A conversation with Mark Chalmers, CEO of Energy Fuels (NYSE: UUUU) about what Uranium investment targets are going to need to have to make it in this cycle. Without contracts in place some Uranium companies will not get funded. So price discovery is important but that does not equate to immediate financial relief for some. Don’t be left holding that Uranium stock.
There is lots of money to be made if investors focus on the fundamentals and are not distracted by rhetoric by Uranium company’s that won’t make money even at $100 a pound. Pick companies with the right business model. Management teams experienced in bringing Uranium companies in to production and selling in to a contract market.
We discuss our investment thesis with several Uranium CEO’s. If you believe in the macro story of the Supply Demand story for Uranium then you need to know how to pick winners in this section. Not all boats will float on this high tide.
What is clear is that if the management team has not worked in mining Uranium before and produced and sold uranium in to the market, they don’t know what they don’t know. Cash is King – In a market short on institutional funding, some companies are running on vapour and struggling to find money and if they can, it is expensive and dilutory. Quality assets – the basics of mining are the same. Companies that can get Uranium out of the ground cheaply will do better than others. Investors need to understand a company’s ability to mine economically.
If you buy in to the macro story, we encourage Uranium investors to start looking at which companies are most likely to make it. It is apparent to industry insiders and veterans which companies and which assets will find it more difficult than others. We are listening to them and forming our thoughts.
- 90 Day Working Group Announcement Expectations
- Importance of Management
- Cash is King: Who Won’t Survive?
- Who Should I Consider as an Investor?
- Energy Fuels: Rebuilding the Share Price, and The Mill – A Means of Standing Out
- The Market: When Will it Change and What’s The Plan if it Doesn’t?
Matthew Gordon: Good to see you, albeit online. We caught up at the WNA Symposium in London last month. What was your take on it?
Mark Chalmers: Well it’s a good event. I really enjoyed being there again. And I caught up with a lot of people.
Matthew Gordon: There was a lot of excitement around the WNA Fuel Report as possibly being a catalyst for change. And we agreed at the time that it wouldn’t be. But the next catalyst for change is President Trump’s Nuclear Energy Working Group. It’s a week or so before that is due to announce.
Mark Chalmers: We don’t know exactly what timeframe the president will act on the report. Or what announcements will be made.
Matthew Gordon: There’s been various speculation as to what it could entail. But you’re not expecting it to focus necessarily on the uranium market, but the nuclear market as a whole. It’s hard to forecast what the impact could be for US uranium companies.
Mark Chalmers: There’s no guarantees, but I believe the working group gets it. I think they get it. I would be absolutely shocked if we get nothing here. The question is what will be proposed and what will the President decide is appropriate. It’s not very often you get on the President’s desk twice in 90 days. And I’m very proud that we’re able to do that. We’ve got this focus on the front end, the fuel cycle. The focus is absolutely required by the United States government, the largest consumer of uranium in the world, the United States of America is one quarter of the world’s uranium. We cannot go to zero.
Matthew Gordon: done a lot of interviews now with uranium CEOs over the last 3-4 months. As an investor, we’re starting to build up a picture of what the market looks like. I am a believer in the macro story in terms of the supply / demand story and what those numbers look like. I don’t have a sense of timing. I don’t think many people do. I’ve heard from 3 months to 24 months in terms of timing from people. I wanted to speak to you about some of the thoughts that we’ve had, and get some affirmation of some of those thoughts, if indeed you agree. There are lots of different companies at different stages and different positions financially, who may or may not make it, depending on how long this goes on for. But it was clear to me that you need three things. 1. You need a management team who’s been there and done it before. And I don’t mean mining. I mean getting uranium out of the ground, getting it to where it needs to be in terms of being able to process it and sell it and to market – that’s one. 2. Cash, because a lot of companies are running out of cash. And 3. Fundamentals of the asset itself, you’ve got to come back to that, because mining is mining. Start off with the management component with you first?
Mark Chalmers: Oh, absolutely.
