Uranium Royalty: Mediocre Assets And Poor Capital Structure At High Price (UROY)

Thesis

Being the first and cheapest is not a good enough reason to invest in any company. Such is the case with Uranium Royalty Corporation (NASDAQ:UROY). The company is truly the first of its kind, uranium royalty. Compared with its precious metals counterparts, it is much cheaper. However, I believe its low valuation is justified.

UROY has a poor share structure regardless of the low share count. Warrants and options represent more than 10% of fully diluted shares. I give UROY a sell rating due to its mediocre portfolio, poor capital structure, and exorbitant price.

Company Overview

Twenty royalty assets are included in UROY`s portfolio. However, only two are cash-generating: McArthur River and Waterbury Lake/Cigar Lake. The remaining royalties are at various stages of development. Geographically the assets are in Canada and USA, except Langer Heinrich in Namibia. The image below from the last company website shows the list of the company`s assets.

The two producing assets are owned and operated by Cameco and Orano. Cigar Lake and MacArthur are among the largest uranium mines in the world. The former delivers 14% of global uranium production, as shown in the table below.

Cigar Lake is a joint venture between Cameco (54.5%), Orano Canada Inc. (40.5%), and TEPCO Resources Inc. (5%). The mine has an AISC below $20/lb. On September 03, 2023, Cameco announced production cuts. Below is a quote from the announcement:

At the Cigar Lake mine, we expect to produce up to 16.3 million pounds of uranium concentrate (100% basis) this year, a reduction from the previous forecast of 18 million pounds of U₃O₈ (100% basis). Production from the McArthur River/Key Lake operations for 2023 is anticipated to be 14 million pounds U₃O₈ (100% basis), down from the previous forecast of 15 million pounds U₃O₈ (100% basis).

The image from the last company presentation below illustrates the Cameco asset’s royalties.

Cigar Lake royalty is floating 10% to 20% Net Profit Interest (NPI) on a 3.75% portion of the total uranium production. The royalty percentage will drop to 10% if the mine produces 200 million pounds.

McArthur River Royalty is a 1% GORR (gross overriding royalties) on a 9.0% share of uranium production. In addition, UROY can accept streams (physical uranium delivery instead of cash payment), as they did in 2022. This is arguably the company’s best royalty.

Flagship US assets are Reno Creek and Lance. The chart below shows their parameters.

Peninsula Energy owns 100% of the Lance Project in Wyoming. With All-In Sustaining Costs of US$39.08/lbs, the mine is expected to produce 14.4 million pounds (Mlbs) of U3O8 over a 14-year mine life. Production was scheduled to start in 2023. However, Penisula announced on August 31, 2023, a new schedule with a planned restart in late 2024.

The last significant asset is Langer Heinrich, of which Paladin owns 75% and 25% is owned by China General Nuclear (CGN). Since the middle of 2018, the mine has been held on care and maintenance due to low uranium prices.

According to Paladin, the project is on schedule and under its budget of US$118 million, with initial production set for the first quarter of 2024. The estimated 83.8 Mlbs of U3O8 in proved and probable reserves have a 17-year mine life and C1 costs of US$27.40/lbs.

I consider Cigar Lake, McArthur, Lance, and Langer Heinrich when valuing company assets. The other royalties have reputable quality; thus, many are in the pre-feasibility study stage. That means they have yet to prove the deposit’s economic viability and estimate its reserve base.

Company Financials

UROY balance sheet is neat and clean. It carries zero debt after it repaid $CAD 9.7 million on May 3, 2023. UROY owns Yellow Cake PLC shares, Queens Road Capital shares, and 1,548,068 pounds of U3O8 stored at Cameco’s Port Hope / Blind River facility. The table below represents some metrics I use to assess a company`s liquidity and solvency. The data is from UROY’s last financial report.

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It is worth mentioning UROY’s agreement with Yellow Cake. The former can purchase uranium from the latter for up to US$21.25 million (US$2.5 million to US$10 million annually). Besides that, Yellow Cake has a contract with Kazatomprom. If UROY exercises this option, Yellow Cake will purchase the necessary amount of U3O8 from Kazatomprom and sell it to the UROY for the same price at which Yellow Cake purchased the U3O8.

Company performance is mediocre, as seen by the profitability metrics below.

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Its investments in other companies and physical uranium are not generating any cashflows. On top of that, its two producing assets are insufficient to generate significant cashflows comparable to precious metals royalty and streaming companies.

