January 17, 2012 - 12:29am EST by
2012 2013
Price: 6.15 EPS $0.00 $0.00
Shares Out. (in M): 106 P/E 0.0x 0.0x
Market Cap (in $M): 654 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 639 TEV/EBIT 0.0x 0.0x

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  • Uranium
  • Discount to NAV
  • Pricing Improvement


Since Jamal’s write-up of Uranium Participation Corp six months ago, the price of uranium has increased slightly while the price of Uranium Participation Corp. shares has declined.  As a result, the shares are currently trading at a 17.6% discount to NAV, which I currently estimate to be $7.15 per share.    Furthermore, the long-term demand/supply fundamentals appear to be supportive of a higher uranium price, although admittedly events in Japan have put a damper on demand growth in the short-term.  As a result, I expect that there is substantial appreciation potential for U shares, base on an eventual increase in the price of uranium combined with an eventual elimination of the NAV discount. 

NAV Calculation


Most Recent Published NAV Calculation (as of 12/31/11)

CAD NAV             $737,500,000

CAD NAV/Sh      $6.94

Uranium oxide (U308) lbs.           7,250,000

Uranium hexafluoride (UF6) KgU              2,374,230

CA $/lb Uranium oxide spot price $52.63

CA $/KgU Uranium hexafluouride spot price $145.94


Current Figures (as of 1/16/12):

UF6/U308 historical price ratio   2.73

$/lb Uranium oxide spot price    $53.70

$/KgU hexafluoride est. spot price           $146.60

USD/CAD conversion rate 1.02

CA $/lb Uranium oxide spot price             $55.02

CA $/KgU Uranium hexafluouride est. spot price $150.21

Assumed wtd avg. cap gains tax rate       10%

CAD Est. change in NAV (after taxes)      $24,753,165

Current CAD NAV            $762,253,165

Est. Diluted Shares          106,413,043

Est. CAD NAV/Sh              $7.16

Current CAD Price U-TSX              $6.15

Current Premium (Discount)       -14.1%


The company has been buying back shares due to the steep discount.  In November, 300,000 shares were repurchased, and in December, another 300,000 shares were repurchased.  The company has about $15mm in cash that it has available which it can use for repurchases.  In addition, management can always choose to sell some of its uranium in order to buy back more shares while the stock continues to trade at such a steep discount to NAV.

Jamal covered the history of the U’s stock price in relation to NAV fairly well, and I would encourage you to read his report if you want to see this data.  I believe U’s discount to NAV has expanded further since Jamal’s report, due (in my opinion) to tax loss selling that occurred at the end of 2011.

 My calculation above compares the current price of U shares to the spot price of uranium.  My understanding is that the contract price of uranium is currently around CAD $62.50/lb.  Using the contract price rather than the spot price, U is trading at a 25.1% discount to an adjusted (contract price) NAV. 

Why is the contract price so much higher than the spot price?  I believe the magnitude of this difference is due to the fact that the long-term fundamentals are stronger than the short-term fundamentals.  In the long-term, demand is likely to continue increasing, even while a major source of supply is taken off the market.  In the short-term, several Japanese nuclear reactors are sitting idle, and I have heard about concerns that the Japanese will sell uranium into the spot market.

 If you look at the 30-year relationship between brent oil price ($/bbl) and the uranium spot price ($/lb) (http://www.indexmundi.com/commodities/?commodity=crude-oil-brent&months=360&commodity=uranium&indicator=price-ratio), the long-term average ratio between these two commodities is 1.789.  Applying that ratio to the current brent oil price of $111.92/bbl, I get a uranium price of $62.57/lb, which is close to the current contract price.

Fundamentals of Uranium – Demand Side

According to the World Nuclear Association, currently there are 434 nuclear reactors operating worldwide in 30 different countries, generating 370 gigawatts (GW) of electricity and providing for 14% of the world’s electrical requirements.  In addition, 61 additional reactors are under construction in 14 countries, with Asia being the primary growth driver, representing another 62 GW.  Of those 61 reactors being built, 46 of them are being built in China (26), India (6), South Korea (5), and Russia (9).  China has an especially aggressive nuclear plan, as it is targeting 112 GW by 2020, as compared to just 12 reactors that produce 9 GW today.

