Ur-Energy's Production Model Offers Attractive Margins

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 |  Includes: UEC, URG, URZ
by: Michael Filloon

As uranium companies are gearing up for the impending uranium shortfall, junior miners look to get in the game. There have been large moves in the uranium miners. This has been caused by tighter spot markets. This is from countries trying to buy as much uranium as possible before the price goes higher.

The spot market over the past few months has increased from $40 to $68 per pound. Sources on uranium prices here and here are stating prices are going higher as what the buyer will pay and what the seller will take is getting farther apart. The last time the uranium price moved this quickly the price hit $137. There are several reasons for this move:

  1. Countries with a growing middle class have started to stockpile inventories.
  2. Russia is not signing a HEU-2. The HEU-1 is the decommissioning of nuclear missles and the warheads are broken down into uranium concentrate for reactor fuel.
  3. Most important - the world's population is getting larger and the world needs more electricity. This need is getting large enough to cause worries as to how long other fuels will last.

Several junior uranium miners have begun to emerge. They are Ur Energy (NYSEMKT:URG), Uranerz (NYSEMKT:URZ) and Uranium Energy (NYSEMKT:UEC) just to name a few. Historically junior miners will outproduce larger, more developed companies in a commodity bull run. This is because they can increase production (or in this case start producing) much faster on a percentage basis than companies like Cameco (NYSE:CCJ). If these four are placed in a graph you will see a very large outperformance with respect to share price. These stocks are not for the faint of heart, as seen in the last recession. Of the three junior miners, the stock that has outperformed in the short term has been Ur-Energy. This is not to say that this company will continue to outperform, but I have found that smart money travels to the best. Since I have decided it is easier to make money following the trend, I will continue to do this until the chart changes. It should be noted that all three look good fundamentally, and I do not believe it will change anytime soon.

Ur-Energy has $34.7 million in cash and an additional $3 million in expired stock options. There is no debt. This money should carry the company into production, hopefully avoiding reissuing shares and eroding stock value. 40.5% of the leaseholds are in the United States, 32.8% in Canada, and the rest located elsewhere. United States positions seem to be of new-found interest. The discontinuing of HEU conversion to nuclear fuel could put a large dent in inventories. It is rumored Rosatom's head Sergei Kiriyenko has told US utilities there will be no HEU-2. Currently the United States produces only 7% of the total uranium needed to run all of their nuclear reactors. United States production has suffered with the low uranium price. U.S. production has decreased 17% from 2007 to 2009. It is estimated from 2009 to 2019 the United States utilities will use almost 261 million pounds of uranium.

More importantly, the average price of uranium purchased went for $45.86 per pound. Just a couple of years ago it cost Denison Mines (NYSEMKT:DNN) almost $60 per pound to produce. Cameco's production costs are so low because most of their assets have very high uranium concentrates. Since Ur-Energy doesnt have as high concentrations, they had to find a mining technology to increase margins. Ur-Energy uses In-Situ Recovery uranium mining. Due to the lower concentrations of uranium in the Wyoming ground, this production method must be used to assure profitability.

A general description of In-Situ Recovery uses a water solution pumped through the uranium wells. This solution breaks down the uranium and washes it to a nearby production well. The uranium solution is then sent to the nearby processing plant. The process in environmentally sound and cost effective.

Ur-Energy has run up in price faster than some other non-producers. The reason is they will probably start production this year. Lost Creek has 9.8 million pounds of indicated uranium oxide. They have another 1.1 million pounds of inferred. Their pump tests showed good porosity, which is helping with cost savings. This site is economically feasible with the price of uranium oxide at $40 per pound. Worst case scenerio has Lost Creek producing 6.5 million pounds through the life of the mine. Lost Creek has an on site central processing plant that helps decrease costs. Production life is seven years, with the plan of developing adjacent properties. This could add up to 24-28 million pounds of uranium oxide. The Lost Soldier measured and indicated resources add an additional 12.2 million pounds and 1.8 million of inferred.

It seems that the price of uranium is not only sustainable, but it could go higher. Inventories are tight because utilities are worried there will not be enough fuel. This probably will get tighter through 2015 as there are very few large production increases from major miners coming to market. Ur-Energy offers low cost production, mining locales that are uranium friendly, and an on-site processing plant. This coupled with production starting this year and enough cash to run day to day operations make Ur-Energy look like a good investment.

Disclosure: I am long URG, DNN.