Ur-Energy Investment Thesis – Part II

Considerable Upside

All things being equal, a business selling for fifty cents on a dollar naturally has more upside potential than one selling at par value.  But a company can remain undervalued for years, tying up precious capital that could have been allocated elsewhere.  So what will trigger a correction in the market price?  As I explained earlier, URG has evolved from a developer to a producer.  Look to UR-Energy to report their first profit next year and earnings move stock prices.  They leverage in situ recovery (ISR) technology to minimize production costs and lower their onsite-footprint (http://www.ur-energy.com/in-situ-uranium-mining-process/).  This comment from CEO Wayne Heili says it all, “These current levels do incentivize us to produce,” he added: “We’re lower than we’d like them to be, but they’re not too low.”

The point being they can make money in any market.  That’s my kind of business.

Excellent Management Team

Wayne Heili assumed command of UR-Energy in May, 2011 and did not disappoint—he coordinated the company’s transition from a developer to producer.  This is no simple chore given the potential for unexpected problems that could lead to production delays, lower than desired production, or slower ramp up.  3rd Qtr. MDA:

“As at October 24, 2013, all production circuits of the plant were commissioned and uranium yellowcake had been processed, dried and packaged. Production rates during the period, from three header houses in Mine Unit 1, were exceeding projected levels. Additional header houses will be brought online when needed to sustain the targeted production rate.”

I haven’t met Mr. Heili or anyone on URG’s management team, but I do know this.  Execution is everything and in this case it was flawless.  If there was a major weakness, it would have surfaced during the transition period.  Good managers do the basic things well.  They keep everyone focused on the mission and run the day-to-day operations as efficiently as possible.  This may sound simplistic, but execution on this scale is harder than it looks.  The company is now in a position to exploit any improvements in the uranium market; only 30 to 50% of current production capacity is under contract, leaving the remaining 50% available to be sold in a stronger price environment.

We are dealing with capable, seasoned managers that can be counted on to act responsibly and in the best interest of the shareholders.  Investors need only be patient, giving them time to execute the project pipeline.  I’m confident that Heili will continue steering the business in the right direction.

More on CEO Heili:

Nice Time to Buy

“The phenomenon that provides the greatest reward in relation to the risk involved- is the dramatic improvement in price that results from the combined effect of both a steady improvement in per-share earnings and a sharp, simultaneous increase in the price-earnings ratio.  As the financial community quite correctly discovers that the fundamentals of the company (now its new image) have much more investment worth….”      Phillip Fisher

Improvements in earnings per share will undoubtedly move stock prices, but Fisher observed another x-factor behind price movement.   When the market recognizes the improving fundamentals for a company’s industry it recalibrates the price-earnings ratio—the company is considered to have greater intrinsic quality, justifying a higher stock price.  Fisher recommends that we factor the financial appraisal of the business into our analysis.  It is his view that strong-businesses (ones having considerable investment merit), who’s industry has fallen out of favor, carry the least investment risk and are most suitable for wise investment (Common Stocks and Uncommon Profits, p.210).

The uranium market will not stay depressed forever.  If you buy URG now, you will no doubt benefit from the more immediate catalyst of improved earnings for the company, but perhaps even more so from a gradual reappraisal of uranium stocks when the industry recovers.  Again, I remind investors to be patient.  It will take time for any positive changes to be accepted, especially given the politicization of Fukushima.  But that just gives us more time to buy.

Improving Financial Position for URG

Financial position: a concern’s ability to have and to create liquidity (either from surplus cash or from other assets readily convertible into cash, such as a portfolio of blue-chip corporate stocks and bonds whose resale is not restricted); by an ability to generate surplus cash from operations; by an ability to borrow; or by an ability to market new issues of equity securities.     Martin J. Whitman

This past summer was a tough one for Roger L. Smith, UR-Energy’s CFO.  Smith, a seven year veteran of the company and former Rio Tinto exec, had to keep the ship afloat while the business waited to close on the Sweetwater County, State of Wyoming, Taxable Industrial Development Revenue Bond (“State Bond Loan”) for U.S. $34M.  The approval process is rather drawn out and URG had nearly exhausted its working capital as it wrapped up construction at Lost Creek.  He secured two high-interest loans from RMB Australia Holdings Ltd. (RMBAH) in the interim to finance the remaining construction costs and production began on schedule.  URG closed on the State Bond Loan in October which was immediately used to pay off the RMBAH debt.  The company released the following statement on October 24th:

“The closing of the State Bond Loan permitted the retirement of the Company’s debts with RMB Australia Holdings Ltd. (“RMBAH”). The two RMBAH loan facilities served as interim financing to complete construction at Lost Creek and begin production uninterrupted while the State Bond Loan was advanced to closing.  The early repayment of the second loan facility triggered a rebate of half of the arrangement fee paid by the Company (US$450,000 credited) while half of the warrants issued in relation to that loan were also cancelled (1,500,400 warrants for common shares cancelled).  A portion of the RMBAH first loan facility remains available to the Company to be redrawn for specified purposes.”

The State Bond Loan terms are much friendlier, calling for quarterly interest payments of 5.57% per annum beginning January 1, 2014.  Quarterly principal payments commence on January 1, 2015 with the loan maturing in October 2021.  The loan is secured by the Lost Creek Property assets.

In July the company executed a Share Purchase Agreement to acquire the Pathfinder Mines Corporation (Pathfinder) for US 13.3M.  If Pathfinder has anything close to the estimated 15M lbs of U308 reported, that was a brilliant purchase.  The caveat is that URG didn’t have the cash to close the deal; now they do.  The bottom line is that the State Bond Loan eliminated the immediate liquidity risk.  Going forward, URG will be in a position to employ a mixture of cash-flow from operations, debt, and equity to further exploit Lost Creek and breathe life into its Pathfinder property. 

Much more could be said about UR-Energy’s financial position, but I’m saving that for a more focused discussion of the financial statements in a follow on article.

(To be continued)

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