Ur-Energy Investment Thesis – Part I

URG

“There is a tide in the affairs of men, which taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries. On such a full sea are we now afloat. And we must take the current when it serves, or lose our ventures.”            William Shakespeare

I don’t typically make public recommendations for a stock purchase.  In fact, my colleague and I have always been rather clandestine with respect to our investment practice.  But once in a while there are game changing investments you can make in the market.  This is one of them and we feel compelled to share this with our community of investors.  On that note, I have advised our partners to focus the bulk of their invested capital on one company.

UR Energy (NYSEMKT: URG)

Close to sixty percent of our portfolio equity is already concentrated on URG.  This is one of the best investment ideas I have at the moment and by far the safest high-return operation on our radar.  The idea that you win big by taking big risks doesn’t work in the stock market.

Why invest in URG?

Firstly, I’m not a broker and I have no desire to promote this stock for self-benefit.  My goal is to provide sound investment advice to my partners, colleagues or any reader in a strong financial-position.  I will outline my investment thesis and then expound on each facet in detail.  I have been following the Uranium Industry for several years and have reached the following conclusions with respect to UR-Energy:

1)      Moderate risk

2)      Considerable upside

3)      Nice time to buy

4)      Excellent management team

5)      Improving financial position for the business

6)      Favorable long-term prospects

The Risk

On March 11, 2011 a massive earthquake and tsunami struck Japan.  This represented the biggest natural emergency for Japan since industrialization.  The events of that day were apocalyptic:

  • The earthquake generated a 15-metre tsunami that disabled the power supply and cooling of three Fukushima Daiichi reactors.  All three cores melted in the first three days.
  • The accident was rated 7 on the INES scale, due to high radioactive releases over days 4 to 6, eventually a total of some 940 PBq (I-131 eq).
  • Four reactors are written off – 2719 MWe net.
  • After two weeks the three reactors (units 1-3) were stable with water addition but no proper heat sink for removal of decay heat from fuel. By July they were being cooled with recycled water from the new treatment plant. Reactor temperatures had fallen to below 80ºC at the end of October, and official ‘cold shutdown condition’ was announced in mid-December.
  • Apart from cooling, the basic ongoing task was to prevent release of radioactive materials, particularly in contaminated water leaked from the three units.
  • There have been no deaths or cases of radiation sickness from the nuclear accident, but over 100,000 people had to be evacuated from their homes to ensure this. Government nervousness delays their return.  Our thoughts and prayers remain with those affected.

Almost in an instant, Nuclear Power went from a booming industry to one of controversy.  As expected, Mr. Market, Graham’s fictional characterization of the stock market, lost complete control and uranium stocks got punished in the ensuing sell-off.  That’s when I decided to take a look.  Consider this quote from a 1990 Berkshire Hathaway Shareholder address:

“The most common cause of low prices is pessimism—sometimes pervasive, sometimes specific to a company or industry.  We want to do business in such an environment, not because we like pessimism but because we like the prices it produces.  It’s optimism that is the enemy of the rational buyer.”

Mr. Buffett, we like doing business in such an environment as well.  Buffett wasn’t suggesting that investing in that context automatically makes you the smart guy.  The point is you have to think for yourself and be rational when everyone gets emotional.  In our post-Fukushima reality, Uranium stocks have faded into obscurity.  These once high-flyers are still selling at panic levels despite having favorable future prospects.  The truth is Nuclear Power remains the safest means of base load power production and it’s not going anywhere.  I will provide more support later, but here are some facts;

  • There are currently 489 nuclear energy reactors planned or proposed globally, seven more than prior to Fukushima, and this is expected to drive a large increase in uranium demand [in the] mid to long-term
  • 80 new nuclear power reactors are on target to be commissioned by 2017, with 63 currently under construction. Planned and proposed reactors include 171 in China, 56 in India, 41 in Russia, 30 in the US and 13 in the Ukraine.
  • Demand for uranium is expected to increase from around 166-million pounds a year to 226-million pounds a year by 2020, and to 280-million pounds a year by 2030. This compared with global mine supply of 139-million pounds in 2013, represents a significant gap for new mine supply to fill.
  • Japan, Sweden, and Germany have idled their reactors but new reactors coming online will more than offset this drop in the next decade.  We are likely to see some Japanese restarts next year.  Heavy reliance on oil and gas imports is undermining their economic competitiveness.  http://www.nydailynews.com/news/world/japan-shuts-operating-nuclear-reactor-maintenance-article-1.1456935

There are always corrective forces at work in a market; the clouds covering this industry will ultimately give way to a bright sun or natural nuclear reactor if you prefer.  In my view, the only downside is another Fukushima-like event.  I’m willing to accept that as my investment risk given the safe track record of nuclear power.

