DNN - Uranium Energy: Investors Are Still Waiting For Production Start

2023-09-12 13:26:03 ET

Summary

• The Resource size for Uranium Energy Corp.’s various properties sums to 226.2 Mlbs (M&I) and 102.7 Mlbs (Inferred).
• Uranium Energy's recently completed purchase of an exploration-stage property in Canada’s Athabasca Basin is reviewed.
• The company’s Wyoming-based Christensen Ranch ISR Project is apparently nearing production.

I last covered Uranium Energy Corp. (UEC) in May, assigning the stock a Sell rating. My thesis revolved around the fact that the company does not produce any uranium and has been relying on the sale of existing inventory for almost all of its revenue. If a picture is worth 1000 words, then the thesis of that article can be summarized by the following screenshot.

However, since then the stock has been on quite a tear as it rides the wave of a rapidly developing new uranium upcycle. My portfolio, obviously, did not benefit from UEC's price run, but I do have plenty of uranium exposure through positions in Denison Mines ( DNN ) and Cameco (CCJ), the latter of which actually produces uranium and a lot of it.

For UEC, Q3 was very similar to Q2 as the company continued to rely almost exclusively on the sale of existing inventories for almost all of its revenue.

The company is due to release fourth-quarter earnings in the coming days, and I doubt much will change. UEC continues to rely on the sale of inventories for much of its revenue; however, over recent months, the company has been providing investors with a steady news flow. From a deal with Rio Tinto ( RIO ) to the completion of a restart program at the Christensen Ranch ISR Project in Wyoming, UEC does, in fact, appear to be moving towards some sort of production restart.

RIO Tinto Deal

Last month, UEC completed the purchase of a portfolio of exploration-stage projects in Canada's famed Athabasca Basin for CAD$1.5 million. The deal will add an additional ~44k acres to UEC's land holdings in the Basin, which now totals more than 1M acres.

Most of this acreage comes from two deals the company completed last year, when in June it acquired Canada-based UEX Corp. in an all-stock transaction. This was followed up in October, when UEC purchased the Roughrider uranium development project from Rio in a $150 million cash and stock deal. All of this acreage is either exploratory or developmental stage at best and won't be producing for many, many years to come.

As I discussed in my first article on the company, these assets may very well have some long-term value, but it's very rare that one sees a pre-production miner successfully pursue what is essentially becoming something of a roll-up strategy. UEC appears to be trying to carve out a substantial presence in both US ISR extraction as well as Canadian hard rock uranium mining through the purchase of other exploration stage miners as well as explored, or partially explored, properties from players looking to exit the space.

There's nothing wrong with having a broadly diversified property portfolio; after all, other producers such as Cameco also have geographically diversified portfolios. But these other players often bankrolled their expansions by using positive free cash flow generated from existing operating mines. UEC is depending on uranium inventory sales to pay for U.S. mine restarts, its Athabascan expansion, as well as covering operating costs. Also, last quarter General and Administrative expenses alone ran at $3.75 million, substantially higher than 2022's Q3 G&A cost of $3 million. It'll be very interesting to see what Q4's number comes in at, later this week.

What will also be very interesting will be the company's purchased uranium inventory levels, which totaled 771k lbs. at the end of Q3. Granted, the company also has inventory purchase commitments of about 1.8 million pounds between now and 2026, but it's highly likely that UEC's growing list of spending obligations will draw that number down rather quickly. The company also had $17 million in cash at the end of Q3.

U.S. Operations

Although the uranium sector is only beginning to get more media attention, it's worth remembering that the current uranium up cycle really began in the summer of 2021, almost two years ago. The trigger was the introduction of the Sprott Physical Uranium Trust (SRUUF), and, since then, a growing awareness of uranium's long-term prospects have attracted even more liquidity to the space.

With a rising uranium price, UEC should be focused on bringing its property portfolio to production. And it's certainly taking steps to do so at some of its operations. In July, the company announced it had completed the Restart Program at its Christensen Ranch ISR project in Wyoming; however, the press release is bereft of any details concerning the actual amounts that will be produced as well as the exact dates at which production will begin to ramp. The press release does, however, show investors an inordinate number of pictures and gives them a long list of tasks that have been completed at the property, such as the "Conversion of lighting in plants and wellfield module buildings to energy efficient LED." That's correct, they're telling investors that they changed a light bulb.

Over at its Texas operations, the company continues to drill exploration and delineation holes, and has not provided any type of projected production start date for that location either.

Takeaway

UEC has long told investors that its U.S. ISR operations were "Production Ready."

Yet the price of uranium has been rising for over two years now, and we have yet to see UEC produce any meaningful amounts of uranium. Granted, it does appear that Christensen Ranch will begin producing in the near future, but, even there, investors have very little information for a project that is supposedly that close to production. The company has not provided a project NPV, an IRR, Capex projections, or any guidance as to how much uranium will be produced annually at the site. Irigaray and Christensen Ranch have a licensed capacity of 2.5m lbs. per year and 18.95m lbs. of Indicated Resource.

Will they produce at the full 2.5m lbs. of licensed capacity? What will be the Life of Mine? How long will it take to ramp to full production? What will the operating costs be? What will the All-In Sustaining Costs be? For me, there are just too many open questions for a project that is supposedly on the cusp of production. Until there is greater clarity on these matters, I will stay away from the stock and maintain a Sell rating on Uranium Energy Corp.

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