Energy Fuels: A High-Leverage Play on the Uranium Price

Rob Chang is a Metals and Mining Analyst at Cantor Fitzgerald Canada. He has covered the metals and mining space for over eight years for the sell-side and the buy-side. Prior to Cantor, Chang served on the equity research teams at Versant Partners, Octagon Capital and BMO Capital Markets. His buy-side experience includes managing $3 billion in assets as a director of research/portfolio manager at Middlefield Capital, where his primary resource portfolio outperformed its direct peer and benchmark by over 28% and 18%, respectively. He was also on a five-person multi-strategy hedge fund team, where he specialized in equity and derivative investments. He completed his Master of Business Administration from the University of Toronto’s Rotman School of Management.

RIN: We keep hearing about this uranium renaissance, but nothing has really happened yet. What’s been keeping the bull market for uranium at bay?

RC:  In our opinion, there are two primary reasons prices remain low. First off, it’s the higher-than-normal inventory levels, and that’s mainly due to Japan not consuming the 20 million pounds that it usually consumes per year. Because of that we’re seeing a larger-than-normal inventory globally, so markets have 40 to 80 million pounds out there.

On top of that, we also have some markets waiting for Japan to announce the restarts of its reactors. There is a school of thought out there that believes Japan may never turn on any of the reactors although much of that dissipated with Japan’s recent announcement on its energy policy. However, as long as some of that still exists, there’s still going to be a little bit of an overhang, and a little bit of disbelief that the uranium renaissance, so to speak, will start.

That being said, we believe that’s unlikely for a couple of reasons. First off, Japan is running at a $75-billion deficit annually because of the substitution from nuclear power to other sources. That’s something it can’t afford given that the country continues to struggle economically.

On top of that, if we look at the global demand scenario and how it is shaping up, even if Japan doesn’t turn on all its reactors, the rate of growth will be so much that it doesn’t quite matter. In fact, given the current supply and demand situation, even if Japan doesn’t turn on any of its reactors, a major imbalance will still occur. Perhaps a little bit later, but it will still occur.

RIN: The general consensus is that uranium prices will go up. Do you have an idea of when that might happen?

RC: Our estimate is that’s going to be during the back half of this year. That’s when we’re going to really see the start. The reason is that from reports from utilities and producers, 2016 is the year when a lot of the utilities’ requirements will become uncovered.

What I mean by that is, generally utilities forecast how much uranium they need and make long-term contracts to get the supply in advance. However, because of the low price environment we’ve seen for awhile, many producers have been reluctant to negotiate at the lower prices. On top of that, utilities have been rewarded for waiting to lock in long-term contracts because the prices have been declining steadily, almost on a monthly basis. When you put those together, you’re seeing a lot less contract activity happening in the last few years. It’s to the point where, if we had full coverage, or close to full coverage of the last few years, in 2016 it flips dramatically to largely uncovered.

Knowing that, and being that we are only two years away, 2014 is the key year. We have a perfect storm happening.

RIN: Do you have an idea in terms of a target price? Are you expecting long-term prices to go up pretty quickly?

RC: Absolutely. We think prices will move pretty dramatically. For this year, we believe the price will average $43.25/lb. Then, next year, $62.50/lb and then $70/lb after. Given that we have $35/lb now, it’s going to be a pretty dramatic leap up.

RIN: That sounds good. You released a note on the US Department of Energy approving billions of dollars worth of nuclear loans. Can you elaborate a little bit on what that means for the nuclear landscape in the States? How does will it impact companies?

RC: The US is the number-one consumer, globally, of uranium and consumes about a quarter of global demand. There has been some thought that the US will be stepping away, or at least stagnant, in its uranium consumption.

This approval effectively green-lights Southern Co.’s Vogtle nuclear reactors in Georgia, and it shows the US is headed towards building more nuclear power. That shows domestic demand within the US, and is certainly positive that the country is going to consume more rather than the fear of them actually scaling back.

RIN: As far as the U.S. is concerned, what I’ve been hearing a lot more is to look at the ISR producers. What’s the difference in terms of economics between the hard-rock mining and the ISR mining?

 RC: The difference between the two is that for ISR mining, it is solution mining. ISR miners are able to produce at a relatively low cost because essentially what they’re doing is drilling two holes. With one hole, they’re pumping solution into the ground; basically, soda water. On the other side they’re pulling it out. In between it’s dissolving uranium, making it mobile and sucking it up. It’s kind of an elegant low-environmental-impact way of mining. Generally, it’s lower cost because there’s very little rock moving and a lot less heavy equipment to operate the mine. That being said, it generally produces lower yields.

For the U.S. ISR producers, many of the ones that are emerging, or currently running, they’re generally expected to produce anywhere between 200,000 pounds to – when they’re fully ramped up – a million, maybe 2 million pounds. That’s pretty much their limit, given the type of mining method that they’re using and the size of most ISR amenable deposits.

Hardrock miners, such as Energy Fuels, which mine underground, and potentially open-pit as well, are the larger operations. Associated with them are higher costs, but they are capable of producing at a much larger scale. Whereas ISR producers would be doing 200,000 to a million pounds, EFR could scale up to multimillions rather easily, just like any other conventional type of mining you see. Higher cost is definitely higher production potential.

RIN: Just to look a little bit at Energy Fuels (TSX:EFR, NYSEMKT:UUUU), I’ve noticed that they get a lot of attention. They’re a pretty solid-looking company. What is it that draws this attention?

