Blog : Uranium Penny Stocks: $UEC $URRE

by Peter Leeds on June 8th, 2016

One of the worst performing commodities over the last few years has been uranium.  From a price peak over $130 per pound in 2007, the value of the metal has now slid down into the high-$20's.  You can see a long term uranium price chart here.

A few things have presented obstacles to uranium prices, not the least of which was the 2011 Fukushima nuclear power plant meltdown in Japan.  As well, there has been an overwhelming glut of uranium on the market, as miners have been producing more than the world uses (for many years now).

Recently, things have been changing.  Many of the producers have been curtailing activities during this period of low prices and the glut overhang.  

On a worldwide scale, there are numerous nuclear power plants either seeking permits, or approaching the operational phase.  As of 2014, there were 435 nuclear power plants in 31 countries, with another 72 under construction.

All of these require (or soon will require) uranium.  This anticipated demand (although it is a long term prospect), along with the decreasing supply, are setting up to push prices of the commodity higher on a long term bullish trend.

This "shift" in the market forces is becoming more widely recognized, and is partially responsible for the price jumps we've seen in recent days, in uranium-related penny stocks like URRE and UEC ($URRE, $UEC).  These two companies are American-listed, "pure play" uranium penny stocks, and as such feel a magnified effect of any changes to the price of the commodity they produce.

Where URRE and UEC go from here is uncertain, after the big run-up in share prices.  They may give back some of the recent reactionary gains, and in fact likely will in the short term.  Over a longer time frame, if and as uranium prices climb, the underlying miners will benefit.

One of the issues, however, is that there are several dozen companies in Canada, and several dozen more in Australia, all of which are mining uranium.  As a group, they all seem to have enjoyed at least a part of the recent run-up in share prices for uranium producers.  This share price benefit can be seen, even among the worst, most financially-broken of companies.

What this implies is that the entire (slow-moving) industry had a quick (fast-moving) pop in price, which is wholly irrelevant to the fundamentals of the companies.  Typically, a move like this will give back in the short term, regardless of the long term trajectory.

Also, there are many massive, multibillion dollar corporations which mine for uranium.  You just don't hear about that as much as you do with the "pure play" miners, because it is just a small part of their operations.

In other words, UEC and URRE might make a great acquisition target for BHP, Rio Tinto, or Cameco, but as a freestanding businesses, they will always have troubles.  If uranium prices climb, they could see a benefit in their share prices.

However, we thought to look "under the hood" of both of these penny stocks, to see what their fundamental positions look like.  Here are some of our findings:

Uranium Energy Corp. (UEC):  

UEC burns up about $23 million dollars per year, on revenues of only about $3 million (fiscal 2015).  In fact, this penny stock only made a total of $3 million over the last 5 quarters put together, but still lost just under $2 million each and every month!

[You can see Peter's video lesson about "Burn Rate" and operating losses by clicking here].

The company recently raised over $10 million through a financing, but that was more out of necessity than choice.  UEC has $3.3 million in current assets, plus $50 million in total assets.  On the liability side, they owe $13.6 million in current liabilities, and $26 million in total liabilities.

[Peter explains assets and liabilities in this video].

UEC is a great "concept," but they are bleeding cash so fast that they will probably either need to sell all (or parts) of their operations and land claims to one of the massive players in the mining industry.  The outlook for UEC, regardless of uranium prices, in our opinion is very dismal.

Uranium Resources (URRE):

Much like we've seen with UEC, this company has also had to find ways to generate some cash (just to stay in business).  As of today, they approved a $12 million dollar financing, which should keep the lights on a little longer.

Looking at their annual revenues, their yearly total of all the last 5 years added together equals... zero.  They still lost $10 to $20 million per year in each of those fiscal years.  Right now, they are bleeding through $1 to $2 million dollars every month.

The good news, if there is some, is that they were able to move much of their production strategy further along.  Which is all great, as long as their balance sheet is in good shape...?

URRE has $1.3 million in current assets, but owes $11.4 million which they need to pay within the next 12 months.  Of course, since those numbers were reported, they did arrange that $12 million financing... but most of that will probably have to go to paying their current liabilities... meaning that it might get used up just to keep the lights on!

Looking at the longer term balance sheet position, $URRE has $56 million in total assets, which is strong enough considering that their total liability position is only $17 million.  So, overall they are in better shape than $UEC, but that is not really saying much.

The overall outlook for URRE, just like UEC, in our opinion, is pretty ugly.  These penny stocks will need to raise even more money, and any time they do, it will result in shareholder dilution.

Given the anticipated decline in what is currently a "hot industry," we'd be cautious.  This is what we talk about with our own precious metals and oil penny stock picks at Peter Leeds Stock Picks.  We try to look for companies that:

- have no "forward hedging" or "pre-sales" of their future production.
- have enough reserves to last them 10 years or more.
- are producing companies, as opposed to exploration companies like UEC and URRE.

We also like to see well-funded companies, with numerous types of metals which they extract.  This gives them less exposure to the fortunes of any one specific commodity, and broadens their income stream.

You can see penny stocks just like the ones Peter talks about by subscribing to his newsletter here.

 

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