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Energy Fuels (UUUU) released its Q3/2023 financial results on November 3rd and followed-up with a conference call held yesterday on November 6th. Though the financial results were ultimately positive (quarterly sales of 180,000 lbs at $58.18/lb, net income of $0.07 per share and a +39% YTD increase to working capital, now amounting to $162.5M. Near term guidance however was underwhelming.
We take the financial results with a grain of salt seeing as the net income has historically been influenced not by fundamental operations (ie actual internal production) but rather by inventory selling and one-off externalities such as the gain on the Alta Mesa sale and/or mark-to-market investment gains/losses. That said, nothing at all wrong with $162.5M in working capital (of which 586,000 lbs of finished U3O8 inventory along with 906,000 lbs of V2O5 inventory, together equating to ~$49.0M at current commodity prices). We highlight however that in an environment of rising uranium prices, a substantial ramp in uranium production is unfortunately not seen in the near term – neither is a substantial ramp in Rare Earth Element (REE) production. We highlighted this dynamic earlier in numerous posts. Ever since the April 13 2020 decision to enter the REE space, development on the uranium front has been slow on the conventional front, while (seemingly) completely mothballed on the ISR front.
Recall that historically, the corporate strategy consistently revolved around the production of uranium from a conventional US uranium asset base. Due to market dynamics since the mid-2010s however, like many of the US uranium peers, production was curtailed due to depressed pricing. The corporate pivots began in 2018 when the company decided to prioritize vanadium production. In April of 2020, the priority shifted yet again, this time focusing on REE production.
As per Q3/2023 results, apart from the sale of 180,000 lbs of uranium from inventory (at $58.18/lb), there wasn’t much else on the uranium, vanadium or REE front. Working capital of $162.5M was a positive point (note that this figure excludes the latest $20M tranche paid by enCore Energy (EU) as part of the all-in $120M Alta Mesa acquisition), however keep in mid that the $0.07 per share gain was primarily driven by “other Income”, stemming largely from a $7.2M gain related to the aforementioned convertible note and other investment gains. Ultimately, an operating loss of $6.9M was incurred during the quarter. At this point we remain more concerned with the operational direction, strategy and assets rather than the pre-production financials. Note the growing share count however.
Uranium: Progress continues to move forward with prep work on numerous conventional uranium and uranium/vanadium projects, particularly La Sal, Pinyon Plain and Whirlwind. There has already been a workforce expansion and meaningful development work conducted on surface and with underground infrastructure. Production at any one of these mines is expected in early 2024 with mined material expected to be stockpiled at the White Mesa mill. Once sufficient material at the mill has been accumulated, an actual mill campaign is expected to begin with uranium production now seen in late 2024 or early 2025. In context of the near 15-year uranium spot price highs, this production timeframe is somewhat disappointing seeing as all domestic peers (Ur-Energy (URG), Peninsula Energy (PENMF) and enCore Energy (EU)) are expected to exit 2024 with meaningful production. Of particular note is that Alta Mesa, sold from Energy Fuels to enCore Energy in late 2022 is expected to commence production as early as Q1/2024. We also highlight the fact that while all the domestic peers have been in the midst of re-starting their ISR operations over the course of the last few years, Energy Fuels took the contrarian approach and decided to pivot and go all-in on REEs instead. It's worth noting that the company still owns one ISR property (Nichols Ranch). Due to lower capex intensity, ISR projects have been the first ones to get fast tracked to production (from peers: Lost Creek, Lance and Alta Mesa) however Nichols Ranch has had no such luck. This despite a marked improvement in the uranium market, three LT contracts signed in 2022 and the establishment (and subsequent participation) in the DOE's strategic uranium reserve. Since being mothballed in 2019 Energy Fuels has no immediate plan to re-start Nichols Ranch. This ultimately begs the question of asset quality and potential for writeoffs.
Despite a current Measured & Indicated resource of 7.0M lbs, the fact that there is no re-start work planned for at Nichols Ranch speaks volumes. We'd go so far as to say that since the acquisition from Uranerz Energy Corp. 2015, total production (1.2M lbs) has been disappointing. When factoring in the acquisition price alone (all-stock deal equating to ~$110M), amortized over LOM, total ISR production to date from Nichols Ranch has amounted to a whopping ~$92/lb.
Lastly, we also note that despite a currently healthy LT order book (3.0M lbs or up to 4.1M lbs if all options are exercised) with major domestic utilities, no new LT contracts have been signed thus far in 2023.
