Uranerz: The Newest Uranium Producer

Uranerz: The Newest Uranium ProducerIn the last several years, not many companies have been able to transition from uranium development to production. Indeed, with current uranium prices below global marginal production costs, very few companies have been able to maintain operations, let alone contemplate production. For Uranerz Energy (TSX:URZ,NYSEMKT:URZ), that has not been the case. 

The Wyoming-focused company started its mining operations this week at Nichols Ranch after having been issued clearance from the Nuclear Regulatory Commission. In a note to clients, Cantor Fitzgerald’s Rob Chang called the news a “transformational event” as Uranerz has now joined a select group of companies actively mining uranium.

What allows Nichols Ranch to produce in this weak price environment is the in-situ recovery (ISR) mining method being used. When compared to hard-rock mining, ISR generally comes out on the lower end of the cost curve due to lower capital costs and initial inlay costs.

As Dennis Higgs, chairman of Uranerz, explained to Uranium Investing News, Uranerz “was able to get into production within the $40-to-$50-million range of capital expenditure,” which is significant when compared to the steeper costs associated with hard-rock mining.

Beyond that, however, Higgs pointed to sales contracts that the company entered into in 2009, when uranium prices were thriving. Uranerz has several offtake agreements with two major US utilities, including Exelon (NYSE:EXC), which operates the largest nuclear fleet in the US. The company also has a toll processing agreement in place with Cameco (TSX:CCO,NYSE:CCJ), which is operates in the Powder River Basin.

Higgs said that Uranerz is looking to produce somewhere in the area of 300,000 to 400,000 pounds in 2014, hopefully ramping up to 500,000 to 600,000 in the coming year. Even so, Higgs warned that production ramp up does, to some extent, rely on uranium prices.

“If the uranium price next year were to double,” he said, “we’d be looking to significantly increase production.” Unfortunately, there is a trade off between rapid development and growth and a weak pricing environment.

Now that Uranerz has become the newest uranium producer in the US, investors might want to note the overwhelming concern of uranium supply security. The US currently consumes somewhere in the area of 50 million pounds of uranium per year, but its domestic production only contributes about 4 to 5 million pounds. With only five companies currently producing uranium in the US, domestic supply is still going to be a concern — so much so that Chang speculates that uranium produced in the US could command a premium in the future. That would be a good thing for producing companies like Uranerz.

 

Securities Disclosure: I, Vivien Diniz, hold no direct investment interest in any company mentioned in this article.