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Earlier this week Energy Fuels (UUUU) held its Q1/2024 conference call, post quarterly results which came in after the close on Friday, May 3rd. We view the earnings largely as a non-event (300,000 U3O8 lbs sold generating revenues of $25.4M and EPS of $0.02) seeing as the company remains in uranium re-start mode. Moreover, the company is well in the midst of a transition to becoming less of a uranium producer and more of a REE producer instead. Though there are some near term uranium mines currently ramping up, the majority of the earnings call was devoted to the longer term future which clearly revolves around the recent flurry of REE property acquisitions and MOUs. Though this commodity pivot has been evident for the last few years already, Energy Fuels clearly has no business being valued as a uranium company anymore – management stated this very concept on the call as well. We do not currently cover, nor do we have a rating or target price on UUUU shares.
The corporate pivot to becoming a REE producer began four years ago when the company began the evaluation of REE processing at the White Mesa mill (as announced on April 13, 2020). This was followed up on December 14, 2020 by an announced agreement with Chemours, whereby Energy Fuels would receive a minimum of 2,500 tons per year of natural monazite sands from Chemours’ Mineral Sand Plant located in the state of Georgia. This monazite sand was to be processed at the White Mesa mill into a marketable, mixed REE carbonate. Though the 2,500 ton benchmark was a very small beginning (representing a mere 0.4% of White Mesa’s ore throughput capacity), the initial trial was expected to increase to 15,000 tons of monazite sands in the subsequent years. Fast forward to today and the initial three year supply agreement with Chemours is still in the process of being re-negotiated, having expired last year. Moreover, given that Chemours under-delivered over the supply agreement agreement period, approximately 4,000-5,000 tons are still outstanding and remain owing to Energy Fuels. Needless to say, due to the inability to secure monazite intake for the White Mesa mill, various acquisitions and MOUs were subsequently agreed upon in the subsequent years. In order to finance much of these acquisitions, some of Energy Fuel’s best uranium assets were sold. To recap:
SHORT URANIUM OPTIONALITY:
July 15 2021: Sale of the Tony M, Daneros and Rim Mine along with Sage Plain and 8 DOE leases in Colorado to CUR for $13.0M + 19.9% ownership in CUR (now IsoEnergy, ISO) and a toll milling agreement.
Nov 14 2022: Sale of Alta Mesa ISR to enCore Energy (EU) for $120M.
LONG REE OPTIONALITY:
May 19 2022: Acquisition of the Bahia Project in Brazil for $27.5M.
Dec 27 2023: MOU with Astron Corp. to jointly develop the Donald and Mineral Sands Projects in Australia. Investment by Energy Fuels expected at $122M (A$180M).
April 21 2024: Base Resources (BSE.AX) acquisition announced for total equity value of ~$250M (A$375M). Toliara Project located in Madagascar.
Though there is some progress in terms of uranium startup of operations, we highlight that Alta Mesa represented the crown jewel in Energy Fuel’s uranium portfolio. It coincidentally is on the verge of ISR re-start (expected later this quarter), now being 70% owned by enCore Energy after turning a tidy profit on the 30% stake sold to Boss Energy (BOE.AX) less than 12 months after acquisition. Along with 8 DOE leases in Colorado, the conventional Tony M, Rim and Sage Plain mines were sold to Consolidated Uranium (now isoEnergy) and are in the process of being prepared for production re-start.
In light of recent spot uranium strength, given the pivot to REEs shares of UUUU have underperformed peer producers.
CURRENT PRODUCTION:
Energy Fuel’s current uranium production comes form Pinyon Plain (Arizona), La Sal (Utah) and Pandora (Utah). Production is still expected to be minimal given the ramp up phase this year. For FY/2024, the company expects to produce between 150,000-500,000 lbs, however most of this would be coming from stockpiled ore and alternate feed material (along with some mined conventional ore). A new contract for receipt of alternate feed totaling between 11,000-30,000 lbs per year was recently signed. That said, once fully ramped (mid-late 2024), annual uranium production is expected at a run-rate between 1.10M-1.40M lbs. This production figure can be further increased once Nichols Ranch recommences ISR production, expected in 2025. Whirlwind also remains a nearer-term option. Longer term projects still requiring permitting and pre-development activities include Roca Honda and Sheep Mountain. In any case, despite the near-term production potential, the aforementioned assets do not boast long asset lives given their current resources.
As per the lone remaining ISR asset – Nichols Ranch, production has been disappointing since the 2013 acquisition. Nichols Ranch has underperformed is ISR peers such as Alta Mesa and Lost Creek (URG) given that only ~1.2M lbs has been produced between 2014-2019. It's hard to envision that much production improvement should be expected if ever brought back start up.
The bet on REE production will only really come into fruition in 2026 (best case scenario). Bahia is still in the midst of permitting and drilling. A resource estimate is expected for later in 2024. Management hopes that Bahia may contribute between 3,000-10,000 tonnes of monazite per year. With Donald, most of the needed licenses and permits are in place, Energy Fuels remains in the negotiation phase for a definitive earn-in agreement. There is no assurance that the terms of the MOU will be agreed upon and no such related timeframe given. Lastly, the recently announced acquisition of Base Resources (for the Toliara project) has yet to close. Recall that the Toliara Project is subject to negotiation of fiscal terms applying to the Project with the Madagascar government and the receipt of certain Madagascar government approvals and actions, including the lifting of a suspension on development at the Toliara Project pending negotiation of fiscal terms and the addition of Monazite recovery to the existing mine permit. All of this needs to be resolved before development is to begin.
If all the permits are secured and all the MOUs and acquisitions conclude, it is Energy Fuels’ hope that together, 50,000+ tonnes of monazite per year can be secured for processing at the White Mesa mill. Don't expect much in the near term however.
Following the end of the Phase 1 REE separation circuit in Q1/2024 (~$8.0M under the initial $25.0M budget), Energy Fuels is currently engineering further enhancements to the White Mesa mill in order to increase separated neodymium praseodymium (NdPr) oxide production to 4,000-6,000 tonnes per day by 2027. By 2028 the plan is to produce separated dysprosium, terbium and potentially other advanced REE materials in the future from monazite and potentially other REE process streams.
Suffice it to say, given the tone and length of time devoted on the quarterly call to the various REE initiatives, the future of the company is firmly entrenched within the REE sector and contingent on the ability to secure the needed monazite sands to feed the White Mesa mill. As seen above, given the 2020 pivot to REEs, shares of UUUU have traded with a higher correlation to REE heavyweights such as Lynas Rare Earths (LYSDY), +0.45 and MP Materials (MP), +0.23, versus any other uranium peer. As management stated, Energy Fuels can no longer be seen as primarily a uranium play. We expect the correlation to REE peers to strengthen further as development and permitting advances on the various REE initiatives mentioned above. That said, the transformation to large-scale REE production won’t come cheap – an estimated $700M+ will be needed for Phase 1 and 2 developments at Toliara alone.