During the recent market turmoil, we have noticed investors discounting everything, including that which has already been marked down. We tend to shy away from being heroes or attempting to catch falling knives, however, buying when there is blood in the streets has always provided great entry points. At this point in time, we feel the uranium mining shares have bled enough and now offer investors an interesting speculative play with significant upside potential over the next 12-24 months.
It has been our belief over the past 5 or more years that uranium provided a unique investing opportunity as the BRIC countries built up their civilian nuclear facilities and brought their populations firmly into the 21st Century. That is the long-term trend as we still see it. The short-term trade hinges on Russia, and after what China has done with the rare earths one must believe Russia will use their might to influence the market.
How will they do it? Simple, the Russians will pull their Highly Enriched Uranium [HEU] off of the market once the current ‘Megatons to Megawatts’ program runs out (it runs through 2013). This will cause U.S. utilities to either buy more uranium quickly or burn through their stockpiles which are already low. Currently the Russians supply somewhere around 10% of the US’ uranium needs. The world already consumes more uranium than it can currently produce, and the situation will only get worse as more nuclear plants come online, so that 10% will be a problem for the US to fill overnight.
For those who do not remember, 2002 was the last time major changes were made to the agreement, and in 2003 both the US and Russian governments allowed for market pricing. This lifted the artificially low floor for the market and telegraphed to the world that the Russians were in this to make money, not to simply dismantle warheads. Check out a price chart for spot U3O8 prices between 2002-2005 and the significance can quickly be quantified.
Also supporting our thesis is that Russia AND China are both trying to buy uranium projects currently under development to add to their already robust project portfolios. Their focus has been on Asian and African assets, which offer properties either currently producing yellowcake or short lead times to production. The most recent proposed acquisition in the space, of significance, would have Cameco buying Hathor for about $520 million in cash.
For US investors, there are a few ways to play the theme on the reputable American exchanges.
Cameco is the largest uranium mining company investors can invest in, and largest public company focused on the industry. CCJ has the world’s richest mines and deposits located in Canada’s prolific Athabasca Basin, however they also have unique operating hurdles to bring, and keep these properties online. Cameco had revenues of $2.1 billion in 2010 with $515 million in earnings, dwarfing many of the world’s smaller producers and certainly all of the junior explorers. Cameco produced almost 23 million lbs U3O8, up over 10% from the prior year and the company has plans to take production up to 40 million lbs U3O8 by 2018.
Although not our favorite way to play the sector, the company has long-term contracts which insulate the company from the market’s ups and downs. Cameco has downside exposure on the top line and bottom line when the Russians cut off the flow of the easy uranium as they are one of the parties who buys and sells within the framework of the agreement (according to the company’s latest corporate fact sheet they have secured over 83 million lbs over the years). If CCJ can ever get Cigar Lake up and running, they will reward many investors who have had the faith (blind faith maybe) to continue holding the shares.
Cameco is doing something we have been waiting for since we began covering the uranium industry. They are purchasing a company outright and going hostile to do it. This indicates to us that any deposits in the Athabasca Basin which are not owned by the big players (Cameco or Areva and possibly Denison) could be potential takeover targets for CCJ. CCJ possesses the expertise to mine in that area (even though they have had their own shortcomings), and has decades of experience with the area, thus buying juniors makes sense.
Uranium Energy Corp. (UEC)
UEC was the first US uranium junior into production. They have excess capacity at their plant and will continue bringing their various mines online. The company maintains a strong balance sheet with $33 million in the bank. Based on the company’s 3rd Quarter numbers, investors can expect the company to be a low cost producer of U3O8 (cash operating cost is around $15/lb.). Management owns about 22% of the outstanding shares and the overall float is respectable @ 73.4 million (86.4 million on a Fully Diluted basis). Investors can look forward to the company bringing more of its properties into production, starting with the 3rd phase of the Palangana ISR project in September.
Ur-Energy was recently granted the final NRC license they required to move forward with their Lost Creek project. Although a major milestone, it is our understanding they still require a few more permits from other agencies in order to actually get into construction and build their plant and facilities.
URG has 103.6 million shares outstanding, with 109.4 million fully diluted. Like UEC, the company has a strong balance sheet with C$31.4 million as of 6/30/11 (there is no debt). Operating costs for Lost Creek should be about $20/lb according to the 2011 Preliminary Assessment.
We think that although there is an approximately C$4-5 million difference in what the company has on hand and the actual cost of the project that they can fund it either through a secondary, debt offering, line of credit, or production off-take agreement. The company will also have the opportunity to allow others to lease production capacity at its plant. Once URG ramps up production, investors could be greatly rewarded as they will be in full production when the ‘Megatons to Megawatts’ program ends.
Uranerz Energy (URZ)
This company was a day trader favorite. Uranerz, like URG, has properties in Wyoming. Unlike URG, but similar to UEC, URZ will employ a hub and spoke development plan. One plant, many production centers. URZ began mine construction in Q3 2011 and expects to reach production in the 2nd half of 2012. The company currently has $44 million in their treasury, and at publication of this article had announced a $100 million shelf offering of various instruments, as reported by Briefing.com. Also adding credibility to URZ is their long-term off-take agreement with Exelon. Nichols Ranch, the flagship property, has initial production expected to be between 600,000-800,000 lbs U3O8 with maximum annualized production levels around 2 million lbs U3O8. The project will have a production life of 5.25 years and an operating cost of $24/lb. If you include taxes and royalties this figure is $35/lb, which gives investors a much more accurate figure. With the float around 77 million shares outstanding, the company could provide investors a sharp bump up should U3O8 prices rebound.
Denison Mines Ltd. (DNN)
Once Denison finally puts it all together, investors will be able to reap the rewards of the company’s crown jewels. The company is involved in the mining and milling of uranium in North America (with significant vanadium production). It has always been our opinion that Denison was either a buyout candidate based on its infrastructure or a purchaser of mines based upon that same infrastructure. The company possesses many keys, maybe too many, yet we are still waiting to see how management uses them.
Although the company is currently unprofitable, they have production of uranium and vanadium (a by-product of their U3O8 production). The company continues to return great results from their drilling at their Wheeler River project (which hosts the Phoenix Zone deposit). DNN expects uranium sales to total about 1.2 million lbs. According to their press release dated August 4, 2011 we can expect vanadium sales in 2011 to be 1.7 million lbs.
As all of these companies either possess U3O8 production or have near-term production horizons, any uptick in the spot market will get these stocks moving higher. One must remember that long-term most new projects require $60/lb U3O8 prices simply to breakeven, so if the world wants uranium, prices must go higher. With the low cost production or planned production these companies have, higher U3O8 pricing will yield fatter margins on the income statements and fatter wallets for investors.