Share prices of Uranium Energy (UEC 4.05%) are skyrocketing, rising by a huge 153% or so over the past year. To put that in perspective, the S&P 500 index is only up about 22% over the same period. Don't get too excited, however; there are a couple of big risks here that you ignore at your peril.
What Uranium Energy does
Uranium Energy sells uranium, as you might expect given its name. However, it is important to note that it is not a uranium miner. When the nuclear fuel's price hit historic lows, Uranium Energy made the decision to start buying. It built up a substantial stockpile of the fuel at low prices that it can now sell at higher prices. In hindsight, that was a very wise choice, but the main value of the company is in that stockpile.
Data by YCharts.
This is the first big issue that investors need to keep in mind when they consider the stock price advance. Uranium is a commodity. Like all commodities, it is prone to price swings. Over the past year, the price of uranium has been heading largely higher, and so has Uranium Enegy's share price. But the interesting thing is that, without having mining operations like peer Cameco (CCJ 0.51%), Uranium Energy is a leveraged play on the price of uranium.
It makes sense that Uranium Energy stock would rise more than Cameco when the price of uranium climbs. But it will also likely fall harder when uranium pulls back. That's the story so far in 2024, as the price of nuclear fuel has softened a touch in recent months.
If you are looking for a way to leverage yourself to price moves in uranium, that might be fine with you. But you should go in knowing you are taking this aggressive stance before buying Uranium Energy stock.
Uranium Energy has big, expensive plans
The second issue that investors need to consider before buying Uranium Energy is that it does want to become a uranium miner. That's not inherently bad, because it will mean it has an operating business to back up its uranium stockpile. It has a mine that it plans to reopen in August, so the story here is going to change fairly quickly.
But it takes a lot of money and effort to operate a mine. While the money side of the equation is likely taken care of by the company's astute decision to build up its uranium stockpile, execution risk still needs to be considered. The thing is, this one mine being reopened is just the start of the execution risk. Uranium Energy has a handful of mines in North and South America from which it wants to extract ore. It claims to have the "largest diversified resource base in the Western Hemisphere."
In other words, Uranium Energy has big ambitions to be a key global supplier of uranium. That's great, but reopening one mine is just one very small step on the road to the company's ultimate goal. The execution risk is substantial, and over the longer term, there's no way to know what will happen to uranium prices. If they decline sharply again -- like they have before -- Uranium Energy could end up short on the cash it needs to fund its growth plans. Or, if uranium falls far enough, those plans could end up getting shelved because it just wouldn't be profitable to build the mine.
Uranium Energy is a high-risk investment
Although Uranium Energy clearly made a good call when it started buying uranium during the industry's darkest days, it is still an investment that's only appropriate for more aggressive types. The simple fact that its value is largely tied to its uranium stockpile is one notable hidden risk, but the need to execute large and costly development projects is another that shouldn't be ignored.