The driver of this demand growth is increasing electricity consumption. According to the IEA, world net electricity consumption is expected to increase from 16,819 KWh in 2008 to 23,721 KWh in 2020, with most of the growth coming from non-OECD countries.  These countries are planning ahead for their electricity growth, and nuclear is a part of the mix for any country that wants diversified sources of energy for the purposes of energy security.  So the long-term demand outlook for uranium demand is very good and, due to how long it takes to plan for and build a plant, fairly predictable.

There is a demand problem in the short-term, which is why the spot price is depressed.  Japan (12% of current wwide nuclear capacity) is only operating about 20% of its reactors right now while its offline units await regulatory and safety approvals.  Germany (3% of wwide capacity) has shut down 7 units and plans to phase its program out by 2022, and Switzerland (0.8%) is planning to phase out their programs by 2025 and 2034, respectively. 

However, the growth of nuclear reactors in non-OECD countries makes up for any planned phase outs.   Demand for uranium is forecasted to increase by 3% per annum over the next ten years from the current consumption rate of 175mm lbs to 225mm lbs in 2020.  Industry forecasts have declined a little since Fukushima, but generally the declines have been modest in the 5-8% range.  The most significant impact of Fukushima is that future reactors are likely to have many more safety features.

 Fundamentals of Uranium – Supply Side

While demand is fairly predictable and constant, supply is much less predictable.  Below are the major factors that are influence supply:

  • Mining Production:  Today about 10 mines represent 60% of the world’s production of 145mm pounds per year.  New mines, particularly in Africa and Kazakhstan, have come on line to drive increased mining production of uranium.  Kazakhstan alone represented more than 100% of the estimated production growth in 2010, which means that everywhere else production has actually been declining.  Obviously the mined uranium of 145mm lbs is far less than the 175mm lbs per year that is consumed.  Ux Consulting expects that additional mining production from Kazakhstan (40% production increase expected between 2010 and 2020), Africa (new, low-grade mines), and Canada (Cigar Lake) will be able to match the dramatic forecasted increase in demand. 
  • Russia:  In 1993, Boris Yeltsin and Bill Clinton signed an arms dismantlement arrangement, referred to as the Megatons to Megawatts program, whereby Russia provides the U.S. with as much as 20mm lbs/year of highly enriched uranium (HEU) coming from Russian warheads.  This program ends in 2013 and, upon expiration, the current supply from this program of 20mm lbs/annum will be taken off the market. 
  • Excess Inventories:  Until the 1980s, world production was much greater than world consumption of uranium.  During that period, excess inventories of uranium were created and are now held by the Department of Energy.  However, since 1985, world consumption of uranium has exceeded world production by about 100%.  The excess inventories that had been created until 1985 have been declining now for more than twenty years and are expected to continue to decline (at about the same pace).
  • Reprocessing:  Reprocessing of spent fuel today represents about 2% of world supplies today, but new reprocessing facilities are coming on line and could increase reprocessing production to as much as 12mm lbs/annum.

Ux Consulting expects overall secondary sources of supply will fall from 50mm lbs. today to 19mm lbs by 2020.  This forecast, if accurate, suggests that mining production will have to increase over 45% from 145mm lbs today to 211mm lbs by 2020 in order to meet global demand.  At the same time, the mines currently under production are expected to decline between 2010 and 2020, so all of the difference must take place by development of new mines.  I expect that this is likely to occur, but it will require a far higher uranium price then $50/lb to make marginal new mines profitable.  Post-Fukushima, a number of projects have been put on hold or cancelled because the marginal cost of production is too far above the spot price.  This supply destruction will likely contribute to a tighter market as demand increases, and this tightness will likely lead to higher uranium prices.  Also, it is worth noting that mines can take as much as 10 years to progress from resource definition to production. 

Overall I believe there is considerable upside to this stock over the next year.  At the very least, I expect most or all of the Price/NAV discount to dissipate.  I also think that the current spot price of $52/lb will have to increase in order for supply to match increasing demand in coming years, and particularly so with the end of the Megatons to Megawatts program.


- 2011 tax loss selling at an end
- Japanese nuclear reactors come back on line
- End of the Megatons to Megawatts program
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