Seeking Alpha
Oil & gas, small-cap, growth at reasonable price, hedge fund analyst
Profile| Send Message|
( followers)  

Uranium Energy Corp. (NYSEMKT:UEC) is North America's newest producer. It has a $418M market cap. I have been following and trading Denison Mines (NYSEMKT:DNN) and Uranium Resources Inc. (NASDAQ:URRE) for years, but until recently knew very little about this name. I'll be honest, following the spot market through UXC.com and TradeTech.com has made every one of the uranium names look good.

Tradetech recently stated*:

January 31, 2011The spot price for uranium rose again in January for the eighth consecutive month. Thin spot supplies continue to exert upward pressure on the uranium spot price and TradeTech’s Exchange Value is $72.25 per pound U3O8, an increase of $10.25 from the December 31 Value and an astounding $30.00 from the same period last year. The market was especially active for January with 27 transactions reported for the month.The shift from a buyers’ market to a sellers’ market that began last year gained new momentum in January. A driving force behind this increase is the ambitious nuclear program in China, along with reports in recent months from several producers that they will not meet production targets. The most recent announcement reinforced this view as Energy Resources of Australia Ltd. reported on January 28, plans to shut down its Ranger facility in Australia for three months due to excessive rainfall. Sellers with inventory remain convinced of further price increases and are extremely reluctant to release material into the market. Buyers have limited opportunities to purchase with more and more sellers withholding material from the market in expectation of higher prices.

News like this is not only good for Uranium Energy Corp.(UEC), but for all the names in this space. Not only has there been a quick run up in the price of uranium, there has been a change in how it is mined. These changes have begun to reduce the cost of mining the commodity, making it possible for companies to make some real money.

Conventional uranium mining is the removal of rock from the ground in open pits or underground mines. This rock is crushed and treated. The uranium is then chemically removed. In-situ recovery is the process where uranium is recovered by dissolving it with a carbonated water solution and pumping the uranium solution to the surface, concentrating it on resin beads, and shipping the uranium-loaded resin to a plant for processing into U3O8. Not only does ins -situ recovery reduce costs (approximately $40/lb.) but it is also doesn't disturb the surface layer. Although this technology has been used for 30 years or so, it is being realized that plays within the United States are now profitable with its application. There is some bad press with respect to this method, but only because acid had been used instead of carbonated water, creating environmental issues.

Uranium Energy Corp. (UEC) is not the only company using in-situ recovery. My article on Uranium Resources (URRE) shows they are using the same process. Ur-Energy (NYSEMKT:URG) uses this also (see here). Denison Mines (DNN) is currently using the in-situ recovery and has decreased their cost to produce a pound of uranium from $66/lb. to a little over $37/lb. in one year (see here). All of these companies are currently using in-situ recovery, which reduces costs while not affecting the environment. This method is being used in the United States as it is a good match with the deposits.

Uranium Energy Corp. is the newest North American producer of uranium. They have $35 million in cash and equivalents. Uranium Energy has zero debt. Management owns 22% of the stock and another 30% are major stockholders.

Uranium Energy has an interesting view of the increased need for the production of uranium. Many know that nuclear reactor builds will increase the need for uranium oxide as a fuel source, but it takes years to build (approximately four years) and even longer when permitting (can take a decade).

The current US/Russian HEU agreement will expire in 2013. It produces 13% of the world's - and 45% of the United States' - annual nuclear fuel. One of the reasons this deal will not be extended is that Russia is planning to use their current HEU as a fuel for their reactors. Russia has said they can build reactors that run on HEU removing costly expense.

Due to changes in mining technology, the price to mine uranium will be cheaper than down blending HEU. Secondary supply of uranium has decreased significantly. In 2006, secondary supply constituted 37% of the total. Last year this decreased to 24%. By 2020, it could be as low as 7%.

The United States has the fourth largest recoverable uranium reserves in the world. 20% of the United States' electricity is produced from nuclear. It takes 55 million pounds of U3O8 to accomplish this. Many of the countries that produce uranium are politically unstable and weather can create major production disruptions. This combined with the draw down secondary supply could cause a major upswing in uranium pricing.

Uranium Energy has a very large potential for uranium production in South Texas. In over 30 years, the Texas Commission on Environmental quality has approved 31 of 31 applications. The South Texas uranium deposit covers 270 miles and 26 of 31 deposits are able to be mined through in-situ recovery. This current deposit has approximately 12 million pounds of uranium.

Their Hobsen ISR processing plant can produce 3 million pounds per year. Uranium Energy's Palangana ISR project is in production phase. This is the first ISR mine in the United States in five years. This mine is only 100 miles from the Hobsen Plant. It has measured and indicated resources of 1.057 million pounds with average grade of .135%. The inferred resource is 1.154 million pounds with average grade of .176%. Uranium Energy's Goliad ISR project will be in production the fourth quarter of this year. This is the largest ISR uranium project in Texas, with 5.4 million pounds of measured and indicated with 1.5 million pounds inferred U3O8. Their Salvo ISR project is in their drilling program. This site is 60 miles from the Hobsen plant and has an historic resource of approximately 1.5 million pounds of U3O8.

In summary, Uranium Energy is producing low cost, unhedged uranium. They are in a uranium friendly state, with an aggressive $2.5 million exploration program. They also have a fully licensed, constructed and well located processing plant. It seems this company may be well positioned to enter the market at the right time. Current resources on the spot market are starting to tighten up and it is become a sellers market. Uranium Energy will be there to take advantage of this. The United States currently imports much of its uranium. Uranium Energy wants to help change that.

*This note was copied from Tradetech.com. They have weekly uranium spot price changes with added notes on changes in uranium inventories.

Source: Uranium Energy: Helping to Decrease Foreign Uranium Dependence