Matthew Gordon: You is because you have been through a couple of cycles. You have produced. What would you say to investors about the importance of why the experience of having been through, not only a couple of cycles, but you’ve actually produced product and got it into market. Why do you think that’s important?
Mark Chalmers: Uranium is very unique. And it has a number of dynamics. When you start looking at uranium projects, it has the mining risk, and processing risk. It also has a lot of risk because it is uranium and that is obviously connected to the nuclear fuel cycle. A lot of people underestimate how all those things meld together and how one of those elements can really throw a monkey wrench into any project. When you look at other mining industries like gold and copper, silver, zinc, whatnot. They’ve had a lot more continuous operations over the years. They haven’t had the hiatuses that the uranium market has had. We go through these peaks and valleys. And the valleys, often are very pronounced and very long lived. And you lose a lot of that expertise and the knowledge. So there are similarities, but also many differences.
Matthew Gordon: Your last point about a lot of the expertise has been lost, because the sector has been in the doldrums for a while. People have got to make a living and they go off and do other things. I’ve spoken to only four CEOs who have ever managed to get companies into production. The rest are learning on the job. And as an investor, my problem is I don’t necessarily want them to learn with my money, because things can go wrong if you don’t know what is coming down the line. To coin your phrase, “you don’t know what you don’t know”. And that’s fine with someone else’s money, but not with mine. I just thought it was interesting with some of the conversation’s that we’ve had, it became obvious that these companies were just hoping that the market would come back and there would be enough money sloshing around. And some of these mistakes would get hidden by all the money that would be thrown at them for investment. But when things are tight, like they are now, if you don’t have the cash to be able to cope with this market, you’re in trouble.
Mark Chalmers: It’s pretty hard when these companies get to the point where they’ve gone to the equity markets multiple times. The share price continues to decline. The market just gets tired of the story. And so that’s why it’s important to maintain a healthy cash balance. And I think the one thing that is really a problem for a lot of these really small mining companies, juniors, micro caps, and it is pretty chronic in the entire industry, is that people get down to that last $100,000, or $1M and then they go out and try and raise money. It’s expensive or impossible to do. We’re not in that position. We’re a lot more complicated than a lot of these other companies. Other companies may have one project or it’s not constructed. So, the holding costs may be lower. But you just don’t want to get against the rope, because when you’re against the rope, people know you’re against the rope.
Matthew Gordon: I’ve gone through a period of learning about Uranium equities, speaking to some great influencers in the market, some fund managers. I’ve managed to speak to a couple of the utility companies. And I had a conversation a couple of weeks ago. It made me really nervous, actually, for the first time in this space. And it comes back to that line, ‘not all boats will float on a high tide’. They just won’t. I’ve been approached by a couple of groups to ask for my advice on a couple of junior uranium companies, who are struggling for cash and who are speaking to these finance groups to take them out. It’s like they’ve had enough. They’ve fought their fight and don’t want to go on, or don’t know how to go on. And that made me nervous, because it reinforced my thoughts. I’m a buyer of the macro, there’s going to be winners, but not everyone’s a winner. It’s clear because there are people struggling right now. And the longer this goes on, the more problematic it becomes. So, if this thing goes on another 6 months, I can see more than a couple of companies struggling because they don’t have the cash, or the ability to persuade a generalist fund to put money in. And the specialist funds have made their bets and they can probably see better than some of generalist funds, as to who is going to make it and who’s not.
Mark Chalmers: With a lot of these companies. Not only do they have no money, but they also have projects that are not proven. And in many of those projects need hundreds and hundreds of millions of dollars of capital investment, if not billions of dollars.
Matthew Gordon: When you start talking about things like getting some debt into the company to be able to be in a position to build out whatever it is that they’ve got, or be able to even pay for the Feasibility Studies (FS). Again, there’s no real plan there. Mark, you’ve been around the block. You’ve seen a few things and some of the companies I’m probably talking about. What’s your take on the market?
