Thesis:  I believe Ur-Energy (URG) is an undervalued junior uranium miner worth $2.26, representing a 62.9% premium to its share price as of writing.  On 12/04/13, the Company announced its first shipment of uranium at its recently completed Lost Creek Project.  I believe the Company will undergo a re-rating to its valuation to reflect its new status as a junior producer.  Q4 13 results will serve as a short term catalyst as the Company will finally disclose actual production costs.  In addition, the end of the US-Russia HEU program may result in an uplift in uranium prices.  Longer-term catalysts include the restart of Japan’s nuclear reactors after the March 2011 Fukushima accident and increasing nuclear demand from China, India, South Korea and Russia.  Finally, the recently acquired Pathfinder acquisition will serve as the Company’s future growth. 

Company description:  Ur-Energy is a junior in-situ recovery (ISR) uranium mining company with properties in south-central Wyoming.  The Company’s flagship project, the Lost Creek Project, entered production in August of 2013.  Its Lost Creek processing facility is capable of producing two million pounds of uranium annually with a one million pound production rate planned for the mining areas of Lost Creek.  The Company’s shares trade on both the Toronto Stock Exchange under the ticker symbol “URE” and on the NYSE MKT under the symbol “URG”. 

Background on the Lost Creek Property:  The Company holds 2,100 unpatented mining claims and State of Wyoming mineral leases for 42,000 acres in the area of its Lost Creek (LC) Property.  The LC Property consists of the following projects: (1) the LC Project, (2) LC East, (3) LC West, (4) LC North, (5) LC South, and (6) the EN project.  The Company acquired the original LC Project in 2005.

As of the date of writing, the Company has only brought the LC Project and the LC East project to measured and indicated resources per NI 43-101.  The LC Project consists of (1) 3.6M lb of 0.058% grade uranium as a measured resource, (2) 2.4M lb of 0.052% grade uranium as an indicated resource, and (3) 2.1M lb of 0.057% grade uranium as an inferred resource.  LC East consists of (1) 1.3M lb of 0.054% grade uranium, (2) 1.4M lb of 0.040% grade uranium, and (3) 1.5M lb of 0.046% grade uranium. 

Japanese nuclear shutdown decimates uranium prices:  Within a week of the Fukushima accident, URG’s stock price fell from $2.50 to $1.72, representing a drop of over 31.2%.  Likewise, many other uranium companies experienced a significant drop in share price, none of which have since recovered.  Fukushima was the worst nuclear disaster since Chernobyl in 1986.  Prior to the shutdown, spot uranium prices traded as high as $75, but after the accident and subsequent shutdown, prices collapsed, falling to $34 in 2013. 

Shortly after the accident, Japan shut off all 50 of its nuclear reactors (representing 11.6% of the world’s nuclear reactors), leaving the country without nuclear power for the first time in over 40 years.  Prior to the shutdown, nuclear power provided 30% of Japan’s electricity.  Currently, Japan is supplementing its electricity needs through coal and natural gas.  In April of 2013, the Japanese Ministry of Economy Trade and Industry estimated that Japanese power companies had spent an additional $93 billion on imported fossil fuel since the accident. 

Despite negative investor sentiment since the Fukushima accident, I believe URG has come a long way since 2011 with its now producing Lost Creek Property and the following headwinds:

• Shinzo Abe promotes pro-nuclear policies:  On 12/26/12, Shinzo Abe was elected as Japan’s Prime Minister.  One of his more notable policies is the restart of Japan’s nuclear reactors.  On 09/19/12, the Japanese government established the Nuclear Regulation Authority (NRA).  Among other duties, the NRA was charged with writing new safety standards for nuclear plant.  To restart reactors, Japanese operators must pass new stringent safety standards.  In July 2013, four utility companies applied to restart 12 nuclear reactors.  The NRA began inspection tests in July and NRA Chairman Shunichi Tanaka said checks would take six months, suggesting January would be the absolute best case scenario for restarts. 

• Japanese restart would be a tremendous headwind:  I believe it is likely Japan will restart some of its nuclear reactors at some point in 2014.  A restart would alleviate concerns that Japanese utility companies would dump excess uranium into the market.  Further, I believe the (1) the environmental impact of coal to supplement nuclear energy and (2) the high cost of importing natural gas all point to nuclear energy being the most economically viable method to meet Japan’s energy needs. 

