Epstein-Research Blog | Even After Run, NexGen Energy Ltd. Shares Have Big Upside Potential | Talkmarkets - Page 3
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In 2011 Peter Epstein, CFA, left a $3 billion hedge fund where he was a senior natural resources analyst to help increase awareness of a number of natural resource companies in which he's invested in. 

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Even After Run, NexGen Energy Ltd. Shares Have Big Upside Potential

Date: Thursday, March 24, 2016 4:31 PM EST

Arrow will grow in size, and possibly in grade, with (in my opinion) new zones of mineralization identified this year or next. One of the six drills turning on site is testing regional, high-impact targets along trend from Arrow. NexGen will take full advantage of its liquidity runway to maximize shareholder value ahead of a takeout. The Company has another year+ to draw additional interested parties to the table. 

Screen Shot 2016-03-21 at 10.12.27 AM

The valuation per U3O8 lb. in the ground attached to NexGen should be higher, to properly reflect how unique Arrow is. One look at the new corporate presentation shows that the resource is shaping up as a deposit that could rival the deposits at McArthur River & Cigar Lake. 

In many important ways, the Arrow deposit is already world-class. What EV/lb. takeout valuation is appropriate? M&A metrics change significantly over time and jurisdiction. If one agrees that (eventually) a takeout is likely, isn’t it fair to surmise that the EV/lb. ratio would be a strong one? I asked Cantor Fitzgerald’s Robert Chang that question, his response, 

“I think in the current environment, a premier uranium deposit like Arrow should command an EV/lb. ratio of US$5 -US 7/lb.”  

As a frame of reference, a US$3/lb. valuation on 250 million pro forma lbs. and C$1/US$0.80 exchange rate, equates to a fd share price of $2.92, +118% above the current price. A valuation of US$5/lb on 300 million pro forma lbs. is $5.72, +327% above the current price. If investors begin to focus more on the possibility, or even the perceived likelihood, of a takeout, price expectations in the $2.00s and $3.00s will be a thing of the past. 

It’s at this point that readers should let their imaginations run free. If one believes as I do that the fundamental downside from a ($1.45/lb. valuation is minimal, it might be wise to embrace more exciting scenarios, unburdened by biases.

In the wide range of M&A EV/lb. values, various averages emerge. There’s the post 2011 Fukushima average, the Athabasca-only average, an average excluding the Rio/Hathor deal, an average excluding small transactions. These averages fall in the vicinity of US$5 – US$6/lb. 

The year forward has a number of visible milestones that could serve as valuation catalysts. In the end, this article is not about what should or will be, but about what could be. NexGen Energy’s (TSX-V: NXE) / (OTC: NXGEF) shares could be a home run if management continues to execute well. 

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