Is the NexGen Energy share a buy amid the uranium rally?

The price of uranium has exploded in the past few weeks as global economies re-open post-pandemic and countries increasingly look to nuclear power as a clean energy source.

According to Trading Economics, the price has touched its highest since June 2012 and is up around 48% since the beginning of the year. It has been driven by a demand recovery from businesses and industry as COVID-19 lockdowns come to an end and mines forced to shut in the crisis re-open.

Boosting prices more are supply constraints. Uranium needs to be below $60 for new mines to be running viably. On Monday the commodity close at $43. Investment firm Sprott Asset Management physically bought uranium for the launch of its Physical Uranium Trust in July lifting the price even higher.

 

Nuclear energy is being rehabilitated as a clean energy option in the move away from fossil fuel. The EU's European Green Deal highlighted the importance of nuclear energy in meeting climate targets and US President Joe Biden is committing $6bn to support US nuclear power as part of the $1trn infrastructure bill. New reactors are being built in China, Turkey, India and Russia.

These factors are expected to send global uranium production up by 6.2% compound annual growth rate by 2025.

 

How stocks are reacting

Uranium stocks are benefiting. NexGen Energy’s [NXE] shares more than doubled from $2.66 at the close on 4 January 2021 to $5.9 at the close on 15 September.

Cameco’s [CCJ] share price rose from $13.39 at the close on 4 January to $24.73 at the close on 15 September. Energy Fuels [CLNE] has risen 4.5% from $7.83 at the close on 4 January.

The recent drop in some share prices have largely been caused by an interview Sprott gave to the Financial Times stating that it had no intention to “corner the market” on nuclear fuel. This dampened hopes that it would continue scooping up uranium and hiking the price.

This dip could present a buying opportunity for investors and NexGen stands out from the peers as being the stock to turn to. In July the company commenced its 2021 Field & Regional Exploration Drilling Program at Rook I.

“The NexGen group has a tremendous track record of discovery, and the geological team has been looking forward to recommencing exploration drilling on what they consider to be the most prospective land package globally. Further, the detailed field work this summer is a foundation to future surface and underground infrastructure at the Rook I Project” - eigh Curyer, CEO NexGen Energy

 

According to analysts at InvestorPlace, NexGen’s main strength is that it is more undervalued than its fellow uranium stocks. As a lossmaking development stage company, it is pinning its hopes on the Rook I Project in Canada which, it believes is the largest development-stage uranium deposit in the world. It forecasts annual average annual production of 28.8mn pounds between the first and fifth year.

Leigh Curyer, CEO NexGen Energy, and former CFO and head of corporate development at Canadian miner Uranium One, said at the time Rook I was launched: "The NexGen group has a tremendous track record of discovery, and the geological team has been looking forward to recommencing exploration drilling on what they consider to be the most prospective land package globally. Further, the detailed field work this summer is a foundation to future surface and underground infrastructure at the Rook I Project.” 

The after-tax net present value of the Rook I Project is estimated at $3.47bn, says InvestorPlace, compared with NexGen’s present market valuation of about $2.1bn. “NXE stock is therefore worth accumulating on correction for investors bullish on uranium,” InvestorPlace states.

 

Timing is key to taking advantage

Analysts on Marketbeat are also optimistic with a ‘buy’ consensus and a target price nearing $8. Raymond James has an ‘outperform’ rating and a price of C$8.50.

The uranium sector like many in the mining world can be cyclical. A supply-demand imbalance leads to rising prices making it attractive to ramp up production once again. However, when that happens and supply comes flowing through then the price inevitably falls.

It means that investors need to get their timing right to take advantage. NexGen is perfectly poised for the recent uranium price drop, expectations that they will climb once again towards $60, its valuation and its development prospects in Canada.

Investors can also gain from sector-focused ETFs such as the Global X Uranium ETF [URA] where NexGen has a 7.69% weighting and the North Shore Global Uranium Mining ETF [URNM] where it has a 4.15% weighting. The Global X, which has assets of almost $1bn, has a year-to-date daily total return of 15.91% with North Shore having $630m of assets and a return of 30.72%.