Uranium Stock Uranerz: On Fire, With More Upside Expected

Many investors are scared of Uranerz (URZ) because it more than doubled in a mere 28-day period. In spite of that spectacular run, it would be unwise to write off this stock as having gotten ahead of itself. The dramatic gains were produced by the combination of skyrocketing uranium prices, the end of a long term bear trend and the beginning of the next bull trend. Given these extenuating circumstances, URZ may have some room to run once the current correction is over.

That said, exactly when should you buy URZ?

The strict technical analyst would wait to buy until about 105 % of the mid-October pivot [when the bear trend ended at 1.40] at 2.87.

However, fundamental analysis strongly suggests that the stock is an excellent opportunity at its current price of 3.69.

URZ 1-yr chart

The uranium market is on fire and by all accounts will stay on fire for the foreseeable future. Today's price of $63/lb means huge margins for miners, and experts expect the price to top $100/lb some time next year. Furthermore the price is likely to keep rising because the nuclear power plants that use uranium are insensitive to price, as it is such a small cost in running a nuclear plant. All this means a bright future for uranium miners.

Uranerz expects to start production by 2010, and will initially produce approximately 750,000 lbs/year at cost of $30/lbs. At today's prices that means operating profits of $24.75 million. Overhead, as well as selling and general administrative costs, cannot be accurately predicted, but an extremely conservative estimate would be 10 % of revenues. This means that at current uranium prices Uranerz would earn $22.28 million per year. In other words, URZ's is trading at a 5.67 P/E for its 2010 earnings. However, that is at today's prices. Uranium prices are likely to top $ 100 in the next year, and by 2010 they could be much higher. Given that uranium prices are $100/lb in 2010, a conservative estimate of profits for Uranerz in that year would be $52.5 million, which would put its P/E for 2010 at 2.41. This is a much more likely scenario than the previous scenario with Uranium prices at $63 per pound, and by 2010 prices are likely to exceed even $100. All of the above calculations have been with extremely conservative estimates; therefore this calculation leaves plenty of room for error.

Not only does Uranerz have impressive earnings prospects, but management is extremely experienced in the industry, and most of the Uranerz team worked at the Uranerz division of Cameco (CCJ) previously. Uranerz also has a strong balance sheet and no debt.

Finally, although Uranerz is an attractive fundamental investment at current levels, a private placement of 15 million shares will become unrestricted, and will be trade-able at an undisclosed time in the next few weeks. This development will likely cause significant downward pressure in the short term. After the stock has taken a dive, URZ will present a truly extraordinary buying opportunity. A long term investor unafraid of some risk would do well to consider parking some capital in Uranerz.

Capital expenditures to start production are estimated by Uranerz to be between $20 and $40 million, and analysts believe this is an extremely conservative estimate.

Disclosure: Author has no position in URZ

Comments

[Geoff Demming:]

I found this article quite dull, you have simply just reiterated what we already know. Either way URZ is having a nice break today from its recent correction

2006 Dec 11 12:15 PM

[PA:]

Motley Fool basically thinks URZ is "junk" when looking at the company, its fundamentals and management. I'm curious to know why URZ's management didnt respond to Motley Fool's damaging article... as follows

most toxic-looking are based in Canada and trade on the AMEX.

Uranerz Energy (AMEX: URZ) is perhaps the most baffling of these. This stock has quadrupled over the past year, yet this is a company with $0 (that's zero, zilch, nada) revenues. What it's got going for it is various claims for uranium properties in various locations across the globe -- often acquired for such negligible amounts that you have to wonder just how promising they are.

And even the Uranerz filings note that it has never earned revenues and can't be assured of getting any of its claims (in places like Mongolia, for instance) to the operational stage.

The filings also note that there's enormous lead time to get any of these claims up and running -- if they should prove economical -- and that the company lacks the money to bring them to the commercial stage. The latest Q3 10QSB even raised doubt as to whether the company can even continue as a going concern.

So, no revenues. Burning cash. Why on earth is this stock rising?

Who knows? I suspect much of it has to do with self-promotion. It's pretty frequent with the PR, and this is the keynote on the company's website: "Uranerz Energy Corporation is the only pure-play uranium company listed on the American Stock Exchange (symbol URZ)."

But I suggest investors treat it as if it's radioactive.

In cases like this, where we can count on no revenues or profits, and are basically asked to trust management to make good things happen in the future, I find it especially instructive to look into the past. What's the track record for other publicly traded companies in the histories of management and directors? In the case of Uranerz, investors have more to fear.

According to the filings, Uranerz's chairman, Dennis Higgs, is the CFO at Miranda Gold, a company that (according to my information from Capital IQ) has not earned any revenue since at least 1999. (Several other members of Uranez's advisory board are also Miranda Gold alums.)

The resumes of other managers and directors include stocks such as Asia Payment Systems, Manaris, China World Trade, and Lincoln Gold Corp.

If that's not enough to give you second thoughts, dig deeper. The filings (check out page F-11 in the recent 10-QSB) reveal a nest of related-party transactions that ensure that managers and directors get plenty of company business (via consulting fees and other deals) while investors foot the bill.

Of course, none of this is proof that Uranerz can't succeed, but I have to believe that if the future were as bright as market action implies, managers and directors wouldn't be shedding shares at the pace they have been over the past couple of months.

2006 Dec 15 01:32 AM

[Patrick Bre...:]

The Fool strikes me as dreadfully out of touch on this one as it's substantially riskier than the types of investments the Fool touts. A company that is exploring for minerals does not generate revenues until it starts mining. Duh. The principles sold their previous uranium concern to Cameco for $485m. They are relatively experienced and seem to have assembled some promising assets. I would frankly steer Fool investors away from Canadian mining juniors as they certainly are risky.

2007 Jan 03 12:52 AM