in March 2011, four months after Severstal walked away from Berkeley.

Atherley says he was one of the original people who put Berkeley together, claiming he was nearly made managing director in the early days. He made his name on the UK stock market with Leyshon Resources, a former AIM-quoted small cap which sold a gold mine for three times its investment and used that cash to look for gas in China. It found gas and had offtake partners lined up; sadly it couldn’t make the gas flow and so gave the remaining money back to shareholders.

Cashed up

Berkeley has enough cash to see it through to mine financing, expected in April or May, says the MD. It will then seek to raise money beyond the $81 million for phase one mine construction to cover working capital requirements for the business. The $81 million figure only includes working capital for Retortillo, not additional exploration drilling and study work on other prospects.

Berkeley shouldn’t have any problem getting project finance if the asset is as good as it claims. It will operate in a jurisdiction that doesn’t have the geopolitical problems that accompany many mining projects. Uranium isn’t presently forecast to experience a large price decline and demand is likely to increase, not decrease, if countries move towards cleaner energy.

The risks are further declines in the price of oil and gas price persuading power generators to shun nuclear power developments, thereby putting pressure on the uranium price. Spain has a history of being very slow when it comes to granting mining permits, so Berkeley may need to take a more conservative view with Zona 7’s schedule.

The share price appreciation in 2015 has helped improve liquidity in the stock. The MD says the biggest traction has been with generalist growth funds. The first of the ‘new breed’ of institutional investors owning Berkeley should soon become public as Atherley claims one is on the cusp of exceeding the ownership level that requires disclosure to the stock market.

The next question to answer is how will the share price move from 25p to the 100p price target set by stockbrokers Numis and WH Ireland? ‘To unlock value in the share price, the market will want to see infrastructure work begin; the start of construction; offtake and financing; these are the building blocks to hit 100p,’ says Atherley.

We believe the shares are attractive for anyone with an appetite for risk. The 100p price target looks a bit excessive, but we certainly see scope for the stock to double in price again if financing goes smoothly and the mine gets in production.

Biography

Paul Atherley, managing director

Trained as a mining engineer, Atherley has experience in running natural resource companies and in investment banking. He has worked for HSBC and most recently ran Leyshon Resources which was involved in gas exploration in Asia. He has previously been the chairman of the British Chamber of Commerce in China and vice chairman of the China Britain Business Council in London.

Berkeley Energia (BKY:AIM) 25p

SUMMARY

Low operating costs, long mine life, high potential return on investment are all reasons to buy the uranium miner. It should be able to make a profit at current commodity prices, but still needs to clear financing and permitting hurdles.

Bull case

• Quickly secures financing and offtake deal(s)

• Uranium price starts to recover

• Takeover target once in production

Bear case

• Becomes subject to onerous financing terms that could cause problems if cash flow disrupted during early stages of production

• Uranium price suffers new decline

• Permitting delays force Zona 7 start-up to be pushed back

Market value: £45.1 million

Prospective PE: n/a

Prospective dividend yield: n/a