CA - Uranium Energy: Nuclear Thesis Starts Picking Up

2023-06-23 13:10:41 ET

Summary

• Uranium Energy Corp. aims to resume production when uranium prices reach $60 per pound, driven by the demand for uranium in the renewable energy transition.
• Uranium Energy Corp. offers greater exposure to uranium demand compared to uranium ETFs and larger producers like Cameco Corporation, making it an appealing investment option.
• Shareholder dilution has prevented significant debt accumulation, enabling Uranium Energy Corp. to sustain its presence in the market despite not producing uranium.

Investment Thesis

The Uranium Energy Corp. ( UEC ) thesis is straightforward. Right now, the business is not in production. But when uranium prices reach $60lbs per pound, the business should resume its idled production.

I strongly believe in the need for uranium to supplement our renewable energy transition. The U.S. government strongly believes in the need for uranium. This is a straightforward investment thesis. This plays into what I call the triple Ds, Deglobalization, Decarbonization, and Digitalization (the topic of this Friday's blog).

Here's why I'm bullish on Uranium Energy Corp.

Why Invest in a Uranium Company

Before getting into UEC specifically, allow me to explain why I believe in the need for uranium. I'm not calling on a uranium squeeze. I've articulated my thoughts on this in the past. Succinctly put, the definition of a squeeze comes from the ''unexpected taking place.''

Given that so many uranium bulls together with utilities are eyeing up uranium prices, this will prevent a squeeze from taking place. Furthermore, I don't believe a uranium-price squeeze is healthy for my investment case.

The need for uranium boils down to a compromise between domestic energy needs and the threat posed by climate change. That's why I invest in Uranium Energy Corp. as part of my Future Energy portfolio.

Because I wish to participate in the key energies of the future. And given that uranium is carbon-neutral, it is seen as a suitable alternative to carbon-based energy sources, namely fossil fuels.

Note, I'm not calling for the full replacement of fossil fuels for my investment thesis to work out. I'm simply arguing that uranium energy will be yet another energy source from the U.S.

Everything that we want to flourish in our modern life boils down to the need for cheap power. From running AI training, AI inference, data analytics, heat pumps in our house, charging mobiles, charging EVs, etc.

Next, we'll turn our focus to why UEC.

Why Invest in Uranium Energy Corp?

Above, you see the price trends of Sprott Physical Uranium Trust ( SRUUF ) and Cameco ( CCJ ). The uranium ETF loosely tracks the price of uranium. But it will never get much upside. Fundamentally, if uranium prices stay around $65 to $70/lbs, that ETF will flatline.

Meanwhile, Cameco, one of the world's largest uranium producers based in Canada, will be able to significantly outperform the uranium ETF. However, Cameco, for all its size and positive operating leverage, contracts out its uranium pounds. And means there's a ceiling on the price that Cameco is able to sell its uranium.

I very much like Cameco. But at the same time, I believe that if I'm going to invest in uranium demand, I may as well play the trade to the maximum.

And by investing in UEC, I'm investing in a 100% unhedged business.

What About the Investment Risks?

UEC is not in operation right now. For my investment case to work out favorably, the price of uranium needs to cross $60/lbs and stay above this price stably for a period of a few months.

Even if the price of uranium right now appears to be rapidly moving towards this price point, the price of uranium works on a supply and demand balance.

In fact, there's a reason why uranium prices are not higher. And that's because there's a very large and unquantifiable amount of uranium in the secondary market.

And nobody can accurately say how much uranium there is in the secondary market. Many people will speculate that it should be drying up, but that same assertion could have been made at any point in the past 3 years.

Consequently, in the interim, the only way that UEC can remain viable is by diluting shareholders every so often.

If you read around about UEC, you'll come across a short thesis that argues this much. Essentially, asides from some bombastic phrases, the core of what the short thesis says is that UEC isn't producing any uranium and is diluting shareholders to keep afloat. And that's 100% accurate.

However, I would counter that by saying, that if UEC hadn't been diluting investors, its balance sheet would today hold a substantial amount of debt.

And by extension, if UEC had held some debt, it would probably not have survived this long.

The Bottom Line

Uranium Energy Corp. plans to resume production once uranium prices reach $60 per pound, driven by the increasing demand for uranium in the renewable energy transition.

Compared to other options like the uranium Sprott ETF or larger producers such as Cameco, UEC offers maximum exposure to uranium demand, making it an enticing investment opportunity.

However, investing in UEC is not without risks. The company is currently not in operation and relies on uranium prices exceeding $60 per pound.

Critics raise concerns about UEC's lack of production and occasional shareholder dilution, but I argue that the dilution has prevented substantial debt accumulation, allowing the company to stay afloat in the market.

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