5 catalysts for company X – in short form:
- US Section 232. First steel and aluminum – uranium next?
- Modest valuation compared to US peers while having superior near-term production capacity.
- Potential other sources of revenue from vanadium and clean up work for the government of old US uranium mines that were never restored.
- There has been forced selling of shares from the uranium ETF Ura Global X for the past three months. This will slow down and stop completely by July 31st.
- Inclusion in the Russel 3000 index on June 25th = forced buying from institutions and small cap ETFs. News from yesterday.
So company X = Energy Fuels. This is a company which I’ve been accumulating from the end of March till now to a degree where it has now become my largest position in the uranium space so I thought I’d write a few words about why this is my #1 pick currently.
Note that this post will be a company specific post and not about the uranium sector. I made two videos on my view on uranium here: The Case for Uranium Part 1 and The Case for Uranium Part 2 in case you are interested in a deeper dive into that. Both were made before I started accumulating Energy Fuels (EF). My general view on uranium is unchanged since then if not slightly more bullish as hedge funds have started to enter the space buying physical uranium realizing that the industry is now on its knees so severely that supply destruction has become an economic necessity = uranium prices must rise. As always in cyclical industries where demand is certain: After rain comes sun.
A word of warning
Before I elaborate more on the 5 catalysts let me stress that EF (ticker symbol: UUUU) is an aggressive pick that comes with a certain amount of risk. I have personally chosen to size more heavily than I am normally comfortable with in relation to the amount of risk the stock carries with it because I see huge potential within a 1-year time frame. But realize that my uranium outlook is a lot more bullish than that of the general market, and even among uranium bulls. If I am proven wrong on the timeframe there are better uranium stocks available, specifically Uranium Participation where I’d postulate that the risk is almost insignificant and a 2x on one’s money in a three year time span extremely likely.
Note that if U3O8 prices stay below 45 USD/lb for the coming 12-months it is likely EF will need more capital as they have no long-term contracts and would sell at a loss at current prices. This could potentially lead to bankruptcy, but much more likely a dilutive capital raise. Neither option is ideal for investors but that is the price one pays for the significant upside potential.
Now for an elaboration of the above mentioned catalysts.
The 5 catalysts – in elaborated form:
- US Section 232. EF has tremendous upside if the Trump administration decides to help out US producers by forcing US uranium buyers to buy a 25% quota domestically (12 million pounds out of 180 Mlb of global demand = limited impact on the overall market).This could result in a two tier pricing system where US producers receive up to 30 USD per pound of U3O8 more than than non-US producers = 55-60 USD/lb. Were that to happen EF would go up at least 3x and probably more.According to my calculations Energy Fuels EBIT at a U3O8 price of 60 USD/lb will be about 90-110 MUSD when ramped up fully (assuming 5 Mlb of production). Current share price of 2,06 USD = market cap of 150 MUSD.
This may appear to be a long shot on the surface as it seems to go against the very soul of America. However, it has been in place before and many in the industry believe this to be a very real possibility and judging from that I’d say the chance is at least 30%.
The reason for all this speculation is that Energy Fuels and Ur-Energy sent a so-called 232 petition to the US Department of Commerce on January 15th claiming unfair competition from state-owned players in Kazakhstan much like the petition that the steel and aluminum industry submitted in the summer of 2017 and which the administration have now acted on in 2018. The argument is that subsidized players can afford to dump prices whereas others cannot and this leads to elimination of competition on unfair grounds.
Section 232 of the Trade Expansion Act in 1962 focuses on national security and for that reason the administration can act without support from congress. And since uranium is much more of a national security concern than steel and aluminum (20% of US electricity comes from nuclear energy) one might conclude that the administration is likely to act on it.
However, if national security isn’t the real motivation behind the steel and aluminum tariffs but instead it is jobs for American workers then uranium may not get the same backing as the new jobs it would provide are in states where the republicans are already dominating (Wyoming, Texas) and where they don’t really need the extra votes.
Note that there is a risk the stock will fall if the administration decides not to act. EF has outperformed the general uranium market the last three months and much of that could be due to investors beginning to price in the possibility of 232. The flip side to that argument is that the petition was submitted on Jan 15th and as can be gleaned from the graph below the response initially was not only muted but even negative.
And while we’re at it let’s include a graph for the last 5 years to illustrate the suffering that has been going on for shareholders (the general direction is similar for all other uranium producers):
- Modest valuation. EF can bring on more U3O8 in production in a shorter amount of time than the two other main US players, UEC and Ur-Energy, despite being valued significantly lower (close to 0,5x!) on an Enterprise Value to pounds in the ground basis. Because of those factors EF has significantly more upside.Why do I single out UEC and Ur-Energy specifically? Because they will also be affected by petition 232 (if you are in uranium for that specifically and want a US producer) and because all three have similar mining methods and mining costs (which are in the lower 2nd quadrant globally). This means all three can bring on production faster than most global competitors, which is why I believe that in the current environment this is where to look primarily. EF can potentially bring those costs even lower than the others, see catalyst 3.
