CA - Ur-Energy: A Made In America Uranium Story

Summary

• The U.S. has been a large uranium consumer, yet domestic production is close to zero.
• Ur-Energy Inc. has begun ramping up production at its Lost Creek project in Wyoming.
• The company has already contracted 0.6Mlbs of U3O8 annually beginning in 2024.
• The solid financial position of Ur-Energy paves the way for non-dilutive production path of the two main projects.

Ur-Energy Inc. ( URG ) is in the perfect position to start bringing much needed, made in America U ₃ O ₈ pounds to the market. The company has begun ramping up production in its operating Lost Creek project, while the Shirley Basin project is advanced in the permitting process and almost ready for construction. URG has a solid financial position, which looks sufficient to bring both projects into full production, minimizing dilution risk. In terms of valuation, the estimated NPV of the two projects is slightly above the current EV. While the economic analysis used higher than current uranium spot prices, URG’s risk profile looks superior to that of the average uranium developer.

Uranium importance for the U.S.

The last two years demonstrated the importance of supply chain security. Some critical minerals are produced primarily in countries which carry relatively high political risk, therefore, supply chain disruptions may arise. One of those minerals is uranium – roughly 40% of it is produced in Kazakhstan, which was rocked by riots in the beginning of 2022. At the same time, the U.S. is one of the largest consumers of uranium, as according to EIA data, U.S. utilities purchased 46.7Mlbs of U ₃ O ₈ in 2021, yet almost all of it was imported as domestic production was close to zero.

While Canada, which is the second largest producer of uranium is a very close U.S. ally, nothing beats domestic production and reserves in terms of supply chain security. For that reason, US$75M were allocated to create a strategic uranium reserve by the Department of Energy. This is where companies like Ur-Energy come into the table.

Company overview

Registered in Canada, Ur-Energy is a uranium developer/producer with assets in the mine-friendly state of Wyoming, USA.

The capital structure consists of 223.1M shares, 16.7M warrants, which could be converted into 8.4M shares for an exercise price of US$1.35/share and 10.4M Stock Options & RSUs. The ownership structure is dominated by retail, while management holds a little less than 2%, which is pretty low, although higher than other uranium developers.

Projects overview

The flagship project of the company – Lost Creek has been in operation since 2013, however, in the last few years production dropped to almost zero due to unfavorable price environment. Now that uranium has been rising and a supply deficit on the market is expected, URG is ramping up Lost Creek up to its projected annual production rate of 1.2Mlbs of U ₃ O _8. Although the project may appear to be low grade at 0.046%, especially compared to some of the Athabasca basin peers, the ISR mining method allows for an economic viability of Lost Creek with projected OPEX cost of US$16.34/lbs.

The other project – Shirley Basin - also plans for an ISR mining method, which should keep operating costs at US$15.95/lbs. Unlike, Lost Creek, which is already built, Shirley Basin will need US$33.1M of initial capital investment in order to be brought into production. The figure is pretty recent, as the Technical report for the project was updated in September 2022. Annual production is expected at around 1Mlbs. The good thing about this project is that it has been granted all major environmental permits, so the path to construction shouldn’t take long.

It has to be mentioned that at Lost Creek URG has a facility, which is licensed to process up to 2.2Mlbs of U ₃ O ₈ per year, which is exactly the combined projected production of Lost Creek and Shirley Basin. Ur-Energy also has three smaller projects, including the Excel Gold Project in Nevada and a satellite deposit to Lost Creek. However, those project are very early stage, so I’d like to think of them more as a free of charge option, instead of part of the current value of URG.

Financial position and liquidity

As of Q3 2022, the company has US$39.9M of cash and equivalents on its balance sheet as well as 325klbs of uranium inventory. At the same time, IB debt amounts to US$12.3M. Recently, URG was able to sign a contract to deliver 100klbs of U ₃ O ₈ to the U.S. strategic reserve for a price of US$64.47/lbs, which implies a significant premium to the spot price. The remaining 225klbs should be worth at least US$11M at current spot prices. The resulting liquidity position of more than US$56M should be more than enough to fund the initial CAPEX at Shirley Basin. While Lost Creek is already built, ramping it up will likely require upfront capital, but not nearly as much as that of Shirley Basin, so given the liquidity position and CAPEX requirements, I think that dilution through capital raising is unlikely.

It has to be mentioned that URG has already contracted 0.6Mlbs of annual U ₃ O ₈ production beginning in 2024. Although the price of those agreements was not disclosed, it could very well be above the current market price, given the price at which the sale to the U.S. strategic reserve was made.

Share price and valuation discussion

During the past year, UGR has underperformed the price of uranium, represented by the Sprott Physical Uranium Trust ( SRUUF ). In the general case of a developer, that will be understandable – most developers face permitting risk, CAPEX blowout risk, etc. However, in the case of URG, most of those risk factors are minimized. The company has its flagship asset already built and ready for a ramp-up, therefore, the development risks are not relevant. When it comes to the second asset – Shirley Basin, it has already received the environmental permits, which are usually the hardest to obtain and has low initial capital requirements, due to the ISR technology.

Looking at the economics of both projects, they have combined estimated NPV of US$251M at 8% discount. At the same time, the EV is around US$243M, when accounting for the physical uranium on the balance sheet. While the indicated combined NPV is only slightly higher than the EV and both technical reports use uranium prices in the low to mid US$60s/lbs, I think URG is in a better spot than the typical uranium developer. If uranium prices jump higher, URG will be in a position to benefit immediately, as it has a producing asset and one in pre-construction phase. At the same time, most developers could be still be stuck in permitting. For that reason, I consider URG a compelling option to get exposure to U.S.-made uranium and will look for pullbacks towards the US$1.10 range to initiate a position.

Uranium price risk

I find URG far superior in terms of risk, compared to the vast majority of uranium miners – fully funded, with assets that are in politically stable jurisdiction, one is already in production, while the other has gone through most of the permitting. The U.S. being a major consumer of uranium may also prove to be a benefit as some premium to spot prices may be applied to URG’s contracts with U.S. utilities.

Given all of the above, the biggest risk to Ur-Energy Inc. is likely the uranium price. If for some reason it remains at current levels or decrease, the value proposition of Ur-Energy Inc. will not be very rewarding for investors. But given the expected dynamics on the uranium market, U ₃ O ₈ should be going higher.

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