Energy Fuels (NYSE: UUUU) - Will Be Producing Rare Earths by YE/23

Energy Fuels Inc. is a leading US producer of uranium- the fuel for carbon and emission-free nuclear energy. Nuclear energy is expected to see growth in the coming years, as nations around the world work to provide plentiful and affordable energy while combating climate change and air pollution. Energy Fuels is also a major US producer of vanadium and an emerging player in the commercial rare earth business where its work is helping to re-establish a fully-integrated US supply chain. With a truly unique portfolio, the company has more production capacity, licensed mines and processing facilities, and in-ground uranium resources than any other US producer. It boasts diverse cashflow-generating opportunities that include vanadium production, uranium recycling, and rare earth processing.

Matt Gordon caught up with Mark Chalmers, President, and CEO, Energy Fuels. From 2011 to 2015, Mr. Chalmers served as Executive General Manager of Production for Paladin Energy Ltd, a uranium producer with assets in Australia and Africa, including the Langer Heinrich and Kayelekera mines where, as Head of Operations, he oversaw sustained, significant increases in production while reducing operating costs. He also possesses extensive experience in ISR (in-situ recovery) uranium production, including management of the Beverley Uranium Mine owned by General Atomics (Australia), and the Highland mine owned by Cameco Corporation (USA). Mr. Chalmers has also consulted for several of the largest players in the uranium supply sector, including BHP Billiton, Rio Tinto, and Marubeni. Until recently, he served as the Chair of the Australian Uranium Council, a position he held for 10 years. Mr. Chalmers is a registered professional engineer and holds a Bachelor of Science in Mining Engineering from the University of Arizona.

Company Overview

Energy Fuels Inc. is a leading, US-based integrated uranium producer for use in carbon-free, clean nuclear energy. The company also produces high-grade vanadium which is used in aerospace, steel, chemical industries, and battery production. The majority of the vanadium production comes from the White Mesa Mill in Utah. Energy Fuels is emerging as the largest critical minerals producer in North America with a strong focus on uranium, and rare earth metals production and processing. It is also involved in vanadium production and recycling. The company’s main assets are located in the western part of the United States where it owns and operates the only uranium mill in the country. The company was founded in 1987 and is headquartered in Colorado, United States. It is listed on the New York Stock Exchange (NYSE: UUUU) and the Toronto Stock Exchange (TSX: EFR).

Energy Fuels is a unique company that is working on electrification and reducing carbon emissions. The company has a long history of uranium production, which has been its core business for decades. It is now entering the rare earths business, which is a perfect fit for the existing uranium operations. At the same time, the company is advancing some initiatives for radio isotopes for cancer therapy. Energy Fuels is the only company in the market that is covering these kinds of critical elements.

Energy Fuels was recently awarded a contract to sell $18.5M of natural uranium concentrates (U₃O₈) to the U.S. government for the establishment of a strategic uranium reserve. The U.S. National Nuclear Security Administration (NNSA), an office within the U.S. Department of Energy (DoE) is tasked with purchasing domestic triuranium octoxide and conversion services for the Uranium Reserve. The Uranium Reserve is intended to be a backup source of supply for domestic nuclear power plants in the event of significant market disruption. Furthermore, the company announced its application for membership in the DoE’s newly created HALEU Consortium.

The sale of uranium for the NNSA Uranium Reserve is expected to be completed during Q1, 2023, realizing total gross proceeds of $18.5M. Notably, the company sold the product at almost $62/lb. It had an existing inventory that was valued at $25/lb on the books. The company anticipates that with the various initiatives from the government, this could be a repeat story.

Initially, the supply was supposed to be around $150M/year over 10 years, and the first award was around $75M. It remains to be seen how this proceeds. Overall, this is highly positive as the US government works on re-establishing the nuclear fuel cycle in the country. Notably, the United States is the largest consumer of nuclear products in the entire world. The country is looking to re-establish its capabilities and go beyond its current capacity.

