UEC - I Agree With Kerrisdale Capital: Uranium Energy Is Overpriced

2023-04-06 16:07:39 ET

Summary

• Significant dilution for UEC shareholders has been caused by a massive increase in outstanding shares over the years.
• Kerrisdale Capital issued a short report last month and I agree with most of their assertions.
• Uranium prices have been impacted by speculative buying via Sprott Physical Uranium Trust over the last two years.
• UEC still has no operations.

Kerrisdale Capital's short report is correct that Uranium Energy ( UEC ) is over-priced, in my opinion. UEC does not currently have any operating uranium mines, and it keeps issuing new shares, which greatly dilutes current shareholders, to raise cash to pay their management's salaries and other expenses. Eventually investors will wise-up and realize Uranium Energy "has no clothes", which is why I continue to rate UEC stock a sell.

Massive Increase in Shares Outstanding = Dilution

Uranium Energy has issued a large number of new shares over the years that has resulted in shareholder dilution. As of March 10, 2023 they had 375,391,500 shares outstanding compared to only 75,255,013 shares outstanding as of October 11, 2011. While the total equity capitalization has increased because of more shares outstanding, the stock price has performed much worse than the rest of the market as can be seen by the chart below.

It seems traders are ignoring the capitalization numbers and only looking at UEC stock price charts. Usually there are multiple metrics used to estimate an appropriate stock value, such as dividend yield, P/E ratios, and cash-flow per share. The problem is that UEC stock does not have a dividend yield, has only a token amount of earnings per share, and has negative cash flow until this fiscal year when they sold some of their purchased uranium inventory.

In addition, many traders just buy/sell UEC stock as a proxy for the price of uranium and they do not seem to pay attention to total equity capitalization compared to actual asset value.

2Q and Six Months Income Statement

Some of this increase in number of shares was because the company issued UEC stock to acquire assets, but these are "paper" assets - they are not actually operating assets. For example, late last year they bought Roughrider Mineral Holdings from Rio Tinto Group ( RIO ) by issuing Rio Tinto 17,895,815 UEC shares plus $64.101 million cash. Rio Tinto now owns 4.7% of UEC.

Some may assert that issuing additional shares indicates that management is prudent because they are not borrowing money to pay for their bills, which could increase the risk of some type of future default. I take a different approach. If they tried to borrow money a bank would do extensive research into their property holdings, current/future operating expenses, and potential for reopening mines. The reality is that borrowing is not an option, except perhaps at very high interest rates. This could be problematic for UEC.

For example, a few years ago both Uranerz Energy and Ur-Energy ( URG ) received loans under the Wyoming Industrial Development Revenue Bond Program to help complete their uranium mines. I personally fought against both of these loans and was told that a major reason why the state had to make the loans was neither company could get traditional financing. URG eventually was not able to make payments and had to restructure the loan. Instead of borrowing money, URG now sells new stock/warrants to raise needed cash. Uranerz Energy was acquired by Energy Fuels ( UUUU ).

Management - A Major Concern

The CEO, Amir Adnani, was paid a total of $1,635,553 in 2021 according to their 2022 proxy statement. The CFO was paid $446,601 and their Ex.V.P. was paid $555,292. All their directors on the board were each paid over $100k. I consider these salaries rather high given there are no operating mines, and they only do a few sporadic acquisitions/financial transactions.

I also have to question the quality of management. For example, their Nine Mile Lake Project in Wyoming that they received as part of a deal last year with Anfield Energy ( OTCQB:ANLDF ) is actually a liability, in my opinion, and not an asset. As part of this deal UEC received Anfield stock that was valued at about $9.17 million, which is currently down over 50%, cash, and other Wyoming in-situ recovery property interests. A high-quality management team would have performed some due diligence on Nine Mile Lake and discovered that the land was almost annexed in 2006 by the city of Casper, Wyoming, which does not allow mining within the city's limits. While the land currently remains just outside the city limits, it is extremely unlikely the Natrona County Board of Commissioners would ever approve their needed permits because new residences are very close to the Nine Mile Lake Project. In addition, Harford Field , which is a privately owned 3810-foot dirt runway airport, is located near this site and UEC would most likely have to get FAA approval for any activity because of the distance from runway/height FAA restrictions. UEC has to pay a total annual maintenance fee of $39,335 to keep the Nine Mile Lake claims. While this is just a token amount, it is not rational, in my opinion, to waste cash on this "asset". I think this entire issue is a reflection on current UEC management and their lack of attention to details/expenses.

Uranium Prices

The spot price for uranium plunged a few years ago and many mining operations were temporarily closed. They have recovered over the last two years.

