Energy Fuels Inc: An Under-Appreciated Nuclear Renaissance Story

| About: Energy Fuels (UUUU)

The following exclusive interview with Stephen Antony, CEO of Energy Fuels Inc, (NYSE:UUUU) was conducted on December 13th. I believe the company offers a very compelling investment opportunity. In addition to reading this interview, please take a look at Energy Fuels' updated corporate presentation.

Congratulations on your recent NYSE MKT Listing. Your new ticker symbol, "UUUU", is interesting. What was the basis for that?

Steve Antony, CEO Energy Fuels Inc: Thank you. We chose, "UUUU", because U is the chemical symbol for uranium, and Energy Fuels is one of the largest producers of uranium in the United States. We believe Energy Fuels offers unique exposure to expected growth in nuclear energy and the resultant increase in the uranium price. In addition, we believe Energy Fuels' leverage to a rising uranium price is strong. For instance, in the seven months leading up to the March, 2011 Fukushima event, Energy Fuels shares climbed on a split adjusted basis from approximately $6.5/share to $79/share, over a 1,000% gain. At the same time, the long-term price of uranium rose 22% and the spot price by almost 80%. I am not suggesting this is where our stock is headed, I'm just pointing out how leveraged Energy Fuels potentially is to a rising uranium price. Now, in late-2013, Energy Fuels is a much larger company, a major domestic producer of uranium, and one of the largest holders of uranium resources in the US.

"UUUU" should clear up any confusion between Energy Fuels, the uranium company and Clean Energy Fuels (NASDAQ:CLNE), the vehicular natural gas company!

No doubt. While the Energy Fuels name is very familiar in the uranium industry, we are occasionally confused with Clean Energy Fuels. However, one similarity is that we both operate in the clean energy business. Uranium-fueled nuclear energy is one of the best ways to produce clean, baseload electricity, and nuclear energy produces no carbon emissions. According to a 2013 study by NASA, the use of nuclear energy between 1971 and 2009 saved up to 1.8 million lives due to reduced air pollution. Nuclear energy offers substantial clean-energy benefits that cannot be ignored.

You mentioned that Energy Fuels is a leading uranium producer in the US. Why is this significant and where does Energy Fuels fit into the domestic market?

Energy Fuels' 1.2 million pounds of production for the twelve months ended September 30, 2013 accounts for about 25% of total US production, making us the 2nd largest producer in the country behind Cameco (NYSE:CCJ). We believe our position as a leading US producer is highly strategic because the US is the World's leading producer of nuclear energy. Annually, the US consumes about 50 million pounds of uranium, providing electricity for about one in five Americans. However, the US only produces about 4.5 million pounds per year, making it over 90% dependent on imports. Add in the recent expiration of the HEU Agreement with Russia, which provided about one-half of our uranium supplies for the past 20 years, and we believe the strategic importance of Energy Fuels as a major domestic producer is magnified.

Energy Fuels is unique among US peers because we own the only licensed, operating conventional uranium mill in the US, we produce from mines located in historically prolific uranium districts, and we are one of the largest holders of US-based uranium resources, including major development projects in Wyoming and New Mexico. In our view, when you control the only mill, you control the district. The Four Corners uranium district, where the White Mesa Mill is located, was once among the largest uranium producing regions in the World. Most people don't recall that the US used to be the World's leading uranium producer, peaking at about 44 million pounds in 1980.

In comparison to some of our US peers, Energy Fuels is already an established US uranium producer with long-term uranium supply contracts in-place with major utilities, priced at a substantial premium to the current spot market. However, what really differentiates Energy Fuels is our potential to substantially increase production as market conditions improve over the next few years. Indeed, we believe we can quintuple production to six million pounds per year from our existing assets. No other publicly traded uranium producer has that kind of organic production growth potential. We believe investors should take a closer look at Energy Fuels, focusing on our future production profile and the world-class nature of our assets.

Can you be more specific about Energy Fuels' organic production growth and how it can be realized?

