Introduction

In April 2022, I wrote a bearish article on SA about US-focused uranium miner Ur-Energy (NYSE:URG) in which I said that the company was looking expensive as the net present value (NPV) of its Lost Creek project was just above $200 million. Uranium spot prices have recently surpassed $70 per pound, but production at Lost Creek is ramping up slowly and the company has contracted sales agreements at just $62 per pound. Considering the market valuation has soared by over 76% since early July 2023, I think this could be a good time to open a small short position. Let’s review.

Overview of the recent developments

In case you’re not familiar with Ur-Energy or my earlier coverage, here’s a brief description of the business. The company was incorporated in 2004 under the laws of the Province of Ontario and is focused on the acquisition, exploration, development, and production of uranium. Its flagship project is Lost Creek in the state of Wyoming, which is an in-situ recovery (ISR) uranium facility that produced around 2.4 million pounds of uranium between 2014 and 2019.

Ur-Energy

Lost Creek has measured and indicated resources of 11.9 million pounds at an average grade of 0.046% but the cash costs were low thanks to ISR. This is an extraction technique that is somewhat similar to fracking as it includes injecting chemicals into an aquifer with a uranium ore body. The chemicals then make the uranium spread over large areas of the aquifer, with the uranium plume getting to the surface through production wells. Ur-Energy also owns the Shirley Basin ISR uranium project in the same state, which has produced over 28 million pounds of uranium. This project has a licensed annual mine capacity of one million pounds and has measured and indicated resources of 8.8 million pounds at an average grade of 0.23%. Its production costs are estimated at $15.86 per pound and according to a preliminary economic assessment (PEA) from 2015, Shirley Basin’s NPV is $146 million at $65.29 per pound of uranium over the life of mine. However, this project is barely mentioned in the latest corporate presentation of Ur-Energy.

In addition, I think the NPV is likely much lower today due to rising costs of construction and raw materials. As investors started flocking back in uranium in 2021 as energy prices rose following the end of COVID-19 lockdowns, spot uranium prices rose above $40 per pound.

When I first covered Ur-Energy on SA in May 2021, the company was aiming to have an annual production of about 2 million pounds of uranium by 2023.

Ur-Energy

Yet, the first sales agreement was inked in August 2022, and it was for just 200,000 pounds of uranium concentrates over a period of six years beginning in the second half of 2023. In 2022, Ur-Energy captured just 325 pounds of uranium at Lost Creek. However, 2023 started strong as the company secured several more sales agreements amid soaring uranium prices due to supply-side uncertainty as a coup in Niger led several mines to suspend operations while deliveries from Russia are threatened due to insurance sanctions. As of the time of writing, uranium spot prices stand at $74 per pound.

On October 30, Ur-Energy announced that it sold a total of 190,000 pounds of uranium at an average price of $62.56 in the first nine months of 2023 and that it expected to sell another 90,000 million pounds in the fourth quarter of the year. The company currently has three sales agreements with total average pricing of around $62 per pound that cover the 2023 to 2028 period, which means it could book revenues of around $220 million over that timeframe.

However, I think there are two red flags here. First, commercial production at Lost Creek restarted in May 2023 and it has been ramping up slowly, with just 30,491 pounds captured and 15,759 pounds drummed in Q3 2023. As a result, Ur-Energy has had to rely on its inventory to make deliveries under its sales agreements. With spot uranium prices at $74 per pound, the company could be losing around $12 per pound if it runs out of inventory and has to buy uranium on the spot market. On a positive note, the cash costs on sales from production are below $20 per pound.

The second red flag is that Ur-Energy’s profitability is limited by the sales agreements – if spot uranium soared to $100 per pound, the company would still be selling at around $62 per pound. Lost Creek produced over 700,000 pounds only in 2015, which means that sales on the spot market are unlikely to take place. If Ur-Energy manages to deliver 3.3 million pounds of uranium between 2024 and 2028 (current sales agreements) and the gross profit per pound sold remains at the $32.41 per pound level of Q3 2023, you are looking at a total gross profit of $107 million over the period.

Turning our attention to the valuation, the market capitalization of Ur-Energy has increased significantly over the past few months as uranium prices soared and it stands at $439.5 million as of the time of writing. As of October 26, the company had $55 million in cash (see page 37 here) which puts the enterprise value at $384.5 million. As of September, Ur-Energy had an inventory of 169,945 pounds of uranium, which are worth $12.6 million at the current spot price. In my view, Shirley Basin should be valued at up to 0.5x NPV (about $73 million) considering its PEA is old and the CAPEX and estimated operating costs are likely much higher today. Regarding Lost Creek, I doubt that the net income from there will be much higher than something like $20 million for the 2024-2028 period considering operating costs stood at $11.3 million in Q3 2023 alone as production is ramping up (see page 21 here). Overall, I think that Ur-Energy should be worth about $160 million ($55 million+$12.6 million+$73 million+$20 million) and that the increase in the market capitalization of the company over the past few months creates a compelling short selling opportunity.

Data from Fintel shows that the short borrow fee rate stands at 3.65% as of the time of writing and considering the short interest is just 2.9% of the float, the short squeeze risk here seems low. That being said, it could be best for risk-averse investors to avoid this stock as there are no call options available to hedge the risk here. Looking at the upside risks, I think there are two major ones. First, uranium prices could continue rising due to geopolitical tensions and this could act as a catalyst for the share price of Ur-Energy over the short and medium term. Second, the high spot uranium prices could enable Ur-Energy to secure sales agreement at prices above $62 per pound over the coming months for the period after 2028.

Investor takeaway

Ur-Energy is far from the 2 million pounds of uranium production per year it was aiming for when I first wrote about it in mid 2021 and I doubt that the company will reach that level anytime soon. Uranium prices are soaring at the moment, but this matters little as the company has sales agreements at around $62 per pound for the next four years. In my view, opening a small short positions here seems viable as the short borrow fee rate is below 4% but I think that risk-averse investors should avoid this stock.