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April 8, 2024

Trade Idea: NXE $8.43 (NexGen Energy Ltd.)

Buy November 15th $10 Calls for $1.30

TI NXE chart Winning Picks 040824

NXE is a uranium producer, primarily driven by the Rook I project, the world's largest high-grade uranium development project located in Canada.

Recent advancements in the "Clean Energy" narrative have elevated nuclear energy in global discussions. Presently, nuclear energy contributes 10% of the world's electricity, with aims to increase this share to 20% to 25% in the coming decades. 

Focus on Supply

Demand won’t be the issue; the challenge may lie in the supply. Here’s what NXE CEO Leigh Curyer had to say on the last earnings call:

With the rise of technologies and the imperativeness for cleaner energy, the demand for uranium is projected to increase by 127% by 2030 and 200% by 2040. Yet the supply side presents a stark contrast with its fragility due to the confluence of factors, primarily under-investment in exploration development for over a decade, geopolitical tensions and supply chain challenges, challenging mine restarts and overall resource depletion have all affected the current supply levels and the long-term forecasted ability of supply to come online. The potential ban on Russian uranium imports by the US Senate adds to this precarious situation, leaving many market participants reassessing future strategies and looking for sustainable new diversified primary uranium sources in sound jurisdictions.

If nuclear energy is the solution, the U.S. must address the uranium supply chain. Astonishingly, 70% of the U.S. supply comes from international markets outside of Canada, with even 12% sourced from Russia. Take a look at the chart below:

TI NXE Supply chart Winning Picks 040824


Given the rising demand and the supply dynamics, it's clear that uranium supply has rapidly become a national security issue.

This underscores the necessity of developing projects like Rook I.

Options Flow

In the past few weeks, there have been buyers of NXE call options at multiple strike prices across various months. The November 15th $10 Calls have attracted the most significant interest.

TI NXE Flow chart Winning Picks 040824


Specifically, over the past week and a half someone has purchased 50,000 NXE November 15th $10 calls for approximately $1.07 each. The risk/reward ratio (RR$) is just above $14, suggesting a potential move toward $15-$16.

The Trade

In general, this stock's performance will fluctuate with the price of uranium. As demand surges with Big Tech's shift towards nuclear-powered data centers to support AI, there is an increasing race for uranium.

Adding to the supply issues, this imbalance could escalate quickly.

Furthermore, the Sprott Physical Uranium Trust, which “holds substantially all of its assets in uranium in the form of U3O8,” now has a NAV of $6 billion. As the "uranium" narrative gains traction and more investors choose to invest directly in this trust, it could become problematic as the Trust acquires more supply, driving prices even higher.

NXE is not an earnings play. It is a bet on “nuclear,” uranium prices, and the development milestones of this Rook I project.

The repeated call buying is intriguing. While I don't know who is behind it, I have noticed that neither Blackrock nor Vanguard appear in the top 80 names on the NXE holders list. This call buying has the hallmarks of Blackrock, who I suspect is also buying into the stock.

I like the NXE November 15th $10 Calls for $1.30. The Target Stock Price is $15.


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