Nuclear power doesn't produce carbon dioxide, which is a big issue to consider as the world attempts to limit greenhouse gas emissions. The U.S. government has increasingly been pushing nuclear power as a clean energy solution. And Uranium Energy Corp. (UEC 3.75%) is eager to provide the nuclear fuel demand that could arise if there is a nuclear power renaissance -- only there's some history to keep in mind before you buy this stock.
Setting up for a brighter future
Uranium is the fuel used in nuclear reactors. It is what Uranium Energy Corp sells. At this point, the company is selling uranium that it acquired when the nuclear fuel was trading at depressed levels. But the company has been building its presence, attempting to create a mining operations that has the scale to compete with the industry's largest players. It has either completed or has in the works roughly $566 million worth of acquisitions. This activity is set to increase the company's resources three times over and its production capacity, assuming that the development assets it is buying get built out, by four times.
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There's a big execution risk here, noting that the company will basically be left with no revenues if it doesn't develop these new assets before the stockpile of low-priced uranium it has acquired runs out. Assuming at least some of the mine developments play out, the company appears to be hitting the market at a good time and in a good position to thrive.
For example, Uranium Energy has managed all of the above investment with a pristine balance sheet. In fact it ended fiscal 2023 debt free and with record revenues, which is a pretty nice combination. That said, it was an active year, so earnings are a little muddy. The company lost roughly a penny a share.
But CEO Amir Adnani's comments about the future of the uranium market in the news release are very constructive:
There has been a step-change across the globe with an increasing number of countries adopting plans and programs to restart, extend the life of and or build new nuclear plants in the quest for clean, safe, highly reliable and cost effective electricity that nuclear power provides. This drive for global clean-energy, along with uranium supply and demand fundamentals, has translated into a rebalancing of the uranium market, transforming it from an inventory burdened to a production driven market. Recent spot price movements have begun to reflect that.
Don't forget that uranium is a commodity
A big part of Uranium Energy's stock price advance is actually related to the price increases taking place in the uranium market. That largely dictates the company's top and bottom-line performance. Over the past year or so, uranium has been trending higher, just like Uranium Energy's stock price. It helps that Uranium Energy does not sell its uranium using futures contracts, which means it is completely exposed to the price moves of uranium.
So long as uranium prices continue to head higher, or at least don't fall, Uranium Energy is fairly well positioned to benefit. But without any contracts in place to hedge against price changes, a drop in the price of the nuclear fuel could hit the company's earnings statement fairly hard. Definitely harder than if it had hedges in place to protect its downside exposure -- which would come at the expense of limiting its upside potential. If you buy Uranium Energy, you are, indirectly, making a bet on the direction of uranium prices and nuclear power more broadly.
There appears to be some tailwinds for nuclear power right now, as the CEO clearly expressed. That's good news, but investors shouldn't forget the past. The price of uranium is still well below the peak reached in the late 2000s. And it's roughly around the same price it was at when the Fukushima disaster took place in 2011 in Japan. Just before that nuclear accident, there was a notable spike in the price of uranium. The nuclear fuel plunged afterward, hitting a low point in 2016, as countries around the world pulled back on their investment in nuclear power.
There is a huge amount of headline risk here and all it would take is a single accident, even if there is no loss of life, for uranium prices to hit the skids again. Clearly, there's no way to tell what happens in the future, and newer nuclear power plants are being built to enhance their safety. But there are still a lot of older plants and, well, humans make mistakes. It is highly likely that there will, at some point, be another nuclear mishap, and Uranium Energy will be fully exposed, at least today, to the impact because it's unhedged.
Tread carefully with this commodity stock
Whether or not Uranium Energy's stock continues its ascent depends on the price of uranium. If the nuclear fuel continues to rise, this unhedged uranium seller will probably continue to benefit. There are good reasons to believe that this is a very real possibility, given the changes taking shape in the industry and in the world's view of nuclear power. But if uranium prices fall, for whatever reason, Uranium Energy's stock will probably fall right along with it. This isn't the kind of stock conservative investors should own a lot of, if at all. However, if you have a strong and constructive feeling about the nuclear power sector, it could be a good way to play your hunch. Just don't go overboard and bet more than you can afford to lose, because the headline risk here is fairly large.