RC: There are a couple of really compelling points for Energy Fuels. First off, when you look at the fact that they own the only conventional mill in the entire US, that’s an important strategic advantage. There is no other place that you can conventionally mill uranium material, other than at the White Mesa mill.

The second thing is that it has a very impressive portfolio of projects, and past producing operations to the point where even though it is not currently operating in the current low price environment, quite a few can be turned on within six month and could probably over the course of a few years be able to ramp up production to anywhere from a million to potentially even 4 to 5 million pounds per year. When the price is right, EFR can act relatively quickly and be able to produce large amounts of uranium fairly quickly, capitalizing on the higher prices.

RIN: In terms of the significance of the White Mesa mill, you mentioned they are the only conventional mill in the US. What kind of a growth potential does the mill offer the company?

RC: The growth potential is that it has a strategic advantage for any new acquisitions because it will have the best cost profile in terms of figuring out the economics of acquiring projects. What I mean by that is if a competing company was to bid for a conventional mining asset, it would still need to factor in the cost of building its own mill … or the cost of paying EFR to mill the material for them. In contrast, EFR has that already built into their cost, and that’s a huge strategic advantage, because it can process it with its own mill – there isn’t that additional cost involved.

On top of that great negotiating power, EFR will have full visibility on the supply situation, at least on the conventional side, throughout the US. That’s because everyone has to go through EFR to process their material. It gives the company good informational advantages, and strategic acquisitions advantages as well.

 RIN: Will Energy Fuels be taking advantage of toll milling? 

RC: Absolutely. Toll milling gives EFR great opportunities to process other material at a very nice price. Since there is no competition, those using the toll mining services really have nowhere else to go, it’s certainly a very important key for Energy Fuels.

RIN: I found a December interview with Stephen Antony where he comments that Energy Fuels offers unique exposure to the growth of nuclear energy and the resulting uranium price increase. I think we touched a little bit on this already, but can you elaborate a little bit about what he may mean by that?

RC: It’s a high-leverage play on the price of uranium because the company is a higher-cost operator. When prices are low, of course the higher cost operator will not do as well as low cost producers, but if prices go higher, the company can make the decision to produce from its various operations fairly quickly. And as I said, within six months to about a year and a half it can produce up to 4 to 5 million pounds annually, quickly taking advantage and selling to the spot market that large volume of new production.

Keep in mind, the US only produces around 4 to 5 million pounds total, so EFR could effectively double US-based production if prices rise quickly. It can go from a company that is breaking even to a company that becomes very profitable very quickly. So that’s an excellent play. On top of that, the company owns a mill, so it gets to see supply coming from other locations, and of course, change prices accordingly to capture increased demand and increased desire to use its mill. That gives the company additional leverage.

RIN:  You just mentioned how much the US produces per year, roughly. Is demand expected to grow?

RC: It’s expected to be mostly sideways. With the building of the new reactor right now, it’s certainly going to be positive. Long term, we still believe that the country is going to add anywhere between eight to 15 reactors from now until 2025. Globally speaking, the US accounts for about a quarter of the world’s power consumption of uranium, so it’s the world’s number-one consumer.

In total, the country consumes about 50 million pounds of uranium and produces about 4 to 5 million pounds. Because of that, the domestic security of supply is really important. Anyone producing from the US should get a premium simply because the US needs to have secure domestic sources of this material.

RIN: I heard recently that the DOE is actually selling some of its stockpiles of uranium. Is that true?

RC:  Yes, the DOE uses that material to finance other parts of corroborations. For example, they’re decommissioning an enrichment facility, and they’re partially financing it by selling their inventories. So they have been doing that. It’s anywhere between 1 to 5 million pounds per year, sometimes up to 7 million. We do factor that into our model, and it’s expected that they will continue somewhere around that range.

RIN: Is that a strategic move on their end?

RC: They have a really large supply. They can afford to sell this material to finance projects and with this era of fiscal constraint, economics now rule the the day.

RIN: They aren’t even getting the best price for it at the moment, are they?

RC: Not at all. The ideal situation is that the DOE holds onto the material and does not further flood the market with material.

RIN: Now, Energy Fuels has a few partnerships with Cameco and Sumitomo. How do those factor into the company’s model?

RC: They certainly give support given that those are two large and notable organizations that have checked the quality of EFR’s portfolio and are backing the company. That certainly lends more credibility to the company, and those are experienced investors. That’s why I certainly believe it’s a positive to see them on the shareholder register.

RIN: What should investors be on the lookout for in regards to Energy Fuels in the coming year?

RC: The key thing really is the uranium price. Once it starts moving higher, it becomes an increasingly compelling story. As general market activity picks up, because it has a mill, the company is set to do very well; it is set up to become a good consolidator of the uranium space, especially on the western side of the US.

You may also see the company opportunistically pick up some good assets, which is going to be good for the overall portfolio. Overall, it’s a good leverage play.

RIN:Well that’s I have for today. Thank you for joining me Rob.

RC: Thank you.

Editorial Disclosure: Energy Fuels is an advertising client of the Investing News Network. This interview was conducted as part of their advertising campaign. This is paid-for content.

Rob Chang did not received compensation from the company for participating in this interview. 

Securities Disclosure: Vivien Diniz holds no investment interest in any of the companies mentioned. 

Rob Chang and Cantor Fitzgerald hold investments in Energy Fuels.