Investment Objective and Strategy
UPC's primary purpose is to invest in uranium, either directly or through its wholly-owned subsidiaries, UPBL and UPBL2, such that the common shares of the Corporation represent an indirect interest in physical uranium. As with any company, an investment in the common shares of the Corporation provides investors with exposure to increases (or decreases) in the value of the Corporation's underlying assets. In the case of UPC, the value of the Corporation's underlying assets is largely derived from its holdings of physical uranium. As a result, investors in UPC indirectly invest in physical uranium, without being exposed to the risks associated with investments in companies that engage in the exploration, mining and processing of uranium.
Accordingly, the strategy of UPC is to invest in holdings of uranium and not to actively speculate on changes in uranium prices by entering into exchange and/or investment contracts or derivative arrangements. The intent is for UPC to provide investors with a vehicle that is levered directly to the uranium price, leaving it to investors to speculate by way of their own investment decisions as to the future changes in the uranium price. With this intent in mind, the Corporation's primary objective is to provide investors with the maximum exposure to its underlying uranium investments, at any given time, as is reasonable given the Corporation's current and expected future financial position.
The Corporation uses the measure of Net Asset Value per share to assess all material business decisions. The NAV is calculated as the value of total assets less the value of total liabilities. To arrive at NAV per share, the NAV is then divided by the total number of common shares outstanding as at a specific date. NAV will typically equate to the value of the Corporation's physical uranium, plus its net working capital. Accordingly, NAV per share can notionally be divided into the portion of the Corporation's working capital and holdings of uranium attributable to each share.
As of February 29, 2020, the Corporation held investments in U3O8 and UF6 with an estimated fair value of $589,588,000 and net working capital and other assets of $7,517,000 for a combined NAV of $597,105,000. Based on the market value per pound of U3O8 of $33.17 (US$24.70), the Corporation's holdings of uranium equate to approximately 17,775,000 pounds equivalent of U3O8. As at February 29, 2020, the Corporation had 138,060,713 issued and outstanding common shares -- meaning that each share represents an indirect ownership in approximately 0.1287 pounds U3O8 equivalent, providing leverage to the commodity price and representing $4.27 in NAV per share. A further $0.07 in NAV per share is attributable to each share's indirect ownership in the Corporation's net working capital and other assets. Taken together, the NAV per share is estimated to be $4.32 at February 29, 2020.
In line with the Corporation's primary objective, as outlined above, the Board of Directors attempts to manage the Corporation's business activities to maximize the NAV per share and more specifically, the attributable equivalent pounds of U3O8 per share. Accordingly, the Corporation considers a transaction to be accretive when it increases the NAV per share.
While the underlying value of the Corporation's common shares, or NAV per share, is directly linked to the estimated fair market value of the Corporation's holdings of uranium and net working capital, the common shares of the Corporation will often trade on the TSX at a value that is either at a premium or discount to the estimated NAV per share. Management believes the premium or discount of the share price to the estimated NAV per share, at times, may reasonably be indicative of the market's sentiment regarding the future price of uranium.
Trading at a premium or discount to NAV per share provides the Corporation with the opportunity to manage its business activities, on an accretive basis, via numerous tools available through the capital markets. The Corporation's general approach to maximizing its NAV per share is summarized in the following table.
UPC's General Bias for Accretive Transactions
Capital Market Opportunities available to UPC
Common shares trading at a premium to NAV
The Corporation's bias is to issue new common shares at a price that is higher than the estimated NAV per share, to fund the purchase of additional uranium at the lower market price and/or funding operating expenditures that would otherwise be funded from existing working capital. The intended result of the foregoing is to increase the attributable holdings of uranium and/or working capital per share, and ultimately increase NAV per share for existing shareholders.
An equity financing, by way of a prospectus supplement to a short form prospectus, private placement, or similar transaction ("Equity Offering"), can be useful to fund the purchase of significant additional holdings of uranium. Relatively high transaction costs and the availability of significant quantities of uranium in the market (at or near the market price) have a significant bearing on the accretion that can be expected from a financing of this nature. A portion of the proceeds from an Equity Offering may also be retained to fund future operating expenditures.
An equity financing by way of an at-the-market offering ("ATM Offering") can be useful for raising capital in amounts that are typically smaller in size than those under an Equity Offering, and often attract a lower level of transaction costs. The periodic use of an ATM Offering to raise capital at a premium is a viable option to satisfy the Corporation's need for a regular stream of working capital to fund operating expenditures. Proceeds from an ATM Offering may also be used to purchase smaller amounts of additional uranium on an accretive basis.
Common shares trading at a discount to NAV per share
The Corporation's bias is to sell its uranium at the market price and/or use its working capital on hand to fund the repurchase of common shares and/or fund operating expenditures. The intended result of the foregoing is to increase the attributable holdings of uranium and/or working capital per share, and ultimately increase NAV per share for existing shareholders.
The sale of uranium at the market price implied in the NAV per share can be an accretive source of working capital in order to fund operating expenditures when the Corporation's shares trade at a discount.
The use of working capital on hand, or the sale of uranium at the market price implied in the NAV per share can also be an accretive means to fund the repurchase of common shares in accordance with a Normal Course Issuer Bid ("NCIB") -- which is intended to result in a reduction in the number of outstanding common shares and an increase the NAV per remaining share.
While the table above provides a general summary and illustration of the transactions generally considered accretive to the Corporation, readers are cautioned that it presents a simplified version of the analysis undertaken by the Board and management. The analysis required to assess whether a given business opportunity is accretive can be complex and requires the consideration of many specific factors -- including, but not limited to, transaction costs, execution risk, risk of concentration of inventory, storage availability, and tax or other commercial implications.
For more information, see the Corporation's Annual Information Form for the fiscal year ended February 29, 2020.