Best Foot Forward. I want a Clean Fight

What a week for Energy Fuels (NYSE: UUUU)

US Secretary, Dan Brouillette announced a package which signalled to many that the US Department of Energy has taken seriously the cry for help from the uranium miners and the Nuclear industry. A 10-year $150M pa budget which The Office of Nuclear Energy (ONE), which sits within the Department of Energy (DOE), is asking for to “re-establish the nation’s nuclear fuel supply chain through the domestic production and conversion of uranium.  Sounds positive in the best-case scenario, but more information is required.

But it seems to have set off another event which has started a passionate debate by Uranium investors on social media. Energy Fuels (TSX: EFR | NYSE American: UUUU) has issued a new release announcing a bought deal for $16.6M through Cantor Fitzgerald. It has not yet closed, but we would expect it to close within the next week.

This isn’t the first Uranium company to sortie into the market recently looking for capital. But it is one of the largest. So what is going on? We don’t know yet, but will request a call with the CEO, Mark Chalmers, when they close the Deal, as we won’t get much out of him before then.

So why would they raise money now with their shares so depressed, and at a discount? It doesn’t make sense. Or does it?

Firstly, it’s worth remembering that Energy Fuels has around USD$16M of unsecured, convertible debentures with annual interest-only payments of c.USD$1.4M and a maturity date of 31st December 2020. That effectively is a large liability on the balance sheet which we will see in their March 2020 Quarterly Statement, so they need to do something about that.

Energy Fuels is raising $16M. They owe $16M. So maybe they are going to pay off the convertible. That would make sense wouldn’t it. Except it doesn’t. The uranium market has been hard to read for the last 4 years, it’s not any easier today. If you are company spending cash to keep the lights on, you need cash to hand, and not keep getting the begging bowl out. The smart thing to do would be to refinance the convertible and keep as much of that cash available as possible.

Also, what you can’t do is wait for the market to turn and save you. That has been the downfall of many a company. The response to the DOE announcement was mixed. It hasn’t had the super-charged effect that uranium companies needed. Don’t get me wrong, it was more positive than negative, but some doubt around the detail remains. So, in our opinion, companies need to get on to the front foot. Be in control as best they can. In the of case Energy Fuels, the USD$16.6M bolsters their balance sheet to somewhere in the region of USD$55M – $60M. Remember this is made up of cash and working capital in the shape of inventory (uranium & vanadium). About 50% is inventory, not cash, but only semi-liquid. That said the price of vanadium is creeping up again, c.$7-$7.50 at the moment, the c.1.5Mlbs of Vanadium in Energy Fuels stores is starting to look attractive again. We don’t expect that to be sold anytime soon, but is currently an appreciating asset.

Remember the $16M convertible is due at the end of 2020.

This reminds me (it’s not an exact parallel, but enough of one) of the actions of another company that we follow closely, RNC Minerals (TSX: RNX). The new CEO, Paul Huet, did a bought deal in September 2019 for USD$18.5M, much to the chagrin of his large retail following. The share price was depressed and cry from the crowd was ‘no more dilution’. But that raise turned out to be the making of one of the turnaround stories of last year. It bolstered their balance sheet and allowed them to put things in place to take advantage of the turnaround in the gold price from September 2019. It was a bold move. It didn’t win him any fans initially, but now the mood is much changed. The company is consistently producing and adding to their cash balance.

That is gold and this is uranium, but investors banging the ‘10- 50 bagger uranium drum’, probably won’t be overly concerned about the cost of this money to Energy Fuels as they will be swimming in cash, they tell us, when the market turns. The more conservative of us, who buy the macro story driving the demand cycle, may have winced at the price paid by Energy Fuels, but here is my take.

If the announcement from the DOE is the first salvo, it is a positive one. Right now, there aren’t US uranium producers capable of suppling annually the 2Mlbs – 2.5Mlbs of domestic uranium that the DOE announcement claims it will buy from 2021. Is this a case of Chalmers wanting to get on the offense to be able to claim as much of the $150M as possible? We think so. Can he do it? Well that’s going to come down to timing, luck and planning. Only one of those he can control. But if he has timed this correctly, even us conservatives would expect to make money on Energy Fuels. It doesn’t necessarily mean I’m happy today about what this does to the share price, but then I wasn’t buying into the short-term thesis for Uranium. And to be clear we do not own shares in Energy Fuels today. But after the raise next week that may change.

We talk in one of our other articles here about Energy Fuels belief that given there are only a handful of US uranium companies capable of producing uranium today, they would expect to the be at the front of the queue. And Energy Fuels, with the only working uranium (and vanadium) mill in the US – White Mesa, probably think it deserves to be at the head of that queue. In the current market it would be hard to argue against that.

So whatever your take on the DOE announcement, the conversation just got a lot more interesting.

Your opinion that matters, so please leave a comment below.

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