Palisade Research - Thu, May 25, 2017

The Greatest Benefactor of US-Russian Relations: (V.ARY; ANLDF) Anfield Resources

picture of two opposing fists, in front of a world map background, painted with US & Russian flag colors

Like many other commodities, the price of uranium is cyclical.

line graph showing the inflation adjusted uranium price per pound from 1929 to present

Since 1929, uranium has seen three momentous bull markets. The first occurred from 1943 to 1955, and was spurred by an incentive program created by the US Government. The competition for nuclear warheads had begun, and the DoD was in dire need of uranium. Through the Atomic Energy Commission, a generous price for uranium was offered, igniting a staking frenzy. By the 1950s, the program was scaled back and incentives halted, ending the first uranium bull market.

The 1973 to 1979 bull run was triggered by OPEC's oil embargo, resulting in a global economic crisis. Prior to, uranium was floating lower, and had bottomed out at $6/lb., before investors began flocking to alternative sources of power. Nuclear power was a great beneficiary, and afterwards saw rapid expansion. Prior to the oil crisis, global capacity nuclear capacity grew at an average of 2,400 MW per year. From 1973 to 1990, this jumped to 16,000 MW with the United States building 25% of the 321 new reactors in the world. This run was ended by the Three Mile Island meltdown in March 1979.

The last and most recent uranium bull occurred from 2001 to 2008. China and India were growing at an unprecedented rate. In 2007, almost half of the world's reactors were being built in China and India, with 64 planned and 158 planned, respectively. Oil prices were increasing, and the onus was once again placed on alternative energy sources. The agreement between the US and Russia, under the Megatons to Megawatts program, was also scheduled to end, removing significant supply from the market. This was accompanied by Cameco's Cigar Lake mine flood (232 million lbs), and hedge funds hoarding the physical commodity. Uranium's collapsed was caused by the 2008-2009 financial crisis, and investors liquidated their positions en masse.

Uranium experienced a small renaissance in 2011, but this was cut short due to the Fukushima Daiichi nuclear disaster in Japan. An earthquake and subsequent tsunami caused three nuclear meltdowns, and caused many countries to unnecessarily reconsider their energy programs. Germany took its eight reactors offline, and began importing its energy from France, which ironically gets the majority of its power from nuclear!

Now after 6 years, the uranium markets are finally seeing some light at the end of the tunnel. China remains the engine for growth, with 36 operating reactors and many more planned. In 2015, there were eight new grid connections. In 2016, another five came online. The country currently has another 20 reactors under construction, and aims to have the third largest capacity in the world by 2020.

The United States Department of Energy also recently lowered its transfer rate due to supply concerns. Analysts are now expecting a supply deficit, something unheard of just a couple of years ago.

area graph showing actual uranium supply & demand and estimated forecast deficits with prices at $40 per pound from 2012 to 2030

Accompanying these two points, we maintain five more points of why uranium is a compelling investment and why its on the verge of an incredible turnaround.

* It's a contrarian investment - uranium was one of the worst performing commodities in 2016, but is now one of the best performing of 2017. Many people are still on the sidelines, scared of the 41% drop last year, but this is the ideal time to invest for a contrarian.

* Price (in)sensitivity - Unlike other commodities, particularly ones used as input, the cost of fuel for a nuclear power plant is insignificant. In fact, uranium accounts for only 2% of operating costs. Compare this to coal plants where coal accounts for 35%. If each commodity increases 20-fold, you can bet all of the world's coal plants will be off-line and coal stocks will eventually die. The opposite would happen with uranium.

* Mine construction - With a deficit on the horizon, the fix will not be fast. In fact, the time from a production decision to production is almost a decade. This is why uranium bull markets can be much longer than other commodities.

* Uranium stocks are scarce - Unlike precious metal companies where there are hundreds to choose from, there are only about thirty uranium companies for a North American investor. When the bull market is in full effect, there will be only so many places the surge of capital can go. This means uranium stocks have more torque than other commodity stocks.

* No other sector yields the kind of gains that uranium can - When you ask the leading resource investors about uranium, chances are they have made a substantial portion of their wealth from it. Just ask Doug Casey or Rick Rule about Paladin Energy, and they will be happy to tell you about 10,000% return

Frank Giustra is another mining magnate who has had incredible success in uranium. In fact, his company UrAsia Energy was acquired by Uranium One in 2007 for US$3 billion. UrAsia owned uranium mines in Kazakhstan, which quickly became the foundation and flagships of Uranium One. At the same time, Uranium One bolstered its projects in the United States, eventually becoming a key producer of domestic uranium.

