NexGen Is A Must-Own In The Uranium Space

A highly strategic asset for the upcoming bull market

NexGen is a pre-revenue Canadian mining company that owns arguably the most strategically important uranium resource in the world. The company’s flagship Arrow Deposit is the largest and lowest-cost undeveloped uranium asset with strong economics even at US$30 / lbs U3O8 price. The company advanced through a Preliminary Economic Assessment (PEA) in 2017, a Pre-Feasibility Study (PFS) in 2018 and Feasibility Study (FS) in 2021.

Source: Investor Presentation

Construction is expected to start in 2024, with initial production in 2027 ramping up to full production in 2028. At an estimated average annual production of roughly 30mm lbs/year for the first five years, Arrow could represent almost 15-20% of total global uranium production. If you read my post on the uranium market in February, you’ll understand why the period starting 2027 / 2028 is so important. I wrote:

“Assuming all the idled mines and planned mines come online as scheduled (which is rare in the mining world), the market could reach equilibrium during the 2025 - 2028 period (again this is assuming no significant financial demand).

But the equilibrium won’t last as production from older mines will start declining while China and India are expected to continue adding 10+ GWe of generating capacity each year in 2029-2030+. By this time the world will have exhausted its pipeline of planned mines. Even if companies started prospecting new mines today, they wouldn’t come online in time to supply the new reactor builds 2030 and beyond. Uranium price needs to move to a level to reflect this.”

NexGen’s Arrow will be ramping up production just as major existing mines like Cigar Lake will be nearing the end of their life. This means that acquiring NexGen might become critical for major producers like Cameco to maintain their production output and fill the widening supply gap starting later this decade and into the next decade.

Based on the FS, the Arrow Deposit has a base case after-tax NPV of roughly C$3.5bn at a uranium price of US$50/lb and 8% discount rate. The global uranium cost curve suggests that prices will have to be sustainably above the US$70 - 90 /lb range to incentivize development of new mines. This uranium price range would imply an after-tax NPV of C$5.3bn to C$7.2bn at an 8% discount rate (see table below).

In order to translate these NPV figures to a stock price target, one must take into account the company’s other assets including unproved resources and its 50.1% ownership in ISO Energy (which has a market cap of roughly C$380mm and could be worth a lot more in the future given its exciting pre-resource discovery of the Hurricane Deposit). One must also make assumptions around how the development costs will be financed, account for SG&A expenses and use a fully diluted share count that accounts for future equity capital raises.

There is a lot of subjectivity involved in arriving at these estimates, but here is an example from Sprott Capital Partners (SCP) that arrives at a C$11.40 target price using a US$60 / lb uranium price and 8% discount rate. This would imply a ~93% return from today’s stock price.

SCP assumes that roughly C$1.7bn will have to be funded for capex, working capital, SG&A expenses and a reserve for contingencies. For capital structure, it is assumed that this amount will be financed with a combination of debt (58%), equity (9%), cash-on-hand and cash from option exercise (13%) and off-take agreements from utilities (20%). The share count used for arriving at the target price assumes C$153mm equity issuance at ~C$7 per share.

One can argue about several of these assumptions. For example I think a US$60 / lb price assumption is too low given the uranium cost curve, and the estimates for the value of the ISO Energy stake and the unproved assets will prove to be too conservative. On the other hand I believe a discount rate higher than 8% would be justified to account for the heightened risks in the current macro environment. One could also be more conservative on capex and SG&A costs given rising inflation.

My view is that it’s better to think in terms of margin of safety and be roughly right vs. being precisely wrong (a.k.a. 80/20 rule). Ultimately if I’m correct about uranium prices being sustainably above US$70 - 90/lb in the future, the current stock price of C$6.00 represents a compelling valuation as it implies a long-term uranium price of <US$60 / lb, a level which is below the marginal cost of production for the sector.

As one of the few uranium companies in North America that institutional investors can deploy capital towards in size, NexGen should benefit disproportionately from capital inflows to the sector. The company is also a core holding for all the major uranium ETFs. If prior bull markets in uranium are any guide, I expect investors to value the Arrow Deposit using a triple-digit uranium price and a 1.2x - 1.4x premium to NAV during the mature stages of this cycle. The market should also give fair credit to the company’s unproved assets, as well as the fact that a takeover by a uranium major is a high probability outcome. All of this suggests significant upside from today’s stock price.