Thursday, February 23, 2006

Feb 23 Uranium Stocks Update: Urasia Energy (CVE:UUU )

Urasia's Ramping Up of Uranium Production at Akdala

In addition to developing its other uranium properties, Urasia is spending money to increase production at its existing Akdala mine, from 600t in 2005 to 1,000t (2.6 million pounds) this year. With the price of uranium oxide rising again this week to $38.25/lb from $37.50/lb, I wanted to revisit Urasia's projections for Akdala.

Capital Costs

Projected costs for the expansion currently underway to a capacity of 1,000 t U per year amount to U.S.$37 million, of which U.S.$11 million is budgeted for 2005 and U.S.$25 million is budgeted for 2006.

(Caveat) Additional infrastructure costs may be assessed in the future to account for railways, road, and power line construction to the various uranium production projects in the region, but it is not clear how such costs might be allocated to the Akdala project.

Analysis: So is expanding the annual production of Akdala from 1.6 million lbs of yellowcake to 2.6 million lbs worth the capital cost of $37 million US + unknown infrastructure costs? Urasia thankfully has included a sensitivities section where they projected net present values (NPV) based on different uranium oxide prices.

(1) Average Price Over Project Life (U.S.$ per pound U3O8)
(2) Net Present Value (million U.S.$)

Base Case (1) $21.59 (2) $77.1
(1) $35.00 (2) $159.9
(1) $40.00 (2) $190.8

(Urasia used a 12% discount rate to calculate the NPV)

Analysis:

Refresher

NAV = difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.

Discount Rate = percentage used to calculate the NPV, reflects the time value of money.

So did Urasia make the right choice in expanding their existing production? The answer is an overwhelming yes. They correctly deduced that the price of uranium oxide would continue its ascent and have taken the necessary steps to capitalize on it. At the current $38.25/lb US price of yellowcake, they seem almost prescient!
 

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