Entering text into the input field will update the search result below

Ur-Energy: Even More Perfect Opportunity

Oct. 16, 2014 2:50 PM ETUr-Energy Inc. (URG)
Jan Svenda profile picture
Jan Svenda's Blog
1.93K Followers
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Summary

  • Recent sell-off created a no-brainer out of this junior mine in Wyoming. Irrationality prevails in the uranium market, despite great news.
  • Spike in the spot price could start off increased production, while long-term contracts are providing sufficient downside defense.
  • Market valuation of the company includes an unfeasible risk discount, a sign of a contrarian play, making Ur-Energy a strong buy.

I do not want to talk too much about the circumstances of the uranium industry as I wrote quite a lot about that in the preceding article. The only thing I would like to point out is that, since I published the article, there has been mostly good news about the outlook for the industry as a whole. The only murky event was the public protest against nuclear energy in Japan, but this issue has already been tackled in my previous article; the protestors will not impact the governmental decision. Of the good ones, I would like to mention the India-Australia deal, which will to some extent take Australian supply out of the market, while demand remains intact. Secondly, there is the spot price surge, which is now stabilized at 35.60$ per pound. Thirdly, this annual report from the Japanese NSR shows that only one of the major facilities has any security concerns, whilst every other facility is proceeding swiftly with inspections. Lastly, the aftermath of the Ontake volcano eruption, which sadly took the lives of many innocent people last month. Despite sparking an initial scare about the restarts, the government reiterated that they will proceed with the reopening of the reactors. You can see that the policymakers will not change their mind easily and will continue to push demand up.

It is clear that the future outlook has been strengthened by a couple of events, this was totally overlooked by the markets as we saw a major sell-off of the uranium stocks. That is why I want to focus on the share price of URG and perform a simple and conservative valuation, by which I will show that these price levels are not feasible for Ur-energy (URG). We have to bear in mind that this a company that already produces uranium, has significant recourses, very low U3O8 production cost and contracts that are priced way above the spot price. This valuation will be focused solely on the only producing mine, which is the Lost Creek project. Note: I will be approximating a lot, tens of thousands do not affect my main point.

Lost Creek has almost 9.2 million pounds of U3O8 measured (proven) and indicated (highly likely to be proven). This year URG already extracted around 500k pounds, so therefore we will count only 8.7 million pounds. Now, 1.1 million of U3O8 can be priced by their long-term contracts as said in their presentation, but URG already sold 300k of pounds in 2014, therefore we can price only 800k pounds at an average of 50.60$ per pound and the rest (7.9 million) at the most recent spot price, which is 35.60$ taken from UXC pricing. From this revenue we will deduce all-encompassing mining costs of 29.10$ per pound - as found in this PEA. This gives us the following breakdown.

This leaves us with a profit of 68.6 million $, which accounts for approximately 67% of yesterday's market cap. For the rest of the capitalization, we will value the Shirley Basin project (7.5 million pounds of measured U3O8) at a price of 4.6$ per pound (net profit), which gives us a following comparison to Lost Creek; a pound of U3O8 in the Lost Creek mine is valued at approximately 7.6$ that gives us difference of 3$ per pound or 39%, which is the discount for the mine not being active yet. This is a very conservative discount and I would argue that there are not many significant risks (the only major being the spot price of the commodity) with the opening of the new project, as URG is very skillfully managed.

We have to bear in mind that this valuation neglects its two other US projects, which the balance sheet values at 13 million $. Lastly this valuation omits the capital assets of URG (buildings and enclosures), which account for another 32 million $. That gives us 45 million $ totally unaccounted for, but of course we need to take into account liabilities in the form of debt and environmental cost for the company. Summed up together, the liabilities will offset the unaccounted amount.

This makes the valuation at first sight a fair value, but if we look at the discount applied at Shirley Basin, we could spot a typical contrarian sign - the market over-discounting risk. Moreover, the commodity price upward movement will further enhance this argument. I do believe that this straightforward thought process is enough to show URG for the 'undervalued' (now for the short-term as well) gem that it definitely is.

In the end, I would just like to look at the recent sell-off, which is supported by two facts. First of all, the stock has broken its one year support of 1 $ and is now left without a serious support until roughly 63 cents, which is a three year low. Secondly, the industry is still hated and will remain as a contrarian play until continued good events yield the first restart of a Japanese reactor, now aimed at March of 2015. For the time being, if the stock continues to get hammered, which is quite likely (overall this is a high-beta stock that finds itself in a tricky time for the general markets), I would recommend buying at unprecedented levels, because future downward movement would only further fuel my already strong argument.

Analyst's Disclosure: The author is long URG.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.