UEC: Valuation of Pre-Production Uranium Miner

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by

Paul Manning
in , ,


UEC is consistently overvalued, and I don’t get why. 

EC owns mineland but has no developed mines or significant current production. Valuing this company seems simple. I just assess the value of their uranium (in the ground) to work out the company value. 

UEC’s owned uranium resources 

The following is according to their press releases and project info:

https://www.uraniumenergy.com/projects/arizona/anderson/

https://www.uraniumenergy.com/news/releases/index.php?content_id=1075

1. Wyoming Hub & Spoke ISR Platform:

Measured & Indicated (M&I) Resources: 66.2 million pounds of U₃O₈

Inferred Resources: 15.1 million pounds of U₃O₈

Average Grade: 0.069% U₃O₈

2. South Texas Hub & Spoke ISR Platform:

M&I Resources: 13.0 million pounds of U₃O₈

Inferred Resources: 9.9 million pounds of U₃O₈

Average Grade: 0.085% U₃O₈

3. Canada (Roughrider Project):

Indicated Resources: 27.9 million pounds of U₃O₈

Inferred Resources: 33.4 million pounds of U₃O₈

4. Arizona Operations:

Anderson Project:

Indicated Resources: 32.1 million pounds of U₃O₈

Average Grade: 0.099% U₃O₈

Workman Creek Project:

Inferred Resources: 4.5 million pounds of eU₃O₈

Average Grade: 0.113% eU₃O₈

5. Paraguay Operations:

Yuty ISR Project:

Indicated Resources: 9.0 million pounds of eU₃O₈

Inferred Resources: 2.2 million pounds of eU₃O₈

Average Grade: 0.049% eU₃O₈

Alto Paraná Project:

Focus: Titanium resources; no uranium resources reported.

6. New Mexico Operations:

 de Baca Project:

Historical Resource Estimate: 500,000 pounds of eU₃O₈

Average Grade: 0.1% to 0.2% eU₃O₈

Note: This estimate is historical; a qualified person has not completed sufficient work to classify the mineral resources as current, and the estimate should not be relied upon.

Dalton Pass Project:

Historical Resource Estimate: Measured: 946,000 pounds of eU₃O₈; Indicated: 3,789,000 pounds of eU₃O₈; Inferred: 765,000 pounds of eU₃O₈

Average Grade: 0.07% eU₃O₈

Note: These estimates are historical; a qualified person has not completed sufficient work to classify the mineral resources as current, and the estimates should not be relied upon.

Total Combined U3O8 Resources:

Measured & Indicated Resources: 148.2 million pounds of U₃O₈

Inferred Resources: 58.4 million pounds of U₃O₈

Additional Notes:

The New Mexico projects’ resource estimates are historical and have not been verified to current standards.

Now let’ s calculate UEC’s In-Situ Resource Value

Resources: 148.2 million pounds

Spot Price: $77.50 per pound

Yardstick Discount Factor: 10% discount for pre-production (in the ground) uranium deposits.

From what I can tell typically an 8-10% discount rate is used. Though maybe it should be 5%

In-Situ Value of uranium= 148.2  M×77.50×0.10=1148.55million USD.

Now let’s workout the Net Asset Value of UEC

Net asset value=(In-Situ Value of Resources)+(Cash and Current Assets)−(Liabilities)

Plugging in 

Cash and Current Assets: $261.2 million ( from their latest 10-q ) .

Liabilities: $93.78 million ( from their latest 10-q)

NAV=1,147.35+261.2−93.78=1,314.77million USD.

  Shares Outstanding: 419.1 million shares ( from their latest 10-q  ).

This leaves us with a NAV per share valuation of  $3.14 per share. Based on current resources and share price.

If we invert that we get an implied spot price of  227.94 USD per pound at the current stock price for UEC of 8.46 USD

P/NAV is 2.7

Corporate Finance Institute suggests using P/NAV https://corporatefinanceinstitute.com/resources/valuation/mining-asset-valuation-techniques/ 

I don’t know enough about the uranium market to speculate as to whether 228 a pound is likely or not. But it is clear that UEC is 2x overvalued compared to the resources it has under ownership. 

UEC is consistently overvalued by a factor of 2.35

Since 2014 the average P/NAV is 2.35 

The relationship between the market cap of UEC and the net asset value of UEC (since 2014) has a Pearson correlation coefficient of 0.97. Meaning that these metrics move in tandem very very closely. 

All of this means that (1) it would seem only slightly overvalued here when looking at historic comps, and (2) for each 1% that the price of uranium goes up, the price of UEC goes up 2.35%. Making it sort of levered on the price of uranium. If this relationship holds up as uranium increases then UEC would be a good quasi “levered” play. The flip side of that is that if uranium prices crater, then the price of UEC would go down 2.35x more. 

So this also opens up some interesting hedging plays. 

Conclusion

I found this interesting, relating the value of M&I resources to the company’s price. It seems a lot simpler to value these as compared to other equities.

However, I have to stop my investigation here. For further research I would need access to: S&P Global Market Intelligence or Mining Intelligence. But I don’t have $15,000+ to blow on a database like that.

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Comments

2 responses to “UEC: Valuation of Pre-Production Uranium Miner”

  1. kurtjensengps Avatar
    kurtjensengps

    In-situ value is not a great way to value miners, and UEC is comparatively mature *enough* at a number of its sites to actually model discounted cash flows.

    Just multiplying the in-situ value * 10% is not the correct way to discount Net Present Value. For revenue in each year, it’d be discounted by [ Revenue / (1 + rate ) ^ n ]. A discount rate of 10% is more like 91% of value for revenue realizable next year, 82.5% of value for the year after that, 75% of value for the year after that. Yes, timelines in uranium mining are long, but you’re effectively calculating that zero revenue of the M&I resource would be realized within the next 24 years. 1/(1.1^24) = 10%

    When you more realistically discount cash flows at a 10% discount rate over the next 10 years to UEC’s actual permitted production capacity, with a realistic ramp up of production & mines coming online in a 4-6 year time frame, you find that the stock’s price tracks the spot price of uranium fairly accurately.

    Unsurprisingly, the market is not out of its mind – its valuation is about right based on U spot price. And this actually conservatively only takes into account its four currently permitted / ramping into production hubs without ascribing value to uranium in the ground with no current plans to produce in the next 5 years. UEC has assets to grow faster, to secure permits to ramp production higher, etc., all of which would shift a DCF valuation up.

    Imo, UEC is not insanely overvalued, it’s accurately tracking the spot price of U – if you think U spot is going higher, it will track with it, because it’s unhedged to long-term contracts. My basic envelope excel sheet model is returning a $5.01 share price at $63.65/lb spot price and UEC closed at $4.99. Because spot is below term currently, this would suggest UEC may be undervalued by the odd uranium spot market. It’d be worth $7.12 at $80/lb, term price.

    Again, I think this is a fairly conservative DCF valuation tracking spot price – UEC could very well realize more production than I am modelling at any given spot price and be worth more at any given spot price, but my conservative model is tracking the market, currently.

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  2. Paul Manning Avatar
    Paul Manning

    You are most likely more accurate using a DCF model. For this valuation I just used a rule of thumb of 10% of spot price value for each pound of measured resource. I think I found that idea here (where it really should be 5%): https://smedg.org.au/wp-content/uploads/2020/07/SRK_Valuation%20of%20Mineral%20Assets.pdf

    I updated my post to make that clear.

    Do you know of a good DCF model for UEC that you can share? I’d be curious to see the assumptions

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