JohnCarnemolla
With almost 7 months since my last article on Nexgen Energy (NYSE:NXE), I believe it is timely to refresh the thesis and see if there are any interesting updates to the company.
Overall, Nexgen has made little progress towards first construction as it is currently mired in the most tedious phase of mine development. Uranium prices have been boosted in recent days by geopolitical risk in Niger, but overall, I continue to rate Nexgen a hold unless it cheapens materially towards the low end of the historical 0.63x to 1.09x P/NAV range.
Brief Company Overview
NexGen Energy is a uranium exploration and development company advancing the ‘Rook I Project/Arrow Deposit’ (“Arrow”) in Southwestern Saskatchewan. According to the company’s most recent 2021 Feasibility Study (“FS”), the Rook I project can produce over 22 million lbs of U3O8 annually and generate over C$750 million in after-tax free cash flows at US$50/lb U3O8. For an estimated C$1.3 billion in capex, Rook I is projected to deliver C$3.5 billion in NPV and a 52% IRR (Figure 1).
Figure 1 – Rook I has eyepopping economics (NXE investor presentation)
This places the Rook I project clearly as a ‘tier 1’ project with some of the best combination of size, cost, and capital intensity in the world (Figure 2).
Figure 2 – Rook I is one of the best uranium projects globally with the right combination of size, cost, and capital intensity (NXE investor presentation)
For a bit of context, Cameco Corporation (CCJ), the largest publicly traded uranium producer in the world, only has licensed capacity to product 30 million lbs of U3O8 per annum. So Nexgen’s Rook I project by itself is almost equivalent to Cameco.
Niger Heats Up Uranium Price
Recently, uranium bulls got a shot in the arm when the military in Niger, a landlocked central African country, staged a surprise coup and ousted its government (Figure 3). The military junta behind the coup is pro-Russia whereas the ousted government is pro-Western countries.
Figure 3 – Niger is a central African country (Google Maps)
Amid heated anti-Western/France rhetoric from Niger’s populace and military junta, there are rumours that Niger is planning to halt export shipments of uranium. Niger is the world’s 7th largest producer of uranium and most of its exports go to Europe, especially France, due to Niger’s history as a former French colony.
Rumours of Niger halting supplies sent the price of uranium soaring, with spot uranium recently touching 1-year highs near $58/lb (Figure 4).
Figure 4 – Uranium prices have soared due to geoplitical risk (tradingeconomics.com)
This has benefited the share prices of uranium producers and developers like Nexgen.
Slow Grind In Permitting
Unfortunately, those looking to Nexgen’s Rook I project to plug the supply worries may be disappointed. As with most mining projects in Western countries, the development of a mine through permitting and regulation is a slow and tedious process.
Since our last note on Nexgen in January, we have seen very little in terms of actual progress towards first construction of the mine. Reading through the company’s latest Q2/2023 6K report, we can see that YTD highlights of the Rook I project are mostly on the corporate side, as Nexgen established an at-the-market (“ATM”) equity program to issue shares in January, appointed a new board member at the end of January, and published a sustainability report in April. In May, Nexgen also received initial interest from prospective financial institutions to finance the Rook I project.
Operational highlights have been scant. In June, Nexgen signed an Impact Benefit Agreement (“IBA”) with the Métis Nation – Saskatchewan Northern Region 2 (“MN-S NR2”) and the Métis Nation – Saskatchewan (“MN-S”). Combined with Benefit Agreements with the Clearwater River Dene Nation (“CRDN”), Birch Narrows Dene Nation (“BNDN”), and Buffalo River Dene Nation (“BRDN”), Nexgen believes it has now obtained the support of the primary indigenous communities that will be impacted by the Rook I project.
In terms of permitting, Nexgen continues to advance its draft Environmental Impact Statement (“EIS”) and expects the Provincial technical review to conclude in August. Nexgen also expects to respond to all Federal technical review comments in mid-Q3/2023.
I believe my initial assessment on Nexgen, written a year ago, remains valid. The company is in the midst of the most arduous and tedious part of a mining project, the development phase. Often, this is when mining projects get delayed or hits regulatory/permitting snags. Until all the permits are received and Nexgen actually breaks ground on construction, the company will be stuck in the ‘Orphan Period’ phase where its share price fluctuates on the whims of the market and uranium prices (Figure 5).
Figure 5 – Illustrative life cycle of a mine (Visual Capitalist)
Nexgen is Fully valued
Valuation-wise, Nexgen currently has a C$3.2 billion market cap or 0.91x the C$3.5 billion NPV of the project. Note that the NPV is calcuated assuming a flat U3O8 price of $50 / lb. Higher uranium price assumptions can lead to significantly higher NPV estimates (Figure 6).
Figure 6 – Rook I NPV sensitivity to uranium prices (NXE 6K report)
In effect, with little in terms of development on the actual mine construction, Nexgen is basically trading as a leveraged bet on uranium prices.
I believe Nexgen is a buy if valuation trends towards the lower end of the $2.2 billion to $3.8 billion valuation range and a sell towards the higher end of the range, which translates into 0.63x to 1.09x P/NAV (Figure 7).
Figure 7 – NXE valuation has ranged from C$2.2 billion to C$3.8 billion (Seeking Alpha)
Given we are in the middle of the range, I believe Nexgen is a hold.
Conclusion
With little in terms of actual progress towards construction of the Rook I uranium mine, Nexgen remains a levered play on the price of uranium. Trading at 0.91 P/NAV at the moment, I am neutral towards Nexgen and rate it a hold.
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