With recent news from Cameco (NYSE:CCJ) indicating that the Cigar Lake project might be substantially more difficult to repair than was previously announced, I'm looking hard at new opportunities in the uranium sector. I have evaluated my strategy going forward, and I believe that the best way to proceed is to put about 60% of my allocated uranium sector funds into safer bets, and divide the other 40% into junior explorers with good prospects.
To this end, I've been rumbling through the SEC filings for junior explorers in the hopes of identifying those with the best prospects. Today I'd like to do a detailed review on Uranium Energy Corp. (URME.OB), another U.S. based junior explorer. I have read through the 2005 Annual Report and all subsequent filings, as well as recent press releases, in order to get this information.
To start, the basic facts are that URME is an exploration stage company that is not scheduled to begin production of uranium until 2009 (according to the company). It has a market cap of $165 million, with 29 million shares outstanding and a float of only 6.2 million. This low float helps explain the volatility of the stock, which has shot up 250% since I began watching it back in late 2006.
URME 1-yr chart
As URME has only just begun to drill, they have very little in the way of reserve data, so valuation remains a difficult proposition. Therefore, at this stage I am looking mostly for a progression toward success and the ability of management to make good on its promises.
According to the 2005 Annual Report, URME's goal is to accumulate 50 million pounds of uranium reserves. To this end, they stated their goal to acquire 12,500 acres of land in 2006. Having reviewed all subsequent press releases and quarterly filings, URME managed to accumulate 16,038 acres for the FY2006. I am encouraged by the fact that they have achieved and exceeded their goal for acquisition in 2006, and this bodes well for meeting their goal of accumulating 50 million pounds of uranium. Of course, we won't know the reserve estimate across all properties for quite some time (i.e. 2+ years), but the acquisitions are a step in the right direction.
Throughout 2006, URME faced significantly increased operating costs, resulting in a loss of about 10 million dollars for the first 9 months of 2006. In order to finance the company, URME remains dependent on equity financing, which has resulted in significant dilution in 2006. However, URME appears to be the situation for which the equity markets were created: to provide working capital to businesses that are not yet credit worthy. Prospects appear to be good, and therefore, consultants and businesses are willing to accept stock options as a payment for services rendered.
In early January, URME was able to raise 13.5 million dollars in cash through equity financing. This is the company's largest equity financing to date, and should provide significant working capital for the 2007 exploration and acquisition plan. This is an important development, because prior to this round of financing, the company was using cash at a rate of about $1.5 million per quarter (based on Q3 2005), and had only 2.4 million in cash at the end of Q3 2006. This financing provides a stable base of funding for 2007 activities, which means that further dilution is not likely in the next 6 months. However, I do anticipate another round of funding, more than likely in 2008.
As far as exploration goes, URME made significant progress in Q3 by beginning exploration of their Goliad Project in South Texas. On November 9th, the company reported that significant uranium mineralization had been encountered in 19 of 34 holes on the Goliad property. 300 more holes are planned to test mineralization on the property.
On the holes already completed, grades appear quite low (max % grade of 0.177) when compared to grades I have seen for EGRAF or Paladin, where grades often reach a maximum 0.6-0.8%. However, this is not particularly surprising, as most U.S properties have already been mined, and therefore mineralization is unlikely to approach this high a grade. In any case, the EGRAF/Paladin mines are amongst the best in the world, so we are using a tough standard for comparison. Mining at lower grades can still be profitable, and indeed very profitable at current prices. Even if URME's costs approach those of URRE (see recent posting) at $39/lb, they will still be able to make money because they have not sold forward future production and can therefore take advantage of the spot uranium price (currently $75/lb).
URME has also begun drilling at its Shirley Basin Project in Wyoming in Q4, but as of yet, we have not heard any results.
Since the beginning of the year, URME has taken steps to increase their staff, which to me indicates that they have significant opportunities ahead. They have also released a press release stating that they are ahead of schedule with regard to permitting for the beginning of production at their Goliad project in Texas. This is obviously a positive sign, and perhaps it indicates that they will be able to begin production earlier than 2009 (the projected date as of mid-2006).
As far as valuation goes, because we have no reserve data, the best I can do is make an approximation of the valuation using the options pricing for the most recent round of financing. For the $13.5 million in financing, the company received $2.50 per share, and the warrants have an exercise price of $3.00 share. Therefore, based on the available data, financiers believe the company is worth more than $3.00 per share. It is not uncommon to see discounts for financiers of 30% or more, so I would estimate that the recent round of funding indicates the company is probably well valued at around $4 per share.
If we account for the recent positive news regarding new hirings and the permitting for Goliad being ahead of schedule, I think I could justify paying $4.50 per share. However, we must remember that this is still a very speculative bet, because the company has no revenues. Anything can happen in the future, and further appreciation of the stock price will require positive news from the company going forward.
Overall, I am encouraged that management has been able to to meet or exceed promises in 2006. As of now, this is really the only metric by which we can judge the company. However, based on the valuation analysis above and the volatility of the stock, I am inclined to wait for a pullback before entering into a small position. The company appears to have good prospects, but may be a bit ahead of itself because the low float has resulted in a price spike that is probably not justified at the present. There continues to be too much uncertainty--and therefore too much risk--to justify buying the stock at current levels.
Finally, if I establish a position in this stock, it will undoubtedly be a small one. I would consider buying URME along with three or four other junior explorers with good prospects. I am not about to bet the farm on any of them, at least not until they can show me some sort of reserve estimates or more concrete data.
Disclosure: Author has no position in URME.OB.