A Turn In Uranium And The Best Way To Play It

Big news for the uranium sector this morning as a new fund is being floated that will raise US$200 million to buy more than 8 million pounds of “yellow cake” U3O8 from the largest uranium producer in the world (Kazakhstan).

This comes after a series of events including mine shutdowns that are all lining up in a bullish way for the uranium sector.  A small selection of some of the recent bullish news for uranium:

Simply put, the uranium price has to go higher in order to bring supply back onto the market over the next several years. The only question is how high must it go before there is a significant supply response – my answer is probably about double current levels (mid-$40s).

The best way for an investor to profit from a double in the uranium price is to find stocks that offer substantial operating leverage to higher U3O8 prices. NexGen Energy (TSX:NXE, NYSE: NXE) stands out in this respect – some basic facts from NexGen’s PEA based on a US$50/lb U3O8 price:

  • C$940 million per annum in after-tax net cash flow,
  •  C$1.3 billion per annum in EBITDA,
  •  27.6 million pounds of production at US$4.42 per pound operating cost (potentially largest lowest cost uranium mine),
  •  90% operating margins.

Even using a US$40/lb U3O8 price NexGen’s flagship Rook I generates an after-tax IRR of 46.2%. The attractiveness of Rook I’s economics really begins to stand out as the U3O8 price begins to move above the US$30/lb mark, a level which might be much closer than it appears –  the current spot U3O8 price is US$23.02, however, the uranium fund-implied price (using premium to NAV in U.TO share price) is nearly US$26/lb.

NXE also has market cap large enough (C$950 million) that it is able to attract institutional buyers (previously Cameco was the only stock that hedge funds would use to play the uranium market). We have begun to see some early buying in the uranium space in recent days, possibly motivated by a TD Securities comment last week that it is now forecasting a 3 million pound supply deficit in 2018 after previously forecasting a market surplus.

From a technical chart perspective NXE is staging a technical breakout from a head & shoulders bottom:

NXE.TO (Daily)

This breakout (over C$2.80), if it holds, would target C$3.40+ over the coming weeks. Considering that the RSI and MACD are just moving out of neutral territory this move could easily reach the C$3.00-C$3.10 area over the near term before a healthy consolidation/pullback takes place.

Simply put, the fundamentals and the technicals are suddenly lining up nicely in the uranium sector and NexGen stands to be the “GO TO” name if this turn in the uranium sector proves to be the real deal.

Disclosure: Author is long NXE shares at the time of publishing this article and may buy or sell at any time without notice. 

 

DISCLAIMER: The work included in this article is based on current events, technical charts, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. The views expressed in this publication and on the EnergyandGold website do not necessarily reflect the views of Energy and Gold Publishing LTD, publisher of EnergyandGold.com. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.