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Uranium Energy Corp. (NYSEMKT:UEC) Is An Under The Radar Uranium Play, But Not For Long

Uranium Energy Corp. (NYSEMKT:UEC) Is An Under The Radar Uranium Play, But Not For Long
Written by
Chris Sandburg
Published on
March 30, 2017
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When Donald Trump won the US election in November, the nuclear energy sector in the US let out a collective cheer. While his policy towards nuclear power in the US played a far subtler part of his campaign than did coal mining and fossil fuel energy, that Trump would be good for nuclear power, particularly in terms of domestic industry activity, was taken as given.The importance of political tailwind in the nuclear space right now can't be understated. The nuclear sector relies on a constant supply of uranium. Without uranium, the reactors can't operate. Over the last ten years, the industry has basically ground to a halt, with the financial crisis and the Fukushima incident in Japan combining to drive uranium prices down to twelve year lows. The February spot for uranium came in at $23 per lb. As of March 24, this had risen slightly to $24. This compares to $136 back in mid 2007.For producers, this has been, and remains, a big problem. The average producer can't turn a profit on anything less than $40 per lb. At current prices, even the most efficient producer isn’t making money on the uranium it's extracting.When you can't extract profitably, you stop extracting until things turn around. This is what's happened. Kazakhstan, the worlds largest uranium producing nation, announced in January that it would cut 2017 production by 10% on the year-ago levels.At the same time, the industry is ramping up towards a dramatic increase in demand. China has twenty reactors under construction right now. The US has four under construction. Between Japan, Russia and India, another fourteen are being built. Between now and 2035, another 155 reactors will be added to the just shy of 450 already active.You don’t need to be Adam Smith to recognize that price isn’t going to stay low for long.Some will point to (and indeed are pointing to) the uranium surplus that exists right now as indicative of a delayed rebalancing, but the truth is that this surplus exists purely because Japan has a large portion of its reactors laying idle post-Fukushima. Once these reactors become active, and they will do near term, the oversupply disappears overnight.There's opportunity, here, and it comes in the form of uranium producers. So many uranium stocks are oversold based on the industry wide depression, and just as resource price has already bottomed out, so have these oversold entities.The obvious exposures to the recovery are companies like Cameco Corp (USA) (NYSE:CCJ) and Rio Tinto plc (ADR) (NYSE:RIO).There are some less obvious exposures available, however. Just as with other natural resource industries, the uranium space is full of under the radar plays that have the potential to move quicker, turn around harder and serve up superior returns than the incumbents.We've been on the lookout for one such company, and we've found one – Uranium Energy Corp. (NYSEMKT:UEC).Many reading will likely already know the name. This isn’t a penny play with a claim or two that's raising equity to fund surveys and estimates. It's a $200 million dollar Texas based producer that's been around for more than a decade and has a fully licensed and permitted production facility that serves as a hub to a spate of North American resources.We'll look at this, and some of the company's other projects, in a little bit more detail shortly.First, however, a bit about the uranium process.There are two primary methods of uranium extraction. The first, and what we might call the conventional method, is basic rock mining. A company blasts open a rock that contains uranium ore, takes the bits of rock and grinds them down to extract the ore. The uranium is then treated with an acid or leach, separating around 90% of the natural uranium from the crushed rock, and dries it to produce yellowcake.The second method is called In-Situ Leaching, or In-Situ recovery (ISR). With this method, an extractor pumps a chemical solution into the bed of rock that contains the uranium, and the solution separates the uranium from the rock. The uranium can then be pumped to the surface. It's then processed to produce yellowcake.As readers might imagine, the removal of the necessity to collect, process and then dispose of huge quantities of rock (and we mean huge, the waste rock piles are literally mountainous) makes the second of the two methods, ISR, far cheaper than the first.Uranium Energy Corp is focused on ISR extraction. At a time when prices are depressed, this gives the company an automatic advantage over some if its open pit extraction counterparts.So, let's look at the projects.As mentioned, the company is primarily focused on Texas, and it operates a sort of hub and spoke type model in the state. By this we mean it's got a central processing facility, called the Hobson Facility, that can take the extracted uranium deposit and convert it to yellowcake, and this facility serves five (currently) ISR extraction projects.Of these five, one has already produced yellowcake, and serves as a proof of concept to the company's operational model. It's called Palangana, and it's located just shy of 100 miles south of Hobson.The image below is an aerial shot of the facility.SourceBy way of a bit of an explanation at what you're looking at, the Production Area highlighted above (at the top of the image) is the part of the facility at which the actual extraction process takes place (the pumping of the solution into the ground, as described above). The Ion Exchange