2023-12-18 14:50:32 ET
Summary
- NexGen Energy is poised to play a key role in addressing the supply-demand mismatch in the uranium market.
- The company has recently beefed up its balance sheet.
- The stock looks overextended and could do with a pullback.
Why NXE Stock Should Be On Your Watchlist
NexGen Energy ( NXE ) is a Canadian-based mining entity that is poised to play a key role in helping bridge the ever-growing supply-demand mismatch in the uranium landscape. How pertinent could this be?
Well, according to the IAEA, the current global nuclear capacity stands at around 391 GW (e). If the globe is to hit its net-zero goals, the WNA believes that nuclear capacity will likely need to expand quite significantly and hit levels of 900GW (e)- 1000 GW (e) by 2040-2050.
If you want to narrow your horizon and only focus on conditions till the end of this decade alone, it is believed that the expansion of global nuclear capacity by 2030 would necessitate demand for 240m lbs of U3O8, yet, primary supply will likely only come in at 174m lbs; if one also includes secondary sources of the mineral which are unlikely to go anywhere from the 20m lbs run rate, you could be staring at a deficit of 44m lbs by the end of this decade (in aggregate the cumulative deficit from now until 2030 could hit 250m lbs)!
With such an attractive supply-demand picture on the anvil, it would likely pay to wedge yourself to an entity like NXE, whose principal asset, the wholly-owned Rook 1 Project, could potentially be in a position to generate 29-30m lbs of U3O8 annually and be a reliable source of supply for the western markets. All in all, If you want to be less esoteric about NXE's potential clout, one could alternatively say that the uranium supply that it mines from Rook 1 could be sufficient to power close to a third of total households in the US.
Do note that Rook 1 is based in the uranium-rich terrain of the Athabasca Basin and has measured and indicated mineral resources totaling 3.75 MT , at a grading of 3.10% U3O8, containing 257m lbs of U3O8. Given the high-grade minerals associated with this terrain, management believes that the all-in-sustaining cost could be very compelling at $10.69/lb. Thus, at an average incentive price of $100/lb, you could potentially be looking at a highly compelling business that generates $3.3bn in EBITDA and $1.59bn of FCF per year during the first five years of its operation.
Even from an operational risk perspective, Rook 1 offers a useful edge, on account of its proprietary Underground Tailings Management Facility that enables the storage of tailings in a safe space, thus dampening tailing disturbances or tailing failures.
Now, as things stand, the Rook 1 project is still in its infancy and NXE is in the process of securing various provincial and federal permits. On the earnings call, management implied that the project could go live four years after the provincial approval, which means production will likely only start by 2027.
Without any topline on offer, it's important that NXE has ample capital to burn, and we've seen that ramp up recently. Admittedly, operating losses per quarter have been trending up sequentially and are now not far from hitting the $20m per quarter landmark, meanwhile, the CAPEX run-rate per quarter has already stepped up to over $20m per quarter over the last two quarters. Given this degree of burn, it is heartening to note that NXE was able to beef up its balance sheet with healthy doses of both debt and equity offerings.
Earlier in the year, they announced a $250m ATM offering, of which they'd utilized 72% at the end of 9m (gross proceeds of $182m). Meanwhile, in Q3, they were also able to close an unsecured convertible debt private placement to the tune of $110m. All in all, NXE's cash balance is currently at record highs of $278m , and it should provide it with useful ammunition to carry on its FEED and engineering work. Even otherwise, future funding shouldn't necessarily be a problem for a high-quality asset like Rook 1 and earlier in H1 management had highlighted how the company had received expressions of non-binding debt financing to the tune of $1bn !
Closing Thoughts - Technical Considerations
Even though there's much to like about NexGen Energy's burgeoning potential in the Uranium space, developments on the charts suggest that the current risk-reward for a long position isn't too ideal.
The chart above helps explore if NXE could appeal as a suitable bargain opportunity for those looking to rotate within the Uranium space alone; essentially one is staring at NXE's relative strength ((RS)) versus its peers from the Global X Uranium portfolio. Based on where the RS ratio is currently perched, it does not look like NXE will offer great value as the ratio is currently hardly a breath away from hitting record highs and is a good 77% above the mid-point of its long-term range.
Then, if we switch over to NXE's own weekly price chart, we can see that over the last three years, the stock has managed to gain steady clout in the shape of a faint ascending channel. Since April this year, we've seen a rather steep uptrend (with the price taking support at the red trendline), and except for a brief pullback in September/early October, the steepness continues to persist.
Now essentially what you have is the price at lifetime highs, trading above the upper boundary of its channel range, and founded on a very steep uptrend that is unlikely to sustain for too long. Meanwhile also compounding the risk you also have a bearish RSI divergence , which typically points to changes in trends. Basically, what we can see is that even though the price trend remains relatively steep, the RSI has pivoted and has started making lower highs. When you have some incongruence between the direction of the RSI and the price action, it would pay not to be overly bullish.
For further details see:
NexGen Energy: Overextended For Now, But Keep It On Your Watchlist