Is It Safe To Buy Uranium Energy Corp. At $1.30?

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About: Uranium Energy Corp (UEC)
by: Aitezaz Khan
Summary

I have included the case that highlights the positive outlook of the company.

I have also included discussion of UEC's balance sheet and the risks that weigh down heavily on the company.

Based on a comparison between positives and negatives, I believe an investment in UEC carries significant risk.

Thesis:

The last time I wrote about Uranium Energy Corp. (UEC) the stock was trading at ~$1.71. I suggested that the fundamental weakness did not support price appreciations in the short to medium term. At present, the stock is trading at ~$1.28 (down 25% from the price quoted earlier), and I believe it's high time to revisit an investment case in this company.

Uranium Energy needs Titanium support to improve its weak fundamentals. Figure-1 (Source: KWN)

In this article, I have discussed the updated fundamental position of the company that does not look good. However, one favourable factor is that besides its uranium projects, UEC also has titanium properties in Paraguay that could derive significant upside for the company. This picture could improve further if the uranium prices support the share price and the company gets on track to deliver significant production. So far, we are only waiting for that to happen. Nevertheless, their financial and operational performance has weakened and UEC's fundamental weakness may continue for an indefinite time until they are supported by positive momentum in uranium prices.

A case to consider the positive outlook of UEC:

UEC has various uranium mining properties across the US states of Colorado, Arizona, New Mexico, Wyoming and Texas. Moreover, UEC has interests in certain projects in Canada and Paraguay. The company's Paraguayan assets consist of two U3O8 (read: uranium oxide) and one TiO2 (read: titanium dioxide) projects. On that note, one should consider the fact that TiO2 is a high-value metal (but not a precious metal) that traded at ~$3/kg or ~$3,000/Mt, during 2018 as shown in Figure-2 below:

Figure-2 (Source: ICIS)

As shown in the above chart, TiO2 prices are scaling up since 2016. Based on the price trend, we can say that titanium seems to have a secure future. Moreover, the inferred resource estimate of the Alto Paraná titanium project in Paraguay suggests that this project contains ~4.94 billion tons of resource at an average grade of ~7.41% TiO2 and ~23.6% Fe2O3 (read: Ferrous Oxide).

In my opinion, the ownership of both U3O8 and TiO2 mining properties at different locations helps UEC to diversify geographical and commodity risks. At present, UEC has zero production of both metals, but has the capacity to process ~4M lbs per annum of U3O8. This would help the company to witness significant growth in an emerging uranium market, but we are uncertain about the time when uranium prices may stabilize to reach the $40/lb mark. At present, U3O8 trades at ~$29.15/lb (based on November 19th, 2018 prices provided by UxC).

In any case, UEC's positive outlook is supported by its ISR (read: In-Situ Recovery) mining methodology in its projects in Texas and Wyoming. This mining method is considered superior over the conventional underground and open-pit mining methods because it requires low CAPEX and operating expenditure, and has a comparatively lesser environmental impact.

UEC's balance sheet and unique risks facing the company:

UEC is a company that is highly leveraged to U3O8 prices, and the company's decision to produce uranium is dependent on U3O8 prices reaching the ~$40/lb mark. UEC has not processed any uranium for quite some time. In fact, the last time any production was delivered by UEC's Hobson Processing Facility was in 2015. Therefore, UEC's mining properties are currently in a state of 'hold' and the company is waiting for the uranium prices to climb up. As such, there's little point in evaluating the company's consolidated statement of operations.

Nevertheless, there are some noteworthy numbers in the company's balance sheet for the FY 2018 ended July 2018 (Figure-3).

Figure-3 (Source: Form 10-K)

Comment on Assets: The company's cash and cash equivalents have nearly halved on a Y/Y basis, and UEC has disposed of its ~$10M short-term investments. Consequently, UEC has shredded its current assets by ~$15M. Nevertheless, the total assets have increased by ~$17M due to a ~$31M increase in UEC's mineral rights and properties.

Comment on Liabilities: There has been no significant movement on the company's liabilities side except for a transfer of ~$10M from the long-term debt to the current portion of long-term debt. This would mean that UEC will have to pay this ~$10M debt within the next 12 months (if it fails to negotiate a restructuring of that debt). Given that the company has ~$7M of cash and cash equivalents and ~$8.3M of current assets, arranging funds for payment of the debt might become an issue for the company. For that purpose, I believe that UEC might repeat its practice of issuing further equity shares and such decision could dilute shareholder value.

