CA - Energy Fuels: Taking Advantage Of Market Conditions With Alta Mesa Project Sale

Summary

• Energy Fuels Inc. has agreed to sell its Alta Mesa in-situ recovery project to enCore Energy for $120m; the deal includes $60m upfront and $60m in a secured convertible note payable.
• Energy Fuels expect to use the proceeds to fully finance its business plans for the next 2-3 years, including uranium, rare earth elements, vanadium, and medical isotope operations.
• Despite the cash injection, the Energy Fuels Inc. stock valuation looks a bit stretched.

Energy Fuels Inc. ( UUUU ) is engaged in the extraction, recovery, exploration, and sale of conventional and in situ uranium recovery in the United States. The company owns and operates several projects and properties in the United States, including the Nichols Ranch project, the Jane Dough property, and the Hank project in Wyoming, as well as the Alta Mesa project in Texas. In addition, Energy Fuels Inc. owns and operates the White Mesa Mill in Utah. The company also holds interests in various uranium and uranium/vanadium properties and projects that are located in Utah, Wyoming, Arizona, New Mexico, and Colorado, all in various stages of exploration, permitting, and evaluation.

The stock has been on a wild ride lately. The Biden Administration started an amazing news cycle for the company with its focus on nuclear energy, but, more recently, plant sales and other headlines have continued to lift Energy Fuels Inc. stock. Today we will discuss the latest happenings and discuss what investors can expect going forward.

The company has a long history of operations in the uranium industry and has a relatively strong track record of success in the United States. There are a few critical drivers for Energy Fuels' business. One is the ongoing conflict between Russia and Ukraine, which has led to increased pressure on the uranium market and the need for other utilities to move away from the Russian supply. Energy Fuels is positioning itself to meet this demand by securing contracts and investing in production capabilities. Another driver is the increasing demand for critical materials needed for the energy transition, such as those used in renewable energy technologies and electric vehicles. Energy Fuels is well-positioned to meet this demand due to its diverse range of products and capabilities.

Alta Mesa Sale

Energy Fuels Inc. has agreed to sell its Alta Mesa in-situ recovery project to enCore Energy Corp. (ENCUF), a company traded over-the-counter under the ticker symbol ENCUF, for $120 million. The deal includes $60 million upfront and $60 million in a secured convertible note payable two years from the closing, with an annual interest rate of 8%.

Energy Fuels expects to use the proceeds from the sale to fully finance much of its business plans for the next 2-3 years, including its uranium, rare earth elements, vanadium, and medical isotope operations, without diluting its shareholders. As part of these plans, the company hopes to install rare earth separation infrastructure at its White Mesa Mill, with the capacity to produce 500-1,000 metric tons per year of separated light rare earth oxides by the end of 2023 or early 2024.

According to the company, there are strong reasons to believe that uranium prices are likely to move higher and reach $55 or more per pound in the near future, which would obviously be a positive development for Energy Fuels. The company has been actively seeking to expand its operations and take advantage of favorable market conditions in order to maximize shareholder value. The sale of the Alta Mesa project and the use of the proceeds to finance its business plans are just two examples of the company's strategic approach to growth and value creation.

Earnings Download

Energy Fuels reported a net loss of $9.3 million in the third quarter, which was primarily due to the significant increases in development, permitting, land holding, and other costs associated with preparing for growth. Despite this, the company has a healthy balance sheet with over $150 million in assets, including significant uranium and vanadium inventories.

This will come as welcome news to investors because mining companies often stockpile resources at unattractive prices and distribute them when price action becomes more favorable. To make this work, they need to have the cash to fund operations.

Leadership's guidance for 2022 includes increased production of uranium, between 130,000 and 140,000 pounds, and inventory of finished goods between 760,000 and 900,000 pounds at year-end. It also expects to produce around 205 tons of mixed rare earth carbonate and 95 tons of REO, with the potential for additional revenue from possible uranium sales with the Department of Energy. The Biden administration has frequently voiced its support of nuclear energy but has recently been putting its money where its mouth is, granting 1.1 billion to keep the diablo plant open.

In fact, the company's products and practices fit perfectly into the ESG (environmental, social, and governance) story, with a focus on zero-carbon baseload energy, clean energy technologies, and the recycling of products that would otherwise be lost in the disposal process. Energy Fuels is also working on the San Juan Clean Energy Foundation, providing financial support for Native American STEM education initiatives, and publishing a sustainability report. Its core business is uranium, and it has a number of proven assets, including the White Mesa Mill, which is capable of producing uranium, vanadium, rare earths, and medical isotopes. The company has secured uranium supply contracts for the next eight years, with base quantities of 3 million pounds and the ability to be flexed up to 4.2 million pounds.

Recent Government Win

Energy Fuels recently announced that it had been awarded a contract to sell $18.5 million of natural uranium concentrates to the U.S. government. The concentrates will be used to establish a strategic uranium reserve, which is intended to be a backup source of supply for domestic nuclear power plants in the event of significant market disruption. The U.S. National Nuclear Security Administration is the agency responsible for purchasing domestic U3O8 and conversion services for the uranium reserve. In addition, Energy Fuels announced on December 12 that it had applied for membership in the Department of Energy's ((DOE)) newly created HALEU Consortium, which is managed by the DOE's Office of Nuclear Energy.

Valuation & Forward-Looking Commentary

So despite all these tailwinds, the rare earths industry isn't exactly firing on all cylinders. Due to the nature of the rare earths industry, profitability can change drastically in a matter of months, but we are coming off a plethora of supply chain constraints and record inflation, and investors should expect some signs of profitability by now. We can expect a massive EPS number in the coming quarter, but this will likely be due in large part to the Alta Mesa sale and not some great operational story.

Nuclear energy will likely be the future, but it is not immune to the effects of a global macroeconomic slowdown. We will likely see some headwinds as global economic activity slows, which raises uncertainty around rare earth pricing.

Then there is the valuation. Energy Fuels Inc. stock is quite stretched despite some clear questions in the near term. We can see from the chart below that we are at historical highs from a price-to-book standpoint.

I prefer to rely on P/B ratios for mining stocks like these because the thesis almost always relies heavily on a revaluation of stockpiled assets so the valuation relative to those assets becomes quite important. Based on the trends and valuation, I would argue that the easy money has been made here and that investors should look for other opportunities.

The Verdict

I cannot find any good reasons for investors to chase the price action in Energy Fuels Inc. here. It seems as though the stock has been taken over by momentum traders, but that is certainly no reason to sell. Investors could be denying themselves their day in the sun. I rate Energy Fuels Inc. as a hold.

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