Energy Fuels Inc.
- NYSE: UUUU
- Shares Outstanding: 121M
- Share price US$1.71 (11.09.2020)
- Market Cap: US$206M
I have just penned an article regarding uranium investing. In it, I explained that investors need to be looking for uranium junior investment propositions that have trump cards to set them apart from the pack.
If you think back to the last cycle, the flood of new uranium entrants were quickly whittled down to the juniors who could build a mine and sell pounds, and the juniors who couldn’t. I expect the exact same thing to happen this time around, perhaps on an even more dramatic scale. We are already seeing juniors who jumped on the uranium or lithium bandwagon jumping off and becoming gold miners! It says a lot about the mentality of the management team: fickle and clearly just promoters?
While we have by no means entered the next uranium cycle, some interest is beginning to reinforce the uranium macro story. The many recent potential catalyst moments, such as the US DoE’s NFWG report, haven’t pushed the U3O8 spot price much beyond $31/lbs, but there appears to be a sentiment shift taking place.
With this in mind, it is time to pick some uranium winners. I like uranium players in tier-1 jurisdictions with strong, strategic backing, an extremely economic project or portfolio of assets and a management team who have been there and done it before. A bit of cash to see out the remainder of this bear run would also come in handy, because dilution is not a good look right now. However, the question will then need to be posed: why is your uranium investment a winner? Just what sets it apart from the competition? There is room for some uranium players, but there is not enough capital to go around.
Once I have settled on a list of companies that satisfy these fundamentals, it is time to search for a trump card. I’m looking at one of these today. Energy Fuels, America’s leading producer of uranium and a potential producer of vanadium and REEs, has several things working in its favour.
Let’s start with the obvious. With the US administration, particularly in an election year, aiming to restore America’s competitive nuclear energy advantage, investors may well expect some degree of federal backing. They may well think this given the fact that Energy Fuels owns some of the largest North American uranium mines and has a history of producing. The company’s portfolio is unique within North America, containing more production capacity, licensed mines, licensed processing facilities and in-ground uranium resources than any other US uranium producer. So, if politicians are buying the security argument, then Energy Fuels ticks that box.
While the US House of Appropriations Committee recently took the decision to block the funding of a US$150M US uranium reserve, most uranium commentators see this as a blip along the road rather than a major setback. Energy Fuels’ CEO, Mark Chalmers, was positive, and he expected the topic to be revisited once the US Department of Energy can provide more clarity about how exactly the reserve would be allocated. This could happen soon after the US Elections take place. It has become clear that nuclear is a part of the potential Biden administration’s energy plans, and this has been of great encouragement to uranium bulls after the prospect of a less than enthusiastic Sanders-AOC ticket.
Moreover, with America also trying to build a new critical minerals hub, REEs could well be endorsed and subsidised. Globalisation has been drawn into sharp focus by Trump, and it appears his last few months may set a few national industry initiatives in motion; that is if he or his administration have the free time to get some concrete numbers out there. If not, expect the Biden administration to continue in the same vein.
With assets across Utah, Nevada, Arizona and New Mexico, investors couldn’t really hope for a more stable mining jurisdiction than North America. With the government’s backing, perhaps permitting timetables will become more favourable. Anyhow, the company’s location is a clear leg-up on the opposition.
This is the big one. Energy Fuels has the ability to monetise various feed streams by processing them at it 100%-owned White Mesa Mill, the only remaining fully-operational conventional uranium mill in the US. This can range from tolled processing to environmental cleanups. All of this drives capital into the company’s bottom line and makes it less reliant on volatile market conditions remaining favourable.
