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Introduction

It’s been a little over a year since I wrote a bearish article about uranium royalty and streaming company Uranium Royalty Corp. (NASDAQ:UROY) (URC:CA) and a lot has changed since then.

McArthur River Uranium The complex is restarting production and spot uranium prices have climbed more than 50% in the past 12 months. Still, the Uranium Royalty stock price is currently below its June 2021 level. However, I think the company continues to look overvalued based on fundamentals. Let’s review.

Business and financial overview

Uranium Royalty currently holds a portfolio of interests in 15 developing, advanced, licensed and past uranium projects in Canada, the United States, Namibia and Australia.

Uranium Royalty Projects

Uranium royalty

The company also holds 1,548,068 pounds of physical uranium and marketable securities, which were valued at approximately C$127 million ($98.3 million) as of June 9. These marketable securities include 7 million shares of UK company Yellow Cake (OTCPK:YLLXF), which owns physical uranium and aims to provide direct exposure to uranium prices. These shares have a market value of approximately $28.5 million at the time of this writing and were pledged as collateral for a $10 million margin loan that Uranium Royalty had in January 2022. Uranium Royalty also owns 8.6 million shares of Canadian resource-based investment firm Queen’s. Road Capital Investment, which are currently valued at C$6.1 million ($4.7 million).

In terms of the royalty portfolio, I think the two most valuable assets it currently holds are the interests in the McArthur River and Cigar Lake uranium projects in Canada’s Athabasca Basin. These are the main projects of the major uranium company Cameco (NYSE: CCJ). In May 2021, Uranium Royalty paid $11.5 million for a 1% gross overriding royalty on a 9% share of McArthur River production and a 20% net profit interest on 3.75% of Cigar Lake production. At the time, I thought Uranium Royalty was overpaying, but my view has now changed. You see, spot uranium prices have risen dramatically over the past year and Cameco has decided to restart McArthur River.

Uranium price

Trade economy

In 2022, McArthur River is expected to produce up to 5 million pounds of uranium. This means that Uranium Royalty will receive a 1% royalty on up to 450,000 pounds of uranium production, which is expected to be worth around $0.22 million. However, the sum is expected to increase significantly over the next few years as Cameco wants to increase production from McArthur River to 15 million pounds per year from 2024. The Uranium Royalty does not apply to the whole of the project, but it covers 100% of reserves and resources. . Currently, McArthur River has reserves of 394 million pounds of uranium, which means that Uranium Royalty can receive a 1% royalty on approximately 35.5 million pounds of uranium. Without discounting and at $50 per pound of uranium, Uranium Royalty could receive approximately $17.7 million in cash flow from this royalty.

For Cigar Lake, the calculations are a bit more complicated. The project is expected to produce about 15 million pounds of uranium in 2022, but Cameco wants to reduce production to 13.5 million pounds per year starting in 2024, which is expected to drive up unit costs. In the first quarter of 2022, Cigar Lake produced 1.9 million pounds of uranium and life-of-mine operating costs are expected to be approximately C$18 ($11.60) per pound. If we are generous and assume that Cigar Lake’s net profit at $50 per pound of uranium is $15 per pound, Uranium Royalty could earn about $11.3 million per year from this royalty. However, the company still hasn’t received a single dollar, as it is a profit-based interest that will start generating revenue after the accumulated expense accounts, including development costs, are exhausted. We don’t know when that will happen. On top of that, net profit interest drops to 10% on 3.75% of production once Cigar Lake’s total production exceeds 200 million pounds of uranium.

Overall, I think the Uranium Royalty royalties on McArthur River and Cigar Lake could be worth around $30 million today. As for the interests in the other 13 uranium projects, I believe there is little value to be found there, as none of the properties appear close to production.

Thus, Uranium Royalty has a market valuation of $250.1 million at the time of writing. It has $98.3 million in physical uranium and securities, and cash should be around C$8 million ($6.2 million) at this time. Add about $30 million for the interests in McArthur River and Cigar Lake and subtract the $10 million loan, and we get a valuation of $124.5 million. However, we must also take into account that costs have skyrocketed in recent quarters as Uranium Royalty has increased its marketing and staff compensation expenses. The company’s operating loss for the nine months ended January 2022 was C$4.2 million ($3.2 million), an increase of more than 600% year-over-year. the other.

Uranium royalty expenditures

Uranium royalty

That being said, I think short selling Uranium Royalty stocks could be dangerous, as uranium prices are notoriously volatile.

Key takeaway for investors

Uranium Royalty’s business fundamentals look much stronger than a year ago, but I think they still can’t justify the company’s $250 million market valuation. In my opinion, his business should be worth maybe half that amount. On top of that, Uranium Royalty’s operating losses are currently around $1 million per quarter.

However, shorting stocks in the commodities sector is generally dangerous, and I think risk-averse investors should just avoid Uranium Royalty for now.