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Uranium Energy: A Power Play

07/09/2013 6:30 am EST


Brien Lundin

President, Jefferson Financial, Inc.

This miner is well-positioned to benefit from rising demand, and higher long-term prices, for uranium, suggests Brien Lundin of the Gold Newsletter.

Uranium has come off quite a bit from the sky-high spot levels it was trading at just a few years ago. A nuclear disaster like the one at the Fukushima plant in Japan can have that kind of impact on the energy metal.

But in a sign of just how badly the world needs a dependable (and green) energy source, uranium continues to trade at multiples of what it did as recently as the early 2000s.

And while junior uranium explorers burst like mushrooms onto the bull market of around five years ago, only a very few had stories that were truly worth telling.

One of those was Uranium Energy (UEC). This company has managed to accomplish the near-impossible in the United States—get a uranium mining and milling operation permitted and producing.

The mill in question is the Hobson plant in south Texas, a facility that serves as the hub for uranium ore from a growing list of producing in-situ leach recovery projects that encircle it.

Results from the company's fiscal third quarter demonstrate the power of this strategy. Production from UEC's flagship Palangana Mine increased by 45% over the prior quarter, to 69,000 pounds of U3O8. The company plans to start up production in a third area of Palangana this quarter, an effort that should result in even more production growth.

Better still, the company isn't just producing ore. It's generating cash flow as well. For the quarter, the company sold 70,000 pounds of U3O8 for gross proceeds of $2.8 million. It was able to do so at a cash cost per pound of just $23, excluding royalties, thanks largely to an increase in production volume

Construction continues apace at UEC's nearby Goliad ISR project, which is fully permitted. And, as of earlier this year, the company published a resource estimate for Burke Hollow, another satellite property.

That estimate puts Burke Hollow at 2.89 million pounds of U3O8. The report also suggested that the property may contain as much as 1.8 to 7.2 million pounds of additional U3O8.

In short, in a uranium space still striving to regain its sea legs after Fukushima, it' s full steam ahead at Uranium Energy. This is a company with the permits, the projects, and the production to last into the next big boom for the energy metal.

And from every indication, that boom is coming. In spite of the hazards posed by nuclear power, on a comparative basis no power source has the potential to be cleaner and to meet our growing energy needs like nuclear.

Most importantly in the near term, the Highly Enriched Uranium agreement with Russia, in which that nation's nuclear arsenal is converted into nuclear fuel, ends this year. That will immediately remove as much as 24 million pounds of supply, likely putting the market into a significant supply deficit.

Whether the market looks forward and we see uranium price gains toward the end of this year, or whether the supply constraints will have to begin impacting the market in 2014, it seems almost assured that uranium is headed much higher.

With its growing production profile, no company is better positioned than UEC to benefit from such an event. Thus, it's one of the very few, cautious buys on our list.

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