Many investors are scared of Uranerz (NYSEMKT:URZ) because it more than doubled in a mere 28-day period. In spite of that spectacular run, it would be unwise to write off this stock as having gotten ahead of itself. The dramatic gains were produced by the combination of skyrocketing uranium prices, the end of a long term bear trend and the beginning of the next bull trend. Given these extenuating circumstances, URZ may have some room to run once the current correction is over.
That said, exactly when should you buy URZ?
The strict technical analyst would wait to buy until about 105 % of the mid-October pivot [when the bear trend ended at 1.40] at 2.87.
However, fundamental analysis strongly suggests that the stock is an excellent opportunity at its current price of 3.69.
URZ 1-yr chart
The uranium market is on fire and by all accounts will stay on fire for the foreseeable future. Today's price of $63/lb means huge margins for miners, and experts expect the price to top $100/lb some time next year. Furthermore the price is likely to keep rising because the nuclear power plants that use uranium are insensitive to price, as it is such a small cost in running a nuclear plant. All this means a bright future for uranium miners.
Uranerz expects to start production by 2010, and will initially produce approximately 750,000 lbs/year at cost of $30/lbs. At today's prices that means operating profits of $24.75 million. Overhead, as well as selling and general administrative costs, cannot be accurately predicted, but an extremely conservative estimate would be 10 % of revenues. This means that at current uranium prices Uranerz would earn $22.28 million per year. In other words, URZ's is trading at a 5.67 P/E for its 2010 earnings. However, that is at today's prices. Uranium prices are likely to top $ 100 in the next year, and by 2010 they could be much higher. Given that uranium prices are $100/lb in 2010, a conservative estimate of profits for Uranerz in that year would be $52.5 million, which would put its P/E for 2010 at 2.41. This is a much more likely scenario than the previous scenario with Uranium prices at $63 per pound, and by 2010 prices are likely to exceed even $100. All of the above calculations have been with extremely conservative estimates; therefore this calculation leaves plenty of room for error.
Not only does Uranerz have impressive earnings prospects, but management is extremely experienced in the industry, and most of the Uranerz team worked at the Uranerz division of Cameco (NYSE:CCJ) previously. Uranerz also has a strong balance sheet and no debt.
Finally, although Uranerz is an attractive fundamental investment at current levels, a private placement of 15 million shares will become unrestricted, and will be trade-able at an undisclosed time in the next few weeks. This development will likely cause significant downward pressure in the short term. After the stock has taken a dive, URZ will present a truly extraordinary buying opportunity. A long term investor unafraid of some risk would do well to consider parking some capital in Uranerz.
Capital expenditures to start production are estimated by Uranerz to be between $20 and $40 million, and analysts believe this is an extremely conservative estimate.
Disclosure: Author has no position in URZ