We are participating in GTR’s rights issue - here’s why

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 30,875,000 GTR Shares and 1,833,100 GTR Options at the time of publishing this article. The Company has been engaged by GTR to share our commentary on the progress of our Investment in GTR over time.

Remember when silver and gold stocks suddenly started running a few weeks ago?

After a lull for a couple of months where nobody cared?

This can happen when underlying strong macro themes are met with renewed “risk-on” appetite for small cap stocks in general.

And the 50 basis point cut in US interest rate has brought some interest back into small cap land.

Meanwhile, the macro tailwinds are getting stronger by the day for uranium, especially in the USA.

Which is why we are participating in the GTI Energy (ASX:GTR) rights issue.

Last week, this happened:

(Source)

This is Russia’s “ace in the hole” when it comes to the international commodity market.

Russia enriches ~46% of the world’s uranium, so it controls a big chunk of the market...

The biggest buyers of uranium in the world are countries like France and the USA.

Something has to give.

The US, especially, is the most vulnerable to supply shocks after decades of neglecting the industry.

The US has the world’s biggest nuclear reactor fleet, producing ~20% of the country's electricity supply.

And yet - the US has virtually no domestic uranium production (for now).

Look how uranium production falls of a cliff in this chart:

(Source)

In 2023, the US sourced just 5% of its own uranium supply domestically...

So where are new local sources of uranium going to come from and how quickly can production come online?

The US government is responding.

Over recent months it has legislated support for the domestic uranium industry with up to US$4BN in federal funding.

We think US focussed uranium stocks are a good way to get exposure to a potentially sharp, rapid upswing in the uranium spot price ...

That’s why we are participating in the rights issue for GTR, increasing our Investment.

GTR’s rights issue is being done at 0.4c per share and comes with one free option for every three GTR shares purchased in the offer.

Those options have a 1c exercise price and a four year expiry date (from issuance).

The offer is underwritten for $1.6M meaning GTR is guaranteed to raise a minimum of $1.6M from the offer.

The offer closes on Monday (23rd September 2024) at 5pm Perth time.

Usually rights issues act as a bit of a cap on a share price during the time that they are open.

Once the rights issue closes, that weight gets lifted, the company has more cash in the bank and company share prices usually start to react a lot more to newsflow.

Back in June GTR raised at a premium to the rights issue price ($2.25M at 0.45c per share).

Since then GTR has drilled ~73 holes at its Lo Herma project (one of its three projects in Wyoming).

Lo Herma hosts ~5.7Mlbs of GTR’s total ~7.4Mlb uranium resource.

Over the last seven days GTR put out two sets of drill results which show that there is more uranium along strike and at depth to the existing JORC resource.

The final batch of assay results came out yesterday and a resource upgrade is expected on the project before the end of this year.

We are hoping that as GTR proves out a bigger JORC resource it (hopefully one day) catches the eye of one of the majors in the region.

GTR’s project sits within ~80km of five permitted uranium processing plants owned by majors like $4.6BN Uranium Energy Corp and $32.5BN Cameco.

All of this existing processing infrastructure is capable of taking on extra pounds from deposits in the region.

The opportunity for US uranium juniors like GTR then becomes clear - to define JORC resource bases that hopefully one day catch the eye of one of the majors and get taken over.

This is a big part of what we want to see GTR achieve with its project:

Ultimately we want to see GTR increase its resource base and make itself an attractive offtake/acquisition target, this forms the basis for our Big Bet which is as follows:

Our GTR Big Bet:

“Prove out a large resource base in the “uranium capital” of the USA and generate offtake or acquisition interest as the USA moves to secure local uranium supply”

NOTE: our “Big Bet” is what we HOPE the ultimate success scenario looks like for this particular Investment over the long term (3+ years). There is a lot of work to be done, many risks involved - just some of which we list in our GTR Investment Memo. Success will require a significant amount of luck. There is no guarantee that our Big Bet will ever come true.

GTR rights issue details - and why we are participating

GTR is currently raising up to $2M via an entitlement offer at 0.4c per share with 1 free option for every 3 shares purchased in the offer.

Those options have an exercise price of 1c per share with a four year expiry - so anyone who takes up their entitlement gets that bonus upside to a rally in GTR’s share price.

We are taking up our full entitlement and also intend to apply for the priority options entitlement on our GTRO holding.

