Why Ur-Energy Could Be A Very Attractive Play

Jul. 1.14 | About: Ur-Energy Inc. (URG)

Summary

Outlook for uranium market expected to stabilize and begin going up in next 12-18 months.

Share price of Ur-Energy tied more to uranium spot price despite long term profitable contracts.

Ur-Energy is an attractive play and expected to turn profitable in the next 12 months.

The majority of the sentiment for uranium investors with at least an eighteen month outlook is bullish. With uranium prices at an 8 year low, it may be that now is the time to load up on uranium producers. Fueling this sentiment is the much anticipated restarting of Japan's nuclear program, as well as the construction of new reactors in both China and the United States. The supply glut will gradually dissipate and the uranium spot price, currently below $30 per pound which is below the nominal price point for profitable production, will rebound. The short term outlook is still bearish but the long term outlook is bullish.

What makes junior uranium miner UR-Energy (NYSEMKT:URG) so appealing is that their sales and revenues are tied more to long term contracts than to the uranium spot price. This allows the company to be profitable despite the low spot price. The market, however, has largely ignored this often overlooked caveat of UR-Energy and the share price has been punished accordingly, presenting a lucrative buying opportunity for the serious long term investor. The current price of $1.14 per common share (as of June 30, 2014) is well below the 52 week high of $1.99 achieved on March 5, 2014 and only $.22 above its 52 week low of $.92 of August 15, 2013. I believe it is trading well below where it should be valued.

On May 22, UR Energy offered additional guidance on fiscal 2014-2015. The company announced that it had achieved sales contracts for 2014 for 518,000 pounds of U3O8 at an average price of $51.10 per pound, including sales of 110,000 pounds at a net average of $54.43 per pound in the first quarter of 2014. Additional deliveries of contracted sales are expected in Q3 and Q4 of 2014. For fiscal 2015, the company anticipates sales of 630,000 pounds of U3O8 at an average of $50.10 per pound. Thus for 2014 the company anticipates revenues of approximately $26.5 million and for 2015 revenues of approximately $31 million. With about 129 million shares outstanding, this puts annual revenue at .20 and .24 per share for 2014 and 2015 respectively. On its last 10 Q report of March 31, 2014, URG reported a loss of about .02 per share on revenue of .05 per share. URG is just around the corner from real profitability despite the extremely low spot price of uranium. As the uranium spot price rebounds above $30 per pound, the excess production can drive further profits in spot price sales to customers that URG does not have long term contracts with. Profitability may not occur until the end of 2014 or even the beginning of 2015, but it is on its way. URG further announced that there is no need to raise additional operating capital in 2014, and that cost cutting measures have been put in place at their Lost Creek facility.

Another significant factor that will propel URG forward is that insiders are purchasing shares. At the end of May, company insiders purchased 185,500 shares at an average price of $1.23 per share. Clearly the directors see the company turning the corner to real profitability very soon, which will only drive the share price higher in the future.

Of course there are significant risks associated with any junior miner. Japan's anticipated nuclear revival may be further off than expected and Europe, especially Germany, may continue to debate nuclear energy despite the ongoing crisis in the Ukraine and Russia's hold on oil and natural gas energy in that part of the world. There is also the fact that the low prices of uranium are the result of a supply glut. New and large discoveries of uranium can add to the glut, and a rebalancing of supply and demand could consequently take longer than expected. While URG is protected from this with their long term contracts, it could still cause significant delays in share appreciation. Despite these risks, however, URG is still an attractive long term play.

In summary, the share price of URG is being punished by being more or less tied to the Uranium spot price, like other junior uranium miners, despite the fact that URG has long term sales contracts that lock in pricing well above spot. With the revenue stream thus created, URG is just around the corner from real profitability. In my opinion, now is the time to accumulate shares of this attractive company at a significant bargain.

Disclosure: The author is long URG. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.