Rare Earth Elements (REEs): Now nearly 3.5 years after the much heralded pivot to REE production, a total of 26 metric tons (MT) of RE Carbonate was sold in Q3/2023. This generated a grand total of $290,000 during the quarter. Not only has the REE ramp been slow, but the fundamental strategy and positioning of the company certainly comes into question. Though there are certain initiatives to counter the current dynamic, being a middle-man refiner is hardly a position of considerable leverage.
In summation, when it concerns REE production, Energy Fuels is the middle-man, not enviably positioned between the Chemours Company (CC) and Neo Performance Materials (NEO). Since pivoting to REE production in 2020, Energy Fuels has signed two critical agreements to make things possible: The first agreement was signed with Chemours (announced on December 14, 2020) as a three year supply agreement with Energy Fuels receiving a minimum of 2,500 tons per year of natural monazite sands extracted from the Offerman Mineral Sand plant in the state of Georgia. This sand would be processed at White Mesa in order to extract a marketable mixed REE carbonate. As per second agreement announced on March 1, 2021 this REE carbonate would then be shipped to NEO’s rare earth separation facility located in Estonia. At this point, NEO would process the REE carbonate into specific rare earth materials used for magnets or advanced materials.
This three way relationship began operationally on March 9, 2021 when Energy Fuels received its very first shipment of monazite sand which was trucked to White Mesa from Chemours’ operation in Georgia. This was followed up by announcement on July 7, 2021 that the first container (~20 tonnes of product) of mixed rare earths carbonate (RE carbonate) was successfully produced at White Mesa and sent en-route to NEO’s separation facility in Estonia. Though the entire process has proven to be successful, three years after announcing an entry into the REE space, the volumes since produced at White Mesa (and extending into FY/2023 as per guidance) remain extremely small:
From the production table above, note that the only meaningful year of vanadium production was in 2019 when 1.9M lbs was recovered from tailings. Though no significant vanadium production has been produced since then (or expected in 2023), note that internal estimates forecast between 1.0M-3.0M lbs of vanadium still recoverable from tailings. As for going all-in on REEs, 270 tonnes was recovered from the monazite sand in 2021 along with 205 tonnes in 2022. These amounts are extremely minimal – for added context, REE sales amounted to just $1.3M in 2021 and $2.1M in 2022. Don’t expect this number to be much higher in 2023 as REE carbonate recoveries are expected to be between 375-485 tonnes.
Though Energy Fuels has begun modifying its existing solvent extraction (SX) circuits at the White Mesa mill to produce separated REE oxides as part of the approximately $25.0M phase 1 upgrades, once completed in early 2024, management expects to have the capacity to produce between 800MT-1,000MT of recoverable separated neodymium-praseodymium (NdPr) oxide. Though ultimately still minimal numbers, all of these projections are entirely contingent on receiving the needed monazite sands to process, from a third party. During the Q3 conference call, management was already stating that Chemours has under-delivered on the monazite front. Being in such a precarious situation, it was stated that a focus on M&A has become a paramount on the monazite front. Keep in mind that the Bahia monazite property acquisition was closed in February 2023. It certainly didn't come cheap - ~$27.0M for 17 mineral concessions (37,000 acres) in Brazil. Though the property has had over 3,000 historic auger holes drilled to date, it remains very junior and is remains pre-resource. A significant drilling campaign will be needed to prove out a maiden resource. Though still very early to speculate, management hopes that Bahia may provide between 3,000MT-10,000MT of monazite sand per year.
For context, recall that Energy Fuels had initial hopes for as much as 15,000MT of annual monazite intake. That number alone represents only 2% of White Mesa’s 720,000 tpa annual capacity. Three and a half years after the pivot to REEs, we remain very much in a wait and see frame of reference, while at the same time, we can easily say that the window to capitalize on high uranium pricing has been neglected. Its nice to package White Mesa as a one-stop shop for all things uranium, REEs, vanadium and medical isotopes however the risk is always on the upside when one tries to capture all shiny objects instead of making a conscious decision specialize in just one or two particular fields. Over the last few years we have been hearing increasing talk of REE production and now even medical isotope production. Either way, value isn’t created by hopes and promises but rather by concentrated efforts to de-risk and advance projects while also proving a viable (and profitable) business model. Though the potential remains, we are still at the wait, see and prove it to me point with Energy Fuels. Patience is running thin however.