The share capital structure is a huge red flag. Its implications are twofold. First is the continuous dilution. Last quarter, compared to Q2 2022, the share count increased by 4.1%. The table below represents the previous income statement. The weighted average of fully diluted shares is shown at the bottom.

To get a better context about share dilution, I share the table below from the Seeking Alpha company profile illustrating the steep growth of shares.

The data is annualized and goes back to 2018. As can be seen, the growth rate is impressive; however, it is harmful to investors.

The other issue is the weight of derivatives (options and warrants) compared to common shares. The former represents 16% of the company`s fully diluted shares, as seen in the graph below.

In other words, the derivatives to equity ratio is a staggering 19%.

Valuation

UROY is a royalty company with a few producing assets. As such, I will not calculate its value based on plausible reserves attributed to the company. I will add only the value of the producing assets to its current assets and subtract the enterprise’s total liabilities.

NAV = royalties + investments + total receivables + inventory – total liabilities

The image below illustrates UROY`s royalties with its values.

As discussed above, I will consider McArthur, Cigar Lake, Lance, and Langer.

I use the following assumptions:

• Duration of royalty payments: ten years
• Discount rate: a 9% discount
• Uranium price: $60/lb.

Cigar Lake: I assume uranium price at $60/lbs, the yearly production of 16.3 million pounds (611,250 pounds attributed to UROY), net profit at $34/lbs ($60/lb price of U3O8 less $16/lb costs), exhaustion of cumulative expenses by the end of 2027, and a 9% discount rate. In that case, I arrive at an NPV of $24 million, considering the royalty percentage will drop to 10% if the mine produces 200 million pounds.

McArthur: UROY will get 13.6 thousand pounds of uranium in 2023 and 16.3 thousand starting in 2024 if the production. The company’s cash flow at the current uranium price of $60/lbs is $ 860 thousand in 2023 and $ 896.5 thousand in 2024. With a 9% discount rate, I obtained an NPV of $ 6.1 million.

Lance: UROY has two different royalty interests on the Lance Project: a 1% gross revenue royalty and a 4% gross income from the underlying property royalty interest. With a production rate of 1.0 million lbs starting in 2024, a uranium price of $60/lbs, and a 9% discount rate, the net present value is $ 8.47 million, with an annual cash flow of $ 1.32 million.

Paladin: Langer Heinrich’s contract is a production royalty (PR) of AUD$ 0.12 per kilogram of yellowcake produced. I assume yearly production of 4.94 million lbs from 2024, a uranium price of $60/lbs, and a 9% discount rate; I get an annual cash flow of $ 195 thousand and an NPV of $ 1.25 million.

• Cigar Lake NPV $ 24 million
• McArthur NPV $ 6.1 million
• Lance NPV $ 1.32 million
• Langer Heinrich $ 1.25 million
• Total royalties NPV $ 32.6 million

Balance sheet items:

• Cash $2.9 million
• Uranium inventory at price $60/lb $ 92.4 million
• Yellow Cake and Queens Road investments on July 31, 2023, $ 31.3 million
• Total receivables –
• Total Liabilities $ 0.6 million

UROY NAV = $ 126 million

Market Capitalization = $ 273 million (Sept 22, 2023)

The market cap is more than double the company`s NAV. The principle that the tide lifts all boats, even the shoddy ones, is always applicable. The uranium market is not an exception.

UROY is the only uranium royalty company. Thus, I will compare it with similar-sized gold royalties.

• Gold Royalty Corp (GROY)
• Metalla Royalty & Streaming (MTA)
• Vox Royalty Corp (VOXR)

I use EV/Sales (TTM) and Price/Cash Flow to assess the company`s relative value. UROY is cheaper than its cousins GROY and MTA but much pricier than VOXR measured with EV/Sales.

Conclusion

UROY pretends to be a solid investment, providing exposure to the uranium bull market. Going into the details, I see that the company still needs to deliver on its promises. Besides Cigar Lake, McArthur, and Lance, all other assets have questionable qualities. Langer Heinrich is its own league. It offers excellent royalty. However, CGN involvement adds geopolitical risk. Continuous share dilution and high derivatives to equity ratio are substantial red flags. On top of that, UROY is generously priced by Mr. Market. In conclusion, I give Uranium Royalty a sell rating.