Energy Fuels has assets now in our portfolio that give us the opportunity to increase production to six million pounds per year as market conditions warrant. During the 12 months ended September 30, 2013, we produced 1.2 million pounds of U3O8, all from our White Mesa Mill. However, that's far below White Mesa's licensed capacity of 8 million pounds per year. It should be noted that we recently announced our intention to reduce production next year, unless we see a substantial increase in prices. But, we will continue to fulfill our contracted deliveries, maintain current production capabilities and move permitting and development forward on other projects that make our goals achievable.

If the price of uranium were to increase to $75/lb, about where it was in March 2011, we believe within a few years we could achieve annual production of six million pounds. As prices begin to rise, our first production increases would come from standby projects, including the Daneros, Beaver and Pandora mines which produced as recently as 2012. We would also continue to mine at the Pinenut mine and resume development at our Canyon mine, both located on the high-grade Arizona Strip.

Next, I would expect our Henry Mountains, Sheep Mountain and our recently acquired Roca Honda Projects to come online. These are Energy Fuels' three flagship projects, and among the largest uranium development projects in the US. We are currently permitting and developing the Roca Honda and Sheep Mountain Projects. We are also examining the development of a 2nd production center in Wyoming that combines the Sheep Mountain Project with the recently acquired Gas Hills and Juniper Ridge Projects. The Henry Mountains project which was producing as recently as 2010 is currently on standby.

Roca Honda's PEA estimates annual production of 2.6 million pounds, Sheep Mountain's Pre-Feasibility Study estimates 1.5 million pounds per year. And, the Henry Mountains Complex, in production in 2010, also has the potential for significant production. When you combine these projects with our current production, you can see why we believe six million pounds per year is achievable, and frankly might even be conservative. This number does not consider our alternate feed production. As far as we can tell, no other publicly traded uranium producer can achieve this magnitude of organic growth.

You mentioned Energy Fuels had uranium production from, "alternate feed" materials. What is that?

The processing of alternate feed materials is an excellent business for us. These are uranium-bearing materials not derived from conventional ore. They include tailings from other metal and rare earth processing and residues from the uranium conversion process. To some these are waste products, a liability, but they are valuable to us. In some cases we see up to 75% uranium content. Alternate feeds are particularly attractive because they carry no mining costs and are typically delivered to us at no charge. These could be among the lowest cost sources of uranium in the World. The best part is that Energy Fuels' White Mesa Mill is the only facility in North America currently licensed to accept these materials.

Investors speak with seem to focus on current production at the White Mesa Mill and surrounding mines. But, it sounds like you also have big plans for Wyoming. Can you elaborate?

Yes, we have big plans in Wyoming. In fact, we believe our Wyoming assets alone could become one of the largest uranium producing platforms in the US. In Wyoming, we have three projects with a combined 41 million pounds of U3O8 with grades averaging 0.06% to 0.13% contained in 19 million tons of measured and indicated resources. Yet, I'm not sure we get much credit for our Wyoming assets. There are a few US-listed uranium companies with operations only in Wyoming that have market caps similar to, or in excess of, Energy Fuels. However, our Wyoming assets have larger uranium resources, higher production potential, and comparable production costs.

The Sheep Mountain Project alone has a Pre-Feasibility Study that boasts a base case IRR of 42%, a $201 million NPV, 1.5 million pounds per year of production, and cash costs of $32/lb. We believe we can enhance this project by co-developing it with the nearby Gas Hills and Juniper Ridge Projects, creating a 2nd major production center in Wyoming. We are also encouraged by the State of Wyoming's issuance of industrial revenue bonds in support of two uranium companies. We will certainly take a hard look at utilizing these bonds to help finance our projects in Wyoming. Wyoming is a wonderful jurisdiction in which to operate. It is pro-mining, pro-business, has excellent infrastructure and a skilled workforce.

Tell me about Energy Fuels' balance sheet, including your cash and working capital position?

Our working capital position is one of the strongest among the US uranium companies. Our cash and working capital positions at September 30, 2013 were $12.4 million and $32.5 million, respectively, not including a $5 million, bought deal offering completed in October. At the end of September, we had 426,000 pounds of uranium inventory which we are selling into long-term contracts at an average price of $58.42/lb. Applying our expected 2014 contract pricing to our September 30th inventories would increase the value of our working capital by $8 million. Finally, we have some non-core assets that we are looking to sell to further strengthen our balance sheet, including the Copper King gold/copper project in that came from the acquisition of Strathmore Minerals.

