The investment thesis and the soil for expected higher uranium prices is based on a growing supply and demand imbalance. This is what I already wrote about. An underinvested, not growing supply base is facing higher, maybe even way higher demand from existing as well as new nuclear reactors that are under construction. Today, I am discussing the biggest uranium project under development.
Summary and key takeaways from today’s Weekly
– Even though the start of production is unlikely before the end of this decade, the company NexGen Energy should be watched closely.
– It hosts the world’s biggest and most lucrative uranium mining project under development.
– However, the stock is not interesting from a risk-reward perspective. There are too many uncertainties. But the story should be watched, also if you’re invested via other securities!
In total, I have already written two articles covering the topic of uranium from an investment perspective.
- The first one was: “Uranium: Explosive investment opportunity or meltdown ahead?” (see here), where I gave a big picture overview of the situation and the most recent developments in this space.
–> Should you not be familiar with the situation, please read this older article first.
- My second article – after the request from a Premium Member – covered an interesting company that is the only US-certified developer of next-gen small modular reactors (SMRs). You can find it here.
Plus, everybody who signed up to my free newsletter before Christmas received a free research report (now for Premium Members only) about a company that offers a way to take advantage from potentially higher uranium prices, although without the big risks and operational challenges that uranium miners are facing.
What I haven’t written about so far – because the event lies more in the medium-term future – is a Canadian company called NexGen Energy (ISIN: CA65340P1062, Ticker: NXE). It’s a uranium miner, still being in development stage, i.e. not producing. The start of production is expected rather closer to the end of this decade.
However, I came to the conclusion that a series of articles about uranium cannot be complete without discussing this particular company.
The thing is, the deposit under development is so huge that NexGen in the first years of full production will be immediately by far the biggest uranium producer in the world – surpassing the total (currently suppressed) production volumes of each of the two leaders, Cameco (ISIN: CA13321L1085, Ticker: CCJ) as well as Kazatomprom (ISIN: US63253R2013, Ticker: KAP) with all their projects combined.
Today, I am going to introduce you to NexGen Energy and its gigantic Arrow deposit, as it is also called. In this episode of my Weeklies you will learn everything you need to know about this mine under development and why from a risk-reward perspective I would not invest in the stock.
But, nonetheless, the developments should be watched carefully!
Also, I am going to touch briefly on a topic that cannot be found among the perma-bulls – maybe the price of uranium could take a hit, when this new gigantic supply comes online?
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The Rook I / Arrow deposit – truly a Tier 1 project
NexGen Energy is a British Columbia headquartered exploration company that owns the by far biggest uranium development project in the world. Rook I – or the Arrow deposit, as it is also called – is located in one of the most mining friendly jurisdictions, Saskatchewan, Canada.
This mine will not only be the world’s biggest, when it comes online. From the raw data, it is truly what a defensive investor is looking for:
- solely active in a proven Tier 1 jurisdiction (with the exception of Australia, other meaningful uranium mining jurisdictions are Kazakhstan, Namibia, Uzbekistan, Russia and Niger)
- among the industry’s lowest production costs / highest margins
- strong expected cash flows
- one of the world’s biggest reserves
- meaningful production (spoiler: we will see soon, how meaningful)
Production costs are – based on the last Feasibility Study from 2021 – among the lowest in the industry. All-in sustaining costs (what is needed to operate as is) are projected to be less than 11 USD per pound. When you see the current price of uranium dancing around 50 USD / lbs., you may think what absurdly high margins this mine could achieve.
However, there is a first not so small issue.
The study was released in 2021. This means, it was actually conducted on data from even before that. But starting from 2020 and especially 2021, inflation shot up massively. Many mining companies had to revise their cost projections up by double digits. Hence, here you can expect a meaningful revision up, too.
Nonetheless, margins should be great, but be careful with such numbers!
Likewise, as per the latest technical Feasibility Study from 2021, the Arrow deposit has resources of around 257 mn. lbs, of which 240 mn. lbs. are declared reserves.
The difference between “resources” and “reserves” – in short – is that resources are more (gu)es(s)timates and less secure. They can more easily be cut and revalued down, while reserves require more effort and proof, but are more robust. Resources can be converted into reserves, if enough proof from exploration and third-party assessment is available.
This is huge.
In comparison, the world’s biggest mine from a reserve perspective, the McArthur River Mine (majority-owned by Cameco) has close to 400 mn. lbs. of uranium. Measured by reserves, the Arrow deposit is big, but not the biggest.
However, when it comes to expected production, the picture is a different one.
While the McArthur River mine has a maximum capacity of 25 mn. lbs. per year (it likely won’t reach over the next several years, though), NexGen is planning to dig around 28.8 mn. lbs. p.a. during its first five years from the ground, once full production is achieved!
To maybe highlight this number a bit more, in 2022 Cameco produced in total 10.4 mn. lbs. (its attributable share, without the then most of the time idled McArthur River mine).
Production goals for the restarted McArthur River for 2023 and 2024 are only 10.5 mn. lbs., respectively 12.6 mn. lbs., compared to its full capacity of 25 mn. lbs., as it is slowly warming up again after several years of being on care and maintenance due too low uranium prices.
In total, counting all its projects on an attributable basis, Cameco has a capacity of 32 mn. lbs.
This means, the Arrow deposit equals close to another whole Cameco, from a production perspective!