UR-Energy closed at $1.16 this past Friday.  According to their 3rd Quarter MDA, fully diluted shares outstanding are 137.49M.  You can buy this company for the price of three Gulfstream G550 jets or $159.5M.  Pre-Fukushima, URG sold for $3.27 or $447.9M outright- almost three times the current price when they basically just owned some land.  The company is in a much stronger position today as it evolved from a developer to producer and stands on the precipice of profitability.  They are delivering the first shipment of yellowcake to a plant in Illinois this week. No one seems to have taken notice of this fact.  More importantly, the business is deeply discounted to intrinsic value.

(As of 10/31/13)
Outstanding:                                      122.47M
Stock Options & RSUs:                         9.00M
Warrants                                               6.02M 

Fully Diluted:                                      137.49M

Assuming we hold off on the aircraft and buy URG, what are we getting for our money?

Uranium Deposit Grade % U308 (lbs) URG Share (lbs)
(Proven)
Lost Creek Property 49,000 49,000
(Measured)
Lost Creek Property 0.055 2,942,900
2,942,900
Lost Creek East 0.054 1,255,900 1,255,900
Lost Soilder 0.064 5,000,000 5,000,000
(Indicated)
Lost Creek Property 0.058 2,822,400 2,822,400
Lost Creek East 0.043 1,327,000 1,327,000
Lost Soilder 0.065 7,200,000 7,200,000
(Inferred)
Lost Creek Property 0.054 1,015,700 1,015,700
Lost Creek East 0.045 815,300 815,300
Lost Creek North 0.048 398,200 398,200
Lost Creek South 0.042 602,000 602,000
Lost Creek West 0.109 37,200 37,200
Lost Soilder 0.055 1,800,000 1,800,000
Average Grade 0.058
(Total) 20,548,200

 

Mineral Reserves – Declared $52,320,157
Mineral Reserves – Market ?
URG Cash $6,200,000
Prepaid Expenses $663,169
Inventory $1,080,883
Restricted Cash $5,213,201
Deferred Financing Costs $5,747,835
Capital Assets $38,533,901
Misc. $2,527,596
(Total Asset Value) $112,286,742

 

(Total Debt ) $51,557,960
Net Asset Value $60,728,782
URG Stock Price $1.16
URG Shares Outstanding 137,000,000
URG Market Price $158,920,000
Price/Net Asset Value** 2.62
Net Asset Value/Share 0.44

http://www.ur-energy.com/storage/investor-info/financial-reports/2013/2013-Q3%20URE%20FS.pdf

This is what we get:

Throwing in the remaining assets gives us a total asset value of $112.2M.  Subtract total debt and we’re left with a net asset value of $60.7M or $.44/share.  Since we’re buying it for $1.16/share, on paper it looks like we’re buying URG at a premium to NAV.  There is a glitch in the matrix on UR-energy’s balance sheet.  The $52M recorded for their mineral assets is the acquisition cost for the properties (see note 6 in the 2012 40F).  The economic reality is far different.  Lost Creek is no longer just uranium in the ground, but a cash generating project; a DCF model is required to determine the true value.  According to Haywood Securities, NAV for the Lost Creek Uranium Project is around $181M (http://www.resource-capital.ch/fileadmin/research/fremde/Research_OktoberNov/Ur-Energy_Haywood_24.10.13.pdf).  I’m working on a DCF Valuation and will post it when I’m done.

True NAV for the entire business is close to $200M.  So in reality, we’re buying URG for about .50 cents on a dollar.  URG is flying under the radar and buying shares at the current price should minimize the downside if the market turns for the worse. 

On the income side, I like the growth potential and earnings visibility.  The business has secured long-term contracts for about 30 – 50% of its total production at an estimated $55/lbs of U308.  They will most likely seek additional long-term contracts or sell the remaining yellowcake in the spot-market(@$34.75 on December 11, 2013).  UR-Energy 3rd Qtr. MDA:

“The Company has secured six uranium sales agreements related to production from Lost Creek spanning 2013 – 2019, including the first of Lost Creek’s later term agreements, announced by the Company in early July 2013.  These long-term contracts call for deliveries over multi-year periods at defined prices.”

Here’s a brief article covering URG’s first shipment of yellowcake in the Wyoming Business Report: http://wbdev.sx.atl.publicus.com/article/20131204/NEWS/131209991

(To be continued)

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Response to Ur-Energy Investment Thesis – Part I

    • I ignored the Canadian Assets in my analysis because the company hasn’t announced its intentions with respect to Screech Lake and Gravel Hill. However, they’re accounted for in the Mineral Reserves line item. No mineral data was available for those properties.

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