NLR - Ur-Energy Could Be A Winner

Summary

• Miners could rebound sharply on improved uranium prospects.
• Ur-Energy appears poised to capitalize on the expected boom in the uranium industry.
• Lost Creek is laying the groundwork for uranium production and the market has solid fundamentals.

With Improved Prospects for Uranium, Miners Could Rebound Very Strongly

The boom in natural gas and oil prices in the spot markets over the past year, due to the recovery from the COVID-19 crisis and subsequent supply shortages due to the war in Ukraine, has drawn investors’ attention to the possibility of generating impressive returns from the fossil fuel markets.

This has stolen the stage from other energy commodities such as uranium, which has fallen 10.85% from a peak of $59.45 a pound in March to $53 as of this writing. Following the downtrend in uranium prices, many US-listed uranium producers have recorded sharp declines, as evidenced by the performance of the ETFs in the chart below.

As a benchmark for US-listed uranium stocks, Global X Uranium ETF ( URA ), VanEck Vectors Uranium+Nuclear Energy ETF ( NLR ), and Exchange Traded Concepts Trust - North Shore Global Uranium Mining ETF ( URNM ) fell 4.5%, 12.3% and 15.8% respectively so far this year.

But following decisions by Japan to restart nuclear reactors, China to build plants to boost domestic power generation and Germany to extend the lifespan of nuclear reactors in response to the current energy crisis of unparalleled proportions, the uranium energy sector has significantly better prospects now than just that a few weeks ago. Given the improving outlook for commodity demand, it makes sense for operators to ramp up production and invest in projects to meet future energy commodity needs.

Ur-Energy Appears Poised to Capitalize on The Uranium Industry Upswing

Among US-listed uranium stocks that could see a share price boost in the coming period is Ur-Energy ( URG ) ( URE:CA ), a Littleton, Colorado-based operator of uranium mineral properties in the US.

Ur-Energy's portfolio of assets includes mining activities for uranium production in south-central Wyoming. The energy feedstock is recovered on-site through the operation of a facility called Lost Creek, which is planned to be expanded.

The portfolio also includes the necessary permits for the construction of the company's second uranium production facility, which will be operated in Wyoming's Shirley Basin.

The Lost Creek Production Asset is Gearing Up for Full Rate Production

While waiting for the first uranium order to be fulfilled, Lost Creek has been operating at minimal production levels.

In the meantime, in addition to maintenance work on the plant, the company is investigating how the performance can be brought to an optimal level as soon as it is necessary to produce at full speed. In this phase, the company also wanted to reduce production costs by making the factory more efficient to showcase during an operational phase.

Lost Creek consists of two uranium mining units named MU1 and MU2, both of which are poised to resume production of the energy feedstock once Ur-Energy Inc. has secured sufficient upfront contracts to supply uranium to meet internal needs in the United States.

The First Contract Was Placed in the Vault

On August 8, 2022, Ur-Energy Inc. announced through its website that it had signed a multi-year contract to supply uranium to a leading US nuclear service. This supply agreement is the first in a series that Ur-Energy will enter into going forward as part of a product marketing plan that is of strategic importance to the company and highlights Ur-Energy's following commitments. From now on, a portion of the company's uranium production will be used to fulfill forward sales contracts with US-based nuclear utilities.

Based on the sale agreement announced last September, Ur-Energy Inc. has committed to ship 200,000 pounds of uranium in concentrates annually for a period of 6 years beginning sometime in the second part of 2023.

The prices at which uranium concentrates will be sold have been set on the assumption that they must at least cover the all-in cost. These sales prices are, of course, intended to be profitable for Ur-Energy Inc. and will be increased every year.

In the near term, the uranium price environment is expected to support higher prices for these supply agreements. Analysts are predicting that the commodity price will rise more than 9% from current levels to $57.83 a pound within the next 52 weeks.

Long-Term Outlook for Uranium

But looking to the longer term, this bodes well in terms of profitability for both September’s sales contract and the future sales contracts Ur-Energy Inc. will sign, as evidenced by the following expert panel statistics on uranium energy issues.

According to the 2021 edition of the Fuel Report prepared by the World Nuclear Association, due to an expected increase in global electricity demand over the next 9 years from 2022 to 2030, the demand for uranium is expected to increase by 27%, and the current capacity of the nuclear power plants will expand by about 16%.