In 2010, Uranium One was acquired Rosatom, the state-controlled nuclear arm of Russia. And this is where some controversy began to surface. With uranium being a strategic metal, many departments had to sign off on the deal, and with more digging, theories arose that Giustra had donated to the former President Bill Clinton's foundation to expedite the sale.

There are also allegations that President Clinton was integral in UrAsia securing its Kazakhstani assets. The pair traveled to Almaty together in 2005, where they met, Nursultan Nazarbayev, the leader of Kazakhstan. Soon after UrAsia acquired the mines. Since this trip, Giustra has donated US$31.3 million to the Clinton Foundation and pledged US$100 million more.

Mired in controversy and scandal, politicians became concerned of Russia controlling significant US production. The pressure was put on and Uranium One was essentially forced to sell key US assets. One junior resource was the benefactor, acquiring critical uranium projects for pennies on the dollar, the same assets that contributed to Uranium One's C$6.2 billion market cap.

Anfield Resources (CVE:ARY, OTCMKTS:ANLDF, FRA:0AD)

Current Price: C$0.075
Shares Outstanding: 109.4 million
Market Capitalization: C$8.2 million
52-Week Range: C$0.06 - C$0.31
Cash: ~C$2.8 million

Anfield is a near-term production company with assets all in the United States. Its low-risk profile and high return potential have not attracted as much investor attention as this company deserves. Anfield has managed to bypass the long lead times associated with advancing to production through both the acquisition of an existing mill in Utah and an RPA signed with Uranium One to use its existing processing plant. This is a significant differentiator when comparing Anfield to other non-producers or those who aim to reach production in the coming years.

Assets - Prolific Uranium States

In the mining business, companies that make steady progress toward cash flow are rewarded with ever higher valuations. Those with a diversified array of projects at various stages of exploration and development get a nod of approval for risk management.

Anfield has both elements of this strategy. Its assets fall into three groups: conventional, ISR, and exploration.

* ISR (in-situ recovery) assets are the ones that have the potential to be profitable even in an environment of depressed uranium prices. Think of them as a hedge against future uncertainty. The company bought 24 ISR-amenable assets with a historical resource of ~37 million pounds in September 2016.

As part of that transaction, Anfield has also got access to 395,000 feet of historical drilling and resource databases that will help it focus on the most value-adding areas.

When these assets reach production stage (and it sounds more like a question of "when," not "if"), the company will produce without too much upfront cost or permitting delays. As part of the same Wyoming transaction, it secured the right to process up to 500,000 pounds of mined material per year at Uranium One's Irigaray processing plant. Another key component of this agreement includes the ability of Anfield to buy or borrow uranium material from Uranium One to fulfill any utility contract it signs. This provides a backstop with one of the largest uranium producers and makes utilities more inclined to sign long-term contracts with Anfield.

* Conventional assets - Anfield's other key asset is its 750 tonnes-per-day Shootaring Canyon mill. The mill is located in Garfield county, Utah. It is one of the only three licensed, permitted, and constructed conventional uranium mills in the United States. The area where Shootaring Canyon is located has been historically one of the most prolific uranium production areas in the country.

Anfield plans to advance Shootaring Canyon and other conventional assets in anticipation of higher uranium prices.

The company's outline of how it plans to get to production stage looks like this:

step table showing Anfield's production plans

Anfield is doing the work required to advance its projects along these milestones. Also in 2016, it applied to upgrade its Shootaring Canyon mill's radioactive materials license from standby to operational status.

Another key conventional asset is Velvet-Wood Mine, also located in Utah. Specifically, in the Lisbon Valley Uranium District production area, which historically was Utah's largest uranium production area.

Anfield acquired the Velvet-Wood Mine in 2015 together with Shootaring Canyon. Since then, the company released a PEA for this asset.

In terms of resources, the PEA says that Velvet-Wood Mine hosts over 5 million pounds of U3O8 that can be mined using conventional methods.

economics table
(Source: Anfield Resources)

Most of the value of this project, though, is not in the amount of resources it has but in its capital return potential.

U3O8 mineral resources table
(Source: Anfield Resources)

The economics the Velvet-Wood Mine were done using $65/lbs, offering optionality as uranium prices increase. The most important fact that the PEA confirmed is the low-risk nature of the Velvet-Wood Mine. Portions of deposit have been successively mined in the past; uranium has been successfully extracted from mined material via conventional milling; and the project has some of the required operating permits and facilities in place.

In other words, the project does not suffer from any particular technical problems that would make it hard to restart.

