Uranium U308 leads to UUUU

Exploring ideas - and concluding with Energy Fuels Inc.

Dear reader,

President Joe Biden recently signed the Russian Uranium Import Ban Act, prohibiting the import of low-enriched uranium (LEU) from Russia into the United States and comes into effect in a week’s time, on 11th August.

It includes an exemption provision allowing imports if the U.S. Secretary of Energy determines that no alternative source is available, or if the supplies are deemed in the national interest, with such exemptions available until the end of 2027. The statutory restrictions end on 31 December 2040.

Rationale

Current demand for Uranium (in black) of 67,517 tonnes exceeds supply by over a third of what it was back in 2021.

Today the shortfall is smaller. About 8,000 tonnes in 2024.

The IAEA also tells us that planned nuclear stations will increase that demand by between around 12%-40% by 2030 and anywhere between 29%-250% by 2050. Which translates to world demand of 75,000-93,000 tonnes a year by 2030 and anywhere between 86,000-167,000 tonnes a year of Uranium by 2050.

Meanwhile supply is forecast to grow to 76,000 tonnes by 2030. Eagle-eyed readers will see this meets the need of the “low case” but nothing more. They will also notice a deceleration of new supply.

Efficiency

It is also true that nuclear power stations are getting better at using fuel. So demand for uranium could grow slower than the demand for electricity by improving yield. In fact hydrogen production could provide a step change. Eagle-eyed readers will also know from articles about Electrolysers that these operate much more efficiently at high temperatures. How much wasted energy occurs at nuclear plants through the need to deal with high temperatures?

There is a type of hydrogen named “yellow hydrogen” where this is produced from nuclear power.

Capital Cost

Small Modular Reactors or SMR promise to standardise reactor design which “should” reduce costs. For someone considering investment in Uranium this is relevant in that this would drive forward the build out of reactors and get them operational faster. Currently the approval process takes around a minimum of five years and the Rolls Royce SMR is two years in to those five. Construction of new nuclear plants once approved has taken 7.5 years on average but Hitachi’s latest design promises three years build & commissioning while Rolls Royce’s SMR is expected to be four years build & commissioning. So the UK could have its first SMR operational by 2031.

Typically governments have agreed egregious rates of upwards of £160/MWh (considering rates are inflation linked) to secure construction at Hinckley and it seems HM Govt is prepared to foot the entire bill for any cost overrun to ensure Sizewell C goes ahead.

Rolls Royce by comparison is targeting a £40-£60/MWh build cost for its SMRs.

The Operating cost of a Nuclear Plant is around £4-£7/MWh, which incidentally is cheaper than the operating cost for onshore wind (£9/MWh).

Apart from the complexity of shutting down a power plant once operational, the key here is even if Uranium doubled or even tripled in price… or more, there would be very little, if any, reduction in demand.

Stockpiles

At the end of 2022 these were estimated at about 36,000 tU in Europe, 40,000 tU in the USA, about 132,000 tU in China, and about 49,000 tU in the rest of Asia. So about 0.25mt or over 3 years worth of demand. This is before considering the dilution of military weapons. If you dilute weapons-grade material about 25 times you can put that in a nuclear power plant.

However these stockpiles are a murky mix of private and public sources, of guesstimates and obfuscation, where supplies are scattered around including in ETFs seeking to hold and profit when the price is right like Sprott and Yellow Cake, plus governments so it is not the necessarily the case that stockpiles are actually available when shortages arise - and stockpiles haven’t usually been made available in the past for soaking up excess demand.

Kazatomprom (KAP)

While Kazatomprom might sound like a small prom for Caroline it is actually a Kazahh miner of natural uranium, reconversion and production of uranium dioxide fuel pellets, and production of tantalum-niobium and beryllium. The Company is also involved in electric power generation from fossil fuel and nuclear sources, and scientific projects development. One which is listed on the LSE and paid a $2.58 per share dividend back in May (a 7% yield). It is 75% owned by the Kazakh wealth fund.

With 20% of global production, turnover of £2.2bn, £1.2bn adjusted EBITDA and £0.87bn net profit with a circa $20/Lb AISC it’s very hard not to be tempted. The world-leading AISC is due to its ISR (in-situ recovery) approach of leaching uranium using sulphuric acid.

But there is political risk to investing in this due to its proximity to Russia and relationship with Russia. Russian troops marched in to Kazakhstan to help with riots in 2022. On balance the political risk makes this a non-starter. Also progressive taxes have been introduced in 2024 where the larger mines pay higher rates of tax. On a 3kt annual production tax moves from 6% to 16%.

