Tuesday, March 24, 2015

Looking Glass View of UR Energy

Representatives from UR Energy (URG:  NYSE; URE:  TSX) made an appearance at the Wall Street Analyst Forum in New York City the second week in March.  The company has made considerable progress, giving management a new found confidence.  The company’s Lost Creek uranium mine in Wyoming has been producing since third quarter 2013, providing validation for the URE’s in situ mining technologies.  A second asset, Pathfinder Shirley Basin, has reached the permitting stage and appears to be on track to go commercial in 2017.   

According to the URE’s investor presentation the company has all the right assets, has deployed an efficient and effective mining technology and is led by the most skilled management.  Oh, I forgot to mention:  UR Energy benefits from the best competitive positioning to address favorable demand conditions.  Such arguments are to be expected in investor presentations.

Reported financial results tell a better story  -  or at least a believable story.  Revenue in 2014 was $29.4 million, the first full year of operation at Lost Creek.  It cost $17.9 million to deliver the production, leaving UR Energy with $11.5 million in gross profits.  That is a 39.1% gross profit margin for those who keep track.  The company is trying to begin new properties into production, so development, administrative and general expenses are significant  -  $18.5 million in 2014.  That left UR Energy with an operating loss of $7.0 million in the year 2014.  Of course, it was dramatically smaller loss than reported the year before when the operating loss was $23.4 million.

If investors only look at UR Energy’s reported gross profit and operating losses, they will likely walk away with a distorted picture of the company’s prospects.  Since non-cash expenses were a significant portion of operating costs, the company’s cash flow situation is much rosier than suggested by the operating loss.  Collecting on accounts receivable set up earlier also boosted cash flows.  Operations actually generated $1.9 million in cash during the year.  This represents a dramatic change from previous years when the company burned large sums to support operations  - $25.7 million in the year 2013 alone.

Cash is important to UR Energy.  In fact, the company seems to be a bit money hungry.  Management indicates $30.6 million is needed for capital investments the next couple of years to build out its Pathfinder Shirley Basin mine.  Construction began in January 2015.  Management estimates ‘capex’ will be about $31.26 per pound with operating costs of $14.54 per pound on top of that, ringing up total production cost of $45.80 per pound to cover with long-term supply agreements.  Supply agreements in place in 2014 have been bringing in near $50.00 per pound on average.      

UR Energy is not exactly flush with cash.  The company reported a nest egg of $3.1 million in the bank at the end of December 2014.  Funds are left over from two debt financings completed in the last two years, totaling $80 million.  The company has a banking relationship with RMB Australia Holdings that has provided a revolving line of credit secured by the Pathfinder assets.  The most important source of cash for UR Energy might be in its supply agreements.  The company has multiple sales pacts in place that call for deliveries between 150,000 to 200,000 pounds of uranium per year through the year 2020.   The ease with which UR Energy has found sales agreements is understood in view of $57 million in annual demand from U.S. utility companies for energy production and the paltry domestic supply less than 5 million pounds per year.

Unfortunately, shares of UR Energy do not trade like those supply arrangements are securely in place.  The half dozen or so analysts who have published estimates for URG have formed a consensus of $0.11 in earnings per share in the year 2015, which if achieved should deliver some impressive comparables as the quarters unfold.  The group has coalesced around a growth rate near 19%, while the stock is priced at 8.6 times the 2015 consensus estimate. 

The stock has been volatile over the last year or so, establishing a beta of 1.75 in trading on the NYSE.  Nonetheless, URG has demonstrated a bit of spunk in recent trading sessions.  A review of a point and figure chart for URG suggests the stock could rise as high as $3.80 in the long term.  In our looking glass URG appears as a stock that should be watched carefully. 


Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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