Management at Uranium Energy (UEC 0.67%) chose to buy uranium at a time when uranium prices were near historic lows, which was a very difficult moment to make such a decision, and it built up a nice stockpile. The company deserves credit for that, because it is now reaping the benefits by selling uranium while ore used to make nuclear fuel has increased in value.
The stockpile of ore is one of the main reasons investors are considering buying the stock right now as the company works to build out a uranium mining business. But there are other factors that need to be considered as well. Here's what you need to know before you buy Uranium Energy.
Uranium Energy timed the markets right
After the Fukushima nuclear meltdown in 2011, governments around the world started to question their commitment to nuclear power. Germany went so far as to plan an exit from the nuclear power space. That sizeable negative sentiment around nuclear power had a detrimental impact on the price of uranium.
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The uranium spot price fell from around $72.50 per pound at the start of 2011 all the way down to $20.25 a pound at the end of 2016. The spot price inched higher from there, but it didn't stay consistently above $30 until 2020. Being in the uranium business was largely seen as a negative on Wall Street during this difficult period that lasted nearly a decade.
But then the price of uranium started to rise significantly around mid-2023, however, and now sits at around $86 a pound (it got as high as $106 a pound in January and February 2024).
Uranium Energy signed deals to buy the radioactive ore when prices were closer to the bottom than the top. It now has around 1.17 million pounds of uranium on hand, with an average price of roughly $50 a pound. It has contracts to buy 5.8 million pounds with average prices of around $40 a pound. But the value of the company's decision to stockpile uranium is really illustrated by the $49.6 million gross profit it achieved in 2023 from selling 3.15 million pounds of uranium out of the stockpile.
The long-term opportunity and risk
That said, Uranium Energy doesn't want to be a commodity trader, even though that's basically how it makes its money today. It has a portfolio of mines that it wants to reopen or build that will allow it to become a uranium miner. The first goal is to reopen a mine in August. That's a great first step, and the profits from selling uranium out of the stockpile are helping it to achieve this vital objective.
And then things will get a lot harder.
That's because reopening a mine is likely to be a lot easier than building a mine from the ground up. The process of building a mine is complicated, expensive, and time-consuming. A lot can go wrong along the way, from failing to get the needed government approvals to build the mine, to finding out that the mined ore isn't as high quality as you thought it would be, making profitability harder to achieve. Simply put, Uranium Energy's big plans are great, but a positive outcome is highly uncertain.
When considering Uranium Energy's stock, you have to balance the value that has been created (the uranium stockpile) against the risk that its long-term aspirations of becoming a uranium miner don't play out as planned. That's complicated by the fact that the stock has risen by more than 80% over the past year, which suggests that investors have already factored in a lot of good news. Things probably have to go fairly well on the development front to justify the price investors are paying right now.
And given the lack of uranium production at this point, Uranium Energy's stock is likely to be more tied to uranium price moves than peers that own operating assets. This is a high-risk investment that only the most aggressive investors will probably want to consider.
Most will want to watch Uranium Energy from the sidelines
It would be hard to suggest that Uranium Energy is a poorly run company given the well-timed acquisition of its uranium stockpile. But executing well on that one aspect of the business doesn't guarantee that management can carry out its mine development plans, which is the real future opportunity here. Yes, selling the stockpile will help Uranium Energy finance its long-term plans. But the execution risk is so large in building mines that most investors will probably be better off waiting to see some concrete development successes (beyond reopening a mine) before buying shares.