Mark Chalmers: I don’t envy them. I don’t envy them, because when you’re at the bottom of the bucket and there’s no water coming in to fill up your bucket, what do you do? And it goes back to, ‘there’s no shortage of uranium’. Uranium deposits out there in the world have not all been created equal. And if they don’t have any money for just daily operating expenses… In a lot of cases, those projects are not proven yet, they’ve never been commercialized. So, there’s a lot of technical risk for those projects. In most cases, it’s going to be far, far more difficult, costlier and take more time than they expect. And then you throw on top of that a new project. It’s going to cost hundreds of millions of dollars. In most cases hundreds of millions of dollars, if not billions of dollars. It’s a hole hard to crawl out of. And so, I don’t envy these folks at all. You’re at a huge disadvantage if you don’t already have proven projects, if you don’t already have projects that have the capital investments made. You’re way back in the back of the bus and when you’re in the back of the bus, and you don’t have any money, you’re not going to get up to first class.
Matthew Gordon: What I’m hearing is that exploration companies are some ways away. Certainly, not in this cycle from getting into production. So as an investor, do I put my money into those now because money’s cheap, but risk is high. There’re some companies with a possibility of being funded to get into production. But again, they’re not going to get into production anytime soon. The next 2-3 years, maybe if they’re ready to go today. But not many are. Would you talk to producers who are armed and ready to go?
Mark Chalmers: If you’re playing a sector like uranium, your safest bet is to play probably 2, 3, 4 of the better, more established companies, and you can do that in a way that manages your risk. We’ve seen the damage, or collateral damage, that’s happened to a lot of people back in about 2010/11 after Fukushima. With the deterioration in share prices. That hit us all. That hit Cameco, that hit Energy Fuels and everybody else. So, there is not such thing as no risk, but there is such thing as having less risk. And there is a saying, if you believe in a macro, which I agree a 100%, that you can play certain companies that have less risk and have probably the same upside as a lot of these riskier plays.
Matthew Gordon: You guys got hit, July 11th/12th with the Section 232 announcement. You guys got hit big time on your share price. You dropped off a cliff. You’ve recovered about $0.45 – $0.50 cents since then. What should that tell investors?
Mark Chalmers: That’s an example that certain events can clobber these stocks. I believe that there people were certain of a positive outcome on the Section 232. We thought, as well as many others, even that we talked to the government, that there was a high-likelihood that that was going to happen. It didn’t happen. We got hit, as did most others, particularly those in the United States. It’s a sector that in the up markets, it’s multiple bagger. In a down market, it can be a multiple bagger in the opposite direction. It is a tricky sector, but it still goes back to sophistication in how you make your investment. It shocks me sometimes that people come to me and say “oh, I’m getting in the uranium business and I picked X, Y and Z” and those are exactly the products that I would never have recommended to these people. Now, even in some of those cases, in the right circumstances, people can make money on those stocks. I don’t think there’s any absolute 100% the best plan. But I also think that a lot of people making these investments, they don’t like the super high volatility. And that there are just different elements of risk. And what people do, what percentage of their assets that they’ve invest in high risk returns, compared to what their ultimate horizon is and how they’re diversified, that is down to them.
Matthew Gordon: Can I just talk about your mill, because this the other bit, which it’s not one of my tick boxes, but it’s definitely a massive plus for you guys. It’s one of the only operating mill in the US. Is that right?
Mark Chalmers: Correct. If you go back like 30 years, there were like 35 mills, And White Mesa has basically been in good standing, has been completely operable since that point in time. There are two other mills. There’s a Shooter Canyon mill that ran for a few months or something back in 1979/80 or something, then shut down. And then there’s the Sweetwater Mill in Wyoming that ran for maybe was a year or two, also shut down 30, 35 years ago and hasn’t operated since.
Matthew Gordon: Looking at your mill, it gives you certainly optionality in terms of what you do. But for people without a mill, what are their options? How do they go about processing their ore?
