Energy Fuels (UUUU) has been getting some attention lately, but mainly as a way to make a play on uranium and I don’t think their diversification and growth prospects outside of that are fully appreciated. Hopefully this serves as a good intro to all the aspects of Energy Fuels’ business and future prospects.
Energy Fuels was founded in 2006 by former employees of the historic Energy Fuels Nuclear which was the nation’s largest uranium producer before closing in 1997. Energy Fuels expanded via acquisition and obtained the famed White Mesa Mill from Denison Mines (DNN) in 2012 as part of a purchase for all DNN’s US assets. The company then went public in 2013, turned its first profit in 2015, and is now the nation’s largest uranium producer.
In 2018 Energy Fuels expanded out of the uranium industry by starting to recover vanadium from mill tailings left as byproduct from previous processing operations at the White Mesa Mill. In early 2019 the company produced its first vanadium concentrate and that year was the largest vanadium producer in the US.
In 2020 they produced their first ever Rare Earth Element (REE) carbonate (the stuff that MP Materials has grown so quickly off of). Energy Fuels has agreements in place to obtain a valuable sandy ore from a mine operated by Chemours Company, which produces it as byproduct from their other operations. Energy fuels will process the ore into REE carbonate and sell it to Neo Performance Materials who will process it into more useful materials. The first commercial batch of REE carbonate is expected to begin production by the end of this month (March 2021). Energy Fuels plans to fully vertically integrate this process in house by 2023/24.
Energy fuels paid off its remaining debt in October 2020 and has a wide array of dormant processing facilities kept ready and waiting to jump back into production as soon as necessary. They also operate mines, mainly geared towards uranium, and have other exploration sites for potential future mining operations. Their most prominent site is the White Mesa Mill which is the only operating conventional uranium mill in the US. It is also capable of producing high quality vanadium concentrate and is optimal for enhanced REE processing due to its radioactive element capabilities.Uranium
As mentioned, Energy Fuels is the #1 producer of uranium in the US and their White Mesa Mill is the only operating conventional uranium mill in the US. At the end of Q3 2020 the company had 663k lbs of uranium sitting in inventory and several other processing sites waiting on standby. In the FY2021 US Federal Budget, $75M is set aside to increase the national uranium stockpiles and is expected to prioritize established miners/processors. Energy Fuels is primed to capture a large amount of that contract since it has so much product waiting to be sold. Energy Fuels also has a uranium recycling capability that has recycled over 6M lbs to date. There is also the potential for new construction of nuclear power plants as part of a climate change/infrastructure bill. It may have a stigma, but modern nuclear power plants are actually incredibly safe.
In my opinion uranium is the most boring, low growth part of Energy Fuels business. It will be supported by the government and will provide some nice cash flow for the business, but it is not the most exciting part of what they’re doing. This isn’t to discount how dominant they are in the US market, but to say how much growth potential exists in their other product lines. As I’ll explain in the following sections, Energy Fuels’ long experience with uranium and radioactive material handling has positioned it perfectly to take advantage of the next great growth opportunity in commodities.Vanadium
Vanadium is a mineral that is most commonly used as an additive to steel alloys in order to create high-strength steel products. An exciting new growth opportunity is the adoption of Vanadium Redox Batteries (VRB). VRBs are vastly superior to lithium ion batteries for any stationary energy storage needs. They are cheaper, more flexible and can last decades without degradation. They should be the preferred battery system for grid-sized applications and there are some startups working on at home applications that look similar to an AC unit on the side of a house. Do your research on these (basic link in the sources) because these things are awesome and should be the future of stationary energy storage.
Energy Fuels had toyed with vanadium production in the past, but in 2018 they began the effort more seriously. They started to use the mill tailings (waste byproduct) from previous uranium processing to extract vanadium, refining it down to a high quality concentrate. In 2019 they produced more vanadium than anyone else in the US and created a large stockpile. They have since halted production until economic conditions around it improve, ie. prices rising. In walks Uncle Sam…
In 2019 China produced 59% of global vanadium supply and could therefore flood the market with cheaper products similarly to steel. As part of the US trying to reshore supply chains, the Department of Commerce had to deliver a report to the President on potential Sec 232 actions regarding vanadium by Feb 27, 2021. The President now has 90 days after receiving the report to impose some kind of trade remedy whether it be tariffs, quotas, or something else. This is going to be a MAJOR catalyst for Energy Fuels. They are sitting on 1.672M lbs of vanadium in inventory, with an additional 1.5-3M lbs of recoverable vanadium sitting in their existing byproduct waste storage. They plan to sell their inventory and restart production as soon as market conditions permit, which could be soon. If price conditions improve (as I expect them to), Energy Fuels will be the preeminent vanadium producer in the US.Rare Earth Elements (REE)
I saved the best for last. REEs are used in electric vehicles, wind energy, batteries, cell phones, computers, flat-screen displays, advanced optics, electric motors, automotive, catalysts, permanent magnets, medical devices, lasers & defense applications. REEs are only going to be in higher and higher demand as we move forward; demand is expected to increase 10-15% annually for the foreseeable future. Right now the US is entirely dependent on imports for finished REE products, mainly from China, but the government has starting making moves to reshore the critical industry.
