What do Li Ka-Shing (the richest man in Asia), Rick Rule (the most successful uranium speculator in the resource sector) and Spencer Abraham (the former Secretary of Energy of the US) have in common? Uranium Energy Corp (NYSEMKT:UEC) is the answer.
On Thursday September 5th, the company published a news release highlighting a new strategy of resource optimization with a significant impact on its long-term profitability. This comes on top of the strong fundamentals of the uranium sector (NYSEARCA:URA). In the short-term, the strong balance sheet has up to $25M available positions, providing financial flexibility to advance one of the industry's top two near-term ISR projects, being Goliad and Burke Hollow. Besides, the balance sheet enables the company to acquire any of the attractive opportunities in today's depressed uranium market.
The company's operations
Simply put, UEC is a uranium company with operations in the United States as well as Paraguay. The company's flagship project is the economic Goliad uranium mine which is currently under construction. Production will be available within the current fiscal year. Burke Hollow, the company's second largest advanced stage ISR project, is also being advanced toward production. Moreover, the company has several earlier stage exploration projects, as well as the producing Palangana In-Situ Recovery uranium mine located in Texas.
At the time of writing, UEC has a total of 85.5 million shares outstanding (97.8 million shares fully diluted) and a market capitalization of $203.5 million. 48% of the shares are held by institutions. More importantly, 20% of the shares are held by management and insiders. The relatively high amount of insider ownership means that it is more likely for management's interest to align with shareholders. No insiders have sold any hard (non-option) shares in the past year. This high insider ownership is unique among US uranium producers.
The above mentioned news release highlighted how the company is moving proactively to the reality of lower uranium prices. This proactive approach of fiscal discipline by UEC's management team is a best practice in the industry. The news release also described how further capital expenditures in Production Areas 1, 2 and 3 will be deferred and that production will run at a slower pace in order to optimize future output. The underlying rationale is simple: instead of over-producing at Palangana today and selling the uranium into a weak market at lower margins, UEC is holding onto resources so that the company can maximize their profitability once the uranium sector begins to recover (which it will).
UEC is able to do this as the Palangana mine is an ISR mine rather than an open-pit mine. In an ISR operation, the producer injects a fluid into the ore body and extracts the "pregnant" solution out for further processing. This means very little surface disturbance, no waste rock and, more importantly, the ability to control the amount produced from the mine. The lack of the need to keep hundreds of miners moving the rock also gives ISR operations an advantage in the sense that the overhead costs are much lower. Production flexibility is the ISR advantage over conventional uranium production.
This is not to say that the company has halted expansion plans at Palangana completely. UEC has continued to advance its permitting at the other production areas 4, 5 and 6. PA-4 will be fully permitted soon. Its production will be available to come online in the current fiscal year. Moreover, the company will be optimizing its expenditures as well and reducing general and administrative costs where possible.
It is important to note, however, that most of the value of UEC does not lie in the producing Palangana project but rather in the two development projects at Goliad and Burke Hollow. We view Palangana and the Hobson Production facility as a "play opener" and a proof of the viability of the South Texas Uranium Belt. The Goliad and Burke Hollow projects combined have almost five times more 43-101 compliant resources compared to Palangana. Moreover, only a fraction of the area has been drilled and explored so far. Goliad is completely permitted for production and Burke Hollow's permitting process continues to progress as planned.
Goliad is on budget, with the processing equipment scheduled to arrive late November 2013. Production will be available to come online in the current fiscal year.
Similarly, at Burke Hollow, the other high-priority development asset, mine permits will be submitted early next year. An updated 43-101 is expected mid-2014. It will include 80 new drill holes. This is likely to expand the resources to a significant extent as the project has an independent geological report confirming a potential of 7.2M pounds. As it covers only 30% of the 17,500 acre project, it is clear there is a lot of room to grow with further exploration.
The larger resources combined with the existing production infrastructure at Hobson imply a continuation of the decrease in the average cost per pound.
Hub And Spoke Strategy
The advantage of low cost ISR mining is that UEC can align its production to the price of uranium. The higher the price, the more the company will produce. The Hobson Plant which is fully functioning can process 2M pounds of uranium a year.
As soon as both the Goliad ISR uranium deposit and the large Burke Hollow uranium mines come online, UEC will have the largest, low cost ISR producing uranium strategy in the US. Mind that the former is planned for this fiscal year already.
UEC also has plenty of exploration potential left within its other projects, though still at an earlier point in the development process.
Management has decided to divest some of the non-core assets in both the United States and Paraguay. The decision will strengthen what is already a strong balance sheet. Besides, it will help the company to focus on projects with the most growth in the future.
The Uranium Sector
We continue to believe in the strong fundamentals of the uranium market in the near future. Despite the drop in the uranium spot price, the reality remains that the world requires nuclear power as a base-load, low-emissions generating technology. Japanese reactors are being re-started by a pro-nuclear Abe government. Even countries that previously had no nuclear reactors are starting to look into nuclear power.
The current spot price is below many of the break-even prices of uranium mines, which means that mine closures and scale-backs at other uranium mines will be more likely in the near future. A robust demand combined with a reduction in supply means a higher uranium price.
American uranium, in particular, will be at a premium compared to uranium internationally. The United States imports more than 90% of its current uranium consumption. In fact, the US produces less uranium domestically than the Russians do on American soil (through the Russian ownership of Uranium One (OTC:SXRZF)). As energy security becomes a more important issue in the future, it is close to a fact that the Obama Administration would seek to increase the production of domestic uranium.
As with all resource companies, UEC has only a finite amount of resources in the ground. Therefore, the company has to balance current production with future production. Though it is capable of producing at higher levels, doing so would be detrimental to its future. Instead, the decision to conserve the resources while continuing to develop the near-term assets will increase the amount of uranium available for production as the uranium market recovers. That will positively impact future profitability.
The optimized strategy along with the concerted effort to cut general and administrative costs will be sufficient for the company near-term to develop its flagship and advanced assets Goliad and Burke Hollow. Simultaneously, the company is on the outlook to aggressively pursue opportunities in the uranium sector without adopting dilutive financing.
Former Energy Secretary of the US, Spencer Abraham, is the Chairman of the Advisory Board of UEC. He sits on the board of Occidental Petroleum and was formerly a member of the Areva Inc. board. Mr. Abraham understands the importance of uranium production within the United States. Many consider this a huge endorsement of the company.
Legendary resource investor Rick Rule, who heads Sprott USA, is part of UEC's strong balance sheet. It is also a strong sign of the upside potential. An even bigger name is Li Ka-Shing, the richest man in Asia. Both men add an incredible amount of respectability to UEC's name. Rick Rule only invests in cheap companies and Li Ka-Shing only invests in great management teams, Warren Buffett style.
Disclosure: I am long URA.
Business relationship disclosure: I have a business relationship with Rick Rule's company but not with UEC. I am attracted by high potential resource companies in (all sorts of) metals.