NexGen Decides To Mine Uranium Above Ground
An Unusual Announcement From Uranium Explorer/Developer NexGen Energy to Acquire 2.7 Million Pounds of Uranium
This morning, NexGen Energy (NYSE:NXE, TSX:NXE) delivered the bizarro mining news release du jour with this:
Evidently, NXE has entered into a binding term sheet with MMCap International Inc. SPC for the purchase of 2,702,410 pounds natural uranium concentrate ("U3O8") for an aggregate purchase price of US$250 million based on the five day average UxC spot price.
To fund the purchase of 2.7 million pounds of U3O8, NexGen will issue US$250 million aggregate principal amount of unsecured convertible debentures. The Debentures will carry a 9.0% coupon over a 5-year term. The Debentures will be convertible at the holder's option into Common Shares, at a conversion price per Common Share of US$10.73 (C$14.70 per Common Share equivalent incorporating today's exchange rate) representing a 30% premium to the volume-weighted average trading price per Common Share on the Toronto Stock Exchange for the 5-days ending on the day prior to the date of this announcement.
This transaction will surely draw a great deal of analysis from analysts and pundits alike. However, I’ll take a shot at offering my takeaways from this morning’s NXE news release:
NexGen continues to use its shares as currency, and appears more than willing to issue more of them.
NexGen views the spot uranium price as too low, and the company is willing to pay 9% interest for the luxury of owning U3O8.
By issuing shares in order to accumulate physical uranium, NexGen is in a way saying that uranium offers better return potential than shares of NXE.
Rook I isn't being built anytime soon.
This strikes me as a clever marketing ploy, not dissimilar to Michael Saylor and his harnessing of MSTR's cash flows and equity to accumulate as much Bitcoin as possible. (NOTE: MSTR has a sizeable unrealized gain on its Bitcoin holdings)
Due to the 9% interest rate on the debentures and other associated fees involved in this transaction, NexGen will need a U3O8 price above $150/lb five years from now in order to make a profit on its investment.
Today’s news is also exceptionally bold because NexGen has an open financing in Australia to raise a not insignificant amount totaling C$224 million. Perhaps the company wasn’t expecting today’s negative market reaction, however, it does seem odd to announce a $250 million convertible debenture transaction while another financing is still open for another week.
When I first read the news this morning I was immediately reminded of the Notorious B.I.G's famous quip "Don't get high on your supply".
However, in the next breath I also realized that NexGen is giving the market what it appears to want: more shares.
NexGen’s share price is up more than 100% in the last year. Up until this morning, it seemed like investors had a virtually unlimited appetite for more NXE shares:
NXE (Weekly)
The week isn’t over, but today’s 12.23% drubbing on heavy volume opens up the potential for a double-top to be put in place on the weekly chart. The double-top also comes at a time when NXE has displayed fading momentum and Relative Strength.
NexGen is making a very aggressive move and essentially going all-in on uranium and nuclear energy. The uranium bull in me loves this move as a way to squeeze an already tight spot uranium market. However, the equity investor side of me can’t help but to view this as a sign of hubris by NexGen management.
On the other hand, maybe this is a brilliant move by a management team that knows their world class uranium deposit won’t be coming online by 2030. Thus causing the uranium supply shortfall to be even larger than current estimates.
I have no position in NXE at the time of writing this blog post.
DISCLAIMER: The work included in this article is based on current events, technical charts, company news releases, corporate presentations and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. This video is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.