SRUUF - Uranium Royalty Vs. Sprott Physical Uranium Trust: What Are You Betting On?

Summary

• Uranium bull market may be in its infancy.
• Supply/demand fundamentals look great.
• Valuations are quite scattered and it won't be that easy to make money when liquidity is tightening.
• Two funds are working to tighten the market further and you can bet on one of them.

Note: UROY trades on TSX as well and the financials are presented in Canadian dollars. Amounts in the article are represented in Canadian Dollars or US Dollars and labeled as such.

The last 12 months have been characterized by a very real shock to the global economy from higher energy prices. Who then could blame investors and speculators from wanting more Uranium in their portfolio? After all, nowhere are the supply and demand fundamentals better aligned for longer term price appreciation than for the cleanest form of energy. So it must have come as a surprise to our fan base (all three of them), when we went with a title like this for Uranium Royalty Corp. ( UROY ), ( URC:CA ).

Nobody following the ticker was happy with the call and our fan base eroded by 33%. But here's the thing. Facts move independently of the size of our fan base. UROY crumbled, to put it mildly and we put in a request with 20:20 hindsight to change the title to "A Very Good Exit Point".

Where do we stand with this one today after that drubbing and how does this compare to Sprott Physical Uranium Trust ( OTCPK:SRUUF ) ( U.UN:CA ), is what we look at next.

Annual Report

The recently released annual report covers the quarter ended April 30, 2022. UROY still lacks a revenue base, so all you saw were expenses on the operating income statement. The two big jumps versus last year were the investor communication and market expense and the $1.268 million CAD in share-based compensation.

The operating loss of CAD5.6 million was not too bad considering UROY is a startup by all reasonable means of assessment.

On the balance sheet side of things, total assets jumped by more than CAD100 million while liabilities expanded by only CAD13 million.

We will get to the "why that happened" in a moment. Before that, we will note that the asset expansion was driven by higher levels of short term investments and a very large jump in Uranium Inventories. Royalties and Royalty Option assets also moved up by CAD18.5 million.

The above-mentioned asset expansion was made possible by a very large amount of equity issuance during the year.

21 million shares added about $85 million to the coffers and that is what gave them the cash to pursue the asset expansion.

Outlook

One of the best things going for UROY is that the "hope" cycle continues to work for them. The balance sheet above can show you what we are talking about. In April 2021, total equity was about CAD75 million and with 75 million shares outstanding, that worked out to CAD1.00 ($0.75 USD) per share. Despite the operating losses, issuance of a large amount of shares at over CAD4.00, has raised the tangible equity value per share to a CAD1.87!

Combined with the share price decline, price to tangible book value has declined to 2.25X.

In March, when we wrote on it last, we were at 3.6X. Current improvement is notable obviously any sane investor would be less negative today than in March.

The bigger question remains whether you want to buy it. There is currently a dearth of opportunities in the royalty area within the Uranium space. The proof here is in the pudding as UROY has struggled to find big investment opportunities over the last 12 months. The further proof comes as UROY has gone in hook, line and sinker into physical Uranium. Physical Uranium now represents a 70% higher dollar value on the balance sheet compared to royalty assets. UROY renewed its share issuance program on September 1, 2022.

VANCOUVER, BC, Sept. 1, 2022 /CNW/ - Uranium Royalty Corp. (TSXV: URC) ("URC" or the "Company") announces it has renewed its at-the-market equity program (the "ATM Program") that allows the Company to distribute up to US$40 million (or the equivalent in Canadian dollars) of common shares of the Company (the "Offered Shares") to the public from time to time, through the Agents (as defined below), at the Company's discretion. The Offered Shares sold under the ATM Program, if any, will be sold at the prevailing market price at the time of sale.

Sales of Offered Shares through the ATM Program will be made pursuant to the terms of an equity distribution agreement dated September 1, 2022 (the "Distribution Agreement") with a syndicate of agents led by BMO Nesbitt Burns Inc., and including BMO Capital Markets Corp., Canaccord Genuity, H.C. Wainwright & Co. LLC, Paradigm Capital Inc., and TD Securities (collectively, the "Agents").

The Company intends to use the net proceeds of any such sales under the ATM Program to finance the acquisition of additional royalties, streams, physical uranium and similar interests and for working capital.

Source: Seeking Alpha

So selling shares at more than 2.0X tangible book and buying more Uranium is going to be the primary agenda.

The impact here is going to be one that boosts tangible book value per share, but likely drives the price a bit lower. Why? Well, the technically pure ETF/Trust in this space SRUUF trades at a 6.22% discount to NAV.

If UROY traded there today, it would drop to below $1.40 USD ($1.80 CAD) or about 50% from here. The more UROY becomes SRUUF, the more the premium should drop.

Verdict

UROY's physical Uranium purchases are jumping in where SRUUF left off. SRUUF has struggled to move to a premium in the last few months and hence unit issuance has dried up. UROY's jump here is very interesting for the Uranium bullish crowd.

The very large premium to NAV makes UROY rather indifferent to issuing shares to buy more Uranium and that could make a tight market, tighter.

But the more UROY becomes like SRUUF and the more it becomes a physical Uranium fund, the lower premium should go. In an ideal world, we want to be Long SRUUF and Short UROY. Due to the extremely tiny size of UROY, we have decided to pass on such a paired trade, but anyone long UROY should consider moving to SRUUF.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

For further details see: