Energy Fuels Inc.
- NYSE: UUUU
- Shares Outstanding: 115M
- Share price US$1.90 (23.04.2020)
- Market Cap: US$218.5M
Uranium has been lying in a coma for what seems like an eternity, and uranium investors across the land have been becoming increasingly frustrated.
We have all been hoping a white swan moment will make the uranium space finally show some signs of life. Two weeks ago, uranium giant, Cameco, announced its shutdown of Cigar Lake would be extended for an indeterminate period. This tightening of uranium supply came after KazAtomProm’s operational update, which stated that annual production would fall by up to 4,000t uranium from previous expectations.
However, while the U3O8 spot price has risen somewhat, from US$23.50/lbs to c. US$32/lbs, uranium securities have only been mildly rallied by events. It doesn’t seem we are quite on the trajectory for bullish long-term uranium prices just yet.
Despite the current state of the uranium space, the uranium macro story has always been coherent and convincing. 441 nuclear reactors operate around the world; they are, and will always be, hungry for uranium. Many uranium commentators including regular Crux contributor, Brandin Munro, have remarked that this significant, COVID-19-induced disruption to the uranium supply chain has exposed the fragility of international uranium supply.
The reality is that utility companies will only have to change their purchasing habits when they decide their inventories are too depleted. We regularly hear whispering that this is the case, but are yet to see anything concrete. When uranium does go, it’s likely to be quick. Exploration companies are very likely to miss this cycle, and so are those that need a billion-dollar investment and don’t have licences in place.
To this extent, explorers who have an elongated path to production become a lot less investable. The most easily understood uranium companies are existing producers who are well-funded, with good infrastructure, and will be ready when the market moves. These are the companies that are going to secure supply contracts with utility companies. These are the companies that will make investors money. These will be the winners in this uranium cycle.
Energy Fuels: A Uranium Winner
One of these companies is NYSE-listed Energy Fuels, America’s premier producer of uranium and potential producer of vanadium. Another is a TSX-listed uranium producer with assets in West Africa, and income from a zinc JV with Befesa Silvermet, Global Atomic Corp.
In this article, we’re going to look at Energy Fuels. The company has recently made an announcement that further solidifies its status as one of our favourite uranium stories.
One of the most important aspects of strong uranium stories is a company’s ability to successfully mitigate risk. One such method is via commodity diversification. Energy Fuels has already managed to mitigate risk with multiple cash streams: vanadium, tolled milling, and cleanup operations.
On April 13, Energy Fuels released news that it is entering an additional space, with an additional potential revenue stream: rare earth element (REE) processing. We decided the time was right to sit down with CEO, Mark Chalmers, and discuss the positive impact this could have on the Energy Fuels story.
Rare Earth Elements – Transformative Economics?
The first thing Chalmers made clear to us is that this is a serious commercial venture, intended to make a significant difference to Energy Fuels’ economics.
Last year, a contributor explored Energy Fuels as an investment proposition on our platform. He identified the White Mesa Mill as a potential gamechanger; we happen to agree. In our opinion, the White Mesa Mill (the only uranium and vanadium mill in operation in the US) is the ace up Energy Fuels’ sleeve. While it can obviously process uranium and vanadium, it is also able to process rare earth elements. It makes clear sense for Energy Fuels to monetise this ability to add value for shareholders and de-risk its business model.
Energy Fuels believes the fully licensed and constructed White Mesa Mill will be integral to bringing the rare earth element supply chain back to the U.S. from China. We recently heard from Hexagon Energy Materials (ASX: HXG) CEO, Mike Rosenstreich, and he explained how momentum is building behind these ideas in numerous powerful circles.
However, despite this new venture, Chalmers was keen to emphasise that Energy Fuels’ primary focus remains on uranium and vanadium. The company simply believes it can leverage its existing licenses, infrastructure and capabilities at the mill to add REEs to the production list. It’s an undeniably smart play, and it’s the sort outside of the box thinking that uranium companies need in this still uncertain market. Sweat the assets.
Digging Into The Details
However, like us, investors will want to hear more detail before getting overexcited. What exactly is the White Mesa Mill capable of?
