Uranium Energy: The Miner Most Vulnerable to Nuclear Worries

Mar.18.11 | About: Uranium Energy (UEC)

After a brutal sell-off in uranium mining shares earlier this week following the ominous developments in Japan, uranium miners caught a break Thursday as many staged sharp recoveries. Uranium Energy (NYSEMKT:UEC) led the way with a forceful 11% rally to $3.84. Uranium Energy's shares are still down almost 50% from their 52-week high; however, they are also well above the 52-week low at $2.11, and they are far above the 50 cent range that Uranium Energy shares traded in several years ago. Then again, Uranium Energy shares may soon be returning to old lows.

The company faces several problems, the first of which is the broad decline in the uranium market. Uranium for the past two decades had traded at $10 or $15 per pound. Suddenly, the price spiked beyond $100/lb in 2007, fell back toward $40/lb shortly thereafter, and had just begun to recover in late 2010. The recent nuclear accident in Japan has taken the wind out of the uranium market, with prices falling sharply.

This problem, of course, could turn around to some degree if a wider nuclear disaster is avoided. This hopeful outcome looked increasingly likely as of Thursday. That said, the nuclear industry will be impacted through at least the medium-term, as many countries will be reticent to build new nuclear plants and some old plants will be prematurely shuttered.

Uranium Energy's other two problems are company-specific, and will stop the company from fully participating in a wider uranium recovery should it occur, as many speculators are betting. Uranium Energy will be badly hurt by its status as being probably the most environmentally-controversial uranium company operating in the United States.

A digression is in order here. I was a columnist and editor with the Rocky Mountain Collegian student newspaper in Fort Collins, Colorado. During my time there, a small Canadian mining firm, Powertech Uranium (OTC:PWURF) tried to open a uranium mine in the prolific Front Range uranium deposit 10 miles from where I worked. I publicly advocated for Powertech's permit to be approved after researching the company and its in-situ leaching (ISL) method of extracting uranium. However, environmentalists have been able to halt the mine and just about kill Powertech with their anti-ISL rhetoric, despite the lack of any solid evidence that Powertech's mine would pose a threat to anyone.

The basis of the environmentalists' alarming rhetoric? Uranium Energy's controversial Goliad project. During the course of my research on Powertech, I found no less than seven articles raging about Goliad's ill effects on both human health and the environment as a whole. To put it simply, Uranium Energy is the poster child for everything environmentalists hate about uranium mining in the United States. Whenever people bring up ISL mining, opponents immediately start talking about Goliad.

Uranium Energy's Goliad project has been accused of violating the Safe Water Drinking Act, and local residents near the project filed a lawsuit against the company for destroying their groundwater. The lawsuit was later dismissed, but the perception of problems remained. Goliad County itself also sued the company. The company had appeared to overcome the bad press, as recent legal decisions had been in Uranium Energy's favor, as this article shows:

The commissioners’ decision [to approve the permit] comes despite an administrative law judge’s recommendation in September that further tests be conducted to determine whether mining could cause contaminants to seep through a fault line and into an aquifer used for drinking water

Under questioning Tuesday from commission Chairman Bryan Shaw, Judge Richard Wilfong clarified that such tests are not necessary until UEC seeks permits to mine closer to the fault line. The company’s permit covers an are about 2,000 feet away from the fault, said Monica Jacobs, an attorney for UEC.

However, the county may still file a lawsuit against the project, and the EPA could also intervene. And given what has happened in Japan, the odds of more opposition are on the rise. Notice the quoted section above. Uranium Energy's proposed mining area is right next to a faultline that, if breached, could allow uranium to seep into an aquifer. Given that the Japanese disaster was a combination of an earthquake and a nuclear accident, it is hard to see already-bitter local residents looking on Uranium Energy's proposed project any more fondly, given recent developments.

The article also reported this:

UEC has maintained that area water wells already showed levels of radioactive elements making the water unsafe for drinking. Opponents claim the contamination was caused by exploratory wells drilled by mining companies in the past.

When people are out-of-their-minds scared of nuclear power and of radioactivity, you don't want to be investing in companies that face this sort of public relations headache. I don't know whether Uranium Energy and/or previous mining companies were responsible for spoiling the ground water or not, but I do know that in today's environment, residents are going to blame and sue first, and ask questions later. When the entire nuclear industry is facing a crisis of confidence, you don't want to be betting on a company facing this sort of PR nightmare.

The third problem for Uranium Energy is that its balance sheet is not particularly strong, and its current production is very small; it is not capable of withstanding the loss of Goliad, should environmentalists get the upper hand. Uranium Energy did successfully open the Palangana mine recently, but its targeted production is only 1 million pounds, whereas Goliad is supposed to produce nearly seven times that.

Palanaga is not nearly enough to justify Uranium Energy's market cap, so investors face sharp losses ahead if Goliad is derailed by motivated opposition. With only 56 cents a share of cash on the balance sheet and a high cash burn rate, Uranium Energy's share price will rapidly decay if the company cannot get Goliad open in a timely fashion. For more analysis of Uranium Energy's problems, both environmental and financial, read this report from Citron Research.

A lot of speculators are treating all the uranium stocks as interchangeable trading vehicles. This is a terrible mistake. Some players have solid balance sheets and large revenue streams (Cameco (NYSE:CCJ) and USEC (USU) both generate $2 billion a year in revenue), while others such as Uranium Resources (NASDAQ:URRE) and Uranium Energy have virtually no revenue. If the nuclear industry faces an extended slump, the explorers will be wiped out while the established players will entrench, survive, and eventually gain market share.

With regulators likely to come down hard on all new proposed projects for the time being, it makes no sense to be investing in exploration and development plays when companies that already generate large revenues have suffered similar beatdowns in their share prices. If you wish to bet on a uranium recovery, stick to a Cameco, USEC, or other player with large revenues. On the flip side, Uranium Energy looks like an interesting short sale with the thesis that the Goliad project, which had been on track for approval, now gets delayed or blocked altogether.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.