Stock image of a uranium mine.JohnCarnemolla/Getty Images/iStockphoto
Mark Bunting is the publisher of The Capital Ideas Digest, a weekly compilation of investment ideas based on a variety of research reports. The Globe and Mail provides marketing services and receives compensation from its parent company, Capital Ideas Research. Try it now.
Getting investors excited about a uranium investment is a tough sell with uranium prices near 11-year lows of about $25 (U.S) per pound.
Supply of the nuclear fuel is still plentiful more than five years after the Fukushima disaster, which led to plant shutdowns in Japan, Germany and Sweden. On top of that, China has delayed approvals for some new nuclear plants.
Despite that backdrop, Warren Irwin is abandoning his usual low profile to make the case for uranium exploration and development company NexGen Energy Ltd. (NXE-T) because he believes strongly that it has "all the hallmarks of a huge winner."
One of the largest-ever uranium discoveries
Mr. Irwin is the founder of Rosseau Asset Management, a hedge fund which specializes in alternative long-term investment strategies with a focus on the resource sector. The company has about $100-million in assets under management. Mr. Irwin says his firm's average compound rate of return since inception nearly 18 years ago is more than 15 per cent, net of fees. Rousseau is one of NexGen's largest shareholders.
Mr. Irwin told Capital Ideas Digest he thinks NexGen is sitting on what might be one of the world's largest-ever discoveries of uranium in the Athabasca Basin in northwestern Saskatchewan. The company estimates its Arrow deposit, discovered in 2014, is at least the third largest-ever uranium discovery in the area after Cameco Corp. (CCO-T) and its McArthur/Key Lake and Cigar Lake mines.
One major difference with NexGen's discovery, according to Mr. Irwin, is that the mineralization is located in basement rocks which is easier to mine compared to wet sandstone where mining challenges are common due to an excess of water.
Making the case for NexGen
"I've never seen a stronger management team in a junior," Mr. Irwin says. "We're dealing with uranium which is at the bottom of the cycle. We're finding a tremendous amount of uranium in the best types of rocks, in the best basin, in the best province, in the best country in the world to find uranium."
Assessing the reserves
Mr. Irwin says he has stuck with "old school" research techniques in assessing resource discoveries.
"I try to be ahead of the curve and I have my own resource model so I have a good handle on where I think the resource is going to come out at, and they're adding resources like crazy, frankly."
NexGen's initial resource estimate for Arrow, issued in March, indicated nearly 202 million pounds of uranium. The number was in line with what Mr. Irwin's research was telling him. More than half of the estimated deposit has an average grade of more than 13 per cent uranium, well above the global average which, according to the World Nuclear Association, is about 0.10 per cent.
NexGen's shares surged after the announcement from just under $1 (Canadian) a share to more than $2.80. The stock now trades around $2 a share.
The stock is "extraordinarily cheap"
NexGen has an enterprise value (market capitalization plus debt) of roughly $700-million, including the $60-million (U.S.) in convertible bonds held by CEF Holdings, which is 50 per cent controlled by legendary Hong Kong billionaire, Li Ka-shing. Mr. Irwin says the market is valuing NexGen's uranium at "roughly $3.50 per pound." He thinks that figure is too low based on the latest drilling results.
"I've taken the assays (an evaluation of the ore), and it has increased my estimate of the current resource from 200 to more than 350 million pounds," Mr. Irwin says. "All of a sudden that drops the value of the company to $2 (per pound) which is extraordinarily cheap by all metrics."
Big oil may eye NexGen
Mr. Irwin believes NexGen could eventually be a takeover target and that the buyer may be a large oil and gas company.
"People will think I'm wacky for thinking this way," he says. "But this deposit is getting so big that whoever controls it will have one of the biggest uranium resources in the world. When that happens, it opens it up to a whole host of new buyers who'll buy it on a strategic basis who are not currently involved in the uranium space."
Once in a generation
While uranium stocks are currently out of favour, Mr. Irwin thinks the sector will eventually take a turn for the better, and that investors will start to take more notice of Nexgen.
"It's a very, very unique story and it really hasn't captured the imagination of the markets yet," Mr. Irwin says. "These things come around once in a generation. They're extremely rare at this level of richness, in such scale, and in such a good operating environment."
Mark Bunting is the publisher of The Capital Ideas Digest, a weekly compilation of investment ideas based on a variety of research reports. The Globe and Mail provides marketing services and receives compensation from its parent company, Capital Ideas Research. Try it now.