{"id":97311,"date":"2016-10-26T10:19:33","date_gmt":"2016-10-26T14:19:33","guid":{"rendered":"http:\/\/countingpips.com\/?p=97311"},"modified":"2016-10-26T10:19:33","modified_gmt":"2016-10-26T14:19:33","slug":"nexgen-energy-ltd-best-house-in-a-bad-neighborhood","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2016\/10\/nexgen-energy-ltd-best-house-in-a-bad-neighborhood\/","title":{"rendered":"Nexgen Energy LTD, Best House in a Bad Neighborhood"},"content":{"rendered":"
October 26, 2016<\/div>
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By Peter Epstein, CFA, MBA\u00a0\u00a0\u00a0epstein.peter4@gmail.com<\/a><\/strong>\u00a0\u00a0\u00a0<\/strong>EpsteinResearch<\/strong><\/a><\/p>\n

NexGen Energy Ltd<\/strong><\/a>\u00a0(TSX: NXE) (OTC: NXGEF)\u00a0<\/strong>is\u00a0a well known emerging uranium company with assets in and near the border of the world-class Athabasca Basin in Saskatchewan, Canada.\u00a0 NexGen is one of the best ways to articulate a contrarian view in the demand for, and spot price of, uranium.\u00a0 Instead of rattling off facts about the global nuclear fleet of reactors, those interested in an excellent overview are encouraged to visit the\u00a0World Nuclear Association<\/strong><\/a>.<\/strong><\/p>\n

This article is not about convincing readers of the need for clean, reliable, base-load electricity.\u00a0 Instead, for readers who believer in nuclear power, I review various ways one can get invested in the theme through uranium companies.<\/p>\n

It\u2019s all about supply & demand<\/strong><\/p>\n

Currently, there\u2019s too much uranium supply on the market (and on the sidelines as \u201cshadow inventory\u201d<\/em>).\u00a0 Attendees at the\u00a0World Nuclear Association\u2019s Symposium\u00a0in London were treated to a grim reckoning.\u00a0 Traders reported that they expected to see the spot price trade below $20\/lb.\u00a0 Well, we\u2019re now at $20\/lb., the price is down\u00a0<\/strong>~40%<\/strong>\u00a0year-to-date, and\u00a0~20%<\/strong>\u00a0since the September symposium.<\/p>\n

Yet, the lower the spot price, the more likely greenfield projects and capital intensive expansions will be delayed or abandoned.\u00a0 For a company like NexGen, funded for the several years, the spot price might as well be at $10\/lb., it makes little difference.\u00a0 Sometimes NOT being in production is a good thing.<\/p>

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On the demand side, things are much more laid back.\u00a0 Like many, I believe uranium consumption will experience a 3-4% CAGR for the next few decades.\u00a0 That may not sound like much, but 3.5% growth equates to a doubling in demand by 2036.\u00a0 Interestingly, it\u2019s been widely reported for years that countries in the Middle East are very interested in nuclear power.\u00a0 Several are making great strides in the industry.<\/p>\n

Just this month the UAE\u00a0raised $24.4 billion<\/strong><\/a>\u00a0specifically\u00a0for a nuclear plant, and Saudi Arabia had orders for $67 billion and accepted $17.5 billion in a ground-breaking\u00a0sovereign bond<\/strong><\/a>\u00a0deal.\u00a0 Nuclear power could be a beneficiary of cheap debt (low interest rates<\/em>) across the globe.<\/p>\n

Where will new supply\u00a0come from?\u00a0 The top 10 uranium-producing countries delivered approximately 60,000 metric tonnes in 2015.\u00a0 Of that amount, a combined ~47%<\/strong>\u00a0came from top producing country Kazakhstan, along with Russia & Ukraine.\u00a0 By comparison,\u00a0just ~34%<\/strong>\u00a0came\u00a0from\u00a0Canada, Australia & the U.S.<\/p>\n

Kazakhstan, Russia & Ukraine accounted for ~47% of supply in 2015<\/strong><\/p>\n

Tensions between Russia and the West have increased.\u00a0 Putin\u2019s sphere of influence over a major portion of the world\u2019s supply (Russia\u00a0+<\/em>\u00a0Kazakhstan\u00a0+\u00a0Ukraine<\/em>) should be concerning. Consider\u00a0this article<\/strong><\/a>\u00a0in which the author points out,<\/p>\n