The currently world’s biggest producer, Kazatomprom, produced on an attributable basis around 22–23 mn. lbs (converted from 11k tonnes; on a 100% basis it was 21k tonnes). This is slightly more than half of the whole output of Kazakhstan, the by far biggest uranium producing country!
This means, the Arrow deposit is going to produce more than the currently by far biggest producing company, Kazatomprom.
However, as Kazakhstan is responsible for around 40% of total world production (and Kazatomprom for slightly more than 20%), measured by total world production, the 28.8 mn. lbs that NexGen Energy is targeting, are the equivalent of about 20–25% of current world supply per year!
This is where the funny part ends.
28.8 mn. lbs. are around 13k tonnes – nearly the amount that Namibia, Canada and Australia – the three biggest producers after Kazakhstan – produced together in 2021!
This means, plain and simple, that there is a realistic threat for a massive oversupply, when “suddenly” 20–25% more uranium will be available! You should keep this in mind. This is only from NexGen’s Arrow deposits alone. At the same time, other mines are being brought into production over the next years. However, also others will be depleted.
One has to follow closely how the supply and demand balance develops.
This space has to be watched. It definitive will not be a one-way train to the upside!
But let’s assume – for a further analysis of NexGen – that oversupply won’t be an issue.
Now, that we have seen these truly impressive economics numbers, it might sound like a no-brainer, to invest in this project.
As you now from my prior articles, world demand for uranium is only going to increase down the road. Here is a world map that shows you the current evolution of nuclear energy use on a by country basis:
Not only are – with the exception of Germany – existing nuclear energy producing countries expanding their capacities. Likewise, many more new countries like Chile, Bolivia, parts of Africa, the Arab World, Poland, Romania, Lithuania, Kazakhstan, Mongolia, Thailand, Indonesia and others are joining and either already building or in serious discussions and negotiations to construct the first nuclear reactors.
But here are three problems that don’t make NexGen a no-brainer investment for me:
- the production start of the Arrow deposit
- the upfront construction costs (CAPEX) until then and its financing
- project delays – both, on the demand side (reactor construction) as well as of course on the supply side (the mining operations)
Let’s have a look at these three points in the next section.
Why the stock of NexGen is not a no-brainer
The first point, the start of production for NexGen is still years away.
I am not talking about one or two years.
Currently, they haven’t started with construction, as further exploration, on-site optimization, licensing and permitting is in the making.
How long could this take?
Under the very best case scenario – that I would not expect – if construction started in 2024 after all permissions and licenses are cleared, it will take around four years under optimal circumstances for the construction work to be done, as the following chart shows:
I am writing “under optimal circumstances”, because there can always be unplanned accidents, weather events, electricity problems or whatever distractions.
This means, 2028 at the earliest.
Or in other words: Until the end of this decade, if things don’t go so well, we could even have reached the 2030s by then.
The next point is the costs. NexGen Energy had calculated in its 2021 Feasibility Study with upfront CAPEX of 1.3 bn. CAD (you have to look closely when they use USD and when CAD).
Due to massive inflation already since the Study, this seems rather unrealistic.
I wouldn’t be surprised to see 2 bn. CAD (equals around 1.5 bn. USD).
Let’s have a look at their balance sheet:
Again, under blue sky assumptions (1.3 bn. CAD in construction costs), NexGen would have only 10% of the cash needed on hand.
A few weeks ago, a first financing step was done.
In early January, NXE launched a capital raise to bring in 250 mn. CAD. A step in the right direction, but still far from what will be needed down the road.
Thus, at least another 1 bn. CAD – likely closer to 1.5 bn. CAD – will have to be raised until production can start.
This of course will massively dilute shareholders. And depending on where the share price and inflation will be, the dilution could reach 50%. The current market capitalization on the basis of 487 mn. issued shares is around 1.9 bn. USD or 2.6 bn. CAD.
And then there is further potential for dilation via options outstanding – another 10%!
You see until here, the project sounds fine and attractive from an economics perspective (based on likely outdated numbers).
But the reality is that the company is likely facing way higher costs and it will need a ton of capital to finance its needs.
Thus, I can also imagine that maybe – as debt markets should rather not be a viable solution – either a partial sale will be conducted or even the whole company could go to the highest bidder, as soon as all licensing and permitting paper work is done.
Why should a company like BHP (ISIN: AU000000BHP4, Ticker: BHP) or Rio Tinto (ISIN: GB0007188757, Ticker: RIO) not jump in and grab this lucrative project, as the costs would be peanuts for them?
But I would not place a bet solely on the hope of a potential rescuing takeover!
And the last point is delays.
We can have them on the demand and also on the supply side.
Should nuclear reactors not be finished on time – which is not a rare event – then a timely start of production from the Arrow deposit could flood the market and massively crash prices.
On the other hand, the mine itself can have delays and consume more capital than anticipated – even not including strong inflation!
You see, there are too many uncertainties, too many ifs or whens.
Should you be convinced that – at least over the next years – the price of uranium has further to go, my research report about a defensive company without mining exposure and risks maybe of interest to you.
Even though the start of production is unlikely before the end of this decade, the company NexGen Energy should be watched closely.
It hosts the world’s biggest and most lucrative uranium mining project under development.
However, the stock is not interesting from a risk-reward perspective. There are too many uncertainties. But the story should be watched, also if you’re invested via other securities!
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