Uranium: Beginning Of A Recovery Or Just Short-Term Noise

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Includes: CCJ, NXE, URA, UUUU
by: Bang For The Buck

Summary

Both spot and contract prices have increased over the last few months.

Beware of the Global Uranium X Uranium ETF changes and make an active decision if that is the type of exposure you want.

More reactors are coming online and supply is decreasing, but it is still unclear when or if it will start to bite.

Overview

I wrote an article Take Advantage Of the Reduced Supply Among Uranium Producers at the end of May this year. I have since then written several articles about stock-specific uranium miners I am invested in. This article is more of a general market update from the initial article and what I am looking at going forward.

Chart URA data by YCharts

Figure 1 - Source: YCharts

In the above chart, I have included the stocks I am long in the uranium market Nexgen Energy Ltd. (NXE), Energy Fuels Inc. (UUUU), Cameco Corporation (CCJ) and the Global X Uranium ETF (URA) since the date of the initial publication. The stocks have all increased over the last five months, but the Global X Uranium ETF has declined some.

Figure 2 & 3 - Source: cameco.com

Both uranium spot prices and contract prices have improved some over the last five months. However, it is important to keep in mind that we are still at extremely depressed levels in a historical comparison, which is illustrated in the second graph.

URA ETF Changes

Some might think the URA ETF is a convenient investment option. There were some changes announced earlier this year, where the ETF will start tracking the Solactive Global Uranium & Nuclear Components Total Return Index. That makes it less of an appealing investment alternative in my view.

The ETF will likely have a significant exposure to uranium miners. The two largest holdings are Cameco and Nexgen for example. However, there is also a long list of companies with minimal exposure to the uranium mining industry, which is diluting the exposure I think many are looking for. Hyundai Engineering & Construction (5.1%), Barrick Gold (NYSE:ABX) (3.0%) and BHP Billiton (NYSE:BHP) (3.0%) just to mention a few.

Anyone looking for exposure to the uranium mining market should think about whether the convenience of an ETF wrapper is worth the diluting effect from companies with low or no exposure to the uranium mining industry included in the ETF.

My Preferred Investments

My investments in the uranium mining and exploration industry have a couple of important characteristics. Most of the operations are in uranium mining, processing or exploration. The companies also have either sufficient working capital and/or operating cash flow if the turnaround takes longer to materialize.

Energy Fuels refinanced when the company was included in the Russell 3000 index earlier this year and now has $55M in working capital. The resumed vanadium production with the very attractive price will likely generate a significant amount of cash flows in the short term as well.

Figure 4 - Source: vanadiumprice.com

The amount of long-term contracts held by Cameco is decreasing over time. However, the company is so far able to generate free cash flows despite the overall depressed uranium market. Note that the Q2 figure in the below chart is adjusted for the Can$333M short-term investment.

Figure 5 - Source: morningstar.com

Nexgen Energy on the other side is involved in uranium exploration and has one of the most interesting uranium discoveries globally. To move the asset into production, additional financing will certainly be required. However, the operating and investing cash flows for the first six months of the year was only negative Can$24M compared to Can$140M in working capital at the end of Q2. So, the company should be able to continue the exploration work a couple of years until additional financing would be required.

Supply/Demand Updates

We have seen a number of updates in the market since the initial article, the below list contains some of the main updates.

  • The petition to consider uranium production a U.S. national security concern is currently being investigated by the U.S. Department of Commerce. A report and decision by the president are about 9 months away at the very latest.
  • Even if the above-mentioned petition is unsuccessful, there is still the possibility of specific U.S. uranium sanctions on Russia in relation to interference in elections and activities in Syria and Ukraine.
  • Cameco did in conjunction with the Q2 report confirm that McArthur River and Key Lake will be closed for an indeterminate duration which has reduced the supply by 18M pounds in 2018.
  • The investment company Yellow Cake purchased 8.1M pounds of uranium from Kazatmprom during the summer. The company also has options to purchase uranium for $100M per year during the next 9 years.
  • While we are still a long way from the 54 reactors in operation before Fukushima, Japan has now restarted 9 reactors. There has naturally been push-back from some residents in the surrounding areas, but court decisions have been in favor of the utility companies.
  • We have recently seen the first four AP1000 reactors in China being connected to the grid, the reactors are not yet in full power generation. This could be a very significant step for future reactor growth in China.

Another partly related point that has been discussed more recently in the U.S., is a potential carbon tax. Whether this is good or bad thing is beside the point. A few weeks ago, we even saw Exxon Mobil (NYSE:XOM) donate to a campaign for carbon tax. One potential reason for donating is to be included in the discussion and can influence the size and application of a potential tax. Phrased differently, "if you can't beat them, join them," as the tax is something that is likely to come sooner or later.

Looking Forward

The spot and contract prices for uranium will likely be the major factor determining the value of Nexgen Energy, Cameco and Energy Fuels going forward, but there are also several potentially market-moving events in the not too distant future.

Nexgen has been reasonably quiet lately. The main upcoming event is the updated Mineral Resource Estimate and maiden Pre-Feasibility Study scheduled for Q4 2018.

The tax court ruling in favor of Cameco over the Canadian Revenue Agency (CRA) was very significant and the stock went up 15% on the day. While the decision only applied to a few years and the CRA has 30 days to appeal the decision. The CEO Timothy Gitzel summed it up in the following way during the conference call. Whether the CRA will appeal the decision will be known within the next couple of weeks.

Clear and decisive ruling in our favor, while the decision only applies to the years 2003, 2005, 2006. We believe the thorough and meticulous analysis of the facts is going to make this difficult to overturn and should serve as basis for resolving the dispute in subsequent years.

Energy Fuels would probably be the stock with the most leverage to a decision if U.S. uranium production is considered a national security concern, due to the significant amount of passive assets. If Energy Fuels is able to get vanadium production operational reasonably quickly, this could also cause a significant boost, provided the vanadium price doesn't reverse sharply from the recent peak.

Conclusion

We continuously see more reactors coming online and there have been some rather significant supply reductions over the last year. The big question is the depth of the uranium spot market and how much excess inventory is really available?

We have seen uranium prices move upwards marginally over the last few months and it could be the start of a recovery for the uranium mining industry. However, keep in mind that we have seen false starts before. The coming year will be interesting to say the least.

If one is certain on the timing of the recovery, companies with poor balance sheets and no long-term contract could certainly have more leverage in a recovery. I prefer to invest in companies with enough cash or cash flows to avoid financial stress if the turnaround takes longer to materialize. There would still be a significant upside if the turnaround materializes with those investments as well.

Did you like this article? Please consider giving me a "Follow" by clicking the button above or check out some of my other recent articles.

Energy Fuels Is Perfectly Positioned For A Turnaround But Also Has More Downside After Recent Runaway

Nexgen Energy: A World-Class Deposit In A Safe, Mining-Friendly Region

The Tax Court Ruling Could Finally Allow Cameco To Focus On The Future

Disclosure: I am/we are long CCJ, NXE, UUUU.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.