Ur-Energy (URG) has a lot of things to its credit - the company has a quality asset in its Lost Creek mine, expansion/growth potential with assets like Shirley Basin and Lost Soldier, and an attractive cost structure. It also doesn't hurt that Ur-Energy represents a meaningful chunk of the U.S.'s low-cost domestic supply of uranium for its nuclear power fleet.
On the other side of the ledger is a uranium market that is still in pretty rough shape. Weak prices have curtailed production and exploration across the world, but spot prices are still hovering around multiyear lows. Likewise, while there is legitimately bullish talk about the construction of new nuclear plants in China, India, and the Mideast, not as much attention is being paid to whether aging plants in Europe, North America, and Japan will be replaced. All in all Ur-Energy shares don't seem overpriced today, but the risk-reward isn't quite enough to get me pounding the table to buy.
Low Cost Production Here At Home
The nuclear power plants of the United States consume about 55 million pounds of uranium a year, but U.S. mines produce less than one-tenth of that amount. Politically friendly countries like Canada and Australia are large global producers (about one-quarter of global supply), but much of the rest comes from countries like Kazakhstan (38%), Niger (8%), and Russia (6%) that don't necessarily feature prominently on lists of our stable, friendly trading partners.
In my opinion, that sweetens the pot a bit for Ur-Energy, as the company's current producing mine (Lost Creek) is located in the mining-friendly state of Wyoming and the company's expansion / exploration projects are all in the U.S. or Canada. Lost Creek is a sizable asset, with a resource base of 8.65 million lbs (measured and indicated) likely to support at least 800K lbs of production a year for more than 10 years.
Ur-Energy is building its business around in situ recovery (or ISR, sometimes also called in situ leaching). This approach involves pumping a solvent or leaching solution into holes drilled into/through the ore deposit, letting that dissolve the ore, pumping it back out, and then concentrating and processing the U3O8 out of the solution. The ISR approach is well understood and used by other miners in the U.S. like Cameco (CCJ). Better still, it's a pretty economical mining process when the geology allows it; economic assessments of the Lost Creek mine have suggested cash production costs in the neighborhood of $21/lb.
Will Enough Demand Materialize?
One of the biggest issues for any mining company is the long-term outlook for the price of the commodity in question. In the case of uranium, there is a great deal of debate about future demand. While there are more than 430 reactors around the world classified as operational, 382 are currently operating. If the idled reactors go back on line and all of the reactors currently under construction or in advanced planning get built, it could double the annual uranium demand by 2020.
On the other hand, years of mine openings and expansions have increased supply, and prices of uranium on the spot market have fallen by more than half since Japan's Fukushima Daiichi accident. With that accident, several European countries (most significantly Germany) have decided to scale down and/or abandon nuclear power. It's also important to note that the nuclear plant fleet in the U.S. and much of Western Europe is getting long in the tooth, and it is very much up for debate whether there is the political will to permit replacement plants - meaning that a lot of plants could be closing in the not-so-distant future (the next 10-20 years).
Cost is another factor that looms large. Nuclear power has never proven to be as cheap as hoped, with an adjusted cost of around $80 to $110/MWh. That's $10 to $20/MWh more than wind and about $25/MWh more than natural gas. With solar prices about $40/MWh higher than nuclear, but coming down quickly, there is at least a credible chance that alternatives like wind and solar will become the replacements for those aging nuclear plants.
Ur-Energy does have some protection here. The company has long-term supply agreements with utilities covering about one-third to one-half of its anticipated production, and those agreements were struck at favorable prices (the company sold 90K lbs in the fourth quarter at almost $63/lb). Even if sell-side analyst projections of long-term uranium prices above $70/lb prove too bullish (as I believe will happen), Ur-Energy has some pretty good downside protection locked in today.
Multiple Growth Opportunities
Talking about expanding uranium production today seems a little strange, particularly as Paladin Energy (OTCPK:PALAY) just put its Kayelekera mine on care & maintenance, but Ur-Energy does have some near-term growth prospects.
The company's acquisition of Pathfinder Mines from Areva brought it the Shirley Basin mine, a formerly producing mine that had 10 million lbs in resources at an average grade of 0.2%. The nature of this deposit is amenable to ISR production and this property also holds one of the four fully licensed and operational ISR byproduct disposal facilities in the country. Ur-Energy was able to change the terms of the buyout agreement with Pathfinder such that about half of the consideration will come in the form of gross royalties from Shirley Basin until the balance (around $6.6 million) is paid.
Beyond Shirley Basin, Ur-Energy also has the Lost Solider property about 14 miles northeast of Lost Creek. While today's prices don't argue for putting this mine into production today, the close proximity to the Lost Creek facility would be good for maximizing the existing concentration/production infrastructure.
Not Overpriced, But Not Enough Of A Bargain Yet
Sell-side analysts think that Ur-Energy shares are worth about $1.70 today, including Canadian analysts that Yahoo! Finance often excludes in its calculations. Many of these targets are based on long-term uranium price estimates of $70/lb or more and discount rates of 8%. I think the former is too high and the latter is too low. I can go along with long-term prices in the $60's (current long-term contracts are going for around $50/lb according to information on the company's website), but I use a higher discount rate of 10%. The result is a net asset value estimate of $1.50 per share today.
The Bottom Line
If you are bullish on the future of nuclear power around the world and bullish on uranium prices, you'll most likely disagree with my rejection of $70-plus long-term prices. If you are that bullish on uranium's future, I would agree that these shares are cheap enough to be an attractive buy candidate today.
Considering the move over the past year though, not to mention the recent devaluation in Kazakhstan and the prospect of that country increasing production by 25% to 35% if prices improve, I'm not as bullish. I like Ur-Energy's low-cost U.S.-based assets and I think the management team is solid, but I'm not bullish enough on uranium today to be a buy of Ur-Energy shares at today's price.