Notably, some of the companies announced the actual pricing on the contracts, but others didn’t. Energy Fuels didn’t announce the pricing initially as it did not know if it had permission for the same. The government had asked the companies to submit proposals, which led to several companies being awarded contracts. It is important to note that this is the first uranium that the government has procured in the past 50 years. In the previous schedule, the US government would provide a price and would award the contract to the company that was willing to supply at the given price point. However, this time around, the companies were asked to put forward proposals and bids for uranium pricing.

Last year, Sprott Physical Uranium Trust (SPUT) bought significant quantities of uranium from the market. Utilities started issuing term contracts or putting out term sheets. This led to a tighter-than-usual uranium market. According to the company, the market imbalance is still shifting as the available inventories continue to diminish and the demand outstrips production. For years, uranium inventories were always available in the market. Back then, there was underfeeding going to very high recoveries, but in the current environment, there are talks about potential overfeeding.

This could represent a delta in enrichment alone, of up to 20Mlb/year of new demand. There is a supply deficit along with increasing demand in the market. Nuclear reactors are being restarted and prolonged along with the commissioning of new reactors. These factors affect the whole market dynamic. As per the company, the uranium pricing needs to go up because the inflationary environment has resulted in an increase in the project development costs. While it is yet to be determined how this fits into the overall picture, these developments definitely indicate a strengthening story for uranium.

Energy Fuels has signed three long-term contracts that go out to 2030. The company has the inventory to execute these contracts. Selling uranium inventory at a premium is a great way to generate revenue. The company is focused on establishing itself as cash flow positive, making a profit through uranium sales. The company will be delivering its first long-term contract in 2023. It is important to note that the actual price will be realized after making adjustments on inflation and the market. While this is a trade-off, the company took the option to sell uranium for profit at an above-market price.

Energy Fuels has signed the initial term agreements out of 2030. The agreements were signed with various mechanisms including floors, ceilings, and some formulas. This way, the parties share an upside. According to the company, higher prices are needed as an incentive to move the project forward. This sentiment is echoed by Cameco which has been talking about $80/lb-$90/lb as incentive pricing. At this point, there are a number of utilities that have gone out and secured contracts with a few players. Some of the uranium producers were not in the favor of producing before contracts were signed as back then, the operation wasn’t deemed profitable. When RP comes out, the company will determine its production profile. However, it would also need higher prices for the next contracts in order to continue ramping up production.

The Alta Mesa Transaction

In November 2022, Energy Fuels executed a definitive agreement to sell the Alta Mesa ISR project to enCore Energy for $120M, facilitating the company’s plans to accelerate both uranium and rare earth production. As part of the deal, Energy Fuels will sell three wholly-owned subsidiaries that make up the Alta Mesa ISR product. The transaction is expected to close by the end of 2022 or early 2023.

Targets 2023 and Beyond

Energy Fuels anticipates that 2023 is going to be an important year for the whole industry and the world at large. It will be an interesting year for the company as it continues to build the uranium story. At the same time, the company is building the rare earths story. It will close on a number of elements such as the Bahia project in Brazil, a material acquisition for the company. It has been receiving a lot of interest for the Brazil asset from some of the heavy mineral sands producers for possible collaboration in order to restart production on the asset. Additionally, the company is looking at other projects similar to Bahia in the US or other jurisdictions. The company wants to demonstrate to the market that it has a reliable source of monazite to feed the mill going forward for decades.

In the meantime, the company is actively advancing Phase 1 of the strategy. In 2023, the company will have a separation capacity of about 4,000t-5,000t of REO (Rare Earth Oxides), which is about 20%-25% of Linus’s capacity. The company is looking to acquire full permits by 2023-2024 to proceed with the operation.

The company is looking forward to Phase 2, the second phase of the separation capacity, including heavy rare earths. Here, the company intends on ramping up the capacity to 15,000t-20,000t of REO per year. But before that, the company has to showcase that it has the supply to feed the facilities as they are being built out.

