The Uranium Tourist Guide Part II: Uranium Energy Corp $UEC, Sprott Junior Uranium Miners ETF $URNJ

It was the best of CEOs, It was the worst of CEOs.

The heyday of American uranium was in the 1960s through the 1980s.  It was the Cold War, and we needed to make ICBMs, as well as electrify the nation with the fuel of the modern age. Suddenly, in the 1970s, nuclear power plants were hit by massive cost overruns.  Even before Three Mile Island and Jimmy Carter’s Sunday Regulations, the average power plant in the early 1970s had a 200% cost overrun.  Of course we did have an oil crisis at the time, but even before Carter, regulatory oversight was often cited as a cause.  The combination of cost overruns and the fear evoked from the Three Mile Island incident led to a dramatic reduction in the number of new nuclear reactor projects.  

In 1993, the US government initiated the Megatons to Megawatts treaty with Russia, buying diluted weapons grade uranium from Russia in exchange for the decommissioning of their nuclear warhead arsenal.  While this was excellent for world peace, it devastated the uranium mining industry in the West.  The excess uranium from decommissioning nuclear weapons was just about running out by the mid 2000s, and the industry saw the impending uranium shortfall.  However, the resurgence of uranium mining was cut short by the Fukushima reactor incident in 2012 where Japan’s response was to shut down their nuclear reactors, and subsequently sell their stockpiles of fuel.  The uranium price spike and crash resulted in only one new uranium mining junior company completing their mine, Paladin Energy (PALAF) with their Langer Heinrich mine in Namibia.

The reason why I am going through this long history of Western uranium mining is not for entertainment, it is because after listening to enough uranium junior mining company earnings calls, I was struck with the feeling that a lot of these guys were not the brightest bulbs in the box.  If someone has thirty years of experience in uranium mining, how low in their class rank in college did they have to score to end up in a dead industry?  If you started your career in uranium mining in 1995, I think there are decent odds that the pool of applicants was a little thin.

This is in contrast to Uranium Energy Corp’s (UEC) founder and 1.2% owner Amir Adnani who is clearly sharp, and not shy for media appearances to market his firm.  Adnani was so shrewd that he went on a massive buying spree rounding up uranium assets at the trough of the uranium price cycle.  He bought Rosatom’s U1 Americas; remember when Hillary Clinton authorized the sale of American uranium assets to the Russians?  Well Amir bought them back for $112 million, 12 projects, three fully permitted.  Then Amir did an all stock deal to merge with UEX for another 13 Canadian projects.  He then acquired the Rio Tinto Roughrider project for $150 million, half stock and half cash.  By giving Rio Tinto stock, UEC now has a toehold relationship with Rio Tinto which usually leads to some amount of free advice and expertise.  Your large shareholders are only ever a phone call away.

All in all, Amir Adnani has very inexpensively rolled up an enormous portfolio of uranium assets, without ever producing a single pound of uranium.  They have bought and resold uranium at a profit, and they still have a contract to buy one million pounds from Rio Tinto at $39 a pound, I told you Amir is smart.  He was able to get the Hobson processing mill permitted in Texas, with a 4 million pounds per year capacity, it is the second largest operating uranium mill in the US behind only Energy Fuels’ (UUUU) White Mesa mill with a permitted 8 million pound capacity.  UEC claims that their first production of uranium will come as early as this August.  They have no long term contracts, so are 100% exposed to spot prices.  It would be hard to imagine a uranium company with more torque.

Warren Buffet famously quipped that you should look for someone with “integrity, intelligence, and energy, and if you don’t have the first, the other two will kill you.”  It is clear that Amir Adnani has the second two, but his salesmanship makes we wonder whether or not he has the first.  Adnani has been an active seller of stock at every stage of development of UEC, so his incentives aren’t as aligned as they could be.  I like CEOs who take out a second mortgage on their house to buy stock, not CEOs who sell stock to buy a second house.  I am being a little unfair, some selling is necessary to pay taxes on stock options, but I have to question just how much Amir Adnani believes in UEC’s future. 

It is hard for me to want to buy a company with a $2.7 billion market cap who has yet to produce a single pound of uranium.  To me, UEC’s presentations use even more pushy sales tactics than even the typical CEO is willing to use, focusing on the total addressable market and the macro trends, but never once detailing capex for bringing any of their assets online or making any attempt to calculate a return.  I can understand the appeal of someone hitching their caboose to the Amir Adnani train, in the age of Elon Musk, who cares if a flashy CEO overpromises and underdelivers, if what they deliver still outperforms the market?  UEC is already a 6x in four years, and quite honestly, with that portfolio of assets being shopped around by a skilled showman, who knows what could be cooked up with joint ventures and creative contracts?  As a value investor, it’s not how I prefer to do business, but then again, $1 billion for UUUU hardly seems like value at first glance either.  And I absolutely cannot justify Cameco (CCJ) at 49x EV/EBITDA.

Trying to find some comparables to put a value on UEC, when UUUU sold their Alta Mesa mill for $120 million, it had a capacity of 1.5 million pounds.  That would put UEC’s Hobson mill at a value of $320 million, and their Irigaray mill at $200 million.  UEC has deposits with 230 million pounds of uranium, 128 million measured and 102 million indicated.  There has been so little exploration spend in recent decades, that these numbers could change drastically, but so could everyone’s. Denison Mines (DNN) has 150 million pounds of uranium measured and indicated, and a market capitalization of $2 billion.  DNN also owns 22.5% of a 24 million pound capacity uranium mill in Canada with 77.5% owned by Orano, the French nuclear giant.  UUUU has an 8 million pound capacity mill and 70 million pounds of measured and indicated uranium for a $1 billion market cap.  

A system of equations, just like being back in high school algebra. If the value of the processing mills is ignored, then UEC is trading at a market cap of $11.73 per pound of measured and indicated uranium. DNN is at $13.33, and UUUU is at $14.20.  But if permitted and operational mills are worth $120 million per 1.5 million pounds annual capacity as the Alta Mesa sale indicated, then UEC is trading at $9.47 per pound, DNN at $10.40, and UUUU at $5.14.  Are any of these three more likely than the others to have underexplored assets?  Probably UEC with their extremely broad collection from their acquisition spree.  It is also important to note that both DNN and UUUU are producing, while UEC has yet to deliver any production.

The whole situation makes me feel like Faust, should I sacrifice value for thesis, should I join the modern age where the line between Elon Musk and Elizabeth Holmes is just a tad bit blurry?  Or should I just punt and buy the Sprott Junior Miner ETF (URNJ), which is 12% UEC, 11% DNN, and 5% UUUU?  If there ever was a time to punt into an ETF, this might be it, because I can’t find a small cap that really puts lead in my pencil.

Which would you rather have, a business with a shrewd and active salesman, but who sells about one third of all the stock he is granted from executive compensation?  A business that is actively producing in Canada with a CEO that sells all of the stock he is granted every year, and is not taking big chances to grow aggressively?  Or a business that is actively producing in the US, has recent insider buying, but is distracted by rare earth elements? I think my judgment is about 2/3rds UUUU and 1/3rd UEC with no allocations to DNN.  That doesn’t address the timing, for all I know uranium and the miners could crash before they rise again.  The uranium thesis has years and years ahead of it, and the recent runup in prices has been aggressive, but then again, almost every imaginable piece of news has been in uranium’s favor.  Kazakhstan is raising taxes on uranium production, sanctions on Russia are making it hard for uranium to get physically transported from Kazakhstan to the West, twenty countries pledged to triple nuclear energy capacity by 2050 at the COP28 UN Climate Conference in Dubai.  The short term price action is anyone’s guess.