Your stock was a top performer over the summer, but has pulled back significantly. Why?

Yes, our stock was a top performer year-to-date through September. Following our announcement of the Strathmore transaction, our share price increased to about $11/share on heavy trading volume. We believe this was as a result of the obvious, compelling synergies from the Strathmore acquisition announced in May. Subsequently, a variety of factors have probably contributed to the pullback. First, the four-month hold period on our June 2013 private placement expired. Some of these shareholders, as well as certain Strathmore shareholders, presumably took profits in October and November.

We recently completed a reverse split that negatively impacted the stock, despite this action having received overwhelming shareholder approval. We did this to become listed on the NYSE and to avoid being designated as a "penny stock" under SEC rules. We believe the new listing will generate significant interest among new retail and institutional investors.

Another factor weighing on our stock was that we completed a bought deal in October which, like most offerings, created some selling pressure. Finally, given that it's December, we're probably seeing some tax loss selling. Still, when one looks at where the company is today compared to a year ago, we are a much stronger company. While management is not happy with the share price, we think we had a good year in 2013, and we did the right things to position the company for the anticipated uranium market rebound.

Who are some of Energy Fuels' largest shareholders and strategic partners? What is your relationship with them?

Korea Electric Power Company, or KEPCO, (NYSE:KEP) is our largest shareholder, owning approximately 9% of the company. KEPCO is the largest utility in Korea with world-class capabilities in nuclear energy. They are engaged in uranium resource development and they build, own and operate nuclear power plants world-wide. Strengthening our relationship with KEPCO was a big intangible benefit of our acquisition of Strathmore. Eun Ho Cheong, VP of Overseas Resource Development project for KEPCO, recently joined our Board of Directors.

Sumitomo Corporation of Japan is our JV partner on Roca Honda in New Mexico. Sumitomo is a large, well-respected company that is a major uranium supplier for Japanese utilities. KEPCO and Sumitomo are leading international organizations, and we are happy to have good relationships with them. In addition, Dundee Corporation is a major shareholder of Energy Fuels.

A number of analysts and investors are predicting significant increases in the uranium price. What do you think?

According to Ux Consulting, the spot price of uranium is $34.75/lb, near a seven year low. We believe there is too much focus on the spot price. Only about 15% of uranium is sold on the spot market, with the remainder sold on long-term contracts. The long-term price is better, at $50/lb, and Energy Fuels expects to sell uranium into our long-term contracts at $58.42/lb in 2014. Regardless, it's hard to say if the spot price has hit bottom, but recent trends are encouraging and long-term fundamentals are stronger than ever.

Given the weak price environment, uranium production is being curtailed and development projects are being delayed around the world. Kazakhstan, by far the world's largest producer, announced that its planned production growth for 2014 is on hold. Russia, an active acquirer of global uranium projects, said it will not be pursuing new development projects next year. Last week, Rio Tinto's (NYSE:RIO) Ranger mine in Australia, one of the largest uranium mines in the World, was closed indefinitely due to a serious operating problem. Surprisingly, Rio's Rossing uranium mine experienced a similar problem and is closed for the foreseeable future. Finally, the HEU Agreement with Russia expired, removing 12 - 24 million pounds of uranium from the global market. These are very significant developments which clearly threaten supply.

On the demand side, global growth in nuclear energy is quite robust with 434 reactors currently operable, 71 reactors under construction, 173 reactors planned, and 314 additional reactors proposed. This represents a true nuclear renaissance in my view. The spot price of uranium needs to double or even triple to meet this highly visible demand. In a recent study, the incentive price to build a new conventional uranium mine was estimated at $83/lb. And, JP Morgan recently updated their uranium price forecast to $80/lb in 2016. Of course, I don't know where the uranium price will be in the coming years, but it is clear that prices need to improve substantially in order to meet current and future demand.

Disclosure: I am long UUUU. 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.