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Energy Fuels: The Waiting Game Continues as the Business Model Comes Into Question

DISCLAIMER: Any written content contained herein should be viewed strictly as analysis, observation & opinion and not in any way as investment advice. No compensation was received for this report. Visitors to this site are encouraged to conduct their own due diligence.

Late last week, Energy Fuels (UUUU) released its Q4/2022 and FY/2022 financials and it was yet another year of minimal revenues and much larger operating losses. If the financials weren't bad enough (on par with the last few years), the conference call and FY/2023 guidance left much to be desired. Shares have declined by -31% in the last month, (far outpacing uranium peers) as the market clearly is losing patience with the ever-changing corporate strategy and slow execution. Historically, this corporate strategy consistently revolved around the production of uranium from a conventional US uranium asset base, however due to market dynamics since the mid-2010s, like many of the US uranium peers, production was curtailed due to depressed pricing. That said, in 2018 the company pivoted to prioritize vanadium production. More recently, in April of 2020, the priority shifted yet again, this time focusing on Rare Earth Element (REE) production.

Though the pivot into REEs may yet still prove to be successful, nearly three years post pivot, REE production is minimal and so are the associated revenues. Moreover, significant levels of vanadium have not been produced (or rather recovered from tailings) since 2019. Looking ahead, no vanadium or uranium is expected to be produced in FY/2023. On the call, there was much use of adjectives such as “remarkable accomplishment”, “very exciting”, “lowest cost” and “perfect position”. Ultimately, what we have been waiting for over the last few years has been to see evidence of a focused vision followed up with actual tangible accomplishments and the building of an operational and financial track record.

Operating losses have averaged $33.0M annually since 2018 while the average EPS loss averaged $0.33 in the same timeframe. Within this very same timeframe, we note that share dilution has been heavy with the company making good use of an ATM facility over the years. Note that at the calendar start of 2018, 74.4M shares were outstanding. At the end of 2022, the company more than doubled that amount to reach nearly 157.7M shares outstanding, representing a share CAGR of +16.2%

You can’t blame any company for rightfully curtailing uranium production in light of depressed pricing- US peers such as Ur-Energy (URG), Uranium Energy Corp. (UEC) and Peninsula Energy (PENMF) have done the same however Energy Fuel’s strategy was to pivot into the production of different, non-uranium commodities. As opposed to Energy Fuels, the above mentioned three peers have stayed the course while re-investing and further developing their uranium properties, all with an eye to the day that a production re-start would be warranted. Given the current bullish US market fundamentals, Ur-Energy, Peninsula Energy and enCore Energy (EU) have all announced plans for a re-start of operations later this year. Energy Fuels on the other hand has guided towards zero uranium and vanadium production/recovery for FY/2023. Energy Fuels Management has decided to go all-in on REEs.

We say this all this in light of the numerous uranium asset sales conducted over the last two years. In 2021, Energy Fuels sold a collection of permitted, past producing uranium mines (Tony M, Daneros and Rim) to International Consolidated Uranium (CUR) for the equivalent of $10.1M, toll milling agreements (to the White Mesa Mill) and a 19.9% equity stake. All three assets are conventional uranium mines located in Utah. This transaction was followed up by the $120M sale of the Alta Mesa ISR uranium project located in Texas, to enCore Energy. The transaction closed earlier in 2013 and for us at least, it signified the end of Energy Fuels’ commitment to ISR uranium mining. We always viewed Alta Mesa (AM) as the uranium jewel in their greater uranium asset portfolio. Alta Mesa included a relatively new central processing plant with the capability to produce at a 1.5M per year capacity. Between 2005-2013 Alta Mesa produced 4.6M lbs of uranium. Note that earlier this week, enCore Energy announced official plans to re-start the AM operations – we forecast nearly 1.0M lbs produced annually on average between a LOM starting in 2024 and extending to 2034. Moreover, note that the AM sale included 200,000 contiguous acres surrounding the processing facility, thus ensuring the potential for considerable resource exploration upside. With Alta Mesa no longer part of Energy Fuel’s portfolio, the only other ISR property left is Nichols Ranch, which we can categorically qualify as a disappointment. Since the acquisition of Uranerz in 2015 for the equivalent of $166M, Nichols Ranch has produced just 1.2M lbs of uranium between 2014-2019. Viewed another way, that would equate to an acquisition price of $138 per lb of produced Nichols Ranch uranium – nearly 3x the current spot price of ~$51/lb. For context, Ur-Energy’s Lost Creek ISR mine produced approximately 2.7M lbs since operations started in 2013 until essentially 2019, and as previously stated, AM produced 4.6M lbs between 2005-2013. Moreover, the resource base surrounding Nichols Ranch currently only amounts to approximately 6.5M lbs when including the Jane Dough and Hank satellites as well. Long story short, when it comes to ISR uranium mining, with Alta Mesa now sold, don’t expect much from Energy Fuels going forward in this department.

