UUUU - Energy Fuels: Not Far From Becoming A Force To Be Reckoned With

2023-10-31 21:54:04 ET

Summary

• Energy Fuels is well positioned to benefit from the growth of nuclear power and the increasing demand for uranium.
• The company has long-term contracts with utilities, providing stability and price floors for its uranium sales.
• Energy Fuels is also involved in the development of rare-earth carbonates, which could play a role in developing the domestic supply chain for electric vehicle magnets.
• UUUU offers tremendous topline prospects through FY25 and, we currently have a bull flag on the weekly charts.
• Institutional participation only continues to grow over time.

UUUU- What’s To Like

If you’re someone who’s optimistic about the growth and penetration of clean energy applications, the stock of Energy Fuels ( UUUU ) is something that ought to be considered.

Firstly, there has been plenty of evidence suggesting that nuclear power is now on the way up; various tailwinds such as the ongoing decarbonization wave, great federal support, the need for stronger energy security, the growing popularity of SMRs , etc. all suggest that nuclear will play an increasingly important role over the next two decades.

Plenty of uranium will be required to fuel the nuclear wave (the WNA believes that uranium requirements for uranium could snowball to 130000 metric tonnes by the end of the next decade, almost twice as much as the current levels) and the supply side position is questionable, made worse by the Russia-Ukraine fiasco. Meanwhile, uranium-themed funds are also doing their bit to upend the supply-demand dynamics even further, by stepping up purchases of the mineral in recent periods. All these factors have sent uranium spot prices to 12-decade highs of over $73 per pound.

Energy Fuels looks very well placed to benefit from the momentum in this space; it utilizes both conventional and in-situ recovery [ISR] technology to produce uranium and is currently the largest domestic producer (up to 2 million Lbs currently) of the mineral. This puts it in a very enviable spot to lock in long-term contracts with domestic utilities. Interestingly enough, industry reports suggest that contracting activity with utilities is at 11-year highs and this offers a great deal of visibility and stability.

Firstly, the price floors on these contracts are nothing to be scoffed at ( Cameco recently suggested price floors of $50/lb) offering decent downside protection. Secondly, these contracts stretch over many years; UUUU for instance, has already signed contracts with utilities to provide base quantities of 3m pounds (which could potentially extend to 4.1m) of uranium concentrate for the next 8 years, starting this year (by the end of this year it will likely deliver 560,000 lbs).

UUUU also has the assets to easily ramp up its production of uranium reserves and plans to bring one new mine into production in Q4-23 or Q1-24, but yet still, they can afford to be patient and wait for prices to ramp up even further, before stepping up production and contracting at higher levels.

It isn’t just the uranium linkages of UUUU that’s worth highlighting. During the uranium recovery process, Energy Fuels also generates rare-earth (RE) carbonates, and besides selling these products it is now also looking to develop other competencies in this arena.

For instance, consider something like NdPr (neodymium-praseodymium oxide) which can be separated from RE carbonates, and is very integral to the production of NdFeB magnets used in Electric Vehicles (EVs). By next year, UUUU could have a capacity of 500-1000MT of NdPr (potentially extending to 1500-3000MT by 2026).

With geo-political tensions between US and China growing by the day, we think UUUU could soon develop ample clout in this space and play an important role in developing the domestic supply chain for NdFeB magnets; we say this because currently, 87% of the NdFeB magnet import to the country come from China alone.

Closing Thoughts- Is UUUU Stock A Good Buy Now?

As covered in the previous section, UUUU stands to benefit from a number of ongoing developments, but what about its merits as an opportune investment play at this juncture? To better understand that, let’s review the valuation and technical backdrops.

If one were to cast a cursory glance at the stock’s forward EV/Sales multiple (based on the FY24 numbers), there’s a good chance some of you may get put off by a figure of 20x, but we feel investors could be getting solid bang for buck even at that multiple.

Currently, the bulk of Energy Fuel's topline (~86% of H1 sales) is being driven by sales of uranium oxide concentrates, but by FY24/FY25, also expect RE Carbonate sales, and NdPr to also make solid enough contributions, thus galvanizing the overall pace of UUUU’s topline. To get a sense of what degree of sales growth you could be looking at, let’s consider sell-side revenue estimates through FY25.

Essentially what the data is telling us is that between FY22-FY25, Energy Fuels could be delivering very impressive medium-term topline CAGR of 101%. Thus, shedding out 20x EV/sales when you’re getting topline growth in excess of 100% over 3 years, certainly doesn’t look like a bad deal. It’s also worth considering that the current multiple translates to a 33% discount over the stock’s 5-year average.

Then, on the charts, we can’t say the risk-reward is the most dazzling, but it is a lot better than what it was a couple of years ago. For instance, the chart below highlights that in late 2021, it looked like UUUU was one of the most overextended names within the Uranium and Nuclear energy space, but that didn't last for too long, and now that ratio has mean-reverted to the mid-point of its long-term range, implying fair risk-reward.

Then if we just focus on Energy Fuel’s weekly price imprints, we can spot some encouraging developments. Previously we’ve seen multiple instances (in August 2022, Oct 2022, and Jan 2023) where the stock has struggled to break past its resistance, but this finally came to an end in September, with the stock building an uptrend and then surging past the red zone. Since then, we’ve seen a pullback (with the price building a base at around the previous breakout zone), broadly mirroring the bullish flag pattern. We feel the recent flattening of the price action could serve as an ideal terrain to open a long position in the stock.

Those who are considering a long position may also be encouraged to note that the smart money has been consistently increasing its stake in this counter for close to a year; for context, since November last year, the net shares owned by institutions have increased by over 20%.

All things considered, we believe UUUU would be a good buy at these levels.

For further details see: