Investment Thesis
Uranium Energy Corp. (NYSE:UEC) offers significant potential due to its unhedged position and the leverage from rising uranium prices. With the increasing energy demands driven by AI, EVs, and more, coupled with uranium’s role in complementing renewable energy sources, UEC stands to gain in the evolving energy landscape.
I roughly estimate the stock to be priced at 17x forward operating income, with no debt. But this is the base case.
We have much to go through, so let’s get to it.
Why Uranium Energy Corp? Why Now?
Investing in UEC involves understanding its deep connection to uranium prices. The share price and prospects of UEC are intrinsically tied to the fluctuations in uranium prices.
Unhedged vs. Hedged: UEC vs. Cameco
A crucial distinction between UEC and Cameco Corporation (CCJ) lies in their hedging strategies. Unlike CCJ, which is hedged, UEC is unhedged. For CCJ, uranium prices moving beyond $76 per pound have a negligible impact.
However, for UEC, surpassing this price threshold can transition the company from unprofitable to profitable. If uranium prices soar beyond $90 toward $100 and stabilize, the potential for significant profit increases exponentially (more on its operating leverage soon).
The Energy Demand from AI and EV Adoption
Let me cut to the topic of the day, AI. The energy demands driven by AI and cloud computing are becoming dramatic. AI and cloud systems, especially those involved in deep learning and data modeling, require immense computational power. This power translates directly to substantial energy consumption, primarily due to the cooling requirements for data centers.
Keeping these servers cool to ensure optimal performance and prevent overheating is an energy-intensive process. Particularly as AI continues to advance and integrate into more aspects of daily life and business operations, the demand for energy to support these systems will only grow. This trend underscores the necessity for reliable and abundant energy sources, positioning uranium as a critical component of the energy mix.
Additionally, the rise of EV adoption further amplifies the overall energy demand. EVs are gaining popularity. This shift is driven by a combination of environmental concerns, government policies, and advancements in battery technology (have you seen how fast these EVs can go?).
However, the widespread adoption of EVs requires a robust and resilient energy infrastructure capable of supporting the increased electricity consumption. Charging EVs, especially on a large scale, places additional stress on the existing power grid.
This scenario necessitates a diverse and reliable energy portfolio, with nuclear power playing a pivotal role.
Unlike renewable sources such as wind and solar, which are intermittent and weather-dependent, nuclear energy provides a constant and stable supply of electricity. This reliability is crucial for meeting the continuous and growing energy demands posed by AI technologies and EVs, ensuring that the transition to a more electrified and technologically advanced society is both feasible and sustainable.
Uranium: A Complement to Solar Energy
Uranium’s role in the energy sector extends beyond its use in nuclear reactors; it is also an excellent complement to intermittent renewable energy sources like solar power. Solar energy, while a vital component of the renewable energy mix, is inherently variable.
This intermittency poses a significant challenge to the stability and reliability of the power grid. To address this issue, a stable and continuous energy source is needed to fill the gaps when solar power is unavailable. You can read more about Amazon’s (AMZN) AWS requirement for direct nuclear power supply, from just a few days ago.
By integrating nuclear power with solar energy, it is possible to create a balanced and resilient energy system that maximizes the benefits of both renewable and non-renewable sources.
Moreover, the push for decarbonizing energy sources highlights the importance of uranium in achieving global climate goals. As nations strive to reduce greenhouse gas emissions and transition to cleaner energy, the limitations of relying solely on renewables become apparent. While wind and solar power are essential for reducing carbon footprints, they cannot entirely replace the consistent and high-output capabilities of nuclear energy. Uranium-fueled nuclear reactors produce minimal carbon emissions during operation, making them a key player in the effort to combat climate change.
By providing a dependable and low-carbon energy source, uranium helps bridge the gap between intermittent renewables and the need for constant power supply.
You need energy that complies with 4 aspects:
- Scalable
- Flexible
- Carbon free
- Cheap
Uranium is all of this. And even though I care about the environment, there’s more to it than this. I’m an investor, so think about this.
Operating Leverage
My primary argument for UEC is its operating leverage, especially for a miner with substantial fixed costs. Here’s an illustration:
- If the cost of production is $11 and its revenue is $10, the operation incurs a $1 loss.
- If revenue increases to $12, a 20% rise, the operation becomes profitable.
- If revenue rises to $13, a 30% increase, the profit margin jumps to $2, representing a 100% increase in profit from a small revenue increase.
An unhedged business with no debt, like UEC, benefits significantly from such leverage, offering a substantial margin of safety.
That’s fine, but what’s going to drive the share price higher?
Next Catalyst Discussed
Even as UEC progresses to production, the market has already factored in the opening of the mines in August. The forward-looking nature of the market means the share price won’t change significantly with the start of production.
I’m not going to overcomplicate this. Uranium is a commodity. It works via supply and demand forces. Demand outstrips supply and the price moves up and vice versa.
What you see above is that in 2025, there’s going to more than 60 million pound deficit between supply and demand. Meanwhile, secondary sources of uranium will run with time. There’s a very real unmet need for uranium, and this will drive uranium’s share price higher.
And once it does, UEC’s share price will move higher. That’s what it boils down to.
UEC Stock Valuation — 17x Forward Operating Income
Before discussing its valuation, allow me to tackle the bear case.
This management team holds more than $50 million worth of stock in the company, at approximately 2.4%, led by CEO Amir Adnani, who holds the most.
Yes, they’ve had to dilute shareholders for the business to remain debt-free. For example, in the past 9 months, they’ve diluted shareholders by approximately 6%. But Adnani and his team don’t get anywhere near the executive salary compensation as they have ownership in the company.
They are diluting themselves too, and substantially more in absolute terms, than anyone else.
Next, consider this.
UEC has the capacity to produce about $8.5 million lbs of uranium per year. Assuming that it costs about $60 per lb to get the uranium out of the ground, and the price of uranium moves beyond $90 per lb, this implies that there’s roughly $30 per lb of gross profit — presently the uranium price is $86 per lb.
At $90 per lb, this means that there’s about $240 million of gross profits percolating through the income statement. Of course, this is an extremely rough estimate and there are other costs too. But I believe that it’s fairly easy to imagine a scenario where UEC could be making $150 million of operating profits in the next two years.
This leaves this debt-free business priced at 17x forward operating income. But remember what I said about the operating leverage and how that works.
The Bottom Line
In conclusion, investing in UEC is a terrific opportunity due to its unhedged position and the leverage it can gain from rising uranium prices.
With the increasing energy demands driven by AI, EVs, and uranium’s critical role in complementing renewable energy sources, UEC is well-positioned to thrive in the evolving energy landscape.
As an investor, I see significant potential here, especially given the operating leverage and the anticipated supply-demand imbalance in the uranium market.
Let’s just say, this investment could really help your portfolio glow.
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