Updated: Jun 12, 2022
As the West looks to diversify away from Russian oil and natural gas imports, a renewed focus has been placed in alternative energy sources. Though much has been invested over the last decade in renewable power projects, solar, hydro and wind has proven to be unreliable, unscalable and certainly not feasible for consistent, baseload generating capacity. Though coal fits the bill and will (unfortunately) continue to be used (specifically in India and China) as natural gas prices soar, increasing interest has been focused on nuclear power as a reliable source of energy, and as a source of energy with zero carbon footprint. With heavy hitting sanctions placed on Russia, uranium supply disruptions into the US has come into question seeing as Russia's state-owned uranium supplier, Rosatom provides nearly 17% of US uranium needs and approximately 23% of the enriched uranium needed to power the fleet of US nuclear reactors. Though Cameco (CCO.TO, CCJ) will continue to garner investment inflow being the largest and most liquid producer listed in North America (London listed Kazatomprom is currently the largest uranium producer), the list of smaller North American based producers is a very limited one. The list consists of Ur-Energy (URE.TO, URG), Energy Fuels (EFR.TO, UUUU) and Uranium Energy Corp. (UEC) – all of which have asset bases in the US but have shut-in production due to years of depressed uranium pricing. Excluding UEC which has produced by far the lowest amount of uranium among peers, and has purposely not produced for the longest time among peers, we take a look at both Energy Fuels and Ur-Energy.
Ur-Energy (URE.TO) began production at Lost Creek (Wyoming) in 2013 and has consistently had sub $20/lb in-situ recovery (ISR) production costs. Though production has been curtailed due to depressed prices, the company continued to benefit over the last few years by buying at the spot and delivering into attractively priced term contracts. Once a production re-start should be warranted, a very manageable $15.0M re-start capex would be very manageable along with an expected 6-12 month ramp to approximately 1.0M U3O8 lbs/year. Note that Lost Creek is permitted for 2.0M lbs/year. With final permits also in hand for the Shirley Basin, the company has visibility to production of approximately 2.0M+ low-cost U3O8 lbs/year. Add to that a conservative management team which has delivered the least amount of share dilution compared to peers dating back to 2011.
Energy Fuels (EFR.TO) has been the largest US based uranium producer (despite also producing at a much curtailed rate for the last few years) since 2017. With a conventional uranium asset base scattered around the Four Corners States, the key company asset is the White Mesa mill, located in Utah. The mill has produced approximately 39.0M lbs of uranium since 1980. Refurbished in 2007, the mill has a licensed capacity of 2,000 tpd and can produce up to 8.0M U3O8 lbs/year. The White Mesa mill is the only conventional uranium mill located in the US. As such, the majority of the company assets consist of conventional uranium assets. Nichols Ranch (located in Wyoming, formerly Uranerz’ flagship asset) and Alta Mesa (Texas) are the only ISR assets.
Whether in production/curtailed production or one of the larger exploration/development companies (NexGen Energy NXE.TO, Fission Uranium FCU.TO or Denison Mines DML.TO), most uranium companies trade in tandem, inline with prevailing sentiment reflected with the prevailing uranium spot price and (to a lesser degree) term price. Energy Fuels however has been the clear outlier since 2017, advancing by +400% while peers have averaged a +200% gain in the same timeframe. In our view, the only way to rationalize this large discrepancy is the corporate strategy initiated by President Mark Chalmers since he assumed the Presidency in early 2018. The strategy seems to have been to promote the company’s biggest asset, the White Mesa Mill and pivot in order to highlight the production capabilities for different commodities. As uranium markets have idled post Fukushima, Energy Fuels’ corporate strategy in 2018 was to pivot and promote the mill’s capabilities to produce vanadium instead. Producing vanadium was heavily promoted between 2018-2019 with extensive time devoted on conference calls and marketing materials promoting the vanadium market, the explosive spot price and the fact that very few produce it. In fairness to the company, in FY/2019 a total of 1.9M lbs of V2O5 was recovered from tailings, generating approximately $25.0M in revenues. As the market price for vanadium declined into 2020 post-pandemic, yet another pivot to a new exotic commodity took place – rare earth elements (REEs). Since Q2/2020, much time has been devoted on conference calls and marketing materials promoting the REE market, the explosive spot price and the fact that very few produce it. The market ate up this pivot as the stock advanced +400% since the announcement to process monazite sands at the White Mesa mill in order to recover REEs.
These pivots and corresponding marketing and promotion have certainly had their impact on the share price as a noticeable run up (far surpassing that of uranium peers) was seen in the few months after the initial announcement. The facts on the ground however can hardly justify these explosive upside moves. Recall that currently, Energy Fuels is able to process approximately 1,000 tons of monazite/year (this equates to a minimal 0.1% of annual capacity), with plans to process between 15,000-30,000 tons per year in the future (between 2%-4% of annual capacity). This is a very minimal amount. These overemphasized pivots remind us of the boom years for uranium in 2007 when the spot uranium price hit $140/lb. Back then, gold companies were changing their names overnight to uranium companies, claiming to have uranium mineralization in their exploration assays or making uranium related acquisitions.
We are not advocating that the numerous pivots in Energy Fuels’ recent history have been strictly for PR purposes (though the Wall Street Bets crowd did go wild on the chat boards over the entry into REEs) but we argue that the corresponding runups post the pivot announcement have been way overblown in relation to actual production (or future plans) for the new metal. We are wary of companies that stray from their LT initial vision when commodity dynamics change. We remain the most bullish on Ur-Energy, a company that has continued to develop its ISR and uranium acerage all while curtailing production in anticipation for better pricing fundamentals. Remember that pure-plays always garner higher valuation multiples (just ask any silver producer). The risk reward benefit at this point is clearly better with the traditional uranium companies who have stayed the course and weathered the storm as the spot price has recently surpassed $53/lb representing a near 10-year high. We think the risk is on the downside now with EFR and see a much better risk/reward dynamic with a URE, CCO or DML.