\u201cRussia dominated Kazakhstan for almost 200 years until Kazakhstan regained independence in 1991.\u00a0 Still, capital Astana retains close ties with Moscow through membership in the Russian-backed Eurasian Economic Union & the Collective Security Treaty Organization. \u00a020% of Kazakhstan\u2019s population is ethnic Russian, most living along the country\u2019s 4,250-mile border with Russia. After Russia annexed Crimea in early 2014, many ethnic Russians from Kazakhstan were said to sympathetic with their counterparts in eastern Ukraine.\u201d<\/em><\/p>\n

Putin is well known to project power through his country\u2019s energy and natural resource assets.\u00a0 As a top-3 global hydrocarbons producer, the oil price collapse has hit Russia hard.\u00a0 Putin has an incentive to seize, control or disrupt Kazakhstan exports (40% of global production in 2015<\/em>).\u00a0 Luckily, if market supply gets dicey, we can always rely on Niger, Namibia & Uzbekistan to fill in the gaps\u2026.<\/p>\n

I don\u2019t believe a Russia-related event is an outlier, therefore, I don\u2019t think it\u2019s priced into the spot market.<\/em><\/strong><\/p>\n

So far, I\u2019ve touched on supply and demand, and thrown in a dose of geopolitical intrigue, free of charge.\u00a0 For contrarian and value investors alike, what better place to look for a more despised investment theme? Think about it, interest in\u00a0coal<\/strong>\u00a0stocks\u00a0<\/strong>is above that of uranium juniors.\u00a0 Who saw that coming?<\/p>\n

Even though the spot price is at a level last seen in October 2004, betting on a rebound has been a widow maker trade for years {see price chart above<\/em>}.\u00a0 But, with the spot price at $20\/lb., even a 75% bounce to $35\/lb. would leave it 50% below where it was in March 2011 (the month of Japan\u2019s Fukushima disaster<\/em>).<\/p>\n

Commodity prices can move quite rapidly<\/strong><\/p>\n

How aggressive an assumption is a potential move from $20\/lb. to $35\/lb.?\u00a0 At inflection points, natural resource prices can move rapidly, both up and down.\u00a0 Consider coking coal.\u00a0 According to an October 25th\u00a0article<\/strong><\/a>\u00a0from\u00a0mining.com<\/a>\u00a0<\/strong><\/p>\n

Metallurgical coal\u2019s rise this year has been even more dramatic than that of iron ore and\u00a0trading at $245.50 a tonne on Tuesday, the steelmaking raw material is\u00a0up 25% so far in October<\/strong>. According to data provided by the Steel Index premium Australia hard\u00a0coking coal prices are\u00a0up more than three-fold<\/strong>\u00a0since hitting multi-year lows around $70 a tonne in November last year.<\/em><\/p>\n

What does coking coal have to do with uranium?\u00a0 Not much really, except to point out that commodity price spikes are not uncommon.\u00a0 Instead of coking coal, how about commodities more aligned with energy markets?\u00a0 BOTH\u00a0natural gas<\/strong>\u00a0and\u00a0WTI crude<\/strong>\u00a0prices have\u00a0<\/strong>roughly\u00a0doubled from February 2016 lows<\/strong>.<\/p>\n

Back to uranium prices, from 2003 to 2005 a doubling in the price.\u00a0 From 2005 to 2007, another doubling.\u00a0 In the 9-month period ending in March 2011, spot was up 75% from $40\/lb. to $70\/lb.\u00a0 More recently, from July to November 2014, it was up 60%. While one might want to own more than one uranium investment, NexGen truly stands out.<\/p>\n

It ticks a lot of boxes. In the single-best uranium jurisdiction (Canada\u2019s Athabasca basin<\/em>) on the planet?\u00a0\u00a0Check<\/strong>.\u00a0Undisputed world-class assets?\u00a0\u00a0Check<\/strong>.\u00a0\u00a0Strong takeout potential?\u00a0\u00a0Check<\/strong>.\u00a0\u00a0Extraordinary management team, Board and technical advisors?\u00a0\u00a0Check<\/strong>.\u00a0\u00a0Funded for several years of exploration (~$85 million in cash<\/em>)?\u00a0\u00a0Check<\/strong>.\u00a0\u00a0A green and renewable energy investment?\u00a0\u00a0Check<\/strong>.\u00a0\u00a0Liquid shares that C$100mm+\u00a0sized mutual & hedge funds can buy?\u00a0\u00a0Check<\/strong>.<\/p>\n