BRS, the company that prepared this report, says that the project will likely start no earlier than mid-2018.

Anfield continued its collaboration with BRS and in March 2017 it announced that BRS would prepare a number of NI 43-101 compliant technical reports for the company's 24 properties located in Wyoming, supplying the company with a steady stream of material news flow in the near-future.

map showing Anfield's 24 properties in Wyoming
(Source: Anfield Resources)

Resource delineation is the number one step in advancing these projects. And Anfield will not be starting from scratch. As part of its September 2016 transaction, Anfield purchased a database that contains historic resource estimates and other information that would help the company identify development potential.

One of the key characteristics of this batch of projects is that a lot of them are located close to existing ISR production bases. If needed, and to speed up cash flow generation, Anfield can potentially sign other processing agreements like the one it has now with Uranium One. It will dramatically help it reduce the amount of time needed to get these assets to production.

The first technical report was not long in the making. In April 2017, BRS has announced the results of the first NI 43-101 technical report. The report covers the Red Rim uranium project.

two tables showing indicated and inferred uranium resources

Anfield is advancing its projects at an impressive speed. But it doesn't depend on its own efforts only. One of the overlooked assets in its asset base is a royalty portfolio that it acquired during the September 2016 transaction with Uranium one.

* 2% to 4% sliding scale production royalty on Azarga Uranium's (TSE:AZZ) Dewey Burdock project in Custer and Fall River Counties, South Dakota

* 2% NSR on Western Uranium's (CNSX:WUC) San Rafael project in Emery County, Utah

* 2% to 4% sliding scale gross value royalty on Energy Fuels' (TSE:EFR) Whirlwind project in Grand County, Utah.

* 1% royalty on Energy Fuels' (TSE:EFR) Energy Queen project in San Juan County, Utah.

The royalties are all on established projects, and will offer enormous torque. The Dewey Burdock project is the most advanced and the royalty is conservatively worth CA$4.1 million at current uranium prices. Compare this to Anfield's current market cap of C$8.2 million.

Lastly, the company has cranked up its exploration and evaluation spending. In 2016, it spent C$1.6 million on these activities, over five times more than the C$278,000 it dedicated to advancing its projects in 2015.

Capital - Grinding & Closing Financings

Despite the higher costs, Anfield managed to stay afloat and deliver value through a series of successful equity offerings.

The most recent one closed in March 2017. Anfield initially planned to raise C$1.5 million by issuing 15 million shares at 10 cents each but as the demand for its shares soared it ended up raising almost twice as much. On March 6, it closed a private placement that attracted $2.9 million in new capital.

As well as growing its projects organically, Anfield is going to continue pursue M&A opportunities. Historically, it managed to build an impressively diversified portfolio through a series of M&A transactions. We expect this trend to continue into the future.

The fact that the company is so well-positioned to benefit from multiple uranium price environments already tells us that the management knows what it's doing.

The company has been navigated through the bear markets by Corey Dias, who earned his stripes as an equity analyst and fund manager.

To assist him, he has Robert Scott Lumadue at his side. Mr. Lumadue has over 38 years of experience in the uranium industry, and will help in uranium sales and marketing. Mr. Lumadue will be the bridge to U.S. utilities and nuclear conversion facilities, Anfield's future customers. Utility sales contracts will be a key component of the company's sustainable cash flow so hiring a person with relevant experience for so many years is an invaluable asset.

Besides the executive team, Anfield has an impressive roster of directors with almost 100 years of technical and consulting experience, including environmental and regulatory affairs, uranium sales and marketing, utility fuel procurement, and geological definition and interpretation.

Anfield is a pure-uranium company and has a clearly defined value proposition coming from its long-term assets and its nearer-term counterparts. Its current share price is a great entry point, and like our other uranium recommendations, will definitely be a longer-term hold. As mentioned earlier, we are going to see a series of resource estimates coming from Anfield's Wyoming properties. This should cause some much needed liquidity and eye balls to the stock.

Palisade Global Investments Limited holds shares of Anfield Resources. We receive either monetary or securities compensation for our services. We stand to benefit from any volume this write-up may generate. The information contained in such write-ups is not intended as individual investment advice and is not designed to meet your personal financial situation. Information contained in this report is obtained from sources we believe to be reliable, but its accuracy cannot be guaranteed. The opinions expressed in this report are those of Palisade Global Investments and are subject to change without notice. The information in this report may become outdated and there is no obligation to update any such information. Do your own due diligence. publishes interesting contributor articles in addition to its own content. We have not verified any of the above details.

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