URE:CC - Ur-Energy Can Benefit From Proposed Ban On Russian Nuclear Fuel

2023-03-16 08:58:32 ET

Summary

• A recent bipartisan bill has been introduced to ban Russian uranium imports, which in theory would stimulate a return of domestic mined production.
• Ur-Energy has ample reserves and facilities that it can activate swiftly in order to resume production if the market conditions are right.
• It remains to be seen what will come with such a bill in terms of potential incentives for the US uranium mining industry to resume uranium extraction.

Investment thesis: A recent bipartisan bill that Congress is advancing, seeks to end all Russian uranium and nuclear fuel imports. Ur-Energy ( URG ) is arguably better positioned than any other US uranium mining company to add significant volumes of mined uranium production to the domestic tally, in response to any stimulative effect that the bill might have. It can do so on short notice, as long as the market or government incentives in place make it worthwhile. It remains to be seen what will be offered in the bill, or within some parallel measures to domestic uranium miners. It is very unlikely to be simply a ban on imports, with no provisions meant to stimulate the domestic mining and processing industries. Ur-Energy's stock price is currently trading at half of its highs seen this decade, which is a bargain entry point within the current market and geopolitical context, which suggests that the US uranium mining industry is on the cusp of entering a new sustained era of booming times. At the same time, if there will be no stimulative effect within this proposed bill for domestic miners, then it could potentially take another few years before Ur-Energy will ramp up production, making it worthwhile for investors.

Ur-Energy's financial results are suffering from the decision to idle operations

As we can see, there is not much to be cheerful about in terms of Ur-Energy's financial results for the past few years. The main factor involved in these poor results as of late has to do with its decision to mostly idle its mining and other activities. For the past two years, it did not sell any uranium, based on Ur-Energy's 2022 full-year report . It intends to sell 280,000 pounds of uranium this year, for an estimated revenue of $17.3 million. On the back of modest sales volumes, that is far below its potential capacity, it can still lead to a full-year earnings loss, but perhaps it will not be as steep as what we saw in the past two years. Its estimated forward P/E is just under 9, therefore it seems that positive results are expected going forward.

It should be noted that back when Ur-Energy was still operating as a functioning uranium mining company, it did produce positive net earnings, as we can see from the yearly earnings chart I provided above. In 2018 , Ur-Energy sold 480,000 pounds of uranium, which led to a positive net earnings result of $4.5 million, on revenues of $23.5 million. Past results show in my view its ability to be profitable, which suggests that the current financial losses we are seeing as the company remains mostly idle can be reversed in the event that favorable market conditions will stimulate a return back to mining, processing, and trading of uranium.

The efforts to curb Russian uranium exports

The Western economic war on Russia, over its invasion of Ukraine, has undergone numerous rounds of punitive measures, and there are increasingly few sectors left that can still be targeted. Nuclear energy remains one such sector that is still left to be affected, and it now seems like Congress is set to prepare and presumable pass legislation meant to remedy it.

In regards to the odds of this bill passing, given the spirit of the times, it has a very high chance of getting through in my view. I also expect that it will come with measures meant to stimulate the domestic uranium mining and processing industries, given the low levels of domestic production that we are seeing in the past half a decade or so.

Even though America's nuclear fuel needs can be met by reliable partners, such as Canada & Australia, given the times we live in, having some degree of energy self-sufficiency has become increasingly attractive from a geopolitical point of view. It is also economically attractive to have domestic supplies.

It remains to be seen what incentives there will be baked into this initiative. The very fact that Russian uranium will not be available on the US market in the future does not on its own stimulates a significant nuclear fuel price increase in the US market, because Russia will probably just sell it to other customers, making supplies within the global market available from other sources. I expect that we will see measures adopted in parallel with such a ban on Russian nuclear fuel meant to benefit local US uranium miners because it is a great opportunity to revive the otherwise idled domestic uranium mining industry.

Ur-Energy has ample reserves and facilities in place to ramp up production and sustain it

Ur-Energy has just under 12 million pounds of uranium reserves in the measures & indicated category at its Lost Creek site, with ample licensed capacity to achieve an output of up to 2.2 million pounds/year, and physical infrastructure in place to help it ramp up production on short notice if need be. There are also 6.6 million pounds in inferred resources, which could potentially be upgraded.

The Shirley Basin property has 8.8 million pounds in the measures & indicated category. The site is not nearly as ramp-up ready as Lost Creek, but with some time and investment, it can potentially come into play as a second important source of mined supply. Ur-Energy is also sitting on the Lost Soldier property which has the potential for uranium resource additions, and the Lucky Mc Mine site, which is a very mature mining site, having produced almost 47 million pounds of uranium in the past, under different ownership. It can be assumed that more resources can be squeezed out of a project that mostly ceased to operate due to very low uranium prices in the 1990s. As uranium prices improve, the project may have significant potential.

Investment implications

With a market cap of about $280 million, and proven uranium resources that at the current spot price of $40/pound, amount to about $800 million, with significant potential capacity to add more proven reserves, Ur-Energy stock seems like a good potential buying opportunity at the current price level. It should be noted that contracted uranium sales tend to fetch a higher price. For instance, Ur-Energy has contracts for 2023 delivery at an average price of just under $62/pound. On the other hand, it is a company that is currently mostly keeping its potential production capacities idle, which makes it an arguably less than attractive buy & hold opportunity, given that there is just no telling when those resources will finally start to translate into positive financial results.

The recent move by Congress to get the ball rolling on potentially banning Russian uranium from the US market, while I assume that it will also come with some perks for domestic producers, is potentially the trigger that could in theory move Ur-Energy to shift back into production mode. It remains to be seen how the congressional initiative will unfold, and whether it will, as I suspect lead to stimulative effects for the US domestic uranium mining sector. If it will, then Ur-Energy is arguably the ideal investment contender, since it is the best-positioned company to take advantage of the situation. For now, since there is no clear indication in regards to what stimulus the domestic uranium mining industry is set to enjoy, I will personally wait and see, at least for now.

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