"Security of Supply," these are not just words when it comes to uranium. Global geopolitics mean that uranium supply could literally be fought over in coming years. Casey Research believes that Russia is making a grab for as much uranium production, processing and down-blending business as it can. Russia is also aggressively going after contracts to build and service nuclear reactors.
The U.S. is highly vulnerable to uranium supply disruptions from Russia and Kazakhstan. Worse, it should come as no surprise that Putin and his cronies have a lot of influence in Kazakhstan. If the U.S. wants to diversify away from Russia & Kazakhstan it can go to….. Africa! Yes, that's right, Niger and Namibia are fairly big in uranium. Of course, uranium also comes from Canada, but with Canada increasingly supplying China & India, where will the U.S. get its uranium fix?
The U.S. consumes between 50-55 million lbs of uranium a year in its 104 nuclear reactors. Nuclear energy provides about 20% of the country's electricity. However, the U.S. only produces 4-5 million lbs domestically. The U.S. is far LESS energy independent in uranium than it is in oil. Clearly, the U.S. needs to ramp up domestic uranium production, and soon. Luckily, this is not as daunting as it may sound. The U.S. used to be the largest uranium producer in the world and still has ample reserves.
Energy Fuels, (EFRFF.PK) & (EFR.TO) is very well positioned to help the U.S. reduce its dangerous dependence on Russia and Kazakhstan. This year the Company will produce about 1.2 million lbs of uranium, equal to about a quarter of total U.S. production. Energy Fuels has permitted, recently-producing mines on standby, as well as numerous attractive development projects, most notably the 30 million lbs Sheep Mountain Project in Wyoming. Therefore, the Company could ramp up annual production to 3 million lbs relatively quickly if market conditions warrant.
Today's long-term contract price of $57 per lb is not sustainable. Few large-scale projects will come online with that kind of pricing. Areva, Rio Tinto and Cameco have each delayed mega-projects. These projects require long-term pricing of $65-$85 per lb to be economically viable. Like the Big Boys, Energy Fuels likely requires long-term prices to rebound above $65 per lb before it re-starts idled production.
However, unlike U.S. peers, Energy Fuels is 100% owner of the only permitted and operating conventional uranium mine in the country, the White Mesa Mill in Utah. Therefore, the Company is more leveraged to the inevitable increase in uranium prices than peers. Why? As other conventional mines come back, they will have little choice but to send Energy Fuels their output for toll milling. In the past, White Mesa milled as much as 4 million lbs of uranium in a single year. The mill has nameplate capacity of 8 million lbs.
Thus, within just a few years, Energy Fuels could be producing and milling up to 3 million lbs of its own uranium and toll milling an additional 3 million lbs through the White Mesa mill. That 6 million lbs would be roughly 10% of U.S. consumption and greater than half of U.S. production. Energy Fuels is already the 2nd leading uranium producer in the U.S. and poised to become an important North American player.
Dundee Securities, Dahlman Rose and Haywood Securities follow Energy Fuels closely. Dundee and Haywood have price targets of $0.75 and $0.35, respectively. The current stock price is $0.135. Neither Dundee nor Haywood ascribe much value to Energy Fuels' toll milling opportunity. Toll milling is a low-risk, sustainable, long-run business that lowers unit operating costs due to economies of scale.
BMO, Cantor Fitzgerald, Roth Capital, RBC, Raymond James, CIBC and Global Hunter are also active in the uranium sector, but none cover Energy Fuels at this time. Together, that's ten sell-side shops, up to seven of which could become active followers of the Company in coming months.
With 71 million lbs of U.S. uranium resources, (a top holder) Energy Fuels is too big to be ignored. With an Enterprise Value of about $100 million and the White Mesa mill arguably worth at least that much to a company like Rio Tinto, Paladin or Cameco, Energy Fuels is trading extraordinarily cheap compared to peer uranium producers. In fact, the Company is even trading cheap to some of the development companies.
Investors interested in uranium need to look at this May, 2013 Corporate Presentation. On page 10, one can see that peer uranium producers are trading at an average EV / lb of uranium resource of $3.5. Energy Fuels is trading at an EV / lb of uranium resource of $1.44. I think this major gap in valuation will close in coming months. I see a decent shot of Energy Fuels' stock price doubling to $0.27 cents per share once uranium prices start to rebound.
Disclosure: I am long EFRFF.PK.
Additional disclosure: I am long Energy Fuels, (EFR.TO) / (EFRFF.PK). This article was written by me, Peter Epstein, for Au-Wire.com