Energy Fuels management seems to have placed all of their chips into the wholly-owned White Mesa mill. Located in Utah, the White Mesa mill is the only conventional uranium and vanadium mill, located in the US. Since 1980, approximately 40M lbs of uranium along with 54M lbs of vanadium has been produced from the mill, to date. The mill itself has a large processing capacity – it is able to process ~2,000 tons of ore per day or 720,000 tons per year. Moreover, it is currently licensed to have a capacity for 8.0M+ lbs of uranium per year. That said, recall that for FY/2022, White Mesa produced 161,934 lbs of uranium (all produced in Q4/2022). We have to stress that any production going forward will be processed through White Mesa. Separate circuits for alternate feed recovery, vanadium recovery and REE processing have been added. Recall that, uranium and vanadium processed from White Mesa has most recently come from alternate feed materials or from tailings. REE production was processed from intake of monazite sand. Given this dynamic, the fact that all for Energy Fuels production begins and ends with White Mesa, we would classify the company as a refiner instead of an actual hard rock miner. Additionally, given the fact that there is zero production of vanadium or uranium expected for FY/2023, the relationship between the Chemours Company (CC) and Neo Performance Materials (NEO) becomes paramount. In summation, since pivoting to REE production as announced 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. It’s a similar story with uranium, below 200,000 lbs was recovered annually since 2019 and there are no plans for significant production in 2023. 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.

Three years after a much heralded entry into the REE space (and with it a gradual +400% at peak share price appreciation) the production prospects remain minimal. Additionally, we also call into question the business model of being essentially a middle-man refiner. While the trend over the last few years has been to on-shore and build-out self contained supply chains, Energy Fuels has taken the opposite approach and is very much at the mercy of both Chemours (for raw material intake) and NEO Performance Materials for offtake. In this situation, you are at very much dependent on both parties and you hold little (if any) leverage. What's more is that should prices really skyrocket, you will likely be cut-out altogether (the middle-man is always the first to get shut out). We do acknowledge that Energy Fuels has taken some steps to in-house more of the value chain ($27.5M spent to acquire the Brazilian Bahia property) and talks of adding a $25M separation circuit, however the fact remains that Bahia is still without a resource and at best three years away from producing any monazite.

Though Energy Fuels hopes for as much as 15,000 tonnes of annual monazite intake, that number alone represents only 2% of White Mesa’s 720,000 tpa annual capacity. With zero uranium or vanadium production expected this year, the plant will once again be operating a near minimal levels. We understand that future intake from the Pinyon Mine (Arizona) and the La Sal Complex (Utah) will have a minimal turnaround time however we have yet to receive any clarity on restarts or additional alternative feed material. At a time when the fundamentals are aligned and peers are ramping up uranium production, you would think that making much greater use of White Mesa via uranium extraction would also make sense. We’d go so far as to even ponder a scenario in which the White Mesa mill will never again reach operating rates even near 25% capacity ever again. If this persists for much longer, the dreaded concept of impairments will come up at an increasing rate of frequency. Note that some investment firms value the carrying amount of the mill at an aggressive $400M+. Hypothetically, it is our view however that even a brand new state-of-the-art mill with a processing capacity of 720,000 tpa will be near worthless if deprived of any intake for an extended period of time (just look at some of the Baltic refineries, now starved of Russian oil).

We acknowledge management’s deep experience in the uranium sector and that’s specifically why we were disappointed with the developments at Nichols Ranch and the sale of Alta Mesa. 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 however is running thin.

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