NexGen Energy, a widely held uranium stock that\u2019s not Cameco Corp<\/strong><\/p>\n

NexGen is a stock that can be held by a variety of investment strategies, including; natural resource, generalist, long-short,\u00a0clean energy, value & contrarian funds.\u00a0 With ~C$85 million in cash, it should exhibit relatively low correlation to the more mainstream stock indices.\u00a0 This is key, once investment capital comes roaring back into the sector, few companies have capital structures that can accommodate larger high net worth and family office accounts and institutional investors.<\/p>\n

NexGen has approximately 2x-4x the C$ equivalent dollar trading volume of peers such as\u00a0Fission Uranium (TSX: FCU)<\/strong>,\u00a0Denison Mines (TSX: DML)<\/strong>,\u00a0Paladin Energy (TSX: PDN)<\/strong>,\u00a0Energy Fuels (TSX: EFR)\u00a0<\/strong>and\u00a0Uranium Energy Corp (NYSE: UEC)<\/strong>.\u00a0\u00a0<\/strong>And, there are dozens of other uranium juniors, but most have a nasty habit of harboring 100% downside.\u00a0 If nothing else, most remain addicted to repeated injections of equity capital.\u00a0 NexGen need not issue another share this decade, unless for success-based corporate initiatives, or to drill out new discoveries.<\/p>\n

What about the\u00a0Global X Uranium ETF\u00a0(NYSE: URA)<\/strong>?\u00a0 Indicative of weak sector sentiment, trading liquidity in this investment vehicle is currently less than that of NexGen\u2019s.\u00a0 Also, it should be noted that the ETF\u2019s (somewhat<\/em>) diversified portfolio [20%\u00a0in\u00a0Cameco Corp (TSX: CCJ) \u00a0(NYSE: CCO)<\/strong><\/em>]\u00a0reduces risk, but also reward.\u00a0 The same can be said of\u00a0Uranium Participation Corp<\/strong>\u00a0(\u201cUPC\u201d<\/strong>) (TSX: U<\/strong>).\u00a0 UPC owns physical uranium oxides, nothing else.\u00a0 It\u2019s seen as a direct way to play a rebound in the spot price.\u00a0 However, it\u2019s far from a coiled spring like higher beta names.<\/p>\n

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A 25-30% uptick in the share price of UPC could kick start a major\u00a0advance in juniors like NexGen. \u00a0Note<\/strong>: \u00a0{NexGen\u2019s share price is\u00a0<\/em>nearly 45% below<\/u><\/strong>\u00a0where it was in early June<\/em>}.\u00a0 Interestingly, UPC announced a $19.5 million equity financing in order to buy spot material. Might this signal a market bottom? I guess at least UPC thinks so.<\/p>\n

Why not simply own Cameco?\u00a0 It too is in the Athabasca basin, has more than 30 times the dollar trading volume of NexGen, is a top global producer and bellwether uranium investment.\u00a0 Still, some analysts and pundits\u00a0believe Cameco\u2019s best days are behind it.\u00a0 Brand new Cigar Lake is a great asset, but Cameco\u2019s 50% ownership puts it at just 9 million pounds of production next year.\u00a0 Further, Cigar Lake\u2019s mine life is only about 10-12 years [that could grow, but growth won\u2019t come cheap<\/em>].\u00a0 By the end of next decade, a tired McArthur River\/Key Lake might need replacement or an expensive (billion(s) of dollars<\/em>) face lift.\u00a0 Cameco also has a $2.1 billion tax problem that could hinder stock price appreciation in a bull market.<\/p>\n

NexGen\u2019s 100% owned\u00a0Arrow project<\/strong><\/a>\u00a0is the best discovery in a generation, a lower technical risk proposition than McArthur River & Cigar Lake, and therefore likely to be lower cost if it reaches production.\u00a0 It has a maiden resource of 202 million pounds (inferred<\/em>), but many analysts and investors believe that after an additional eleven months of drilling, it\u2019s now 300 million or more.\u00a0 If Arrow becomes a mine next decade, it could be the single largest source of mined uranium in the world.\u00a0 For these reasons, I believe that NexGen is a prime takeout candidate, arguably the biggest prize in the entire sector.<\/p>\n

