NexGen Energy: Rook I is a fantastic uranium project (NYSE:NXE)
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outline
Nexgen Energy (New York Stock Exchange: NXE) is a Canadian uranium development company listed in both the United States and Canada.TSX:NXE:CA). The Company reports in Canadian dollars.
I’ve written about NexGen on Seeking Alpha in the past. It’s been almost five years since my last article about stocks. However, until recently this stock was a core holding in my uranium portfolio, so I covered it very often in my uranium portfolio. investment group Over the past few years.
NexGen’s stock performance has been very good over the past few years, up 494% since the beginning of the decade and outperforming the Sprott Uranium Miners ETF (URNM) and many of its peers over that period.
Figure 1 – Source: Koyfin
balance sheet
NexGen has a very strong balance sheet of C$370 million. As of the third quarter of 2023, it had cash on hand and total debt of just C$220 million. Of that debt, C$46M also went to IsoEnergy (ISO:California) convertible. The company itself has C$143M in convertible notes and no other debt.
Figure 2 – Source: NexGen Q3-23 FS
One asset that is not fully reflected in the balance sheet is the ownership of IsoEnergy. IsoEnergy was spun off from NexGen several years ago, but NexGen continues to retain significant ownership.
IsoEnergy’s shareholding was 49.7% at the last reporting date, but since the reporting data, IsoEnergy has merged with Consolidate Uranium. According to IsoEnergy’s recent corporate presentation, NexGen now owns 34% of the combined company, valuing that ownership stake at approximately C$260M based on the latest share price.
Luke I
NexGen gets most of its value from the very impressive Rook I project, which hosts Arrow deposits. Rook I is the world’s largest advanced uranium project in development, located in the western Athabasca Basin, Saskatchewan, Canada.
Figure 3 – Source: NexGen Corporate Presentation
Rook I has measured and indicated uranium resources of 257 Mlbs, grading 3.10% uranium. The high-grade portion, about 60% of measured and indicated resources, has an even higher uranium grade of 17%. Many of these resources are also reserves, with a feasibility study (FS) published in 2021 showing reserves of 240 Mlbs of uranium with a uranium grade of 2.37%.
Rook I’s biggest drawback is its location in the western part of the Athabasca Basin, which lacks infrastructure. As a result, FS estimated initial capital costs at C$1.3 billion, including significant infrastructure investments. However, given the project’s large size, high rating and low expected operating costs, the after-tax payback period is less than one year. For example, EBITDA is estimated to average approximately C$1.5 billion per year over the first five years of operation.
Figure 4 – Source: NexGen Corporate Presentation
The net present value of Rook I is over C$8 billion at the current uranium spot price using an 8% discount rate. So this is a truly unique uranium project.
NexGen has spent a long time developing Rook I, received state approval for the project in November 2023, and expects federal approval in 2024.
evaluation
I evaluated it using the financials for the 3rd quarter of 2023 and the latest stock prices. Note that using the fully diluted share count, the market capitalization is C$5.8 billion.
If we were to use US dollars instead, the market capitalization would be $4.3 billion and the enterprise value would be $4 billion. For simplicity’s sake, we’ve assumed that IsoEnergy is fairly valuable here, leaving it out of both companies and only including Rook I on the asset side of the equation.
Figure 5 – Source: Feasibility study and adjustments within
We then obtain an enterprise value for NexGen’s NPV of 0.60, assuming a uranium price of $100/lb.
Concerns and Conclusions
I consider Rook I a world-class uranium project, and it is likely that it will be fully approved in the near future. Given very good economics, a significant portion of the initial capital costs can be expected to be financed by debt, which should at least minimize dilution. Accordingly, NexGen has been aggressively using its ATM program in 2023 and increased the size of the program to C$500 million in December 2023. So shareholders can expect dilution in the near term.
My main concern about NexGen is that it could soon turn into a four- to five-year construction project. Large-scale construction project worth C$1.3 billion over several years remote In my opinion, some parts of Canada are a bit dangerous. It would not rule out construction delays or cost overruns. If Nexgen only pursues this project, there is a possibility that delays or cost inflation will put a burden on its stock price.
Another drawback of NexGen is excessive executive and board level compensation. This is something most investors accept about NexGen, but it’s certainly not a desirable feature that instills trust in my view.
Overall, Rook I is very impressive, but NexGen is not without concerns, and with relatively aggressive uranium pricing, we argue that the stock is not trading cheaply, with an enterprise value to net present value of 0.60. . Keep in mind that Rook I is still in prime condition 4-5 years after production.
There is no doubt that NexGen will continue to profit if the uranium bull market, which is my base, continues, but the risk-reward has worsened due to its outperformance. I don’t think NexGen is likely to outperform smaller uranium miners and near-term producers going forward. I could be wrong if a purchase of NexGen happens relatively quickly, but even if Rook makes NexGen a strong candidate, buys of this size are relatively rare.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
