Energy Fuels (NYSE: UUUU) - The White Mesa Mill: A Trump Card Investors Shouldn't Ignore

Passion Or Mania?

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.

Uranium: A Complex Space

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 Undeniable Macro Story

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.

Not All Boats Will Float on A High Tide

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.

Back to basics

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.

The facts and numbers:

Energy Fuels’ White Mesa Mill:

1. The mill has a licenced capacity of 8Mlbs pa of uranium.
2. The age of the mill is much discussed (as per above), but again Chalmers doesn’t believe this is an issue. Keeping the mill operational is low cost according to Chalmers. Regular maintenance keeps things ticking. Could it be more efficient? We'd like to know.
3. It has a peak historical operational capacity of 5Mlbs pa. Chalmers claims the company was and is limited by a lack of feedstock. Tolling is probably the solution but agreeing on a price and terms with other US uranium producers, or aspiring producers, is a hot topic.
4. Historically, the owner of a mill typically holds the upper hand on pricing for tolling but uranium is a very political and emotive topic, so will there be pressure for Energy Fuels to play ball on pricing? Who knows? Chalmers doesn’t seem to think so.
5. The mill can generate income independent of uranium and vanadium prices.
6. In addition to licences to process uranium and vanadium ores, Energy Fuels has around 18 licences to allow them to process additional feeds that are not primary ores. Energy Fuels has received material from producers for several decades, including low-level tolled uranium from Cameco amongst many others. They are currently accepting feed from a uranium mine in New Mexico.
7. Energy Fuels’ profits from alternate feed are fairly consistent but are not constant. Historically, the company has made anywhere between US$5-15M from alternate feed/clean-up operations. Given enough feed, Energy Fuels could exceed US$15M per year in revenue. The company tries to expand its feed resource by taking part in additional mine clean-ups in the region.
8. When operational, White Mesa Mill has recycled 4-500,000lbs of uranium per year on average.
9. White Mesa Mill needs a certain critical mass to be in an optimal state. This is said to be around 1.5-2Mlbs of primary ores per annum, with the capability for an increase proportional to the company’s primary ore levels. The economics of scale mean commercial operations would be best served at 6-8M lbs per annum. It is worth noting this capacity has not been achieved in many years.
10. The mill is designed to process c. 2000t per day, but investors will want to see this output manifest in reality before they trust the numbers wholeheartedly. Chalmers has stated the mill will not come into play until at least 100,000t of feed is available.
11. White Mesa Mill has a large enough capacity to process all feedstock “within the region.” This appears to make White Mesa Mill the only gig in town and may give Energy Fuels a unique trump card.
12. In terms of the toll fee for feedstock from other uranium producers, Chalmers has been explaining to the market how the mill could provide a JV opportunity for the last year. Historically, Energy Fuels would end up with c. 50% of proceeds from tolled ores. These charges would be for processing, marketing, and then sale either to the U.S government, or utility companies via contracts or alternate purchasing arrangements. While this may have been fruitful historically, it remains to be seen whether an arrangement like this can be constructed in the here and now. Possible new arrangements include ores of a high-enough grade being processed for free, and some ores being sold by the producers themselves, rather than Energy Fuels, for a fee. In the past, there were private companies who could turn a good profit off ore tolling, but it remains to be seen whether this is true of today’s market. Will White Mesa Mill pay its way? We’re hearing quite a lot of ‘back in my day’ rhetoric, but we want to see how this applies in a new bull market. Options are one thing, but action is quite another.
13. Conversations regarding JVs are happening regarding the mill, but there are no concrete arrangements yet. There are several producers interested, but they are currently hunkered down in negative cash flow, so we will see how things develop. The mill becomes much less profitable if market conditions aren’t economically viable, and this is a worry. Low-grade ores from clean-up contracts can only generate so much revenue. Alternate feed can’t be Energy Fuels’ primary source. Based on Q3 financial results, Energy Fuels earned anywhere from US$700,000 up to US$3M for their role in the New Mexico clean up contract.
14. During its 38-year operating history, the Mill has produced over 45 million pounds of vanadium – or over US$500 million of vanadium at today's prices.
15. Energy Fuels is currently in discussions with the Navajo Nation EPA regarding clean-up operations of abandoned uranium mines in operation from 1944 to 1986. ‘Nearly 30 million tons of uranium ore were extracted from Navajo lands under leases with the Navajo Nation,’ and this appears to be a problem White Mesa Mill can help solve.

Energy Fuels’ ISR Facilities

1. Sitting in situ, Energy Fuels has 100% ownership of both Nichols Ranch ISR Mine & Plant, and Alta Mesa ISR Mine & Plant.
2. Nichols Ranch has a total licensed capacity of 2 million pounds of uranium per year.
3. Alta Mesa has a total operating capacity of 1.5 million pounds of uranium per year.

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.

Latest news at Energy Fuels’ mine resources and other assets

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.

General Figures

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.

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