It is also advancing radio isotopes, which is expected to surprise the market in 2023. According to the company, there will be no critical minerals hub in the world outside of China that will be comparable to Energy Fuels.

Energy Fuels is trying to define itself as an earnings-based company. Rare-earth-focused companies such as MP and Linus are bringing in about 10x-14x in multiples. It is not looking to become a chemical company but looking after the shareholders’ best interests. The plan is under execution, and the uranium and the project models are targeted toward achieving the best outcome for the shareholders. The Management team is also invested in the company as shareholders. In its current standing, the market continues to value the company as a uranium play.

The company is looking to become the biggest uranium producer in the United States going forward, but in 2023, it is looking to break from the pack. The company has earnings visibility, and it has conducted deals with a focus on achieving the best outcome for the shareholders. This also includes the recent sale of the Alta Mesa asset.

Energy Fuels is a unique green energy story. It is a green energy company that is focused on decarbonization and electrification. The company has been operating in the space for over 10-15 years, back when there was little to no interest in the space.

The company is confident in its strategy and set goals. It recognizes that there’s a lot of work to be done. It is looking to secure additional monazite, produce uranium, and enter profitability on cash flow. In 2022, the company was profitable, as it sold some of its other assets. Notably, the Alta Mesa asset was bought for $13M and sold for $120M.

It is working on several things to reduce shareholder dilution. In 2022, it was able to achieve minimal dilution. The company has plans to continue reducing dilution to the absolute maximum when it moves to an earnings-per-share company, which is expected to happen in the next year.

On the REO side, the company is looking to become a significant commercial producer of Rare Earth Oxides. It plans to produce REO at an unprecedented scale in North America. The company is cognizant that achieving this will take some time. If the company can get the REO production to 4,000t-5,000t at the White Mesa Mill, it will be able to prove that it can make the oxides at quality specifications. Securing the monazite will show people that there is a clear path for the company on the rare earths side of the business. Achieving large-scale REO production will enable the company to break away from the uranium pack.

At the same time, the company is looking to demonstrate its uranium capabilities. Interestingly, over the last 15 years, the company has produced a third of the uranium produced in the US, second only to Cameco. Collectively, the two companies have produced 86% of the uranium produced in the States over the past 15 years. Energy Fuels is ramping up production and it has a number of projects that are currently being rehabilitated to go into production and development. The details for the same will be announced in due time.

In Phase 1 of the separation plant, the company is putting 72 SX (Solvent Extraction) into the existing SX building. The build will recover uranium through SX, following which vanadium will be extracted through the SX process. By the end of the year, if the company is able to meet the schedules, it will have the ability to separate the oxides for the light REO and an SM Plus for heavy rare earth metals including dysprosium and terbium. The projected cost for building out the existing separation capacity is estimated at around $20M which is remarkably cheap. The plant is expected to have the scale of Silmet in Estonia, the Neo plant, or greater for $20M. This means that the company will be able to put in 4,000t-5,000t of REO for just a $20M capital investment.

The company is looking to demonstrate to the market that it can build a functioning recovery plant. It will start feeding the plant in 2024. The company is looking to break the barrier of carrying out SX at a massive scale while having an economic capital strike rate. This will enable the company to strengthen its position on multiple fronts.

The company’s plan is to look at feed in two ways, one is to produce it, and the other is to buy it for other parties. Interestingly, the price of monazite sands went from almost nothing 4 years ago up to anywhere between $5,000/t-$10,000/t. The Bahia asset will play an important role in the security of supply, where the asset won’t be open to monazite’s market fluctuations.

The company is looking at a combination of purchasing secured sources with blended prices so that it’s not simply a value add-on as the material passes down the supply chain. In addition to the Bahia asset, the company is also looking to secure something that demonstrates that the company can have a blended scenario that buffers the market evaluation as the material will be produced from the company’s own deposit.

To find out more, go to the Energy Fuels website