The ASX uranium share Nexgen Energy (Canada) CDI (ASX: NXG) is a buy according to the broker UBS.
UBS describes Nexgen as a Canadian uranium exploration and development company focused primarily on its flagship Rook 1 project. This project includes the high-grade Arrow deposit in Saskatchewan's Athabasca Basin.
The main reason UBS rates the business a buy is its Rook 1 project, though the business also has "significant exploration upside".
Let's look at why the broker says that it "offers attractive valuation support and upside to higher uranium prices through its largely uncontracted order book."
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Compelling production expectations
UBS said it sees Rook 1 as a multi-decade project that's capable of delivering sales "ramping from 2033 and ~20mlb/yrs at steady state using higher cost and capex assumptions vs latest guidance and a $100/lb real uranium price." UBS noted that other analysts are assuming around 25mlb per year for the first five years, which means there could be more possible upside than UBS is suggesting.
Based on those assumptions, the broker suggests the project could generate C$2.2 billion per year in operating profit (EBITDA) under its base case, offering a free cash flow yield of around 16%.
UBS said that the longevity of the project is key to its valuation, with resource conversion likely to extend the mine life to more than 20 years and justify the $3 billion expenditure on the project.
The broker expects uranium to enter structural deficits, positioning Rook 1 to feed into this, but not materially change the market.
UBS expects the business to achieve a margin of around $70 per pound in around 10 years. The broker believes that a higher uranium price could significantly boost the valuation. The broker suggests that a $25 rise per pound would lift its valuation by more than 35%.
Funding this project is an important part of the investment question, so let's see what the broker's currently thinking on that side of things.
How will the ASX uranium share fund Rook 1?
The broker UBS believes Nexgen has a range of sources it can use for funding:
There are various levers which we explore in this report. It will likely consist of a combination of debt + assets (equity interests + strategic inventory) + pre-payments + equity. We assume C$2.85bn real capex (30% vs 2024 latest company estimate) and assume a minimum C$400m cash on the balance sheet to account for contingency. We acknowledge there is a wide range of potential sources of funds and levers NexGen can draw upon.
Nexgen Energy share price target
As you'd expect with such a bullish outlook, UBS thinks the ASX energy share can provide pleasing returns for investors.
In just the next 12 months – though we shouldn't think of investing in any share, particularly Nexgen, in such a short timeframe – UBS thinks the Nexgen Energy share price could climb to $21. That implies a possible rise of close to 20% in the next year.
Due to the long-term nature of the construction plans, no revenue (let alone earnings) is expected in FY30. But earnings are expected to ramp up by the mid-2030s.
