CA - Energy Fuels: A Near-Term Uranium Producer With Rare Earths Ambitions

2024-01-07 04:00:17 ET

Summary

• Energy Fuels is a near-term uranium producer and is already ramping up production to capitalize on the current uranium bull market.
• The company holds a significant amount of uranium inventory and has an intelligent approach to contracting, focused on maintaining optionality to higher future prices.
• Energy Fuels has the potential to become a leading producer of rare earth elements (REE) through its unique ability to process monazite and its acquisition of monazite-rich projects in Brazil and Australia.
• The main drawbacks are that its uranium resource base is relatively small, the REE business will take years to fully ramp up and its profitability will depend on a recovery in REE prices.

Energy Fuels ( UUUU ) is the largest US-based uranium miner and a producer of advanced rare earth ((REE)) materials and vanadium. It should be noted that the vast majority of the primary uranium supply is located in Kazakhstan and Canada, making the United States relatively insignificant on the uranium scene. Indeed, Energy Fuels is a relatively small producer on the global scale.

The company owns several uranium deposits in the United States, including both conventional and in-situ recovery (ISR) deposits, licensed for over 10 million pounds of U3O8 per year. Some deposits remain undeveloped, while others were placed under care and maintenance, awaiting a recovery in uranium prices. All are generally small deposits. Fortunately, the recovery in uranium prices is now underway, and the company has been increasing production. Currently, production has commenced at three of its permitted and developed uranium mines in Arizona and Utah. Two additional mines, in Colorado and Wyoming, are expected to start production within one year. Meanwhile, Energy Fuels is also advancing permitting for several other mine projects.

The most positive aspect about Energy Fuels is that it is a near-term producer. This means it can fully capitalize on the current uranium bull market. This contrasts with other uranium juniors, such as NexGen or Denison Mines, which possess superior assets but face challenges in permitting and development. It remains uncertain whether Arrow or Wheeler River will be developed in time for this uranium cycle. In contrast, Energy Fuels is already mining uranium and turning a profit.

In addition, the company has adopted an intelligent approach to contracting by maintaining optionality to future prices. This differs from other major producers. For instance, Cameco has contracted volumes in excess of its current production over the next couple of years, forcing it to be a buyer in the spot market. In contrast, Energy Fuels is building its backlog more conservatively and holds almost one million pounds in uranium inventory. This prudent approach means they will be able to realize higher prices going forward.

The most negative aspect of Energy Fuels is that its deposits are all relatively small. Its resource base includes 105 million pounds, with around 77 million from conventional mines and 28 million from ISR deposits. Cameco and Kazatomprom own by far the largest and lowest-cost reserves global. In principle, there should not even be a need to mine uranium in the US. However, two arguments can still be made in favor of Energy Fuels. The first is that Cameco and Kazatomprom may not be able to ramp up production fast enough to meet demand, so that even smaller and higher-cost deposits will be needed. The second is that politics may create a domestic bias in favor of US-sourced uranium. Incentives may be offered to US-based producers to diversify supply away from countries like Kazakhstan, perceived to be under Russian influence. In this case, Energy Fuels would be in a perfect position to benefit as the leading US uranium producer.

Spot uranium prices have recently reached a 16-year high at nearly $90 per pound. The market has tightened dramatically due to dwindling secondary supply and the sustained deficits it has suffered over the last decade. Additionally, the political environment has shifted and is now largely in favor of nuclear energy. The fundamentals couldn't be more bullish. The key question now is: how much uranium can Energy Fuels realistically produce?

The management has stated that production at its three active mines (Pinyon Plain, La Sal, and Pandora) will be fully ramped up by mid-to-late 2024. Then, the company expects to produce around 1.1 to 1.4 million pounds per year. Two other mines (Whirlwind and Nichols Ranch) are expected to start production within 2024. Once they are fully ramped up in 2025, total production would reach over 2 million pounds. At the same time, Energy Fuels will continue to produce uranium from its alternate feed recycling program, but this is only a minor contribution (approximately 150,000 pounds in 2024). Uranium ore may also be bought from third-party miners and fed to the wholly-owned White Mesa Mill, which is the only fully-licensed and operable conventional uranium mill in the US. The company also plans to advance permitting and development on other greenfield projects (Roca Honda, Sheep Mountain, and Bullfrog). Altogether, by the end of the decade, total production might reach 5 million pounds per year. In the medium term, assuming production of 2 million ounces per year, a long-term uranium price of $100 per pound, and unchanged production costs, Energy Fuels may generate gross profits of around $140 million per year from its uranium business.