China and India among other countries are investing significant resources in nuclear power: 

• China to invest heavily in nuclear power:  In 2006, most of China’s electricity was generated from fossil fuels (80% from coal, 2% from oil, and 1% from gas).  In August of 2013, China represented it would reduce its carbon emissions by 40% to 50% by 2020.  Heavy coal use to power electricity demand have led to dangerous pollution levels and nearly half of the country’s rail capacity is used in transporting coal.

During the same week of the Fukushima accident, China announced that it would suspend approvals of nuclear reactors pending a review of lessons that might be learned from the accident.  China restarted its approval process in October of 2012 after completing a formal review.  China represented it would build reactors at a slower pace and only in coastal regions (due to concerns about polluting rivers inland) and only Generation III reactors.  The restart of the approval process in China removed a negative overhang of the Fukushima accident given China’s strong nuclear ambitions.  China operates 18 nuclear reactors and is constructing 30 more reactors, most of which come online between 2014 and 2016.  Further, China has proposed the construction of 188 more reactors (note there are only 434 operable nuclear plants today). 

• India aims to supply 25% of electricity needs through nuclear by 2050:  Currently India’s 21 operable nuclear reactors have a total combined capacity of 5,302 megawatts of electrical output (MWe).  India aims to have 14,600 MWe of nuclear capacity online by 2020.  Further, the country’s goal is to supply 25% of its electricity needs through nuclear power by 2050.  India has six nuclear reactors currently under construction and 39 more proposed reactors. 

• South Korea aims to generate 50% of its electricity through nuclear power by 2022:  South Korea imports 97% of its fuel requirements.  In 2011, the nation spent $170.0 billion on imported energy and according to Korea Electronic Power Corporation (KEPCO, Korea’s largest utility company, accounting for 93% of the country’s electricity generation), the country would have spent an additional $20.0 billion in importing energy without the use of nuclear power.  KEPCO estimates nuclear power generation in Korea is more cost effective than other sources—in 2008, nuclear power cost 39.0 Won per Kilowatt hour (KWh), compared to 53.7 won for coal, 143.6 Won for liquefied natural gas, and 162.0 Won for Hydropower.  Korea’s 23 nuclear reactors provide almost one-third of the nation’s electricity needs and it aims to provide half of its electricity through nuclear power by 2022.  The country currently has 5 reactors under construction. 

• Russia’s Rosatom plans aggressive nuclear expansion:  Russia’s state owned nuclear corporation, the Rosatom State Atomic Energy Corporation has stated the country’s goal of providing 45.0% to 50.0% of its electricity through nuclear power by 2050 and up to 80% by the end of the century.  Russia operates 33 nuclear power plants and is developing 10 more.  Russia has proposed the construction of 18 more reactors.

Potential uplift in uranium prices from conclusion of the US-Russia HEU program:  The 20-year Megatons-to-Megawatts program (also known as the US-Russia Highly Enriched Uranium-HEU Purchase Agreement) was signed an initiated by President Clinton in 1993.  Under the program, Russia agreed to supply the US with low-enriched uranium in exchange for high-enriched uranium from excess Russian nukes.  Under the program, the US appointed the United States Enrichment Corporation (USU) at its commercial agent in the program, while Russia chose Techsnabexport (TENEX).  The program has displaced 8,850 tonnes of uranium production from mines each year and met about 13.0% to 19.0% of world reactor requirements through 2013.  The last shipment under the program was delivered in December of 2013. 

In March 2011, USU signed a 10-year contract (effective December 2013) with TENEX to replace the supply that would no longer be available once the HEU program concluded.  Under the new contract, TENEX will supply low-enriched uranium to USU ramping up to a level that is half of the HEU program in FY 15, with the mutual option to increase the quantities up to the same level as the HEU program after FY 15.  Unlike the HEU program, the quantities supplied in this new arrangement will come from Russia’s commercial enrichment activities.  Given the conclusion of the HEU program, uranium prices may potentially benefit.    

Estimated Economics of the Lost Creek Project:  As of the date of writing, the Company has secured six long-term contracts to provide uranium to primarily North American utility companies.  Based on my understanding of my discussion with the CEO, most of the contracts were signed over a year ago, when LT uranium pricing was much higher (i.e. $60.00 range vs. $50.00 - $55.00 today).  The long-term contracts account for one-third to half of its uranium production (depending on the year).  The Company’s preliminary economic assessment of the project estimates a $60.14 net sales price after deducting taxes and royalties.  The Company expects a direct cash cost of production of $11.54/lb of uranium and $29.13/lb when factoring in sustaining development (i.e.  replacing depleted areas with new areas) and capex.  However, given that the majority of capex has already been incurred (i.e. sunk cost), the real cash cost of production going forward is estimated to be $24.08.

