Sometimes, for some investors, the word passionate is interchangeable with the word maniacal.
What we have noticed, and have had discussions with institutional investors about, is how this passion (mania) can sometimes negatively affect investment decision making. We will come onto that later in this article.
Another thing that is quite often interchangeable is the statements from the CEOs of junior uranium explorers: "We have uranium in the ground and when the spot price returns our share price is going to through the roof! We need a little bit more G&A funding while the market returns. Trust me. Just wait." I paraphrase, but you get the idea.
Clearly, not all uranium CEOs can be right. The truth of the matter is that the uranium market outlook is irrelevant for some of these companies because they’ll be going underwater even if the uranium spot price hits US$100/lb. Let me put it another way: just as when the gold price is high, like it is now, not all gold explorers and developers feel the benefit. The same is true for uranium.
The uranium industry also has the unwanted accolade of being extremely political.
East VS West still lingers in the mind. The rise and fall of nuclear powerhouses used to signify the nuclear arms race; now, it signifies the energy business. The US continues to fall behind China and Russia in the construction, supply and, in some cases, operation of nuclear reactors for a new wave of nuclear energy demand from all around the world. We are big supporters of the macro story for nuclear energy and therefore the uranium industry, but we are also conscious that we need to make money on our investments.
nobody has understood the inventory levels globally for the past 2-3 years
Share price stagnation has become endemic in the uranium industry. With the spot price of U3O8 only now creeping past the US$30/lbs mark, and with meaningful price discovery unlikely until Q4/20, investors in both uranium juniors and established producers have been left frustrated for the last 2-3 years. Some see the recent mine closures due to the COVID-19 pandemic as the final nail in the coffin for the utility buyers' strategy. This remains to be seen. We do not understand the inventory levels out there.
It is now clear nobody has understood the inventory levels globally for the past 2-3 years. Even the best market commentators, fund managers, and uranium CEOs have been left scratching their heads as to why this clear, macro-driven supply-demand story has been able to defy the odds and cold hard logic. So, whilst it is fun to speculate on the timing, the wisest heads have hunkered down and, in some cases, doubled down on the uranium thesis, retreating from the chattering classes online. There is nothing to do but wait.
The uranium macro story is one that resonates.
There is an appreciation of the statistics pertaining to greenhouse gas emissions and climate change, and the reality is somewhat reassuring: the world will need much more uranium in the near future. Some 450 nuclear reactors in over 30 countries are hungry for uranium. Industry commentator and CEO of Bannerman Resources, Brandon Munro, recently stated that around 50% of total future energy production by 2050 would come from nuclear in an interview with us.
However, this does little to help investors today who are operating in a void. Should they cut their losses and bail, or do they continue playing the waiting game that may be increasingly detrimental to their individual investment strategies, financial security, and even their sanity?
We are told the only people who truly know when uranium will see a surge of demand for new material are utility companies, who have been depleting and replenishing their unknown level of reserves at a highly secretive rate. Speculation about their inventory is rife, with data and hard facts low on the ground. Catalysts have been aplenty, yet failed to even slightly affect the equities markets for the last 3-years. Truth be told, no-one has got this right….yet. So, with the closure of Cameco's facility at Cigar Lake for an indeterminate period, KazAtomProm's 3-months shutdown, Rossing and Husabs' closure in Namibia, and the reduced output in Q1/20 from BHP's Olympic Dam, could this be the moment uranium investors have been waiting for?
There is one particular piece of knowledge uranium investors MUST come to terms with.
Sorry to keep beating this drum.
There is a chance the uranium company you are currently invested in is going to lose your money. Can you remember why you invested in it? Do those reasons still hold up? Why that company VS its peers? We believe that some uranium companies that we have studied and spoken to will not survive without partnerships being formed and money being injected (money they can't seem to find), in addition to some luck. Some have inherently flawed models, inexperienced teams, insufficient cash or access to leverage, lacklustre assets, a deficiency of options, and really aren’t positioned to ever get into production!
There is still an undoubtedly exciting upside for the Uranium market, although we are dubious that it will reach the c. $140/lb spot price heights that some are pushing; in fact, in a recent interview, Rick Rule himself expressed his skepticism, as did Brandon Munro in his CRUX Investor interview.
