Uranium Royalty Corp: Speculative Play On A Beaten Down Sector
March 30th Uranium Royalty Corp. (TSXV: URC) exercised its option to purchase $ 10 million physical uranium (U3O8) as part of its investment in Yellow Cake plc’s IPO in 2018. Uranium Royalty bought 348,068 pounds of uranium at a price of $ 28.73 per pound, a 7% discount from the U3O8 spot price on March 29, 2021.
Uranium royalties make royalties or streaming investments in the uranium sector, which allows an investor to gain exposure to a run-down sector with potentially improved fundamentals without taking the explicit risk of uranium mining, including by purchasing physical uranium. In this way, the uranium royalty is applying the same model to a highly speculative sector that many successful licensing / streaming companies use in gold mining as well as in the oil and gas business.
The company has a stake in 15 uranium projects, mainly in the US and Canada, as well as a 5.9% stake in Yellow Cake plc, a specialist uranium purchase company.
Uranium prices fell a few years ago and appear to have upside potential
Uranium prices fell sharply after a massive earthquake in March 2011 caused a nuclear disaster at the Japanese power plant in Fukushima Daiichi. At that time, 54 nuclear reactors were in operation in the country, providing around 30% of the electricity. In response to the disaster, Japan closed all of its nuclear facilities by 2015. Today 33 went back into operation.
Uranium prices in US dollars per pound
Surprisingly, global uranium production continued to rise after the Fukushima incident and fallout, peaking at 62.4 million tons in 2016. When uranium prices reached around $ 20 per pound in late 2016, the cost structures of most global uranium producers were significantly higher than spot and long-term prices. Uranium spot prices have risen slightly since the fall of 2017 trough, now hitting around $ 31 per pound, but current prices remain well below cost for most manufacturers.
Uranium production figures, 2010-2019
Today 443 nuclear reactors operate with a total output of around 400 gigawatts (GW) in 30 countries around the world and in Taiwan. These plants generate around 10% of the world’s electricity. According to the World Nuclear Association, there are currently 53 reactors under construction, which corresponds to a capacity of around 60 GW. Another 97 reactors (101 GW) have been ordered or planned, and another 327 reactors have been proposed. Much of this growth will take place in China, where a core capacity of 197 GW is currently proposed. Nuclear power generation in this country is seen as an important policy initiative that enables China to meet its emissions targets.
Both in the US and around the world, nuclear utilities have reasonably “played” the price curve in recent years by postponing long-term contract negotiations with uranium suppliers. However, the extent to which the nuclear industry is no longer under contract has reached extreme levels. The graph below shows the growing gap between the contractually agreed and non-contracted nuclear fuel needs of US utilities.
Maximum expected uranium market demands from US nuclear power plant owners and operators, 2020-2029
Energy suppliers will soon have to make long-term agreements with uranium suppliers to limit the risk of potentially rising uranium prices. A key point of tension in these negotiations will of course be the price: the suppliers have little interest in reaching long-term contracts close to the current spot price of 31 US dollars per pound.
Strong balance sheet
As of October 31, 2020, Uranium Royalty had cash and securities totaling $ 38 million and negligible debt. Uranium Royalty, a pre-revenue company, has shown good cost control over the past three quarters under review. The operating cash flow shortfall, which was approximately $ 1.3 million for the quarter ended January 31, 2020, has decreased for three consecutive quarters and has fallen to only about $ 125,000 for the quarter ended October 31, 2020.
|(in thousands of Canadian dollars, excluding shares outstanding)||2Q FY21||1Q FY21||4Q FY20||3Q FY20||2Q FY20|
|Operating profit||($ 283)||(272 USD)||($ 427)||($ 780)||($ 656)|
|Operating cash flow||($ 125)||($ 245)||($ 502)||($ 1,326)||(229 USD)|
|Cash and securities||$ 37,936||$ 42,552||$ 43,046||$ 38,789||$ 24,570|
|Debt – End of Period||$ 40||$ 40||$ 40||$ 0||$ 12,702|
|Shares Outstanding (Millions)||71.8||71.8||71.8||71.8||44.8|
The 2021 financial year ends on April 30, 2021.
It is of course possible that nuclear construction projects around the world will be delayed or canceled and that nuclear utilities will continue to postpone reaching long-term uranium supply contracts. If so, uranium’s looming rally in recent years could reverse and negatively impact the stocks of the sector, including uranium royalties.
Based on supply and demand considerations alone, the price of uranium could rise from current low levels as new nuclear power plants come on stream and the nuclear power plants re-sign their long-term uranium supply contracts. In this scenario, Uranium Royalty, a speculative game in the field with a diversified investment portfolio and solid balance sheet, could produce solid results. However, we note that uranium mining-related stocks have generally only shown positive signs in the last few months after a sustained bear market.
Uranium Royalty Corp. traded on the TSX Venture Exchange at $ 3.73.
Information for this briefing was found through Sedar and the named companies. The author has no securities or affiliations with this organization. No buy or sell recommendation. Always do additional research and consult a professional before buying any security. The author has no licenses.