In 2021, nuclear reactors around the world required about 62,500 tons [MT] of uranium. While the report puts the demand for uranium in 2030 at 79,400 MT.

The restrictions and lockdowns to limit the spread of the Covid-19 virus that caused the 2020 pandemic, led to a drastic reduction in energy demand and, consequently, a significant decrease in the contribution of uranium as an energy source. This caused the market price to drop sharply and proved unattractive for many producers of the commodity. So there is still a global supply shortage of uranium today.

But now, with demand picking up quickly, Ur-Energy Inc., like other operators, will have the incentive to resume full-capacity operations and accelerate the production of uranium for sale to US-based nuclear utilities. The uranium price started to rise as early as 2021, around the time of the recovery from the pandemic crisis.

Buying activity from financial and uranium-backed exchange-traded funds also made a solid contribution to expectations for a long-term upside in uranium prices.

Higher Prices Give Ur-Energy Inc. An Incentive to Engage in Development Activities

This uranium price and demand background is encouraging Ur-Energy Inc. to engage in certain drilling activities to develop wellfields [production units] that will feed header houses and the construction of additional header houses within the second uranium mining unit MU2.

This puts the company in a better position during the ramp-up to reach production as quickly as possible.

In addition, the company will continue to research and develop low-cost technologies that will be applied to the mining operations in Lost Creek as well as the Shirley Basin, when this production facility is completed.

In particular, these are technologies that make it possible to significantly reduce the time and cost of drilling rigs, as well as reduce the consequences for the environment.

The Balance Sheet Looks Moderately Solid

As of June 30, 2022, Ur-Energy Inc.'s balance sheet shows $43.3 million in cash against total debt of $12.3 million resulting in net debt of $31 million. This margin is approximately three times the company's 12-month operating expenses , including research and development costs and financial expenses.

This liquidity position allows the activities to be funded for a few years until the company secures enough sales contracts to supply the raw material to US utilities.

In addition, the company has $15.7 million in finished pounds of uranium, which represents significant upside potential for the share price as this stock of commodity can be marketed at a higher than current price until Lost Creek is 100% operational. Then Ur-Energy Inc. will have a more solid underpinning on which shareholders can hope for further gains in the stock price.

Based on solid uranium market fundamentals and the current status of the company's operations, it should not be long before the potential is realized. Meanwhile, conditions for uranium price increases appear to remain favorable for many years to come.

The Stock Price Doesn’t Look Expensive

The stock was trading at $1.21 per share as of this writing for a market cap of $272.80 million and a 52-week range of $0.95 to $2.15.

The share price is trading below the middle point of $1.55 of the 52-week range and below the long-term trend of the 200-day simple moving average of $1.30 .

On the Toronto Stock Exchange, Ur-Energy was trading at Canadian Dollars [CA$] of 1.65 per share for a market capitalization of CA$360.95 million. On the Canadian stock market Ur-Energy had a 52-week range of CA$1.26 to CA$2.72. The stock price is trading below the long-term trend of the 200-day simple moving average of CA$1.6736 .

Based on recent valuation, the current share price is not high, but when compared to the post-income tax Net Present Value per share of the Lost Creek’s project of $0.93, which stems from an amended version of the preliminary economic assessment [ PEA ] in 2015, this stock price doesn’t look cheap.

Considering that the document is from 7 years ago and the discount factor is quite high at 8% [usually mineral properties are valued at 5%], the NPV used as a benchmark for a valuation approach of the stock could perhaps be closer to the current market price. The estimate was made at a price per pound of uranium of $66.03, which is 24.6% higher than the commodity's current price in the market. However, the pricing environment is improving and strong underlying factors such as the energy crisis and efforts to mitigate climate changes could potentially allow uranium to rise well above 24.6% in a few weeks in my opinion.

Wall Street’s Target Price and Recommendation Rating

The stock has an average price target of $2.94 while recommendation ratings are 2 Strong Buys and 2 Buys.

Analysts’ Recommendation Ratings:

Analysts' Average Price Target:

Conclusion - This Stock Might Deserve a Closer Look

Investors should consider this stock when increasing their exposure to uranium miners as Lost Creek continues to lay the foundation for full-scale uranium production and the market has solid fundamentals.

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