On the flip side, EF has higher overhead costs due to a bigger operation and a dilutive capital raise is likely to hit EF shareholders harder than those of UEC and Ur-Energy. UEC has a nice titanium deposit that potentially is worth a lot of money and Ur-Energy has some long-term contracts that go into 2021 whereas the two others have no existing contracts beyond 2018. In terms of current shareholder base rating EF would come in last of the three. That could change as a new management have been in place since January. My impression is that it is a more alert one.
Summary: If you believe that crunch time is very close EF is the play of the three imo. If you believe it happens in 1-3 years, Ur-Energy and UEC may be better options. If you don’t believe any of that stay out for now!
- Unlike most uranium companies, EF has other potential sources of income from vanadium and clean up work of old US uranium mines from the 1950s era when environmental considerations weren’t the same as they are now. Both are new opportunities that did not exist one year ago.The US government has set aside significant amounts of cash in the recent budget for clean up work of these old non-restored mines and it is my understanding that Energy Fuels is in a prime position to receive much of this work because of their White Mesa mill which sits close by.
They also have vanadium in the ponds at White Mesa which they are now looking to extract as vanadium has shot up in price this past year. See graph:
On top of that EF can knock off about 10 USD/lb of U3O8 costs per pound from bi-product vanadium on some of their conventional mine production (which is set to come on at U3O8 prices of 60 USD/lb) if vanadium prices stay where they are. That means it could potentially come on sooner, perhaps at 50 USD/lb. UEC also has conventional mines with vanadium but it is my understanding that permits are years away for those.
Both of these potential revenue streams can turn out to be of extreme importance to shareholders should uranium prices remain subdued for longer as new capital may not be needed. Note that both are in the ”if” category still though. We don’t know for sure if they will make a dime on either.
And two short term tactical triggers:
- The Uranium ETF Ura Global X is transitioning to go from 100% uranium producers to 70% uranium producers and 30% ”nuclear components”. This change started in March and the transition will be complete on July 31st. This means the ETF has had to sell 30% of it’s holdings in many producers.I started tracking their EF holdings from April 6th and the share count was then at 9,3 million. As of today this number is now 6,5 million = 30%. So that means the selling ought to stop if not shortly then at least by the end of July.
Interesting to note that the EF share price has held up well in that period rising 35% despite the heavy selling. Ura Global X has been selling about 60,000 shares daily in the last two-three months. Considering the average daily volume in EF is around 500,000 this is a significant amount of downside pressure that is soon to be removed. Will the effect be like that of a bathing ball under water?
- Russel 3000 index inclusion. Yesterday EF announced it will be included in the Russel 3000 index from June 25th. This may lead to institutional buying propping up the price. However, there is some chance speculators have already anticipated this and bought ahead of time making the effect of the inclusion less significant. We’ll see.
I’d be interested in your view. All feedback is welcome. (And please excuse the formatting. For some reason spaces and paragraphs are getting messed up in this article even after being corrected).
On valuation – some numbers
Stock ticker: UUUU
Stock Price: 2,06 USD
Enterprise Value: 180 MUSD
U3O8 resources: 130 Mlb (EV/Res = 1,38)
Near-term annual production potential: 5 Mlb annually. (2,5 Mlb at 45 USD/lb + 2,5 Mlb at 60 USD/lb)
Annual Burn Rate: 30 MUSD.
Net Working Capital: 43 MUSD.
Interestingly: According to my calculations U3O8 prices at 45 USD/lb means Energy Fuels EBIT is at 10 MUSD, ie. barely above break even. However, at 60 USD/lb EBIT is around 90 MUSD (110 MUSD if vanadium prices stay where they are at now). This goes to shows the leverage that is at play here.
Stock Ticker: UEC
Stock Price: 1,56 USD
Enterprise Value: 255 MUSD
U3O8 Resources: 112 Mlb (EV/Res = 2,28)
Near-term annual production potential: 4 Mlb annually. (2 Mlb at 45 USD/lb + 2 Mlb at 50 USD/lb but the later cannot be brought into production till at least 2 years out)
Annual Burn Rate: 20 MUSD
Stock Ticker: URG
Stock Price: 0,70 USD
Enterprise Value: 95 MUSD
U3O8 Resources: 42 Mlb (EV/Resource = 2,26)
Near-term annual production potential: 2 Mlb annually. (1 Mlb at 45 USD/lb + 1 Mlb at 60 USD/lb)
Annual Burn Rate: Doesn’t apply due to long-term contracts.
I do not accept responsibility for losses that are a result of buy/sell recommendations I make. I encourage you to do your own reserarch before making an investment decision.