Nufcor Uranium, ticker NU/ in London, lets investors buy uranium at a 44% discount to NAV with a short term catalyst that should let us realize much of this value over the next several months. [Note, the price above is in British pence, and the market cap in British pounds.]
The bull case for uranium is fairly straightforward, it is the lowest marginal cost fuel among the major sources of electricity (coal, nuclear, and natural gas), so it should perform the best in a recession, yet it underperformed relative to coal and only slightly outperformed natural gas as the commodity bubble collapsed.
Nuclear power provides the lowest lifetime cost per kilowatt hour of electricity generated virtually worldwide (in the US, natural gas is less expensive over the lifetime of a power plant, due to high fixed costs of building nuclear plants in the US). If you read the nuclear industry propaganda, the bull case they spin is that hundreds of nuclear power plants are being built or in planning around the world. In the very long haul, that is true, but I have little confidence that, with the global recession, we’ll see much new construction in the next few years.
There is, however, a good short-term reason to favor an investment in uranium over coal and natural gas. The marginal cost to produce a kilowatt hour of electricity in the US is on the order of 1.2 cents for a nuclear plant, versus more than 2 cents for coal and more than 3 cents for natural gas. Since electricity can be moved long distances relatively inexpensively, in a recession, power can be generate far from users, so the low marginal cost nuclear plants will generally be the last to shut down as demand declines. Yet uranium has fallen nearly as much as natural gas from peak prices in 2007 (down 48% for uranium versus a 43% decline for nat gas) and far more than coal, which was down only 29%. This actually understates the relative underperformance of uranium, since, between the 2007 peak and now, Cameco announced that they have abandoned virtually all of their reserves in their flooded Cigar Lake mine, removing a considerable source of supply.
Uranium spot prices seem to have stabilized, rising from a low of $45 per pound in October of this year to $52 as I write this at year end. I believe we’re in a deep worldwide recession that will continue to reduce electricity demand, but there is a floor here somewhere, and I think we’re at it. This view is bolstered by NYMEX uranium futures, which are trading in the range of $64.00 for early 2010 contracts (trading is fairly light in the futures, however).
Why Nufcor Uranium?
Macquarie Capital estimates that uranium sector stocks are implicitly pricing uranium at $40 to $50 per pound, so, on the whole, the E&P companies do not appear to be undervalued when compared to the commodity. While there may be bargains in the exploration and production companies (see, for example, hkup881’s write-up on Strathmore—though be sure to read the comments, since he is less bullish now; I don’t know that stock well enough to have a view), there is only one place where I know you can buy uranium at a 44% discount to the current spot price, and that’s Nufcor—and I have a quick catalyst for realizing some of this value.
Nufcor buys, stores, and trades uranium exclusively. Their current market cap is $86.2 million USD. They have 2.5 million non-listed warrants outstanding (versus 41.3 million shares outstanding), which at a 60% volatility have a Black-Scholes value of $1.4 million. Shorter term historical volatility has been near 100%, but long-term vol’s have been around 60. This gives a total market value of outstanding securities of $87.6 million. My current estimate of Nufcor’s NAV is $153.1 million (see the notes section below for how I calculate this; for reference, reported NAV on November 30 was $160.2 million). So Nufcor is trading at 44% discount to NAV.
Why do we see such a large discount to NAV? Uranium was a darling of hedge funds (including to some extent my firm). Looking at month-end premia/discounts to NAV, we can see an interesting pattern:
December 2007 0.3% discount
January 2008 4.3% discount
February 2008 9.9% premium
March 2008 9.6% discount
April 2008 6.7% discount
May 2008 9.8% premium
June 2008 0.6% discount
July 2008 6.4% discount
August 2008 12.9% discount
September 2008 31.3% discount
October 2008 54.8% discount
November 2008 51.3% discount
Nufcor’s discount to NAV has widened dramatically as hedge funds have been liquidating positions. The stock trades around $200,000 per day, so it has been especially hard on funds that have looked to trim their investments.
Uranium Participation (U CN) is the other firm that buys and stores physical uranium. It has about three times the net assets as does Nufcor, and trades around $2.4 million per day on the Toronto Stock Exchange. U CN currently trades at a 9.1% discount to NAV. This morning (December 30), Nufcor’s stock was listed on the Toronto Stock Exchange (ticker NU). Although no shares traded today, I expect a market for the stock to develop as investors in Toronto see the sharp discount at which Nufcor trades.
I don’t recommend shorting Uranium Participation against a long position in Nufcor, since I’m still bullish on uranium generally, and my fund is long U CN, largely because we do not want to build too large a position until Nufcor’s trading volume increases.
Finally, there is one wild card here. DeutscheBank was looking earlier this year to float a third firm that would own physical uranium, and they may well revive those plans if market conditions improve. While normally I would say that a new competitor is a negative, two factors should mitigate the impact: First, new money coming into the purchase of physical uranium should drive the spot price up due to additional demand. Second—and very speculatively—the sponsors of the new fund have an incentive to manipulate the prices of both Nufcor and Uranium Participation, since nobody is going to invest in a new fund while the old funds are trading at significant discounts to NAV. I am certainly not saying that I think DeutscheBank or the fund sponsors will participate in any manipulation scheme, but it is another, albeit remote, possibility for investors in Nufcor to realize the value hidden in the shares.
·Deepening worldwide recession puts pressure on uranium
·Nuclear accident/terror incident involving a nuclear facility
·Continued fund redemptions drive increasing discounts to NAV
·DeutscheBank fund starts and drives NAVs down as investors shift out of Nufcor
Both Nufcor and Uranium Participation report NAVs as of the end of each month, usually about two weeks after month end. I estimate the non-uranium portion of NAV using month-end reported NAV, subtract the month-end value of the uranium in inventory, and subtract operating expenses since month-end using historical average after-tax daily operating expenses. I add that to the value of the uranium inventory at current spot prices to estimate current NAV. I also adjust for announced purchases or sales of uranium and for issuances or buybacks of company securities, though none have occurred since November 30, 2008, the date of the last reported NAVs for the two firms.
Nufcor shares were listed today on the Toronto Stock Exchange