NexGen Energy Stock: Tailwinds And Near-Term Catalysts (NYSE:NXE)

NexGen Energy Ltd. (NYSE:NXE) represents an interesting stock to keep on your watchlist due to recent geopolitical tailwinds, a big catalyst, which I expect to happen before the end of this year, and finally, after management’s success in strengthening their cash position by 32% YoY in Q1 2024.

This additional cash should give them enough fuel for the development of their Rook I project, building all the facilities and infrastructure required for the extraction of high-grade uranium U308; the same one used in nuclear reactors to generate carbon-free energy.

The big catalyst that I foresee for this year is the verdict from the federal commission hearing, where the environmental impact statement and other considerations will be reviewed before deciding whether to grant or not all the required licenses and permits to operate.

Additionally, I see the recently approved legislation in the United States to ban the import of Russian uranium as a major tailwind for NexGen’s future growth.

Despite these factors, my rating is a Hold for the moment, until a date for the federal commission hearing is scheduled.

Company Overview

NexGen is a Canadian uranium exploration and development company, with no revenue from operations since they began trading in the TSX, back in 2014 (indeed, I like to start with the dessert first). Yet, between April 2023 and May 2024, the share price was up by over 140%. The jump in share price is even more pronounced if we go back to March 2020 (800%).

Their share price moves based on two factors:

• Other uranium miners, which are highly correlated to uranium spot prices. As a side note, uranium does not trade on an open market like other commodities. Instead, buyers and sellers negotiate contracts privately. Also, NexGen isn’t technically a miner at the moment, which brings me to the second point.
• Investor sentiment on NexGen’s ability to not only explore and find uranium deposits, but also to extract this valuable mineral, which requires a lot of planning, licensing, and permitting before they can begin their operations.

Coming back to the business overview, their main project is Rook I, centered around a large uranium deposit discovered back in 2014, known as the Arrow Deposit. It’s located in the southwestern Athabasca Basin in Saskatchewan, Canada. The project spans over 35,065 hectares and has 32 mineral claims, at the time of publishing their Q1 earnings report.

The high-grade uranium found at the Arrow Deposit is the type of uranium used in nuclear power plants to produce energy.

To give you an idea about the amount of uranium at the Arrow Deposit, I have included a table below:

Click to enlarge

Table 1. Measured and Indicated vs Probable Uranium reserves

Aside from the Arrow Deposit, NexGen announced the discovery of new uranium mineralization on their fully owned SW2 Property, located 3.5 kilometers east of the Arrow Deposit.

This area, referred to as Patterson Corridor East (PCE), includes a recent uranium discovery in drill holes RK-24-193, and RK-24-183.

According to the press release, management decided to continue exploration efforts in this area, including a significant expansion of its summer drilling program.

I view the discovery of this potential new uranium deposit as yet another factor that increases my level of confidence in NexGen.

A Promising Timeline

Even though management hasn’t committed to a specific date, NexGen Energy’s CEO, Leigh Curyer, discussed during the Q1 earnings call an anticipated sequence of events before beginning mining activities at the Rook I project.

I present below this sequence of events:

• On June 21, 2024, NexGen submitted a revised federal environmental impact statement (EIS), and addressed the remaining 49 technical review comments raised previously by the CNSC.
• The CNSC’s technical review is currently under progress by the federal-indigenous review team. They will confirm whether all technical review comments have been resolved. The deadline for this review is late August 2024.
• Upon resolving all technical comments, the CNSC will consider the EIS final.
• Once the previous milestone is achieved, the CNSC will set a date for the Federal Commission Hearing. I recommend paying attention to the press release section of their website for updates on this date, as this hearing can be a big catalyst for the share price.
• In the latest Q1 earnings call, the CEO mentioned they are ready to start major construction as soon as they receive the necessary approvals. The company is working on detailed engineering plans, procurement activities, and training local workers for future mining roles.

Although a specific date has not been set due to the uncertainty surrounding the decision during the federal commission hearing, I anticipate that construction activities will begin in early 2025.

ATM Program Leads To Stronger Balance Sheet

In Q1 2024, NexGen reported total assets of CAD 1.13 billion, which is about 12% more than in Q1 2023. This increase was primarily driven by a 32% YoY increase in cash and liquid assets.