Uranium Monthly Spot Price

This drop in prices was brewing for decades as production exceeded final demand for uranium as the two tables below show.

As I mentioned in prior articles, much of the increase in uranium spot prices over the last two years is because of speculative buying and not by an increase in demand by utilities owning nuclear power plants. Sprott Physical Uranium Trust ( OTCPK:SRUUF ) has been a huge buyer of uranium. In my September 14, 2021 article on UEC I referenced that SRUUF already owned 24.914 million pounds and was planning on buying more. According to their website they currently own 61.645 million pounds. That is an increase of 36.731 million pounds in a little under 19 months. This speculative buying of uranium by traders via SRUUF has had a significant short-term impact on prices. Geo-political issues in Russia, Ukraine, and Kazakhstan, of course, have also impacted prices the last 15 months.

The latest proposed legislation (text of the proposed law ) to restrict uranium imports from Russia may have a modest short-term impact on domestic uranium prices and purchases, but this seems more political, in my opinion, than having any lasting impact on U.S. uranium production.

If there is eventually some settlement regarding war in Ukraine that could trigger, in my opinion, speculative selling of uranium by SRUUF investors, which could force the trust to actually sell some of their uranium. The huge uranium holding by SRUUF makes trading in uranium companies, such as UEC, very speculative.

The re-starting of formerly closed mines is putting downward pressure on uranium prices. Cameco's ( CCJ ) McArthur River/Key Lake re-opened last year and according to a February press report they are expecting to produce 18 million pounds per year. That is a very significant amount compared to an estimated 125.1 million pounds total world-wide production in 2021.

In addition, there are other mines in the process of re-opening after closing a few years ago because of low uranium prices. Boss Energy's ( OTCQX:BQSSF ) Honeymoon mine in Australia plans to restart by the end of 2023 and produce 2.5 million pounds per year by 2026. Paladin Energy's ( OTCQX:PALAF ) Langer Heinrich mine in Namibia is making progress to re-start production in 2024 according to latest reports . Last year Gold Panda wrote that they could have peak annual production of six million pounds.

Future uranium demand and prices have very wide estimates. While the chart below is over two years old it does give readers an indication of the very wide high/low future uranium estimated requirements.

There are many planned new nuclear reactors world-wide, but it remains to be seen how many are actually up in running within the next decade or so. Almost all of them are outside of the U.S. - mostly in Asia.

Planned Nuclear Reactors

UEC Stock Valuation

Uranium Energy's value is mostly non-operating assets.

*Cash $32.6 million - $0.08 per share

*Uranium Royalty Corp. ( UROY ) shares $30 million - $0.08

*Anfield Energy (ANLDF) shares $4 million - $0.01

*Uranium Inventory 571k lbs. @$50/lbs. $28.55 million - $0.08

*Potential gains on uranium purchase commitments $24.6 million - $0.07

Total $0.32 per share

*Uranium mines and uranium claims - unknown value

Using the latest UEC stock price of $2.70 and subtracting $0.32 per share, implies the market is valuing these mines and claims at $893 million. I seriously doubt any of their assets will become operational and generating any significant profit in the near future because I think uranium prices will most likely remain below cost to operate the mines. In addition, many of their properties are not even permitted yet.

I am not sure how much, if any, additional UEC shares will be issued to raise needed cash over the next three years. They need almost $40 million cash annually to cover cash expenses. If they sell their current uranium inventory at $50 net/lbs., they could receive $28.55 million cash. In addition, if they immediately flip their uranium received under their purchase commitment agreement to purchase 2.395 million pounds for a total cost of $95.112 million over the next three years, they could make a $24.6 million profit (assuming they get $50/lbs.) If they do not sell any uranium, they need to sell additional shares to cover $40 million annual cash expenses and the $95.112 million uranium purchase commitment. Over the next three years they most likely would then need to sell additional shares to raise $215 million, which would create even more dilution for current UEC shareholders.

Conclusion

Uranium Energy is not really a mining company because it has not had any actual operating mines for a number of years. It is uncertain if they will even have any operating mines in the near future because uranium prices remain below production costs.

While uranium spot prices have increased over the last two years, much of that is an "artificial" increase caused by SRUUF buying an extremely large amount of uranium compared to actual market demand/production of uranium. Once the war in Ukraine is settled there could be speculative selling of uranium.

Since I doubt uranium prices will stabilize at a high enough level to justify opening already permitted Uranium Energy mines and starting the permitting process on their other properties, I think it is very unlikely they will have any actual operations in the near future. I rate UEC stock a sell.

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