Uranium Royalty: Speculative Play On The Bull At A Good Price

seekingalpha09-03

Uranium Royalty stock is now at a valuation where intelligent investors can speculate on potential upside.Uranium Royalty stock has underperformed compared to peers, but its current valuation offers a...

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(NASDAQ:UROY) stock. The company was in the right sector and definitely in at the right time as the long slumber of the nuclear commodity market was ending. But the valuation remained a \"meh\" for most of its life. This was reflected in our work where we followed the company but never stamped a buy on it. We also came fairly close to a Sell when we labeled the stock price 18 months back as a good point to exit. Seeking Alpha Those that took up that offer are sitting fairly pretty. Seeking Alpha We think this has reached the kind of valuation where an intelligent investor can at least gamble on potential upside. We go over the rationale and three bullish factors below. 1) Uranium Bull Still In Its Infancy It is easy to think that the uranium bull market is over. After all, many stocks have made some big moves over the last two years. See Cameco Corp (CCJ) below for an example. Data by YCharts But the moves have been fairly modest in relation to how much the commodity itself has moved. Sprott Physical Uranium Trust (U.UN:CA, OTCPK:SRUUF), run by the famous Sprott Group, holds physical uranium. There is no realistic way an individual could procure and store uranium, so this fund is one of the few outlets for that speculation. As you can see below, even that fund is up 105%, reflecting the changes in the spot price of the commodity. Data by YCharts In a normal world, you would expect uranium stocks to deliver a multiplier on this, but generally, most have underperformed our radioactive friend. More importantly, the world remains in a massive deficit of uranium. Cameco Contrary to what you might expect, we are not seeing a flurry of projects being sanctioned as capital remains scarce. We are all too busy chasing AI stocks at 40 times sales to actually care about what will keep the data centers powered up. So our take is that we are in the second innings here and there is upside to be had. 2) UROY Became The Worst Performer In Our List Stupid valuations get you stupid long-term returns. That was what our thought process was 18 months back. Now, things look relatively improved. UROY, which should arguably be the least vulnerable to a pullback in commodity price, has done the worst. Data by YCharts As a royalty company, its exposure is a bit different from the ones spending millions to open up a mine. Instead, here it is at the bottom of the barrel. 3) Current Valuation Provides A Floor Via Uranium Inventory URPY's presentation throws at you the who's who of mining. You can see Franco-Nevada (FNV) and Royal Gold (RGLD) in there and trading at about 2X NAV. UROY, on the other hand, apparently trades at a 30% discount. UROY Presentation It is a bit strange, though, as the two analysts covering this have a giant gap in their NAV estimates. Another interesting aspect is that a third analyst briefly covered this and then stepped away after 3 quarters. TIKR Note that the estimates shown above are in Canadian dollars. So you have to take that NAV with a grain of lead, but the company is sitting on (not literally, we hope) a large pile of Uranium. UROY Presentation So there is a large liquid asset base backing the current market capitalization. Outlook & Verdict We think Uranium will rise in the months and years ahead. A US recession might interfere briefly with this trend, and certainly, stocks with no real earnings can move lower, far lower, on that. UROY fits the no-earnings part as its royalty portfolio is in its infancy. Moreover, there is the cash burn to consider. Running the company is still relatively expensive as the directors need to get paid. For some of its history, this was not really a bother. UROY traded far above where it should be trading, and management was happy to issue shares at those ridiculous prices. Data by YCharts The share issuance boosted cash and in most cases boosted NAV as well. At this deep below the low end of expected NAV, the equation is very different. You really cannot issue a ton of shares without diluting things out badly. Not issuing shares means that you have to burn through cash every quarter. Based on the results for the last fiscal year which ended on April 30, 2024, that drain was about $7.0 million CAD a year. UROY April 2024 Financials That's not an insane amount in relation to the assets, but fairly large in relation to the actual uranium royalty portfolio. UROY April 2024 Financials Still, if you have to speculate, this is the moment, all things considered. For investors who love to add a buffer, this one is actually ripe for it. We would suggest the covered calls for April 17, 2025. We did a similar play for Denison Mines (DNN) some time back, and it worked out really well with low volatility. Here, there is a 23% annualized return if the price stays flat. Author's App There is also an additional 14% upside between the stock and the strike price. In an ideal world, we would hit the $2.00 strikes, but those are not available at the moment. So this represents the best possible one to give you returns with relatively lower volatility. Another way to look at this is that the 23% annualized yield more than makes up for the expense ratios of the fund over time. We are rating Uranium Royalty Corp. as a buy, with the caveat that we would only do it via covered calls. Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult a professional who knows their objectives and constraints.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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