How is this possible if they haven’t started any mining operations?

Well, as you probably guessed, the increase in cash came mainly from financing activities. I provide below more details:

• NexGen raised CAD 135 million, by issuing 13,000,800 shares at an average price of CAD 10.38 per share.
• Following the ATM program, NexGen announced in May they have successfully raised another CAD 224 million by offering 20,161,290 shares in the form of CDIs, for CAD 11.11 per share, targeted to Australian investors in the ASX.

Also, they exercised stock options, adding an additional CAD 5 million to their cash balance.

In May, they purchased approximately 2.7 million pounds of natural uranium concentrate. The funding came from a convertible debenture of USD 250 million at a 9% annual interest rate.

I view the issuing of convertible debentures to buy uranium as a conviction from management that uranium prices are going to increase in the long term due to recent geopolitical tailwinds, which I will discuss in the next section.

In the Q1 conference call, management mentioned that the amount they raised should get them going with the Rook I project without immediate need for external financing.

The Company intends to use the net proceeds from the ATM Program to fund the continued development and further exploration of its mineral properties, including the Rook I Project, and for general corporate purposes

I find this last quote from the Q1 conference call, both reassuring and concerning. On one side, I see it positive that they will be using the funds to prepare for development and exploration. On the other, I didn’t like the fact that they haven’t provided more details about those general corporate purposes.

Another concern I have is the reported net loss of CAD 34.6 million, which, while expected in an exploration and development stage company, highlights the ongoing need to burn cash to keep them afloat.

Geopolitical Tailwinds

Joe Biden signed on May 13, 2024 the Prohibiting Russian Uranium Imports Act.

Basically, the United States relied too much on uranium imports from Russia, which is concerning considering the ongoing war in Ukraine. Historically, this reliance accounted for an alarming 25-30% of the United States uranium needs.

This new legislation will ban the import of Russian unirradiated low-enriched uranium (LEU). The ban will begin 90 days post-signature, with phased reductions in allowable imports leading to a complete ban by January 1, 2028.

As a side note, when this new legislation came to my attention, I started to research potential companies that could benefit from the Russian uranium import ban. This is how I came across NexGen.

I foresee that this new legislation will gradually increase the demand for uranium from allied countries, such as Canada​, in the next 4 years.

I view NexGen in a really favorable position to capitalize on this geopolitical tailwind, once they begin extracting uranium from the Arrow Deposit.

I anticipate NexGen starting their mining operations in 2 years, maximum. By then, the decrease in Russian imports due to the new legislation will likely increase the demand for Canadian uranium.

Valuation

I have to admit that it’s challenging to value a company with zero operational revenue since its inception.

As I mentioned earlier, NexGen’s share price is heavily driven by the uranium mining industry, and investor confidence in NexGen’s ability to extract uranium from the Arrow Deposit, and to explore and find new uranium deposits.

For these reasons, financial ratios have no real meaning. Also, most of these ratios cannot be obtained.

This leaves us with price action, on a weekly timeframe.

I have included a comparison below between the Sprott Uranium Miners ETF (blue) and NexGen (orange). For the moment, a bet on NexGen is a bet on the Sprott Uranium Miners ETF, which is heavily influenced by uranium spot prices.

In regards to NexGen’s weekly chart, a quick glance shows that the price is currently at a potential support level of $6.5.

It looks like a validated support level, however for the reasons I explained above, I am not convinced about the legitimacy of any chart for this type of zero-revenue business.

The Bottom Line

At the moment, I view NexGen as a speculative bet on the uranium mining industry, and on the company’s ability to successfully execute their plans with the Rook I project.

I feel optimistic about the upcoming decision from the federal commission hearing, and I believe they will favor NexGen starting their construction activities.

I also believe the decision from this hearing can be a significant catalyst for the share price.

The tailwinds coming from the United States build up my long term confidence in the Canadian uranium miners, and I think that NexGen, although a highly speculative bet, can have a significant upside in the next 2-4 years.

Nevertheless, at the moment, my rating is a Hold. I will reconsider this rating once a date for the hearing is confirmed, and more information is provided by management in their Q2 2024 earnings call.

I suggest keeping NexGen on your watchlist, and monitor their investor relations website for any news on the federal commission hearing date.