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Energy Fuels: Is It Still A Uranium Miner, Or Is It Now A REE Refiner ?

Following Energy Fuels' (TSX:EFR, NYSE:UUUU) Q1/2022 financial results release (revenues of $2.9M and an EPS loss of $0.09) which were essentially immaterial due to the strategy to conserve inventory until sales are warranted by way of higher prices, post-conference call on May 18, we are still left scratching our head as to the overall corporate strategy, commitment and identity of the self proclaimed largest U.S. based uranium producer. As highlighted earlier in March, we warned of Energy Fuel’s various corporate pivot’s since early 2018, going from being a dedicated uranium producer, to vanadium producer and now most recently promoting the virtues of rare earth element (REE) production. Read the full note here. Though we are cognizant of the versatility of the largest asset in corporate inventory – the White Mesa mill (located in Blanding Utah), eventually a commitment will have to be taken to produce and promote the company as either a primary uranium play, a vanadium play or an REE play. We acknowledge that the many times refurbished, 40 year old White Mesa mill has the capacity to process 720,000 tonnes of ore/year (equating to approximately 8.0M lbs of uranium) and is paramount to the corporate strategy, whatever that may be. The mill is the only operating conventional uranium facility in the U.S. and its versatility stems from the addition of separate circuits which could also process vanadium ores and more recently, process alternate feed materials and REEs. Just over two years after a highly touted April 2020 entry into the REE market, we can recap that FY/2021 production amounted to zero uranium, zero vanadium and zero REEs. There was some progress on the production front this year as 60 metric tonnes of REE carbonate produced this past quarter, while for FY/2022, guidance is calling for between 100,000-120,000 lbs of uranium production (produced from alternate sources and ore recycling) and between 650-1,000 tonnes of mixed REE carbonate (note that vanadium is not expected to be produced, but in fairness, 1.65M lbs of vanadium is currently sitting in inventory). Despite the positive market fundamentals in the uranium market (the spot price advancing to $63.75/lb in mid April, from $42.00/lb on December 31, 2021), the entry into the REE market continues to be the current focal point of the Energy Fuels story as rare earth supply agreements are being negotiated with one having been signed in the past year. Branching into additional revenues generating opportunities such as medical isotopes from thorium and radium processing has also been announced. Most telling from the conference call however was what wasn’t announced – any substantial LT contracting for any one of their potential products – uranium, vanadium or REEs.

We find this fact interesting since Cameco (TSX:CCO, NYSE:CCJ) booked a massive 40.0M supply agreement this past January while also announcing that McArthur River would begin the re-start process with a gradual ramp to a targeted 15.0M lbs of uranium expected to be produced in FY/2024. Ur-Energy (TSX:URE, NYSE: URG) also recently announced some news on the development front - while maintaining Lost Creek in an operational state of readiness for 1.2M lbs of annual production, development work continues on Mine Unit 2. Specifically, header houses 2-4 are expected to be ready for production by Q3/2022 in what is a shortened time to production. Additionally, delineation drilling continues for the next four header houses. Meanwhile, from Energy Fuels, though some of the conventional assets remain in an operational state of readiness, we know that zero conventional or ISR uranium production is expected for FY/2022, while additional development plans have been deferred until a future date. And from Energy Fuels - the self described largest U.S based uranium producer ? The only term contract that was announced was for up to 1.8M lbs of uranium… beginning only in 2026.

With uranium and seemingly vanadium on the sidelines, we would have hoped for some clarity on purchasing and sales for the REE business. Note that for Energy Fuels’ REE business, it must first source the needed monazite sands (currently a small scale contract has been signed with Chemours (NYSE:CC), with the sourced material coming from the state of Georgia), and then those sands are processed at the White Mesa mill in order to retrieve REE carbonate. The REE carbonate is then shipped to Estonia, as part of a small offtake contract signed with Neo Materials (TSX:NEO). At Neo’s Estonian separation facility, the REEs are separated into specific materials used for permanent magnets or various other types of advanced materials. Energy Fuels’ flow chart is as such:

In this situation, Energy Fuels essentially plays the part of intermediary (or middleman), purchasing one raw material (monazite sands), processing it at White Mesa in order to retrieve REE carbonate, which is then shipped to Estonia for further processing/separation into other advanced materials. Essentially, if this is the route that the company wants to transform into, it ceases being a mining company and instead becomes a de-facto, REE refinery. We know that the mid-term goal here is the reach 30,000 tonnes of monazite/year for processing. This is exactly why when promoting the virtues of REE production, visibility on LT sourcing contracts and offtake contracts are crucial. Much like analysts use crack spreads to value refineries and spark spreads to value utilities, some sort of spread is needed for this REE operation as well, since the differentials are key to understanding the profitability of such an operation. We acknowledge that commercial REE production just recently started and that the company continues its attempts to source additional suppliers and off-takers, but not controlling the full value chain of operations can put one in a precarious situation- more so if the beginning and end of the process is controlled by much larger parties who may choose to squeeze the middleman out.

Though the stock has benefitted greatly from the pivot to REEs (much like the previous pivot to vanadium production), much is still unknown in terms of REE production, sourcing and profitability. So much more remains to be seen, however extoling the virtues of uranium, vanadium, REEs and potentially even medical isotopes has everyone guessing. If you try to conquer everything, you spread yourself thin and conquer nothing. It’s time for the company to finally commit for the longer term by signing substantial LT contracts for anyone of their potential commodity products. Constantly being in a state of “evaluating options” while also being in a perpetual state of operational readiness, attempts to cover all the bases while dominating none. A concrete LT corporate direction is finally needed. The explosive stock market appreciations post commodity pivots have to eventually be followed up with some concrete direction and results. There is a lot of potential here but that concrete follow up has yet to happen.

** May 19, 2022 update** Less than 24 hours after the Q1/2022 conference call and our publishing of the above written piece, Energy Fuels announced that it has entered into binding agreements to acquire 17 mineral concessions located in the State of Bahia, Brazil. Encompassing nearly 37,300 acres, the Bahia Project is known for heavy mineral sands (HMS) deposits. With over 3,300 vertical historic exploration auger holes drilled to date, significant concentrations of titanium, zirconium and most importantly, monazite have been detected. Though much work has yet to be completed, based on historical estimates, it is believed that the Bahia Project may supply between 3,000-10,000 of monazite sand/year to Energy Fuel's White Mesa mill. The total consideration is for $27.5M, note that Energy Fuels had $105.8M in cash and equivalents in treasury as of the end of Q1/2022. Closing is expecting following a 90 day due diligence review. This transaction goes a long way for the company as it now will not only own more of the REE value chain (eventually becoming less reliant on purchased monazite) but it also signals to the market that the company is serious about increasing its production of REE carbonate as part of its longer term vision. A PEA for the Bahia Project is expected sometime next year. As of the present, we can safely say that the uranium and vanadium business is on hold while the REE business is aggressively expanding. The fact that developments on the uranium side are currently frozen, Energy Fuels is now clearly an REE play. Whether this will turn out to be the right move or not remains to be seen, but in the least, a near-term REE focused direction has clearly been established.

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