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Momentum in Uranium Continues Given a Proposed $4.3B in DOE Purchasing

Bloomberg announced yesterday afternoon that the Biden administration was actively petitioning Congressional lawmakers to support a $4.3B plan to support the domestic uranium industry by directly purchasing enriched uranium from U.S. based miners. This is all part of a concerted effort to wean the U.S. off of Russian imports (which in 2020 equated to just over 23% for enriched uranium and nearly 17% for uranium). If approved by Congress, the proposal would have the Department of Energy (DOE), directly purchasing domestic uranium and then reselling it to domestic nuclear market participants. This continues to support and prioritize domestic (or at least Western) uranium pounds. Note that this proposal follows up from the “National Opportunity to Restore Uranium Supply Services in America Act of 2022” as introduced by U.S. Senators this past April. That Act was to authorise the DOE to establish a uranium reserve. We believe that this motion has a high possibility to pass in Congress given that there is high bipartisan support and mirrors earlier legislation introduced by swing vote Senator Joe Manchin, a West Virginia Democrat. We also believe that this action may spur domestic utilities to finally become more active in the spot and term markets, which to date both remain at near multi-year highs right around $50/lb, despite pulling back from a spot high of $64.88/lb in mid April. Note as well that uranium acceptance and interest has been seen recently with performance in the Sprott Physical Uranium Trust (SPUT) which began trading two years ago, raised well over $1.0B and has to date accumulated nearly 56.0M lbs of U3O8 in inventory (from 18.1M lbs this time last year). After consistently trading at a discount to NAV since mid April, the Trust has just recently re-gained its premium to NAV valuation in late May. Note as well that since late May, the Trust raised $60M which it has yet to deploy for additional purchases (equating to as much as 1.2M lbs at current spot pricing).

Domestic U.S. producers/developers reacted extremely well to the news yesterday with Ur-Energy (URG) advancing +10.7%, Uranium Energy Corp (UEC) advancing +15.4% and Energy Fuels (UUUU) (which unfairly double- dips as a Rare Earth producer as well) advanced by +12.9%.

Given the domestic U.S. focused theme, our favored names include:

Ur-Energy (URG): In our view, the pre-eminent US focused ISR producer. Production began at Lost Creek (Wyoming) in 2013 and the company has consistently held sub $20/lb 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.

enCore Energy (EU-TSXv): This company has been very much under the radar but has slowly and steadily acquired an enviable portfolio of strategic U.S. based properties ranging from New Mexico, Wyoming, South Dakota and Texas. The properties encompass a nice mix of conventional and ISR uranium acreage, in addition to the Texas based Rosita Processing Plant, which following a modernization re-fit, is on schedule for planned production in 2023. Key assets include the South Dakota based ISR Dewey Burdock project, which is located just 60 miles from Cameco’s Crow Butte mine. Dewey Burdock currently hosts 17.1M lbs at an ISR grade of 0.116% U3O8 which is in-line with other currently in-production ISR mines located in Texas or Wyoming. At an estimated capital cost of $31.7M, over a 17 year LOM at 1.0M lbs/year, the project features an after-tax IRR of 50% and NPV8% of 147M, all this at a low base case uranium price of $35/lb. Other strategic ISR properties include Gas Hills and Crownpoint. Part of our high conviction on this company was the appointment of Paul Goranson as CEO. Paul is considered to be the pre-eminent authority on North American ISR uranium mining having a three decades long track record of successful project development at both Cameco, Energy Fuels (Uranerz) and Mestena. Note that this name is really for those who crave torque in the pursuit of alpha.

Denison Mines (DNN): Though not per-se a U.S asset base, we view Denison Mines as one of the premiere development stories, located in the eastern portion of Canada’s Athabasca Basin. Over the past year the company has consolidated its ownership (now 95%) in the flagship Wheeler River project – the largest and highest grade undeveloped uranium project (132M lbs U3O8 in the Indicated category) in the infrastructure rich eastern portion of the Basin. A 2018 PFS envisioned a freeze wall + ISR recovery method at an all-in cost of below $10/lb at Phoenix, producing approximately 6.0M lbs/year over a 10 year LOM. Including the Gryphon deposit, the base case Wheeler River pre-tax IRR was seen at 38.7%. A Feasibility Study and Draft EIS is expected in 1H/2022. Having raised over C$70M in 2021 (some of which was used to purchase physical U3O8 inventory), the company is currently fully financed through to a construction decision. We additionally see Denison Mines as the most compelling name from a developer/asset quality valuation standpoint as well.


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