CA - Uranium Energy: Production Start Date Is Still Unknown

2023-05-16 22:41:19 ET

Summary

• The Reserves for UEC various properties sum to 198.4Mlbs (M&I) and 67.7Mlbs (Inferred).
• A report by Kerrisdale Capital claims that UEC is further from production than commonly assumed.
• UEC needs to provide shareholders with clear and concise operational guidance for its ISR operations.

Unlike the price of U ₃ O ₈ , Uranium Energy Corp.'s ( UEC ) share price has been on a downward trajectory since early February. And the decline only accelerated after Kerrisdale Capital, an investment management firm, released a Short Report in March, heavily critiquing the company's management and asset portfolio. The report focused heavily on the size, quality, and stage of development of UEC's various properties.

In a previous article , I had discussed how UEC needed to bring at least some of its potential productive capacity online within a relatively short timeframe given its high cash burn. I rated the stock a Hold and decided to take a wait and see approach; however, Kerrisdale's report has prompted me to take a fresh look at the company. In this article, we'll discuss the report along with UEC's future prospects.

Company Background

UEC is a US-based pre-production uranium miner that holds a large portfolio of uranium-bearing properties spread over three countries. The U ₃ O ₈ contained within these properties sums to a respectable 198.4Mlbs (M&I) as well as 67.7Mlbs (Inferred). It should be noted, however, that all UEC's various properties are at different stages of development with its US-based holdings being closest to production.

The Kerrisdale report notes how UEC has recently described its hub & spoke Burke Hollow project in Texas as being on the "cusp of production". And the above graphic would seem to lend credence to that assertion. Kerrisdale quotes Scott Melbye, UEC's Executive Vice President, when speaking of Burke Hollow at a conference as saying, "we've started the production startup and development in the first wellfield."

The above graphic, coupled with Melbye's comments, bring many questions to mind: Given that prices of U ₃ O ₈ have shown significant life over the past year and a half, and given that UEC's US-based ISR facilities are "production ready", then why are they not producing? If CapEx dollars are being spent, then where are the total project CapEx projections? After all, that's something the shareholders providing that capital might want to know.

Production Ready?

But, undoubtably, the biggest question of all relates to timing? When will production start? If the company is developing the wellfields, then where are the schedules outlining expected completion dates for both the Texas and Wyoming Hubs?

Kerrisdale analyzed Melbye's discussion of the Burke Hollow, Texas operations and concluded convincingly, in my opinion, that Burke Hollow is at least two years away from production, assuming everything goes smoothly.

And if that's the case, it may mean that UEC will be required to raise additional funding between now and then. That's because, while the company did book positive net income of $10.5 million on revenue of almost $48 million in the most recent quarter, the bulk of that revenue came from selling off uranium inventory and only a miniscule $95 thousand came from tolling services.

The company's inventory is now down to just 571k lbs of U3O8 which has a book value of about $21 million, giving it an average price of just under $37/lb. Granted, UEC has purchase commitments of almost 2.4M additional lbs between now and 2026 at an average price of about $40/lb; but, if uranium prices hover at around $50/lb for the next 4 years, the company will only be provided with gains of ~$33 million on those trades and that will be spread over a 4-year timeframe.

Meanwhile, General and Administrative expenses during the three and six months ended January 31, 2023, totaled $4.8 million and $10.6 million, respectively. That was a rather steep increase from the $3.7 million and $6.8 million for the respective corresponding periods in the preceding fiscal year. And, as can be seen in the exhibit below, expenditures on the company's mineral properties are showing even greater rates of increase.

Some exploration costs can be attributed to a drilling campaign that commenced at the Burke Hollow Project in March 2021 and continues to this day, but much of the permitting, maintenance, and compliance costs are spread over the rest of UEC's growing property portfolio. These costs, along with the G&A expenses, continue to grow year after year and look set to eventually consume the company's current $33 million cash balance along with the gains that UEC looks set to make on selling down its uranium inventory. If that were to occur, the company would have to tap markets for another cash raise.

The only way to prevent that from happening would be to start production at its Texas and/or Wyoming Hub ISR operations.

But that brings us back to our original questions: How much will it cost to bring these supposed "Production Ready" properties to production and by what date will this be done?

Takeaway

Denison Mines Corp. ( DNN ) is currently working on a uranium ISR project in Canada's Athabasca Basin. It doesn't claim to be production ready and as can be seen in the note to its schedule below, the project was delayed due to Covid.

However, management has promised to update both their schedule and capital cost projections when the project PFS is released later this year. Until UEC can provide its shareholders with that kind of operational guidance for its projects, which are supposedly much closer to completion, its shares will be rated Sell .

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