Now, let's look at the valuation. The company has a market capitalization of $1.1 billion. It has no debt and $162 million in working capital, including cash and inventory. If the uranium and vanadium inventories were re-evaluated at current spot prices, there would be an extra $50 million on the balance sheet. All in all, the total EV is therefore around $900 million. Under optimistic but realistic assumptions, the company is thus trading at a forward EV/EBITDA multiple of around 6x.

This, in itself, is not too expensive. But there is more. Energy Fuels also has alternative but complementary business lines. They are all still quite small, though rapidly growing. Its vanadium, medical isotopes, and recycling businesses are so small that I will not focus on them here. More interesting is its ambition to become a leading producer of REE materials.

Energy Fuels possesses a unique competitive advantage: its White Mesa Mill can process and store on-site radioactive uranium and thorium, enabling the use of monazite as feedstock for the REE extraction process. Monazite, a by-product of mining operations like mineral sands, is cheaper than other rare earth-containing ores, such as bastnaesite. Moreover, monazite holds more value relative to other REE feeds, with a 30% higher concentration in Praseodymium-neodymium (NdPr) and a 95% higher concentration in heavy REEs. The challenge lies in the fact that monazite produces radionuclides as by-products. However, Energy Fuels can safely dispose of the radioactive leftovers, making it the sole US company currently capable of using monazite to produce REE oxides.

The challenge now is to scale the business by procuring sufficient volumes of monazite feedstock. To this end, the company acquired the Bahia Project in Brazil in February 2023, a heavy mineral sand project containing significant quantities of monazite, titanium, and zirconium. It has the potential to supply 3-10 thousand tonnes per annum of monazite concentrates (1.5-5 thousand tonnes per annum of REE oxides) for decades. Additionally, Energy Fuels has entered into an agreement with Astron Corporation to jointly develop the Donald Project in southern Australia, which can supply between 7,000 and 14,000 tonnes per annum of monazite (4,000 to 8,200 tonnes per annum of total REE oxides). This annual quantity is expected to contain roughly 850 to 1,700 tonnes of neodymium-praseodymium oxide, 70 to 140 tonnes of dysprosium oxide, and 12 to 25 tonnes of terbium oxide. Ramp-up is expected in 2026.

Energy Fuels has clearly outlined its strategy for the REE business. In the short term, it aims to commence production of NdPr oxide from its Brazilian monazite asset. Phase 1 is expected to start in Q1, 2024, leading to the production of around 800 to 1,000 tonnes of NdPr oxides per year. Phase 2 will continue in 2026 and 2027, with the objective of increasing production scale following the development of the Donald Project, reaching a total annual production of over 3,000 tonnes. Phase 3, involving the separation of heavier rare earths like Terbium and Dysprosium, is scheduled for 2027/2028.

To provide context to these numbers, the price of NdPr oxide has recently fluctuated around $60-70 thousand per tonne. Therefore, we are talking about revenues < $100 million. The REE prices have been declining in recent months, significantly eroding margins for all REE miners. The viability of the business now hinges on a recovery in REE prices. However, long-term prices well above $100 thousand per tonne are realistic, considering also the increasing demand from energy transition applications. At present, nonetheless, the REE business is not a game-changer. The real game-changer will be the ability to separate individual REEs, including the heavier ones, and this is still several years into the future.

In summary, I like Energy Fuels because it is a near-term uranium producer. There is no risk of missing the upcoming bull market as the company is already in the process of ramping up production. Furthermore, there is no significant risk of dilution, permitting delays, or a blowout of capital expenditures, unlike many other junior miners. Additionally, Energy Fuels has maintained a flexible approach to contracting, ensuring it will have significant leverage to future uranium prices even in the near term, unlike Cameco. The downside is that the company's assets consist of relatively small deposits. The REE business will take years to ramp up, but could benefit significantly from the current political climate of hostility towards China. If the US decides to invest in its own REE supply chain, Energy Fuels will undoubtedly be a major beneficiary. Overall, the company is well-managed and is making very sensible choices given the assets at its disposal. I am bullish.

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