In today’s beleaguered uranium market, investors are often pointed in the direction of in situ recovery (ISR) as a means to weather the storm. Indeed, at the end of 2014, new ISR uranium producer Ur-Energy (TSX:URE) was picked as a stock to watch by Raymond James. On Wednesday, the Wyoming-focused company released its second-quarter production results, and is still looking good to both analysts and investors despite tough market conditions.
Analysts David Sadowski from Raymond James and Rob Chang from Cantor Fitzgerald both weighed in on the subject of Ur-Energy’s latest results, with Chang drawing attention to the fact that the company’s production “beat [Cantor Fitzgerald’s] forecast.” Meanwhile, Sadowski stated in a research note that “[a]lthough production results missed our expectations, sales and realized prices were in-line with projections, making for an in-line quarter, in our view.”
Everything in moderation
In a statement released today, Ur-Energy reported an increase in product sales to 208,000 pounds of U3O8 at an average price of $34.64 per pound. That price represents a 20-percent premium over the average spot market price for Q2, and according to Ur-Energy, is an important consideration for investors and shareholders given current uranium prices. It also topped Cantor Fitzgerald’s production estimate of 195,000 pounds, although the company’s average sale price fell short of the firm’s prediction of $48.50 per pound.
Ur-Energy also said that production rates at its Lost Creek ISR uranium facility during the second quarter of 2014 “were controlled at levels that allowed the Company to fulfill its contractual sales requirements without participating in the uranium spot market.”
In other words, Ur-Energy isn’t spending money churning out more uranium when it doesn’t need to under current conditions. Chang explained, “[f]low rates were deliberately curtailed due to plant head grades which continue to be significantly higher than projected.” For his part, Sadowski noted the company’s pragmatism, stating that it has “throttled-back at Lost Creek, having elected to produce only enough to meet contracted deliveries until spot prices improve.” Overall, higher-than-expected head grades have been a boon for Ur-Energy’s production costs.
Pricing is king
Furthermore, Ur-Energy cited a May 22 press release in which it announced the securing of sales commitments at an average price of $51.10 per pound for roughly 518,000 pounds of U3O8. However, the key word in that statement is “average.” Ur-Energy explained that its second quarter consisted of more lower-priced contracts, while the second half of 2014 will feature “significantly higher priced contracts, which were based upon long-term pricing in effect in 2011 and 2012.”
On that note, Chang attributed lower pricing in the second quarter to “lumpiness in the sales contracts.” The analyst forecasted a slight uptick in operating cash costs for next quarter “given lower plant efficiencies, likely stemming from some down-time early in the quarter.” However, he also pointed out that “no new production areas were needed or brought online”, reducing Ur-Energy’s development spending for the quarter, which he suggested will balance out slightly higher production costs. As Sadowski noted, “[q]uarterly price lumpiness is typical for uranium producers.”
All in all, both analysts have favorable ratings for the company. Sadowski has given Ur-Energy an “outperform” rating and a target price of $1.80, while Chang maintains a “buy” recommendation for the company and has set his target price slightly higher, at $2.25. The Raymond James report gives a clear vote of confidence, stating, “Ur-Energy remains our top uranium producer pick on these high-priced fixed sales agreements – which should facilitate healthy cash flows through 2019E and solid down-side protection – as well as significant, low cost production scalability pending a rebound in the commodity price.”
To be sure, in light of today’s news that Japan has given a green light to two nuclear reactor restarts, investors and analysts may be turning their attention back to uranium companies once more. If that is the case, Ur-Energy is certainly one that should be on their radar.
At close of day today, shares of Ur-Energy were up just over 4 percent, trading at $1.28.
Securities Disclosure: I, Teresa Matich, hold no investment interest in any companies mentioned.