As mentioned, NexGen shares are\u00a0nearly 45% lower<\/strong>\u00a0than they were 20 weeks ago.\u00a0 Little has changed except that the Company continues to accrue pounds in the face of a collapsing spot price.\u00a0 However, I see three clear catalysts. First, a dead, or live cat bounce in pricing.\u00a0 That would improve investor and industry market sentiment.\u00a0 Second, the release of an updated mineral resource estimate in 1q 2017.\u00a0 Third, building on catalysts 1 & 2, the achievement of a healthy takeover premium in the share price.\u00a0 Catalyst #2 will certainly happen, and all three could come into play within 6-12 months.\u00a0 Another very important milestone and de-risking event will be a Pre-Feasibility Study, expected by year-end 2017.<\/em><\/p>\n

Conclusion<\/strong><\/p>\n

Due to the fundamental and technical attributes described above, I think\u00a0Nexgen Energy Ltd<\/strong><\/a>\u00a0(TSX: NXE) \u00a0(OTC: NXGEF)<\/strong>\u00a0has a superior risk-adjusted return profile.\u00a0 NexGen should be a core holding in the speculative portion of an investor\u2019s portfolio.\u00a0\u00a0NOTE<\/strong>: \u00a0{I consider the \u201cspeculative\u201d bucket to be a notch above the \u201chighly speculative\u201d bucket, where the vast majority of natural resource companies reside<\/em>}.\u00a0 NexGen is not merely a lottery ticket, it offers similar upside potential as many riskier names, but less fundamental downside (in my opinion<\/em>).\u00a0 Readers can click on the following links for more information.<\/p>\n

NexGen Energy Website<\/strong><\/a>\u00a0\u00a0\u00a0Corporate Presentation<\/strong><\/a>\u00a0 \u00a0Flagship \u00a0<\/strong>Arrow Deposit<\/strong><\/a>\u00a0 \u00a0<\/strong>Management Team<\/strong><\/a>\u00a0 \u00a0<\/strong>Board of Directors<\/strong><\/a>\u00a0 \u00a0<\/strong>Latest News<\/strong><\/a><\/p>\n

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Disclosures<\/u>: Readers fully understand and agree that nothing contained in this article authored by Peter Epstein of\u00a0EpsteinResearch.com<\/strong><\/a>\u00a0<\/strong>[ER<\/strong>],\u00a0including but not limited to, analysis, commentary, opinions, views, assumptions, reported facts, calculations, etc. is to be considered in any way whatsoever, implicit or explicit investment advice or guidance. Further, nothing contained herein is a recommendation\u00a0or solicitation to buy, or sell any security.\u00a0\u00a0[ER<\/strong>]\u00a0has never been, and is not currently, a registered or licensed financial advisor or broker\/dealer and does not perform market making activities.\u00a0The shares of\u00a0NexGen Energy<\/strong>\u00a0are highly speculative, not suitable for all investors.\u00a0Readers are urged to consult with their own financial advisors before making investment decisions.<\/p>\n

At the time this article was posted, Peter Epstein owned shares of\u00a0NexGen Energy<\/strong>\u00a0and the Company was a sponsor of\u00a0EpsteinResearch.com<\/strong><\/a><\/p>\n

Any comparison between or among stocks is for illustrative purposes only, and should not be taken as fact or relied upon.\u00a0Readers understand and agree that they must conduct their own investment due diligence. While the author believes that he\u2019s diligent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful.\u00a0Mr. Epstein and\u00a0[ER<\/strong>]\u00a0is not responsible for any perceived, or actual, errors including, but not limited to,\u00a0analysis, commentary, opinions, views, assumptions, reported facts & financial calculations, or for investment actions taken by readers.<\/p>\n

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By Peter Epstein, CFA, MBA\u00a0\u00a0\u00a0epstein.peter4@gmail.com\u00a0\u00a0\u00a0EpsteinResearch NexGen Energy Ltd\u00a0(TSX: NXE) (OTC: NXGEF)\u00a0is\u00a0a well known emerging uranium company with assets in and near the border of the world-class Athabasca Basin in Saskatchewan, Canada.\u00a0 NexGen is one of the best ways to articulate a contrarian view in the demand for, and spot price of, uranium.\u00a0 Instead of rattling […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-97311","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/97311","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=97311"}],"version-history":[{"count":1,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/97311\/revisions"}],"predecessor-version":[{"id":97312,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/97311\/revisions\/97312"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=97311"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=97311"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=97311"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}