Energy Fuels (NYSE: UUUU) – Finding Value When The Market Has Lost Its Mind

Energy Fuels Inc.
  • NYSE: UUUU
  • Shares Outstanding: 115M
  • Share price US$1.90 (23.04.2020)
  • Market Cap: US$218.5M

In this series, we take a look at some of the stocks I think the market has severely undervalued during the COVID-19 crisis. Discount stocks can mitigate some of the risk for investors; that’s if they know what to look for.

Green uranium reacting in a glass container

Energy Fuels – A Uranium Gem

Today, I’m looking at America’s leading producer of uranium (and potential producer of vanadium), Energy Fuels (NYSE:UUUU).

We’ve written several articles detailing the potential of Energy Fuels in the past. For those new to the story, it might be worth checking them out of some context. In addition, there are numerous Energy Fuels interviews on the Crux Investor platform. CEO, Mark Chalmers, has kept us informed on all the latest developments in the story, including a controversial event in mid-February; will investors now be looking back at this much more favourably?

Strong Fundamentals

Several months ago, in an article from one of our contributors, the three most important considerations for uranium investors were considered, with reference to Energy Fuels. There was also a bonus point that some uranium investors may not have thought about before.

A Strong, Experienced Management Team

If a management team hasn’t dealt with uranium before, from permitting, to construction, to production, to sale, then you can walk away now.

Uranium requires specific expert knowledge, given the many problematic idiosyncrasies of the space. One such example is the situation with uranium sales; namely, negotiating long-term contracts, and transporting the radioactive material from a mine to the consumer. These are just two difficult processes that require proven experience, and Energy Fuels’ management team has been there and done it for decades. These look like safe hands. Don’t let companies learn on the job with your money.

What continues to strike me is the general lack of any discussion of the uranium market, itself.  All of the juniors are optimizing and “polishing up their single proposed projects” but what is lacking is an understanding of just how the uranium works (or doesn’t work) and the crucial role of term contracts.  As we have discussed previously in interviews with Brandon Munro, the spot price is a nice indicator of near-term market balance and can be a source of “signaling” of future conditions, but the linkage is weak and can be misleading.

We have been trying to provide a bit of enlightenment regarding the role of term contracts, as well as the process itself, which can be time-consuming especially for junior companies that are not known to the utility fuel managers (one result is the likelihood of a series of small volume agreements until a producer proves it can deliver its product on-time and on-budget).

A vast majority of the juniors are run by either technical/operational types pulled from outside of the industry or financial types that are experienced in raising funds.  Their activities tend to be biased accordingly. Energy Fuel’s experience tells us they won’t have these issues.

An Impressive Portfolio Of genuine Assets

We find Energy Fuels’ portfolio impressive. Energy Fuels has ‘more production capacity, licensed mines and processing facilities, and in-ground uranium resources than any other U.S. producer.

Energy Fuel’s 100% ownership of many promising mines across Arizona, Utah, New Mexico and Wyoming gives them a long list of valuable assets, not to mention a large inventory sitting at surface. While the vanadium market hasn’t exactly been favourable in recent times, the diversification the management team has achieved at Energy Fuels could help mitigate risk, and low-cost environmental clean-up and uranium recycling services, the recently announced rare earth elements processing capability and revenue stream, and potential involvement in the EPA clean-up of Cold-War-era uranium mines, are further examples of Energy Fuels’ multifaceted nature. All of their eggs certainly aren’t in one basket. There is a lot more than uranium at work here, unlike many other producers.

A Bonus?

Energy Fuels’ White Mesa Mill has been discussed at length by Chalmers in an interview with Crux Investor.

Energy Fuels' White Mesa Mill
Energy Fuels’ renowned White Mesa Mill

It is the only fully licensed and operating conventional uranium mill in the United States. This gives Energy Fuels something of a monopoly over the region: their mill is the only gig in town. The old adage is that he who controls the mill controls the district. In this case, this is the only operational mill in the entire United States of America. That puts them in the driving seat for processing of U308 and vanadium in the region, the district, and, perhaps, further afield. Other uranium companies have to march to Energy Fuels’ drum beat or be left out in the cold. Companies will have to pay Energy Fuels for use of their mill or face expensive shipping expenses to mills in foreign countries. Energy Fuels will also have control of the timescale of other companies’ uranium production. If I am a shareholder of UUUU, I’m going to like that news. If I’m invested in one of the companies needing to negotiate a toll mill fee, I’m probably less excited and possibly irritated.

The mill itself has a licenced capacity of 8Mlbs pa of uranium. The most it has operated at is 5Mlbs pa. It can also process multiple lines of ore (c. 17); these are licenced too. The reality is that is likely to only operate at 2Mlbs pa unless they do some meaningful upgrades.

Energy Fuels appears smartly positioned to get into production quickly when the uranium price turns, and might be the reason they made the move to raise money in the market when they did.

Sufficient Capital To Survive The Uranium Bear Market

Even before COVID-19 reared its head, uranium companies were pretty desperate for capital.

Institutional funding was incredibly sparse. With the vast majority of uranium companies now in care & maintenance, including Cameco’s producing asset, Cigar Lake, uranium companies have no cash flow from uranium sales. Until price discovery happens, and the price moves towards US$50/lbs, uranium companies will struggle to survive. Energy Fuels is one of the few uranium producers that still has cash flow, mainly in the form of environmental clean-up operations. The other that springs to mind is Global Atomic; I’ll be talking about that company in the near future.

uranium yellowcake
A photo of yellow cake uranium, a solid form of uranium oxide produced from uranium ore. Yellow cake must be processed further before it is made into nuclear fuel. Courtesy of Energy Fuels Inc.

With COVID-19’s impact on global markets, capital is now incredibly expensive, even more so than before for uranium companies. In mid-February, Energy Fuels announced an agreement with Cantor Fitzgerald & Co; the ‘innovative global financial services firm‘ agreed to purchase, on a bought deal basis, US$16.6M of common shares of the company at a price of US$1.47 per share. At the time, many investors were confused, and even angry, at the decision Chalmers had adopted. Commentators were scrutinising the decision rigorously, claiming Chalmers had raised expensive, very dilutive capital. It’s amazing how things works out. Fast-forward a month, and this suddenly looks like the best deal a uranium company could have made. Energy Fuels is now positioned more strongly than most of its peers. It has the cash to ride out the coronavirus crisis, and to see the company into what is building to be the next long-awaited uranium bull market (hopefully, for investors, in the near future).

These are exciting times again for uranium investors, but pick your team wisely.

Company Website: https://www.energyfuels.com/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

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