Shares of Uranium Energy (UEC 0.39%) have rocketed higher over the past year, gaining a massive 175% or so. This has been driven by the rising price of uranium, the nuclear fuel that the company sells. But this is a notoriously volatile commodity that has often experienced steep declines after rapid price increases. What should investors do with Uranium Energy today -- buy, sell, or hold?
Buy Uranium Energy
Uranium Energy is an interesting company in the nuclear energy space. For starters, it doesn't actually have any operating mines at this point. What it owns is a stockpile of uranium that it purchased when uranium prices were deeply depressed. It can now sell all of the uranium for a profit and use the cash to build out the uranium mines it has on its drawing board.
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The first mine it hopes to have up and running is actually a reopening. That mine is slated to be operational in Aug. 2024. That's not too far from now.
And the longer-term plans are much larger than that. Uranium Energy has a handful of projects in North and South America that it hopes to build. That will put it in a position to provide nuclear fuel reliably, assuming that demand for uranium remains strong. Nuclear power does seem to be gaining new adherents as a base load power source that doesn't emit carbon dioxide. That makes it a clean energy play.
If this story sounds good to you, and you believe that uranium prices are likely to remain higher for longer, then you might want to buy debt-free Uranium Energy Corp.
NYSEMKT: UEC
Key Data Points
Hold Uranium Energy
If you already own Uranium Energy shares, and continue to believe the long-term story, then there's no reason to sell today. In fact, with the reopening of an operating uranium mine just months away, it would seem like the company is on the cusp of an important business shift. If you dumped out now you could miss out on the growth of the company as it continues to expand its operations.
Sell Uranium Energy
And yet there are a couple of problems here. First off, you have to balance risk and reward. The stock has gained a huge 175% or so over the past year! It seems unlikely that such a steep ascent can continue unabated. Or, to put it another way, Wall Street is clearly pricing in a lot of good news. But given the huge gain, you could easily pull some cash off the table, perhaps your original investment, and just play with the "house money." Sure, you might not end up with as much if the stock keeps going higher, but you will have ensured you won't end up with a loss if things start going south.
That's where the second problem comes in. Uranium is a volatile commodity, and while it is rising today, dragging the price of Uranium Energy along for the ride, it could just as easily head lower again. Add in the headline risk associated with nuclear power (like the Fukushima meltdown) and most conservative investors probably shouldn't buy this company at all. Uranium prices tend to fall sharply after high profile problems with nuclear power plants. Notably, over the past five years alone there have been four 50% drawdowns in Uranium Energy's stock. It would take an iron stomach to handle that much volatility, let alone accept the risk of another nuclear plant meltdown.
But there are issues to consider beyond the stock price and the price of uranium. There's also a huge amount of execution risk. Sure, Uranium Energy proudly proclaims that it owns assets with 226 million pounds of measured and indicated reserves and another 102 million or so pounds of inferred reserves, which is great. But it hasn't yet produced a single pound from those reserves.
It is still working on reopening just one mine and that should be relatively easy compared to building mines from the ground up, which is really the long-term growth driver here. It isn't uncommon for potential projects to turn into abandoned projects in the mining sector for any number of reasons, including assets that just weren't as good as expected, the commodity environment changed and mines become uneconomic, and, of course, poor execution.
Uranium Energy is not for the faint of heart
At the end of the day, Uranium Energy is a volatile stock that only aggressive investors should probably buy. Yes, it has been rewarding to own over the past year and management made a particularly astute investment decision when it stockpiled uranium at lower prices. But don't let that blind you to the risks of a company that doesn't yet produce its own uranium. If you don't fully believe the long-term story here, you should probably not own the stock -- or, at the very least, lock in some of the profits you have to limit your downside risk as much as possible.
