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It has come to my attention that my most recent article about (URRE) contained a fairly glaring math error in the analysis of a net present value of the company’s uranium reserves. In the article, I wrote:

On a net present value basis, URRE’s valuation appears to be even more heavily discounted. If we conservatively assume that the long term uranium price will be $80 per pound , the total lifetime revenue provided by URRE’s assets would be $42 billion. Assuming a long term net margin of 30% (which I believe to be easily achievable given production costs of $30/lb), the total earnings provided by URRE’s assets would be about $12.5 billion. Assuming a 25 year development timeline for these assets and a risk-free interest rate of 6.5%, the net present value of URRE’s future earnings would be approximately $2.6 billion dollars. That represents a significant premium over the current market capitalization.

I made an obvious error regarding the placement of the decimal, because 53 million pounds of uranium prices at $80 per pound would yield a lifetime revenue of $4.2 billion, not $42 billion. Therefore, the net present value of earnings given the same assumptions listed above would be $260 million, not $2.6 billion.

Based on this information, it is obvious that URRE is currently priced much more aggressively than my above valuation given the assumptions above. In fact, if we assume long term net margins of 30 percent as per the above model, than we can calculate that URRE is currently pricing in the full development of 91 million pounds at $100/lb. This would yield revenues of about $9.1 billion and total future income of about $2.7 billion. Given a 6.5 percent risk free interest rate and a development term of 25 years, the present value of these earnings is about $565 million, which is only slightly above the current market cap of $520 million. Therefore, URRE appears to be priced only slightly below its reserve base at a long term uranium price of $100.

In light of this correction, I am evaluating my current position to determine whether or not there is still significant upside left in URRE. On the one hand, URRE’s reserve base still appears to be undervalued when compared to the valuation of reserves in some recent acquisitions in the uranium sector. On the other hand, URRE certainly does not appear to have much margin for error at current uranium prices. In the end, it all comes down to ones expectation’s about the long term price of uranium, and that is an exceedingly difficult thing to forecast. I am going to review some recent uranium acquisitions to try to glean more info before I make a determination here. URRE doesn’t seem to be wildly overvalued given the spot uranium price, but the stock is certainly not without risks.

Update: Yesterday afternoon I decided to sell URRE at $9.99. Given my corrected valuation for URRE’s reserves, I no longer felt that the stock provided a significant margin of safety at current prices. In addition, after looking over URRE’s chart, I’ve noticed a disconcerting pattern of lower highs and lower lows over the past month. After peaking at $10.94 on 17APR, the stock only managed to climb back to $10.28 a week later and has failed at the $10.19 mark twice over the last few days. (Note: Use a candlestick chart to see this trend) Given this somewhat ominous technical sign as well as the limited margin for error in the stock, I’ve decided to take some small profits and cut my risk over the short term. I may revisit URRE at a later date if it presents a buying opportunity, but I would like to see the stock break through the resistance around the $10.20 level first.

URRE 1-yr chart


Source: Uranium Resources: Not Worth the Risk