Yellow Cake (YCA)

Yellowcake meanwhile pays no dividend and operates to buy and physically hold uranium oxide concentrate (U3O8) and uranium-related commercial activities. This creates an opportunity to profit from an anticipated rise in the uranium price arising from the short- and medium-term supply and demand asymmetry.

It holds 20.16 million pounds of U3O8, all of which is held in storage in Canada and France. It has an agreement for the supply of U3O8 with Kazatomprom. In an update this week it stated its NAV as at 31/07/24 was £6.47 per share (a 21% discount to NAV) and that it had increased its holding from 20.16m lb to 21.68m lb.

The KAP connection is a concern although, of course, the warehousing itself is outside Kazakhstan.

Energy Fuels (UUUU)

Energy Fuels is a diversified U.S. producer of several critical minerals, including uranium, rare earth elements (REE), and vanadium, and is a future producer of heavy mineral sands (titanium and zirconium) and medical isotopes (TAT - targeted alpha therapy).

They own the USA’s only Uranium mill, the White Mesa Mill, in Utah. The mill refines Uranium ore to Uranium Concentrate (U308 - also known as “Yellowcake”) but also processes as well as separates REE (Rare Earths) and Vanadium.

In 2023 it sold Alta Mesa on its books for $3.4m for a stonking $119.46m

Energy Fuels has more uranium production capacity and experience than any other U.S. company, along with a growing portfolio of long-term uranium sales contracts with U.S. nuclear utilities. The company has resumed production at three of its uranium mines to fulfil these contracts and other sales opportunities. Energy Fuels is also preparing two additional mines for production with a goal of producing about 2 million pounds of U3O8 per year by the end of 2025, subject to market conditions and a successful re-comissioning.

On REE’s, Energy Fuels is moving more quickly than any other U.S. company to restore this critical supply chain, and it is currently ramping-up production of separated NdPr oxide, a key ingredient in the permanent REE magnets used in EVs, hybrids, wind energy, defence, and other technologies. The #1 challenge to unlocking the value of Monazite (i.e. the REE in HMS) has been the radionuclides. Energy Fuels has solved this challenge.

Finally, to secure REE raw materials, the company is acquiring heavy mineral sand (HMS) projects globally. HMS projects, which primarily target titanium and zirconium minerals, also produce a REE mineral called monazite as a very low-cost byproduct (note: as used herein, the term “Monazite” refers to a sand product that also contains small quantities of another REE mineral called “xenotime”; typical monazite/xenotime sands contain roughly 50% total REE oxides, of which roughly 20% - 25% is NdPr and 1% - 3% is Dy + Tb).

Among all of these commodities, Energy Fuels has the potential to become one of the largest REE oxide and HMS producers in the world, retaining its position as the largest uranium producer in the US, and remaining a significant U.S. producer of vanadium and medical isotopes.

As at 30/06/24 it has $200m of cash and securities plus inventories of 12 tonnes of NdPr, 130 tonnes of Uranium and 410 tonnes of Vanadium worth $1m, $23.5m and $6.3m.

The Company continues to make progress toward full REE separation capabilities at the Mill to produce both “light” and “heavy” separated REE products in the coming years. The Company has been producing a mixed RE Carbonate from monazite sands at the Mill since 2021. Energy Fuels has recently completed the modification and enhancement of its infrastructure at the Mill (“Phase 1”), which is now capable of producing commercial quantities of separated NdPr. The Company is also planning further enhancements to expand its NdPr production capability (“Phase 2”) and to produce separated dysprosium (“Dy”), terbium (“Tb”) and potentially other REE materials in the future (“Phase 3”) from monazite and potentially other REE process streams. The Company is focused on monazite at the current time, as it has superior concentrations of these four critical REEs (NdPr, Dy and Tb) compared to many other REE-bearing minerals. These REEs are used in the powerful neodymium-iron-boron (“NdFeB”) magnets that power the most efficient EVs, along with uses in other clean energy and defense technologies. For reference, a typical EV utilizes approximately one (1) to two (2) kilograms of NdPr oxide in its drivetrain. The uranium contained in the monazite, which is generally comparable to typical Colorado Plateau uranium deposits, will also be recovered at the Mill.

I’ve modelled the ramp up of uranium over the coming 6 quarters until the end of 2025 which phases 1-3 described above being modelled on a quarterly basis (with an annualised net profit added at the bottom)

As can be seen, this model works under quite a couple of assumptions.