That priority option offer booklet is due to come out on the 3rd of October so we will get a firm timeline for that offer then.

We are averaging down by taking up our full entitlement for three reasons:

1. We think GTR’s enterprise value is relatively low - GTR’s current market cap at 0.4c per share is ~$10M. Considering the company’s ~$3.1M cash balance (at 30 June 2024) the company’s enterprise value is somewhere close to ~$7M.
2. We think the uranium macro will keep getting stronger - threats of a Russian export ban, could spark a second rally in the uranium price which might trigger a wave of cash looking for uranium exposure.
3. GTR is progressing its projects - GTR is aiming to upgrade its resource and take its project into a scoping study - this will give the market a clearer understanding of potential project development economics.

Rights issue closure to take pressure off the share price?

Going into the last few months of the year, the ~$10M capped GTR is setting up pretty nicely from a balance sheet perspective.

GTR had $3.1M cash at 30 June 2024 and could get another ~$2M through the door from the rights issue...

As mentioned above, $1.6M of the offer is underwritten so at the very minimum GTR will raise that amount.

Once the rights issue is closed on Monday we are hoping GTR’s share price starts to react more positively to good news from its projects.

Usually rights issues act as a bit of a cap on a share price during the time that they are open.

Shareholders can sell shares on market and buy them back off market (up to their rights issue entitlements).

That creates selling pressure on market and usually means the share price hovers around the rights issue offer price until the offer closes.

Once the rights issue closes, that weight gets lifted, the company has more cash in the bank and company share prices usually start to react a lot more to newsflow.

Post rights issue, GTR’s plan is to deliver a resource upgrade before the end of the year before taking its project into a scoping study.

With GTR’s strengthened cash backing, we are hoping the market will have time to digest the resource upgrade and value GTR accordingly.

GTR is currently trading at an enterprise value of ~$7M - giving the company a 95c EV/lb of uranium resource.

GTR’s much larger regional peers trade at multiples of this on an EV/lb basis.

A resource upgrade could be the trigger to bridging that “pound for pound” valuation gap.

GTR just finished drilling - resource upgrade coming next

GTR just finished 73 holes at its Lo Herma Project where it is planning a resource upgrade by the end of this year.

Lo Herma currently has a 5.71m lb JORC uranium resource.

The target for the drill program is to try and take the resource up to the higher end of GTR’s exploration target for Lo Herma which is ~10.26m lbs of uranium:

Over the last seven days GTR put out two sets of drill results which show that there is more uranium along strike and at depth to the existing JORC resource:

So it's looking like GTR should get a fairly decent upgrade announced by the end of this year.

GTR has now finished most of the drilling planned at Lo Herma for 2024 but will be going back to do some hydrogeologic wells (similar to metwork drilling where the goal isn't to find more uranium but to monitor the geological conditions underground.

That drilling is expected to start in a few weeks time before GTR starts preparing its resource upgrade.

What are the risks to our Investment Thesis?

Commercialisation risk

GTR now has a total in-ground JORC resource base of ~7.37 million lbs of uranium. There is no guarantee that this resource can be economically extracted. Project development is risky and a range of issues can always come about leading to projects being considered stranded.

Source: “What could go wrong? - GTR Investment Memo 4 August 2023

GTR’s current focus is on expanding its JORC uranium resources across its three projects in Wyoming.

Resource upgrades on their own are good news but they don't guarantee that GTR’s projects become commercially viable to develop.

There is always a risk that GTR needs to add significantly more lb’s to its resource before it can justify development.

A risk that sits outside of our Investment Memo is “Cap Structure Risk”.

Assuming GTR raises the $2M from the entitlement offer the company will have ~3BN shares on issue and almost half a billion options on issue too.

More shares on issue means that every incremental 0.1c increase in GTR’s share price has a big impact on its market cap.

As a result, the company’s cap structure could limit how much of a reaction there is to newsflow in the future.

These are just two isolated risks. To see more risks check out our Memo here.

Our GTR Investment Memo:

You can read our Investment Memo in the link below.

We use this memo to track the progress of all our Investments over time.

In our GTR Investment Memo, you can find the following:

• What does GTR do?
• The macro theme for GTR
• Our GTR Big Bet
• What we want to see GTR achieve
• Why we are Invested in GTR
• The key risks to our Investment Thesis
• Our Investment Plan