We’ve previously covered Energy Fuels’ mill economics for uranium and vanadium: the two ores it is primarily licenced to treat. What many uranium and vanadium investors won’t know is that over the last 20-years, Energy Fuels has received material from a variety of alternate feed streams, and the company has the appropriate permits for these streams. While the majority of these are low-level natural uranium streams, the company has licences for 17 other streams, and can also recover uranium as a by-product from rare earth producers.
The White Mesa Mill is huge: it is capable of processing 2,000t per day. Will there be any issues separating the ore into different categories? Chalmers insists the mill will be operated on a batch basis; there shouldn’t be any hiccups. Material from numerous different streams will be generated, collected, stored, collated, then processed.
What about logistics? The feed arrangements themselves are still in their early days. This is perhaps the one area of the arrangement we’d like a little more clarity on, but only time will tell. We need to give Energy Fuels time to shore up these arrangements and present us with something concrete. However, one thing is clear: Chalmers is primarily looking at this business model from a toll processing standpoint, the same model Energy Fuels already employs successfully. Does the company have the infrastructure in place to pull this off? Luckily, courtesy of existing facilities for uranium, vanadium, and other feed streams, Energy Fuels has ample tailings storage for additional REE waste. The company is ready to get this play off the ground.
More Reasons To Be Positive
Chalmers then provided more positive news. Members of the US government have encouraged Energy Fuels, and are on board with this rare earth elements play. Being state-backed is always a massive advantage and gives Energy Fuels a competitive edge.
The company already has over 500,000lbs of material in inventory, just waiting to be processed at the right time, in the right price environment. This brings us neatly back to the point I made earlier in this article: Energy Fuels has much greater control of its production timescale than other uranium producers. There is little work to do to get into production, so the company can batten down the hatches for as long as necessary and can move the very second the uranium prices change. Other companies will rely on luck to hit the uranium cycle at the right moment. Energy Fuels will need to see prices head towards US$50/lb or even US$60/lb (the same figure Cameco is asking for). Another important factor to keep in mind is that as the uranium spot price rises, so does the value of the existing inventory. That’s growth with zero expenditure necessary. They have possibly seen another US$10M added to their inventory since last week alone.
Right now, Energy Fuels is prioritising desk work; a company this advanced doesn’t have the major fieldwork concerns of its junior peers.
Right now, Chalmers explained the management team is working on optimisations: specifically, mineralogy and pilot testing to ensure that when the time is right, Energy Fuels can move swiftly to enter at a profitable point in the resurrected uranium market.
Chalmers has a level of pragmatism we don’t see in many inexperienced junior management teams. He knows what he doesn’t know; he’s been involved in uranium mining for long enough. His company should have the scale and infrastructure necessary to attract strategic partners and the best minds in the uranium, vanadium, and rare earth elements spaces to propel the company forward.
Chalmers’ Take On The Uranium Market
We were also keen to hear Chalmers take on the current uranium market.
With lots of uranium companies talking about US$40/lbs as a target, Chalmers doesn’t think US$40/lbs will be enough for many companies to produce economically, including uranium-giant Cameco. While there are some dirt cheap projects in Kazakhstan that could be profitable, the rest of the world will need a higher uranium spot price: north of US$50/lbs, closer to US$60/lbs to take “full loading on cost.” We heard similar from the father of the uranium space, ex-Paladin CEO, John Borshoff, in a recent interview with us.
Strategically, Kazatomprom would like the price to stay down so they can maintain the uranium monopoly that prompted the triggering of Section 232 last year. Chalmers added that the inflated Kazakh currency has also given them a cost advantage.
Will these supply disruptions and a tightening in uranium inventories finally shake utility companies up? Chalmers seems to think so; after all, “there is less uranium out there than people think.”
All in all, this looks like a prudent move and there is little to fault them on, other than wanting more clarity on what it could mean for the company’s financials, and, ultimately, its shareholders.
Chalmers is showing time and time again that he is making sensible decisions that take many investors by surprise, just like he did with the US$16.6M raise in February. With the benefit of hindsight, that looks like cheaper money in these current market conditions. Let’s hope Chalmers can keep this up, as Energy Fuels’ share price saw big gains this week and finally appears to be heading back in the right direction. Let’s hope uranium is too.
Company Website: https://www.energyfuels.com/
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