1. That Uranium remains at just $85. At $125/Lb overall profits are dramatically higher

2. $36 per Lb costs is based on 2023 and 2024 YTD costs per Lb. I assume the cost per Lb of Uranium rises from $36 to $55/Lb from 2026 to account for less profitable mines coming (back) on stream.

3. That NdPr (Neodymium and praseodymium) remain at today’s (as at 31/07/2024) price of $50.25.

4. Using the cost of production of REE of $42/Kg in 2026 is based on an average of costs using the 2021-2023 annual accounts. But this was during a period of testing and therefore is probably much higher than what it could be going forwards. I used the $29.88/Kg in UUUU’s presentation from 2027.

5. The volume of NdPr is based on the lower bound of the 10-Q report stating 3-6 tonnes NdPr per year; phase 3 is where it moves to 6 tonnes (i.e. 1,500,000Kg a quarter).

6. 50,000-100,000 Kg/Qtr of heavy REEs (Dy, Tb, La, Ce) per quarter is taken from there being 12,000 tonnes recovered (of 15,000-25,000 tonnes of TREO). $500 is taken from some elements being $700 a Kg others around $200/Kg based on the 10-Q for 2Q24.

6. 2026 is where the “nameplate” 6m Lbs of Uranium is reached. This may or may not happen depending on pricing (bear in mind the $50/Lb cost increase). Prior to that, I follow the 10-Q to arrive to 1.1m Lbs/year then 1.4m Lbs/year then 2m Lbs/year

7. I assume some level of overheads increase particularly with Phases 1-3.

8. I assume Vanadium remains at low prices and there are zero sales until after 2028 (which is very unlikely)

9. I’m making zero assumptions as to the value of HMS at Toliara (despite this being a $2bn NPV), or at Bahia (Brazil), or at Donald (Australia 49% JV).

10. I’m also making zero assumptions as to the value of the medical isotopes TAT

11. I’m also making zero assumptions as to US Government grants for the ONLY RARE EARTH refiner and supply chain in the USA.

12. I’m also making zero assumptions as to any future vertical integration into REE alloying, magnet making or motors.

13. I’m not considering Capex in this P&L but UUUU tell us in their PFS that Phase Two would be $348m investment, while Phase Three is being evaluated. Toliara of course also requires investment.

Valuation

Today UUUU has a $800m market cap.

Its offer to Base Resources is worth $150m (at today’s market cap - it was A$375m or US$241m in April when UUUU itself was a $940m market cap).

You are getting 15.8% of the combined group. (UUUU holders are getting diluted by 15.8% but gaining the Toliara project).

There are 1.17bn BSE shares and each gets 3.25p special dividend so at today’s 12.5p-13.5p it’s a net 10.25p per BSE share which swaps to 0.026 a UUUU share and 10.25p is an implied price equal to $5 per UUUU share, after the dividend is paid to you.

So as a $950m market cap what do you get?

A NAV of $382.7m, made up of $123.8m mineral properties and $40.3m PP&E which, given the recent $116.5m gain on the sale of Alta Mesa, on the books at $3.4m are probably hopelessly undervalued too.

Then $30.5m ore inventory and WIP (at arguably low prices), cash of $24.6m, securities of $146.6m, receivables and prepayments of of $13.5m. So $215.2m of liquid stuff.

So $403.4m of assets less $20.7m of liabilities.

Based on the “4Q25” assumptions of no REE, HMS or Vanadium income and a 2m/Lbs of Uranium run rate UUUU is valued at 21 times, using some fairly harsh assumptions.

As soon as you move, for example Uranium, from $85 to $125 a Lb then profits triple, and the P/E compresses to below 7.

Once REE’s are flowing profits triple too, and more.

Based on the forward 2028 scenario the P/E is at 3.1 at $85/Lb or 1.8 at $125/Lb.

Conclusion

For exposure to uranium I’d recommend a lead lined suit. I’m just kidding. I really like the versatility of Energy Fuels, and the while it’s not the lowest cost producer just for Uranium it’s the most strategic. It has most of what it needs to do in place and has cash and cash flow to cushion it while it increases production.

In today’s world Strategic trumps Best of Breed.

It’s also the case that its polymetal portfolio could prove extremely interesting. Rare earths have fallen back from much higher levels of pricing in 2022 of $140+/Kg. So just $50.25 a Kg came as a bit of a surprise. But even at $50/Kg there are some great profits to be made and I suspect there could be lots of help from the US government too.

With further upside from both the sale of HMS, Medical Isotopes and Vanadium, too, this is a bit of a dream ticket for energy transition.

Regards

The Oak Bloke

Disclaimers:

This is not advice

Micro cap and Nano cap holdings might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip"