If Ucore is really becoming a technology company by commercializing MRT, then we could see the company start to generate stable earnings through partnerships based on MRT. These earnings could attract different types of investors to the company and justify valuations based on multiples of long-term cash flows. The company could develop a core business that generates steady baseline of profits, but has large growth potential -- and the company would still own the Bokan-Dotson project.
This line of reasoning occurred to me while I was watching The Jungle Book in theaters earlier tonight and led me to wonder -- how can we value Ucore solely based on the Bokan-Dotson project? Going back to first principles, the valuation of a resource development project depends on the stage of the project. Ucore has some understanding of the size and composition of the Bokan-Dotson deposit, so you could compare it to other companies based market cap versus resource size in situ. This is problematic with REE because it is hard to find someone to compare it to.
Ucore also has some understanding of the economics of the deposit from their PEA. Maybe there is some relation between the estimated NPV and market cap? The 2013 NPV was ca. $350M USD after tax and their market cap at the time was $85M USD, which means the ratio of Market Cap to NPV in 2013 was approximately 25%. The share price has drifted lower since the announcement of the PEA, but the company has survived by issuing 25M+ shares or 15% dilution. It seems that the project was not good enough to go ahead, but not bad enough to die. In fact, the current market cap is still ca. $80M USD, which means the ratio of market cap/NPV is still around 25% now. I wonder if this ratio (market cap/NPV) is a useful comparable and if this 25% level is significant for other juniors at the pre-development stage?
The lifecycle of cash flows from the Bokan-Dotson project shows that the project was estimated to give $200M free cash flow per year in years 3-8 of the project life, but the project life was only 11 years. The project has a pretty short window to recoup the capital costs and make enough profits to attract investors. In contrast, a long-term contract to based on one of several possible uses for MRT could generate a stream of cash flows with a much different profile.
The cash flow from MRT contracts could have a longer time horizon and greater certainty than Bokan-Dotson. These attributes (long-term, stable cash flow) allow investors to use valuations based on multiples of cash flow. What would it take to get a $100M valuation from the MRT rights? Well, suppose they deserve a low 10X multiple on earnings because it is a new and risky line of business. Furthermore, they get no recognition of forward-looking cash flows yet. In such a conservative situation, annual net earnings of $10M would justify a $100M market cap. Can Ucore generate $10M annually from MRT contracts?
There is some great potential synergy for Ucore here because MRT and Bokan-Dotson can both generate value on their own, but they can also benefit each other. The company initially pursued MRT to reduce the capital and operating costs for Bokan-Dotson: when Bokan-Dotson goes ahead, then it will (hopefully) generate large amounts of capital in mid-life and Ucore can reinvest these proceeds back into expansion of MRT. However, if the company decides to start by pursuing opportunities with MRT first, then they may generate enough capital internally to start the Bokan-Dotson project and trigger infrastructure funding from the State of Alaska. Ucore faces some interesting choices in terms of what to do and what order to do it in. They have the potential to bootstrap themselves into a unique competitive position.
Jim Mckenzie has said Ucore may pursue a 'hub and spoke business model' and I look forward to learning more about that. For example, how does Bokan-Dotson fit into that picture -- could Bokan-Dotson be the hub? Are the MRT use-cases the spokes? How many MRT contracts could generate $10M annually, and how soon? We may get some new information around the upcoming Clean Tech conference in May 2016.
Building a motorcycle wheel requires you to be careful about the order of the spokes that you install and how they all fit into the hub, as there are a lot of ways to connect the different parts. It is a difficult activity, but can be done simply. I wish Ucore management the best of luck in navigating the rich set of opportunities in front of them.
