Impact: Neutral to Slightly Negative
NexGen announced that it has purchased 2.7M lbs of U3O8 at US$92.50/lb. To fund this purchase, NXE issued US$250M worth of debentures to MMCap International Inc., convertible into ~23M common shares (~4.3% of outstanding shares) at C$14.70/sh for five years (~30% premium to NXE’s five-day VWAP). The debentures carry a 9% coupon, of which 2/3rd is payable by cash and the remaining is payable at the prevailing 20-day VWAP. MMCap is the lone subscriber and is expected to gain certain strategic alignment provisions such as voting alignment, standstill, and sale and transfer restriction covenants. We aren’t sure if this means that NexGen needs MMCap’s permission to sell the uranium for any reason, given that the pounds are likely collateral for the debt. The uranium purchase provides NexGen investors with exposure to rising uranium prices, and according to management, provides project financing optionality, and enhances its contracting strategy by having pounds on hand at the start of production. This would suggest that a uranium sale to help fund initial Capex isn’t being considered at this time. Without any exposure yet to delivery contracts, we aren’t sure how important it would be for NexGen to have standby uranium available in case production doesn’t ramp up as expected. Heavily market-related or not, we believe long-term contracts will be necessary. We believe this purchase comes when the uranium market is very tight, and Russian uranium imports into the US will likely be banned, which should lead to higher uranium prices. But we wonder if these pounds come at a high cost. We would need to see ample uranium price appreciation for NexGen to cover the 9% annual debt interest, a 3% transaction fee, and dilution from a 30% conversion rate (in line with our prior share price target before the deal). NexGen is expected to have ~C$960M in cash and physical uranium upon closing of this deal and the recently announced Australian CDI offering (read notable), covering a major portion of the C$1.3B initial Capex. All eyes remain on the Federal permitting of Rook 1, making sure that NexGen can answer all questions put forth by the CNSC.