CGN Mining released a new pricing mechanism for the off-take agreement (2026-28) with its parent company. Under the new mechanism, the proportion of fixed pricing will be reduced to 30% from 40% currently. Most importantly, the fixed price in 2026E is set at US$94.22/lb (with 4.1% increment per year in 2027E/28E), which is way higher than the US$61.78/lb in 2023 (with annual increment of 3.5% in 2024/25) under the current mechanism. Besides, the new pricing is also ~18% higher than the latest industry contract price published by Cameco (CCJ US, NR). We see this as a big surprise to the market and also help remove the major overhang about the uncertain pricing mechanism. We revise up our 2026E-27E earnings forecast by 17%/23%, after revising our offtake agreement pricing based on the new formula. Accordingly, we revise up our NPV-based TP to HK$2.61 from HK$2.18. Maintain BUY.
Existing pricing formula: Under the existing offtake agreement (2023-25), the uranium that CGN Mining sold to the parent company is based on 40% fixed price (US$61.78/lb in 2023, 3.5% increment per year in 2024/25) plus 60% spot price based on the average quote in “Nuclear Market Review” by TradeTech and “Ux Weekly” by UxC. The annual inflation assumptions for fixed price in 2024-25 were set at 3.5%. The minimum quantity of uranium was 1.2kt per year.
What is new? Under the new agreement (2026-28), the fixed price proportion will be reduced to 30% but the fixed price will be increased to US$94.22/lb in 2026. The annual inflation assumption for the fixed price is set at 4.1%, implying US$98/lb and US$102/lb in 2027 and 2028 respectively. The minimum quantity of uranium will remain unchanged. The new agreement is subject to shareholders’ approval in EGM, but we do not anticipate any issue given the favourable terms.