First of all, there are five steps in REE processing, with the holy grail at the end being REE permanent magnets. You must (1) mine the ore, (2) process it into a mixed REE carbonate, (3) separate and isolate the REEs from the carbonate, (4) turn those into metals, alloys, and powders, (5) which can then be turned into the valuable REE permanent magnets.
MP Materials (MP) was the only US producer of REEs, but they only do steps 1 and 2, then outsource the remaining steps to China. They are currently building a facility for steps 3-4 and plan to have that operating by next year and then plan to complete the final step 5 in 2025.
As of this month, March 2021, Energy Fuels is now producing commercial quality REE carbonate at White Mesa Mill. They are sourcing their ore from a mine operated by Chemours Company, with a scaleable agreement in place. The special Monazite Sand that Energy Fuels is obtaining is just a byproduct for Chemours, but is higher in REE concentration than the ore MP uses. The problem is that it contains uranium which makes it harder to handle. Since Energy Fuels has lots of experience with uranium and radioactive elements they are able to complete step 2 of the process at White Mesa Mill and only have to spend $2M to convert some of their equipment to handle the REE processing. The company has a purchasing agreement in place with Neo Performance Materials in which Neo will initially buy 80% of Energy Fuels’ REE carbonate production so that they can complete steps 3-5 at their processing plant in Estonia. The Energy Fuels CEO stated in a recent interview that they have been flooded with calls from potential customers and to expect more supply-side and customer deals to be announced throughout the year.
Energy Fuels has plans to bring the entire process in house and completed under one roof at White Mesa Mill by 2023/24. This means they will pass MP in capabilities sometime in the next 2-3 years, but they will catch up to MP much sooner. Energy Fuels states that they could set aside just 2% of their annual throughput capacity to produce 50% of total US REE demand (15,000MTs). Unlike MP they don’t have to spend tons of money and go through expensive facility build outs just to get started, Energy Fuels only requires retrofitting. They are also able to extract uranium from their radioactive Monazite Sand ore, so their uranium productions capabilities will not be hurt by their new REE business.
I hope by now we’ve moved on from the whole “UUUU is mainly a uranium play” idea that’s been floating around and we can start to compare them to MP as they should be. There are two main differences between the two; one being time, since MP has been in the game longer and therefore has larger current production than Energy Fuels, and the other is the actual value of the extractable REEs, which is where Energy Fuels has a clear and probably lasting advantage.
MP just released their Q4/FY2020 earnings report the other day and it provides some insight into their production totals and their average selling price. In 2020 MP produced 38,503MTs of REE carbonate and sold it for an average price of $3,311.
Energy Fuels will be starting with significantly lower production rates. They have secured enough Monazite Sand to produce a minimum of about 1,500-2,000MTs for each of the next three years with a scaleable agreement up to about 10,000MTs. I fully expect Energy Fuels to begin to supplement this ore with some mined at their own facilities as part of their vertical integration plan. In their March 2, 2021 presentation, Energy Fuels projected that the “basket value” of all the REEs in a metric ton of MP’s ore was about $4,286, but they’re predicting that due to the superior quality of their ore and the ability to extract rarer radioactive elements, Energy Fuels will get about $10,575 per metric ton out of their ore. This price disparity will help close the revenue gap as Energy Fuels ramps up its production, and will produce even larger margins once the process is brought fully in-house by the end of 2024, a full year before MP plans to complete that step.
This is an important point and I don’t want it to be missed; Energy Fuels’ Monazite Sand ore is FAR superior to the Bastnaesite ore that MP extracts from their Mountain Pass Mine. MP will not be able to use the more lucrative Monazite unless they go through expensive equipment overhauls and permitting processes in order to be able to handle radioactive materials. Essentially Monazite has more of the really useful stuff, more of the rare stuff, and some stuff MP’s ore doesn’t even contain – it is a major differentiator. The CEO said in the past few months he has been fielding calls from all around the world from companies (including a large unnamed vehicle manufacturer) looking specifically for products that can be made from Monazite Sand ore.
As of now MP still has an obvious advantage in the REE space, but they are no longer the only game in town. Energy Fuels has the existing facilities and processing capabilities to quickly pivot into a critical role within the national REE supply chain and at very little transition cost.Outlook
The future is looking bright for Energy Fuels. Between their dominant positions in the domestic uranium and vanadium markets, and their burgeoning REE production capabilities, they are extremely well placed to see some large growth in the years ahead. Even after its recent run, I still think the stock hasn’t fully priced in the monumental shift Energy Fuels is in the midst of making.
We are still waiting on Q4/FY2020 earnings to be released. I expect it to happen soon, possibly this coming week. In the past they have released Monday after hours so we could see some news very soon. The earnings themselves won’t blow you away, but the guidance and further REE projections should be welcomed by the market.
While this initial transition to producing REE carbonate is low cost, the CEO estimates they will need around $200M to complete the full integration process. The company recently filed paperwork with the SEC that opens the door for up to $300M in offerings in the future, but in a recent interview the CEO said they hoped they would not have to use it. There is a very good chance the US government steps in with funding help as they have done with MP’s ongoing capability expansion. This government assistance is expected to grow over the coming years as the US reshore’s its critical supply chains.