Mark Chalmers: Well, they either have to build their own mill, or if in the region, they have to basically strike a deal with us to have access to our mill. And there are some examples of work that’s been done in the past with toll milling agreements or joint ventures. So, if you don’t have the mill, and you’re a conventional miner, you don’t have any options, you have to make some choices. I’ve had people tell me they don’t need to mill. They can ship it to China or to Brazil or somewhere like that. That’s farcical. It’s farcical. You’ve got the costs of transportation. The mill was correctly positioned for sustainability. And that’s a big issue that investors should feel comfortable that our mill has been around nearly 40 years and has survived these peaks and these valleys because of its flexibility. And, it’s been able to cash flow, and many times, even though the uranium price were too low to run it just for uranium production.
Matthew Gordon: What are your plans for the next 6 months if nothing happens in terms of the price discovery in the market or 12 months?
Mark Chalmers: If we don’t get relief through this government working group we will manage our expenses as tightly as we can. We’ll continue on with the macro environment we think is alive and well. We’ll continue pushing these different parts of our business that are less uranium price dependent like the alternate feed and the clean-up of abandoned uranium mines. Everybody needs higher uranium prices. This is really a critical crossroads that we’re at with the working group. We’ve survived the test of time. We’ll continue to survive the test of time. But it will be more difficult until uranium prices recover.
Matthew Gordon: And I keep asking every time I see you because I’m not quite sure what the answer is going to be each time.
Mark Chalmers: Well, I liked your comment that a lot of people have quit speculating on that. And I think that’s one of the reasons that these uranium share prices have been suffering. I think a lot of people are tired of speculating, including investors. Everybody seems to be wrong. You know, like you said, six months or two years or one year or whatnot, people been saying that…
Matthew Gordon: If you’re a fund manager, you don’t care if it’s one year, two years or three years. You’re getting paid your 2% and 20%. It’s okay. You can afford to be wrong for another three years, If you’re an investor like a Joe Schmo like me, where you’re putting your own cash into this stuff and you’re underwater and you don’t know what’s coming, you’re unsure. People have been telling the macro story for so long that you’re beginning to doubt whether that’s true or not. You jump up and down and go, hurrah, every time you hear someone talk about the macro story. But maybe you start having doubts. So, getting some sense of timing is important because it’s our hard-earned cash here we’re talking about.
Mark Chalmers: Absolutely. And I always say that whenever people have the most doubts, as is when you should be investing more. People like Rick Rule, it’s quite interesting to listen to some of his discussions and when he started getting interested in uranium. And it was the late ’90s. And he’ll tell you how many doubts he had. But then he will also tell you that he had multiple investments. So, I think the worst was like a 20 bagger or something. So, it is a very unique sector and frustrating. But when it comes, it comes and it comes big. And, there are there a lot of people that made a lot of money in this over the years and there is going to be a lot of money made again.
Matthew Gordon: I just want to make sure that people aren’t being misled and that they focus on the fundamentals, what’s important with regards to the company, assuming the macro is true. I want investors to make the right bets in the right companies rather than have their money frittered away by companies perhaps that are just struggling with G&A, let alone getting into production.
Mark Chalmers: There are companies out there, I won’t name names, that even if the uranium price goes to $100 dollars, they will not be successful. And I think that’s what you’re alluding to. You don’t want people to get in investments that will have no possibility of ever really making it. They might get a bit of a bounce off of an up market. But investing in broken business models isn’t a really good long-term strategy.
Matthew Gordon: I’m not alluding to, I’m trying to shout from the rooftops that in our assessment, having looked at these companies, looked at the numbers, done the analysis. I agree with you, whether $100 bucks or $70 bucks, there are uranium companies which are just not going to make it. They’re not designed to make it. They don’t have the people on board to show them how to make it. People need to ask the right questions.
Mark Chalmers: Being in the space, I have to be a little more careful when it comes to pointing out some of the shortcomings.
Matthew Gordon: I wanted to speak to bounce our thoughts off you. I’m not sensing any pushback. Appreciate your time and taking the call as well.
Mark Chalmers: It’s always a pleasure, Matt. I enjoy talking to you.
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