Uranium Energy (UEC 6.15%) has seen its shares rocket higher over the past year, rising by roughly 100%. That’s an incredible price move, and there’s a chance it could keep going.
Before you step in here, however, you need to step back and dig a little deeper into the company’s business. It might not be what you think.
What does Uranium Energy sell?
It isn’t really a trick question to ask what Uranium Energy sells, but there are important nuances to the story. The price of uranium has been moving higher over the past year and, thus, the company’s stock has moved higher, too. Selling a commodity that is going up in value generally has that effect on a company selling it. Shares of fellow uranium seller Cameco (CCJ 1.23%) are higher by roughly the same amount.
UEC data by YCharts.
Only there’s an important difference between these two uranium sellers. Cameco operates uranium mines. Uranium Energy is really just building uranium mines that it plans to operate in the future. It has been generating revenue by processing and selling uranium that it purchased when uranium prices were lower.
It didn’t actually sell any uranium in the fiscal second quarter, but that’s not the point. Investors are basically valuing it based on the uranium it owns because, given the current price of the commodity, it can eventually sell down the stockpile of low-priced uranium it built up for a profit.
To the company’s credit, it made a good call. But there’s a limited runway here, since every sale it eventually makes will reduce the amount of the nuclear fuel that the company has to sell in the future. There’s a lot of uranium in the stockpile, but if you buy this stock, you need to understand that it really isn’t a miner just yet.
There’s material execution risk at Uranium Energy
That’s where the second big problem comes up. While Uranium Energy isn’t really a miner yet, it does have plans to become a big one. There are a number of projects on the drawing board today across the Americas.
In fact, one of the slides in the company’s December investor presentation refers to it as the “Largest, Diversified Resource Base in the Western Hemisphere”
Image source: Getty Images.
That sounds great! But most of those assets aren’t currently operating. And building a mine of any kind is not easy. In fact, it can take years of effort just to get a mine approved. Then the company has the chance to build it.
Only after it is built, usually years later and at great cost, does the mine start to produce any revenue. A lot can go wrong along the way.
So, not only is there a time limit on the sale of uranium in the company’s stockpile, but it also has a lot to get done building mines before the cash it generates from the sale of stockpiled uranium potentially runs out. This is not the story of a simple commodity miner.
Understand the risks
For starters, commodity price risk is huge for Uranium Energy since the value of its uranium stockpile is likely how investors are valuing the company. If uranium prices should turn sharply lower, which has happened before, the stock will probably fall along with the commodity.
But if uranium prices continue to rise, it’s likely to be a big tailwind for Uranium Energy shares. You need to have a constructive view of uranium to buy in here given the huge price advance that’s occurred over the past year.
And then there’s the issue of building uranium mines, which is no easy task. If anything goes wrong as it builds out its operating mine portfolio, the fallout for the stock could be material as it would diminish the longer-term opportunity for the company.
If you are looking at Uranium Energy, make sure you fully understand what you are buying. More-conservative investors will probably want to stay on the sidelines.