Uranium Energy (UEC): A Rising Star In The Uranium Sector, Why I Own This

Investment Thesis

Uranium Energy Corp. (NYSE:UEC) has been on a rocky path over the past twelve months. Indeed, in the interest of transparency, I’ve been recommending this stock through all its vicissitudes as investors’ attention turned away from the uranium sector.

However, in the past several months, interest has once again returned to the sector as its fundamentals continue to improve.

Cameco Corporation (CCJ) is the name that most uranium investors follow. And this has delivered strong returns in the past 3 months. However, UEC stock has outpaced both CCJ and Energy Fuels (UUUU).

However, even though there are still some critical blemishes in this investment thesis, I now have significantly more clarity and understanding of the moving parts at play in the uranium sector.

Here’s why I believe that right now is a very good time to buy into UEC. In the analysis that follows, I explain both the negative and the positive aspects readers should be mindful of.

Bearish Arguments Facing the Uranium Sector

I’ll discuss the single most bearish consideration in the first instance, as I believe that without being transparent about it, I would be doing you a disservice.

Realistically, nobody has any idea about how much uranium supply there is abundant in the market. People have been speculating since 2018 that the secondary supply of uranium was drying up, and yet, we are in 2023 and there still continues to be secondary supply reaching the market, which market participants had long ago expected to have thinned out.

What is the secondary supply of uranium, you ask?

The secondary supply of uranium inventory, in simple terms, refers to sources of uranium that are not mined directly from the earth but come from other sources.

This includes uranium that is recycled from nuclear reactors, surplus military stockpiles, and uranium extracted from nuclear weapons that have been dismantled.

Essentially, it’s uranium that has already been used in some way and is being repurposed for various nuclear-related activities. This secondary supply can have an impact on the overall availability and pricing of uranium in the global market, as it supplements the primary supply from mines and enriches the uranium market.

Until that excess supply is fully gone, the price of uranium will struggle to increase. That’s the bad news.

The other bad news is that not all countries are keen to embrace nuclear energy as they strive towards net zero. The reference I’m making here is Germany.

Germany has decided that they’ll reach net zero with other green energy sources. You may question the reasoning behind this movement, but that’s beyond the scope of this discussion.

Next, we’ll discuss the bullish thesis for UEC.

Why Invest in UEC?

UEC isn’t producing uranium today. Until the price of uranium crosses above $60 per lb and stays above $60 per lb for a period of a few months, UEC will not resume its snowballed production of uranium. Why?

Because it would cost them more to get it out of the ground below $60 per lb than they’d profit by selling into the spot market.

So, when you look up UEC’s financials and compare them with Cameco, you’d be quick to point out that UEC looks more expensive than Cameco. And that’s true.

But the argument that I’ve been making for a long time is that Cameco is a terrific investment, but it hedges its production. In practice, this means that they are guaranteed to be profitable, but if uranium prices in 2024 were to increase higher than $63 per lb, Cameco wouldn’t make any more than they are making right now. I’m exaggerating to make my point, as I’m sure CCJ would be able to renegotiate some portion of their contracts, but this nevertheless is vaguely accurate.

Meanwhile, I’m extremely bullish on uranium, therefore, I believe that uranium prices will move higher in the medium term, therefore, I want to be invested in a debt-free and unhedged uranium miner.

Yes, UEC has diluted shareholders over time. In fact, that’s part of the bear case you’ll read about UEC (among other flimsy accusations, with little merit). But if UEC hadn’t aggressively diluted shareholders, then its balance sheet would be loaded with debt today. Otherwise, how would they have survived the nuclear winter?

The Uranium Bull Case

As I’ve stated many times, I am interested in a very simple investment thesis. I don’t believe in buying into overly complicated investment theses, because they rarely work out satisfactorily.

In the past 12 months, there’s been a recognition amongst Japanese and European politicians that nuclear energy is a suitable energy source. This is a change from the past 5 years when Japan and other countries turned their backs on nuclear energy.

But today, the mood has dramatically changed. Nuclear energy, often considered a green energy source, plays a unique role in the transition toward more sustainable power generation. It stands out for its low greenhouse gas emissions and capacity to provide a consistent and reliable energy supply. In contrast to some renewable sources like wind and solar, nuclear power generation is not intermittent and can supply electricity around the clock, making it a valuable complement to these renewables.

One promising development in the nuclear energy sector is the emergence of Small Modular Reactors (SMRs). These compact nuclear reactors offer several advantages, including flexibility in deployment and scalability. SMRs can be used to provide variable nuclear energy, adjusting their output to match changing energy demand. Note, here I’m not referring to large nuclear plants, but small modular reactors.

This makes them well-suited to work alongside intermittent renewables, like wind and solar, which produce electricity based on environmental conditions. When renewables generate surplus energy during peak conditions, SMRs can operate at reduced power levels or temporarily shut down, conserving fuel and minimizing waste. When renewables produce less power, SMRs can quickly ramp up to ensure a stable energy supply, enhancing grid reliability.

Furthermore, the ability of SMRs to deliver variable nuclear energy aligns with the goals of a more sustainable and diversified energy mix.

As the world strives to reduce carbon emissions and transition to cleaner energy sources, the combination of intermittent renewables and flexible nuclear power from SMRs can contribute to a more resilient and environmentally friendly energy landscape. This synergy allows us to harness the benefits of both renewables and nuclear energy, addressing the challenges posed by climate change while maintaining a consistent and dependable power supply.

Nuclear energy, particularly with the help of Small Modular Reactors, can act as a dependable teammate to all other energy sources. Imagine it as the “steady hand” in our energy mix. When renewables like solar and wind are abundant and produce lots of energy, nuclear can take a step back, conserving its resources and reducing waste.

Then, when the wind isn’t blowing or the sun isn’t shining as brightly, nuclear can step in quickly to provide that extra power we need. It’s like having a backup generator in your home; it kicks in when your primary power source can’t keep up. This way, nuclear ensures we always have a reliable source of electricity, even when nature’s elements are a bit unpredictable. So, it’s not about replacing other energy sources but rather being there to support and fill in the gaps when needed, ultimately helping us have a consistent and sustainable energy supply.

The Bottom Line

My confidence in UEC has increased. While there are challenges, such as uncertainty about the secondary supply of uranium and countries like Germany opting for alternative green energy sources, there’s a compelling case for UEC.

They may not be producing uranium right now due to market conditions, but when uranium prices cross $60 per pound and stay there, they’re poised to ramp up production. Unlike some competitors, UEC is unhedged, which means it can fully benefit from rising uranium prices.

As I’ve frequently noted, I’m an inflection investor, looking for a change in the underlying narrative. The bullish aspect is the shift in perception regarding nuclear energy.

Nuclear power, with its low greenhouse gas emissions and consistent energy supply, complements renewables like wind and solar. Small Modular Reactors are a game-changer here. These compact reactors offer flexibility and scalability, making them a perfect match for intermittent renewables.

When renewables generate surplus energy, SMRs can reduce output, conserving resources. Conversely, when renewables fall short, SMRs can quickly step in, ensuring a stable power supply. This synergy can create a resilient and environmentally friendly energy landscape, reducing carbon emissions while maintaining reliability. Nuclear energy, alongside SMRs, acts as a dependable partner to other energy sources, ensuring a steady supply even when nature is unpredictable.