Energy Fuels: Miner Turned Broker

| About: Energy Fuels (UUUU)

Energy Fuels (OTC:EFRFF) is a junior uranium miner with two producing mines in the Western U.S. along with a number of exploration plays. Incorporated in 1987 it is currently listed on the TSX and on the OTC in the U.S. According to their website they own or control 88.8 mil lbs of NI 43-101 measured and indicated (M&I) resources and another 38.2 mil lbs of inferred resources. These are all low-grade properties located in the U.S. In addition the firm owns 16.5% of Virginia Energy Resources (TSX-V: VUI, current value of holding approx. $1.1 mil CAD) which owns the Coles Hills project assessed at 133 mil lbs of indicated uranium resources. Keeping in mind that "resources" indicate only the possibility of economic value, that's still a lot of potential. Energy Fuels also purchased Strathmore Minerals in Aug 2013 acquiring a number of plays in the Southwestern U.S. Another prized asset for EFR is the White Mesa Mill in Utah. It is the only conventional processing mill in the country.

In spite of their objective of becoming the dominant uranium producer in the United States, the company has run into a bit of rough patch. They felt compelled to carry out a 50:1 share consolidation which, of course, transformed a .13 share price on Nov 4 into a $5.75 price on Nov 5, i.e., 50:1 turned out more like 44:1. The move was obviously aimed at sparking bigger-league money manager interest. Most analysts view a consolidation as a desperation move. The share price usually declines after such a move which is the case with EFR. The buyers of a bought deal in October at .16/share ($8 after accounting for the consolidation) must surely be disappointed.

The company has also applied for a listing on a major U.S. exchange in a further effort to raise its visibility, pointing to the consolidation as an aid. You have to give them credit for trying to maintain investor interest. But the current situation could be seen as fatal attraction:

Uranium, what uranium?

  • Their news release on Nov 14 containing the results for the quarter ended Sept 30 states that the company expects no sales for the current quarter. Sounds bleak. There is, however, better news for 2014. Sort of. EFR forecasts sales of 800k lbs for the year at an average $58.42/lb. That's $46 mil. Production will amount to 250k-350K lbs from their two operating mines with the balance of sales derived from alternate feed sources and purchases on the spot market. Buying at $36/lb and selling it for $58 is decent margin. Why not shut down the mines and just become a broker? Surprisingly enough, that is just what is going to happen. Both the Arizona 1 and Pinenut mines will cease operation in 2014. Arizona 1 is out of ore. Pinenut, with an estimated 1 mil lbs of ore remaining, will be placed on care and maintenance mid-year due to low product prices. The White Mesa Mill will stop processing ore in Aug 2014 with resumption anticipated for the latter part of 2015.
  • Energy Fuels has a number of promising projects on the go in the Southwest. A few are small-scale projects that, for a variety of reasons, are not being actively developed. The more exciting properties are Sheep Mountain (M&I total 30 mil lbs), Roca Honda (JV 60/40 with Sumitomo, M&I of 16.8 mil lbs) and Henry Mountains (20 mil lbs Indicated & Inferred). Again, these are resource estimates, not reserves. Permitting is at various stages for these three with an estimated completion for Roca Honda by 2016. So, the game plan seems to be: fulfill contracts with production and spot buying, shut the mines until prices improve and give life to new projects as soon as practical.

We'll Pay Cash

  • Unlike some of its junior brethren, EFR has a strong balance sheet. Working capital as at Sept 30 was $32.496 mil, or about $1.71/share. Cash and equivalents were $12.4 mil. The bought deal will bring in another $5 mil gross so their cash on hand would be in the $17 mil range adding another .25 to working capital. A company selling at 3 times working capital is a bargain, assuming other factors are not lethal. Cash flow should be positive over the next year bolstering the coffers further.

The Suits Like It

  • As an earlier SA article pointed out, insiders have been busy buying shares. These purchases were almost exclusively related to bought deals in June and October of this year. Insiders purchased over 2.5 mil shares in connection with these offerings.
  • The management team looks solid, comprised of engineers and financial executives with numerous years of experience, many of them from Denison Mines (NYSEMKT:DNN). Compensation is modest.

Charting a Course

  • Back in April 2007 EFR hit a high of $274.00. That's not a typo. In a little over 6 years it's down about 98%. I think we'd have to call that a bearish trend. The trend continues today with the 5 day SMA (simple moving average) below the 20 day. The big volume days have been primarily down so picking a technical entry point for this one could be tricky. The dramatic spike on rising volume starting on Nov 21 has seen the price rise about 20%. Perhaps start picking away in the $5-5.50 range. When the inevitable market correction appears these shares will decline further. The question is: decline from what price?

The Wrap-up

Energy Fuels, like so many other junior miners, is sitting on a lot of uranium. A rough inventory would be 80 mil lbs of M&I plus inferred. They have a solid balance sheet and are adopting a "go slow" mentality, waiting for a turn in U3O8 prices. They are believers in the old saying: "the cure for low prices is low prices". There is some downside protection given their cash position and ability to re-start two mines if the economics improves, although these mines are near the ends of their lives. A two or three year time lag is possible before EFR is back in any significant way as a producer. If uranium catches fire there will be a lineup to provide any funds they need to turn properties into mines. Or, if industry consolidation starts spreading, Energy Fuels will be in somebody's sights. Using a 30-40% premium for a takeover we arrive at a price range of $8-8.50.

With the usual disclaimer that junior miners are high-risk, speculative investments, EFR's fundamentals give it a slightly better margin of safety than some other "pounds in the ground" companies.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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