Comment on Equity: During the 12 months ended July 2018, UEC had raised ~$36M of additional paid-in capital (from $272M to $308M). During the same period, the company had destroyed ~$18M of equity, by increasing accumulated deficit from $227M to $245M.

[Note: I acknowledge that the word 'destroy' is too strong to reflect the impact on shareholders' equity, but as I will discuss in the next section, UEC is prone to many investment risks that raise questions about the recoverability of such investments in the company].

The remaining ~$18M of additional equity raised by the company is reflected on the mineral rights and properties asset as discussed earlier.

The risks that weigh down heavily on the company:

For many reasons, I believe that UEC is a significantly risky stock. As mentioned earlier, UEC has a production-ready capacity to process ~4M lb of U3O8 per annum, but that production is dependent upon a sustainable uranium market. However, without support from U3O8 prices, the risks seem to be overwhelming. UEC's management has provided a clear definition of their risk profile. These risks are mentioned in detail in Item 1A in Form 10-K but, for brevity, I have selected a few key risks that denote the real red flags (and commented thereon). Have a look at Figure-4.

Figure-4 [Prepared by Aitezaz Khan for Seeking Alpha].

Comment: From the above table, it's clear that UEC is dependent upon additional financing to support and enhance its mining operations. A persistent decline in the market prices has already diluted shareholders' investment in the stock. As shown in the technical price chart in Figure-5, UEC has already lost significant value during the past three months.

Figure-5 (Source: Finviz)

Considering the trend line in Figure-5, it's quite possible that the share price may explore the depths at ~$1.20. However, as shown in Figure-6, the stock has remained largely volatile during the past 5 years and has dropped down from a record high of ~$3. As discussed in R-5 (refer Figure-4), the decline in share price would affect the company's acquisition of additional financing that is paramount to continue its operations, given that the company does not generate any operating cash flows.

Figure-6 (Source: SA)

Moreover, additional financing dilutes the value of existing shareholders. Based on the numbers, it seems that UEC has also diluted the value of newly issued shares. On that note, it should be considered that UEC recently issued ~12.6M units at a price of $1.60/unit. Each unit comprised of 1 share and 1/2 share warrants whereby 1 complete warrant could be exercised at $2.05.

[For simplicity, this would mean that any shareholder who had bought 2 units in the newly issued share scheme would pay $3.2 for 2 shares and another $2.05 for an additional 1 share. For a total investment of $5.25, he will be entitled to 3 shares of UEC, and that would put the per-share cost at approx. $1.75/share.]

Given the current prices of UEC's share at ~$1.30, we can see that the new equity holders have also suffered on account of newly issued shares.

Finally, as indicated in R-9 (refer Figure-4), UEC's going concern is dependent on its ability to continue obtaining additional financing. UEC's preferred mode of obtaining finance has been to raise a further issue of equity, and given that the company has ~750M shares in authorized capital with ~174M shares in issued and outstanding stock, there's still room for a lot of equity issuance. When I last wrote about UEC, the company's going concern ability was in doubt. In the comments that followed, a few readers pointed out that the going concern issue would have little impact, if any, on the share prices. Nevertheless, the share price dropped from ~$1.71 in June 2018 to a record low of ~$1.20 in October.

Conclusion:

An investment in UEC carries significant risk because the company has yet to deliver positive cash flows from its operations. The company depends on equity and debt financing to fund its CAPEX and OPEX. Based on the persistently declining share prices, the company might have problems obtaining additional funding. Even if it does, it would dilute value for the existing and new equity holders.

Nevertheless, UEC is highly leveraged to uranium prices and I believe that if we could see U3O8 prices climbing a healthy spot price (say, ~$40/lb), the company would commence its operations and that decision would boom the investor confidence and we could see an increase in share price. Simultaneously, UEC might also decide to start production from its titanium mining properties in Paraguay, and since TiO2 prices have witnessed recovery during the past 2 years, a combination of U3O8 and TiO2 production would turn the picture favourable for UEC.

Disclaimer: This article does not contain a discussion about whether and if so, the time when we could see U3O8 prices to climb a sufficient-enough level that would help trigger a production decision from UEC. But I would like to hear readers' thoughts on that point.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.