November 24, 2010 - 11:54am EST by
2010 2011
Price: 6.00 EPS -$0.39 $0.00
Shares Out. (in M): 78 P/E n/a 0.0x
Market Cap (in $M): 470 P/FCF n/a 0.0x
Net Debt (in $M): -38 EBIT -23 0
TEV ($): 432 TEV/EBIT n/a 0.0x
Borrow Cost: NA

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This is a recommendation to short Uranium Energy Corp. (UEC-$6).  

  • Brief history.

a. Uranium Energy Corp. was incorporated in Nevada in 2003. In 2006 the company began trading on the OTC under the symbol URME. The company's plan according to the 2005 10-K was "an aggressive acquisition  strategy for the next 12 to 24 months to build uranium resources of 50 million pounds." Today UEC claims about 12m pounds of resources, no reserves and has an accumulated deficit of $70m. On September 28, 2007 the company began trading on the Amex. Today the company describes itself as "a U.S.-based uranium producer with in-situ (ISR) recovery projects in operation in South Texas, and exploration properties throughout the United States."

b. Citron Research wrote up this company in 2007 when the company was trading around $7 per share under the ticker URME. You can find the reports at Citron by searching under the ticker URME. The stock subsequently declined to under $0.20. The stock has since rocketed up along with other uranium exploration companies and now stands at $6. At this valuation and with the upcoming effectiveness of the registration of 8m shares and 4m warrants, I think now is a good time to short the stock.

  • High valuation. With a market cap of $470m (treasury method for options and warrants) UEC trades at a price to book of 7x and 18x the capitalized value of mineral rights and properties, pp&e and reclamation deposits on its balance sheet ($26m). The company paid about $20m in cash and stock for its two "principal mineral properties", the Goliad Project in Goliad County, Texas, and the La Palangana Project, in Duval County, Texas. None of the company's "other properties are currently considered material properties." La Palangana accounts for about half of CIBC's NAV for the company, or over $100m; the company paid $11m (2.7m shares and $1m cash) less than a year ago for these assets. CIBC's price target is $4.70 and its estimated NAV is $3. I doubt the company is worth even that much.
  • Serial issuer of shares, options and warrants. The company has tripled its number of shares outstanding from 23m in early 2006 to 69m today. In addition to the company's October 2010 PIPE, the company granted an additional 2m options in the 3 months since the company's FY ended July 2011 according to the S-3 the company filed today.
  • Zero proven reserves.
  • Company management.

a. The CEO is the son in law of the Chairman.

b. Citron in 2007 noted that the CEO's communications firm and UEC (then traded under the symbol URME) shared the same corporate address and that the Chairman intentionally omitted in SEC filings the fact that his sister owned 9% of the company through an offshore entity owned by another offshore entity that was in turn owned by his sister.

c. The COO is Anthony Harry, who previously worked at Uranium Resources, Inc. from 1984 to 1997 where he was responsible for "all facets of operations and technical support." An EPA letter states that "water samples taken by Uranium Resources, Inc., since 1996, from the storage tank have shown uranium from five to eight times above EPA's current uranium standard for regulated public drinking water systems." See: http://www.uraniuminfo.org/files/EPA_letter_to_Garcia_Hill.pdf  

  • Insider selling. There has been no insider buying this year. The CFO owns 15,000 shares after selling 25% of his holdings this year. He sold 3,000 in April at $3.50 and this month sold 2,000 shares at $5.71. The COO sold about 50k shares this year at prices ranging from $3.67 to $3.90. I wonder if we can entirely rely on form 4 filings to assess insider trading considering Citron's documentation of the Chairman's sister holding stock via layers of offshore entities.
  • Catalysts. A potential catalyst is the upcoming effectiveness of the registration statement the company filed today for the 8m shares the company sold October 26 for $3.40 and 4m warrants with a strike price of $3.95.
  • In-situ uranium mining. UEC plans to use in-situ recovery (ISR) mining for its projects. Citron's reports outline a checkered history for ISR. By its nature, uranium mining is controversial. Local opposition is fierce. A consultant paid by an environmental law firm (i.e. perhaps take this with a grain of salt) found that "In all cases, the Amended and Last Sampled Concentrations of uranium exceed the PDWS [primary drinking water standard]. The higher Amended Restoration Values and the Last Sampled Concentrations are results of the inability of site operators to reduce uranium concentrations based on their respective proposed groundwater restoration programs. This calls into question the operators' understanding of the geochemistry of the hydrogeologic systems that they are exploiting." You can find the report here: http://www.uraniuminfo.org/files/BK_Darling%20Report_Complete_Sept_30.pdf



Upcoming effectiveness of the registration statement the company filed today for the 8m shares the company sold October 26 for $3.40 and 4m warrants with a strike price of $3.95.
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