White Mesa Mill is an absolute game-changer, and many uranium speculators have thought as much for a while now. It has a licensed capacity of over 8Mlbs of U3O8 per year, with plenty of scalability potential to leverage increasing uranium prices. However, it has not and probably will not ever operate at this level any time soon. It can also process vanadium and rare earths. In early 2019, the company produced some of the highest-purity vanadium product in its history courtesy of resuming recovery operations. The vanadium macro story is also compelling: strong, industrial demand in stainless steel, which may well be accelerated by the Chinese reflation package, is sprinkled with some futuristic spice by the prospect of large scale vanadium redox flow batteries (VRFBs). While not yet commercially viable, these could eventually become a real vanadium demand driver. It seems eminently feasible that the US administration will pursue uranium, vanadium and REEs as strategic commodities. After the outright mess that was the Section 232 process, it would make sense to advance the American agenda via partnerships that would afford retained control.
In terms of rare earths, this is yet another commodity that America is trying to wrestle back some control of from China. Energy Fuels announced its intention to step into this space a few months ago and it is symbolic of the optionality White Mesa provides. Indeed, the company recently announced partnerships with both Constantine Karayannopoulos and Neo Performance Materials, a chemical manufacturing company. This could well be shaping up as a new incarnation of Mountain Pass Rare Earth Mine, a Californian project that used to provide most of the world’s rare earth elements. This might be a little premature to be talking about, but the early signs are positive.
It is a demonstrable trump card that Energy Fuels appears to be able to step into any lane it chooses whilst reaching a positive outcome. Cash flow is not solely reliant on mining uranium. Uranium will always remain the paramount focus, but in an investment class so opaque and so volatile, this degree of diversification is gold dust.
The mill also gives Energy Fuels a monopoly over the region. Numerous companies have announced their intention to use White Mesa to toll their uranium product, including as many as 5 in interviews with Crux, and Chalmers was been keen to tell them to stop. He has not yet received any contact from them, and when he does, it will be on Energy Fuels’ terms. The message is clear: Energy Fuels owns this district, and it appears to be positioned more strongly than any other American uranium player for the new bull market. Furthermore, the mill is large enough to process all feedstock within the region. If other American producers want to succeed, they can either ship ore expensively to South America or play by Energy Fuels’ rulebook.
Let’s take a quick look at the summarised potential of White Mesa:
- Licenced capacity: 8Mlbs pa of uranium.
- It is an old mill, but it is relatively cheap to maintain. Could it be upgraded and optimised even further?
- The peak historical operational capacity is 5Mlbs pa. A lack of feedstock imposes these limits, so tolling will be the inevitable solution. I look forward to seeing what the terms look like. Will there be any pressure on Energy Fuels to provide reasonable pricing? I can’t see how there would be.
- White Mesa is licenced to process uranium and vanadium ores, in addition to c. 18 licences to process additional feeds that are not primary ores. Even Cameco has sent low-level tolled uranium though here before.
- Energy Fuels has made around $5M-$10M from alternated feed and clean-up operations. Once again, the feed has been the limiting factor, and the company could well ramp this up to over $15M pa. Additional clean-up operations could help matters.
- When operational, on average, White Mesa has historically recycled c. 500,000lbs of uranium pa.
- Commercial operations would be most conducive to success at around 2Mlbs of primary ores per annum because the mill requires a particular critical mass to remain in an optimal state.
- While it is designed to process around 2,000t of ore per day, investors will want to see these numbers transformed into reality. I see no reason why they can’t be, but the mill is unlikely to become active before around 100,000t of feed is available.
- In 38 years of operations, White Mesa churned out 45Mlbs of vanadium. That is $500M of vanadium in today’s money. Impressive.
These are 2 main trump cards at Energy Fuels’ disposal, but it is certainly worth mentioning one more, though I am not yet sure this is the route the company will take. Many uranium companies will never produce pounds, but that is not to say that their projects are the problem. The uranium sector has needed consolidation for a while, especially to get the utilities to start taking things a bit more seriously, and with a district-scale land position, cash in the bank and additional revenue streams providing a degree of security, Energy Fuels could could be poised to go on an M&A run when the time is right. Having just announced that it will be debt free by October 2020, combined with the RSA decision also planned for October, could this result in some serious growth for uranium investors? It certainly appears possible.
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Company Website: https://www.energyfuels.com/
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