Elaborate ideas are always nice, but pragmatic optimism is usually more rewarding. Last year we had an article written on our platform by regular contributor, a Curious Investor.
Energy Fuels, America's premier uranium producer (and a potential producer of vanadium), impressed us with its fundamentals: an experienced team who have been there and done it before, sufficient cash to see them through until uranium price discovery, a set of good assets, and the bonus White Mesa Mill, which could give them a strategic advantage, perhaps even a monopoly, over other juniors in the region.
Recently, we spoke with CEO, Mark Chalmers. We wanted to talk to him about his company's current situation. First, we’d like to take a look at Energy Fuels’ White Mesa Mill; ‘if you own the mill, you own the region’ is a common quotation. As one of three mills capable of processing uranium in the US, and the only one that is operating, not too many people would argue with Chalmers' assertion that Energy Fuels is well-placed for when the market turns.
That said, some criticism has been thrown as Chalmers for the strong talk about the conditions under which he would allow US uranium producers to use his mill, and also about the age of the mill. Firstly, in the same position, I’d be surprised if other CEOs didn’t demand the same terms. Plus, he is looking out for his shareholders.
As for the age of the mill, it reminds me of a classic car sale a few years ago. The car sold for c. US$3M. It was a stunning looking car from the 1930s. Then, the buyer complained that there was only one original part in the car and that he had been duped and wanted his money back. There was indeed only one original piece traceable to the car, but it had been maintained and restored several times over the past 80 years. It looked great and ran like clockwork. Mills go through continual maintenance all of the time. We’d be surprised if there was one original part left. White Mesa is vast. It operates, and probably always will, at less than half capacity.
Energy Fuels’ White Mesa Mill:
While all these production capacities look impressive, we still haven’t seen if they can be made economic in the market. Only time will tell.
The permitting process is continuing at the Roca Honda Project, which is claimed to be able to provide up to 2.7 million pounds of annual uranium production with a 9-year mine life.
However, Chalmers himself admits the completion of permitting is still several years away. Does this mean Roca Honda will be irrelevant in the next bull cycle? Is this true of many of Energy Fuels’ assets? It’s no good having so many strong, high-grade assets if they won’t be ready in time for the company to produce and sell anything.
Chalmers is right in saying that when you have fully constructed, fully permitted mines and production facilities, it costs money to keep them in compliance and good standing. We imagine it has been a battle to keep Energy Fuels’ many costs down, while also keeping as many assets as possible ready to fire at the right moment. We understand Energy Fuels’ status as the most strongly positioned U.S uranium producer, but we wonder if keeping hold of all these assets will benefit the company in the long run.
As far as vanadium goes, the spot price has dropped c. 25% since the start of 2019. Energy Fuels is putting most of its vanadium into inventory. They have produced around 1.5M lbs of high-purity vanadium (c. 99.7%). A small amount has been sold, and they are targeting premium markets than can afford the extra expenditure to acquire such a high-grade resource. While Energy Fuels has shown it is capable of churning out vanadium, the macro story of vanadium appears even more long term than that of uranium. Energy Fuels is painting the picture of itself as a slow burner, but one that could satisfy investors who can live without short-term returns. Is the company telling the market it is stockpiling vanadium the wisest play? We shall see.
Chalmers has previously said the spot price needs to be at US$55/lb before Energy Fuels can get moving, and it needs to be at US$65/lb before new acquisitions and growth can take place.
This is clearly some way off, but what would a price like this mean under ideal market conditions? Chalmers sees Energy Fuels becoming a US$1B+ market cap company, meaning the company could be at least a four-bagger for patient investors. Chalmers bases this valuation off Energy Fuels’ portfolio and their long-term production capacity.
Upon completing our review of the company’s current situation, Energy Fuels has demonstrated something to us: even for the uranium producer with the strongest standing in the U.S, the future has elements of uncertainty. If this is the case, imagine what the future looks like for other uranium juniors and producers the world over. This is an industry that is going to have a few winners and many, many losers. Energy Fuels has provided some numbers to back up its claims, but there are many variables before these figures can be realised. Energy Fuels looks like one of the best bets in the sphere of uranium investment, but investors should act with caution before entering a market with pronounced risks and an abundance of companies consigned to failure.
Company Website: https://www.energyfuels.com/
If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.
Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.
Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.