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We are upgrading our rating on the shares of Energy Fuels to Outperform and establishing a $9 price target. The upgrade reflects an increased recognition of the value of Energy Fuel's Rate Earth Element (REE) strategy as well as a belief that the company is well positioned to take advantage of an expected increase in uranium prices. The success of Energy Fuels and its stock price is largely tied to the success of the domestic uranium industry. If uranium prices return to historical levels above $50 per pound, all domestic uranium companies including Energy Fuels will do well. We believe such a move will occur in the next few years in response to rising demand and decreasing international supply of uranium. We believe Energy Fuels has a first mover advantage compared to other domestic uranium producers because of its unlevered balance sheet, experienced management team, and control of licensed processing facilities. Energy Fuels is licensed to produce 11 million pounds of uranium, which would represent more uranium than has been produced in the United States in any given year. At the same time, the company has begun to process Rare Earth Elements (REE) concentrate from monazite sand at its White Mesa plant. Although difficult to quantify financially, we believe the processing of REE will provide significant cash flow to the company. Management has indicated its intent to process 15,000 tonnes of sand per year, which would represent approximately half of the national demand but less than 2% of the capacity of the White Mesa plant. Management has also indicated its intent to move to separate REE concentrate into individual elements. Our price target is based on a discounted cash flow analysis that places a value of $5 per share for uranium operations, $3 per share for REE processing operations and $1 for the Vanadium and net cash and inventory positions. Projected cash flows including reclamation costs are discounted back at a weighted average cost of capital of 8% and then divided by current diluted outstanding common shares. The assumptions behind our forecasts and valuation estimate can be found at the end of the report. Read More >>