The Company’s estimate of direct cash production costs is in line with its ISR uranium peers.  Uranerz Energy Corp (URZ) estimates a direct operating cost of $24 per pound of uranium and $35 per pound of uranium when factoring in taxes and royalties.  When Uranium Resources, Inc. (URRE) was producing uranium from 2006 to 2008, its direct operating costs ranged from $18.84 to $23.35 per pound.  Further, since inception, Uranium Energy Corp’s (UEC) Palangana ISR mine has incurred a $21.77 cash cost per pound of uranium.  It should be noted that unlike its peers, the Company does not have privately held royalties on its Lost Creek Project. 

Long-term growth through Pathfinder Mines Corporation:  On 07/24/12, the Company executed a Share Purchase Agreement (SPA) to acquire Pathfinder Mines Corporation from French nuclear giant, Areva, for a $13.3 million.  The Company completed the acquisition on 12/23/13.  Pathfinder owns the Shirley Basin and Lucky Mc mine sites in the Shirley Basin and Gas Hills mining districts of WY, respectively.  Historic estimates prepared by Pathfinder indicate Shirley Basin holds 10.0 million lbs of 0.25% grade uranium and the Lucky MC to hold 4.7 million lbs of similar grade uranium.  In the 1990’s conventional mining operations (i.e. non-ISR mining) were suspended at both sites due to low uranium pricing.  Based on my understanding, the Company intends to receive all licenses and bring Shirley Basin operational within the next 3-4 years. 

Valuation analysis:  To value the Company, I forecasted EBITDA through 2019 under three scenarios, a base case, a bear case, and a bull case.  While the Company is currently producing uranium at an 800K annual run rate and plans to go into full production mode of 1,000K lbs in FY 14, I assumed a base case production of 850K for FY 14, ramping up to 1,000K lb for FY 15 – FY 18.  For the base case, I assumed the Company would bring more production online in FY 19 through its Shirley Basin project.  For the bear case, I assumed that the Company would not bring online any additional production capacity, resulting in a production run rate of 1,000K lb in FY 19.  For the bull case, I assumed the Company would bring online additional capacity in FY 18 from Shirley Basin, resulting in a 1,500K lb production output in FY 19. 

For the base Case, I assumed that the Company would realize an average sales price of $50.88 in FY 14 ramping up to $67.76 as a result of increasing global demand for uranium.  Further, I assumed a production cost per pound of uranium of $26.00 in FY 14, dropping to $24.00 in FY 19 due to efficiencies in production.  For the bear case, I assumed a realized sales price of $46.35 in FY 14, rising to $59.35 in FY 19 and a production cost of $28.00 in FY 14, dropping to $25.00 in FY 19.  For the bull case, I assumed an average sales price of $49.59 in FY 14, rising to $75.33 due to strong demand in a uranium bull market and production costs of $22.00 in FY 14, dropping to $20.00 in FY 19. 

Given that the Company has not previously generated revenue/profits in its operating history, I referred to Cameco’s (CCJ--the uranium industry's bellwether) historical EV/EBITDA multiples.  Currently, CCJ trades at an EV/EBITDA multiple of 12.6x.  For the base case, I assumed the Company would trade at a 12.7% discount relative to CCJ or 11.0x EBITDA.  Following the recession in 08/09, CCJ traded as low as 8.0x and subsequent the Fukushima accident in FY 11, it traded as low as 9.0x.  For the bear case, I assumed a multiple of 8.0x.  Prior to the Fukushima accident, CCJ traded as high as 21.0x.  For the bull case, I assumed a multiple of 15.0x.    

Based on the assumptions above, I estimate a base case value of the Company of $2.35, representing 61.9% upside.  For the bear case, I estimated a value of $0.76, representing downside risk of 45.3%.  For the bull case, I estimated a value of $5.47, representing a 293.5% upside. 

 Risks:

Production costs may be higher-than-expected

Japan may unload uranium inventory on the market place or restart approvals are further delayed

Debt load may prove burdensome if operations do not generate expected IRR

Cheap domestic natural gas prices may deter uranium investments

Political risk in China, India, Japan, South Korea, and Russia over nuclear development

US or other governments decide to downblend its nuclear stockpiles

Potential use of Thorium as a substitute for nuclear fuel

Short term catalysts:

Q4 13 results when the Company discloses production costs

Japan announces approvals for the restart of nuclear reactors

Long-term catalysts: 

Increasing uranium demand from China, India, South Korea, and Russia

Shirley Basin is brought to production