It is very rare in the resource sector for a private placement to close above its current share price. This is currently the case though for Uranium Energy Crop (NYSEMKT:UEC).
Uranium Energy Corporation just closed a US$7 million financing at US$2.10 per share. The main buyer? Three institutional funds that have been looking to take a position in UEC for quite some time, took all of the financing.
Now, this normally would not have caught our attention, except UEC's share price was trading at just US$1.85 when the financing closed on October 24, 2013. This means that the funds bought US$7 million worth of UEC stock at over a 10% premium to the market at the time the financing closed.
This begs the question: Why would the big, smart money pay over 10% more for their stock at the close and over a 20% at the time of this writing?
The fund's investment into UEC is a no-brainer. As explained in our latest update on Seeking Alpha, UEC is a US-based uranium producer with a strong balance sheet and has positioned itself to increase production as the price of uranium increases. The company has gone from an explorer to a producer in a very short time, something very few uranium companies (NYSEARCA:URA) ever achieve. Roughly 1 in 3,000 projects ever become an economic mine, and UEC has beaten those odds in one of the most difficult periods in the history of resource development.
The management team is led by Amir Adnani, someone who is highly regarded by the biggest investors in the resource sector. The team collectively owns about 20% of the company, showing that they are putting their money where their mouth is.
The future looks bright for UEC: their strong balance sheet, especially within their peer group, enables them to become the consolidators for the entire US uranium space and acquire quality assets for pennies on the dollar.
The funds in this financing are definitely not the first major investors into UEC. Li Ka-Shing, the wealthiest man in Asia, as well as Rick Rule, probably the savviest junior resource investor in the world, have both thrown their money and support behind Amir and UEC. From this, it is clear that Amir has the attention of the big money in the industry. We have spent countless hours researching UEC's projects and financials, and we can see why the likes of Li Ka-Shing and Rick Rule bucked up tens of millions of dollars to support the company.
But why did the US funds pay a 20% premium from today's price? Here is our reason: once the financing was announced, the shorters in the market smelled blood and pounced. They believed that they could short the stock and cover at a much lower price if the announced financing was to fall apart, since the stock price would undoubtedly fall.
However, these shorters are about to be caught with their pants down.
We know this because we came across UEC's current report (also called the 8-K) which was posted on the EDGAR system on October 23rd, which stated that the net proceeds of the financing have been submitted to the company. Since most investors rely on press releases rather than SEC filings, and UEC has not sent out a press release since the closing of the financing, the shorters may not even be aware that the financing has been closed.
This has likely caught the shorters off-guard and presents a short squeeze opportunity. The shorters have been relentless since the announcement of the financing, shorting millions of shares since they thought that there was no way UEC could close such a large financing in a difficult environment.
The fact that UEC has not sent out a news release further added fuel to the fire; the shorters believed that the financing is falling apart.
But since the company has received the money and the financing has indeed gone through, these shorters will have to scramble to cover their positions, which could easily set off a short squeeze and send UEC's share price above the financing price.
Now it all makes sense why the funds would choose to pay 20% over the market price today. The first reason is that it would be difficult to build such a large position in such an attractive company at this price in the open market. The second reason is that the price is currently artificially low due to the shorters, a situation which will quickly right itself as the short squeeze comes in.