label refers to a sort of pre-processing part of the production chain, in which the uranium containing solution is prepared into a more concentrated solution that can be safely transported in uranium fluid tankers. These tankers then take the pre-processed solution to Hobson.The Palangana facility cost $10 million in initial capital expenditure to set up, and it took just six months. It's production ready (as mentioned, it's already produced yellowcake as part of a proof of concept run) and it's fully permitted. Cash cost of production is just $21.77 per lb during operation. Note this isn’t all in cash cost, so the actual cost of production of saleable material will be slightly higher (consider the difference between cash cost and all in sustainable cash cost in the gold mining space an apt comparison) but it's an excellent low cost starting point, and one that should easily produce profitable resources once resource prices start to rise.That's where things stand right now. One production facility ready to go, one extraction project ready to go. But that's just the start.The company's Goliad project is also fully licensed and permitted. This one's located around 40 miles east of Hobson, and has a measured and indicated resource of more than 5.4 million lbs in 3.8 MT grading 0.05% U3O8 (U308 here refers to the yellowcake). For reference, uranium can be extracted at grades as lows as 0.02%, and very efficiently with the ISR process that Uranium Energy employs.The company estimates that the cost to get this project to the same stage as the Palangana facility discussed above – i.e. production ready – is similar to that of Palangana, $10 million, and can be done within a similar six-month time frame.A third project, called Burke Hollow, has an inferred uranium resource of 5.12 million lbs in 2.9 MT grading 0.09% U3O8, and is located just 50 miles south east of Hobson. This one's almost fully permitted, with the Class 1 disposal and the Final Mine Area permits already issued, and the Aquifer Exemption (AE) and Radioactive Material License (RML) applications under technical review.In addition to the hub and spoke operations, Uranium Energy has got a further $200 million of NPV in non core assets in Arizona and Colorado (Slick Rock and Anderson), and it's got two projects in Paraguay that are at exploration and development stage right now, and have had more than $50 million in exploration capital spent on them by big name producers before the company acquired them.Looking at the numbers, the company has $27.7 million cash on hand as of January 31, 2017, and 136.4 million shares outstanding. There are around 32 million warrants and options on top of this, bringing the fully diluted share count to a little over 169 million. That's pretty low. There's about $20 million in long term debt on the books, deriving primarily from a credit facility, the principle repayment for which doesn’t start until February 2019, and won't mature until start 2020 (in other words, not an immediate concern).For smart money confirmation, some of the industry's biggest names are stakeholders. UEC Team, J.P. Morgan Global Natural Resources Fund, Blackrock, Sprott, CEF Limited, KCR Fund, Vanguard Group, Fidelity, and Global X Management all have a position in Uranium Energy.Leadership is strong, with the company's exec chairman, Spencer Abraham, having served as the tenth US Energy Secretary in the George W. Bush Administration, and the exec VP and Senior Advisor, Scott Melbye and Harry Anthony, being past and current presidents of the Uranium Producers of America, respectively. CEO is Amir Adnani, prior founder of Brazil Resources and an entrepreneurial veteran of the natural resources space.There are risks, of course.Capital expenditure is always the foremost concern with these sorts of natural resource companies, and Uranium Energy is no different. The $27 million above mentioned cash holding isn’t going to be enough to bring all of its spoke-facilities to production, and the company is going to need to issue to raise operational and expansion capital likely before the end of the year. This raise is going to be dilutive (almost certainly) and that's going to hit early stakeholders.There's also wider geopolitical and natural risk. If we see another Fukushima, the global perception of the nuclear energy space is going to quickly turn sour, and we're going to see price (and in turn, the valuation of the industry's constituent companies) depress once again.With these risks noted, however, there's really never been a better time to pick up an exposure to the uranium space. The dichotomy between future demand and current supply is the biggest it's ever been, and in an industry where demand is calculated, and accounted for, up to a decade in advance (a reactor builder isn’t going to spend billions on construction and then wonder if there's going to be enough resource to supply activation), dichotomies like this don't last long.All said, then, Uranium Energy may be under the radar right now, but it's poised to be thrust into the spotlight as one of the most promising producers in the industry. Risks exist, but they are mitigated considerably by proof of concept already having been established (generally regarded as an inflection point in the natural resource space), as well as the above mentioned macro trends, and there's near term growth potential rooted in the bringing of a second and third project (Goliad and Burke Hollow respectively) to activation, and in line with the Palangana facility.We will be updating our subscribers as soon as we know more. For the latest updates on UEC, sign up below!Disclosure: We have no position in UEC and have not been compensated for this article.

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