Uranium – Converging Threats And Opportunities

Who would have thought that even a year ago Japan, Great Britain, Germany, and the United States would all be reconsidering nuclear energy. But that is precisely what has happened. Having reflected upon the severe lessons of Fukushima, in the context of hydrocarbon prices / availability and the mandate to address climate change / global warming, our friends across the Pacific have recently announced that they will build up their nuclear energy capabilities.

So too on the other side of the Atlantic where the U.K. is pursuing non-carbon energy in the form of “small modular reactors” (SMR’s) and Germany is backing away from its stance to decommission nukes in the wake of fuel supply concerns following Russia’s attack on Ukraine. Even absent those concerns,

“…to reach net zero by 2050, the IEA says nuclear energy capacity will need to double.”

Here in the United States, work is also underway both on full-scale reactors as well as on SMR’s including by the Buffett / Gates venture, TerraPower (private) as well as by NuScale Power (SMR), not to forget BWX Advanced Technologies (BWXT) that has carved out a niche in nuclear energy for naval vessels. BUT concerns exist within the system related to our lack of uranium ore as well as the enriched metal.

Trouble in the Supply-Chain

Indeed, a few weeks ago, TerraPower, that is building a Natrium Nuclear power plant in Wyoming, announced that the project will be delayed at least two years. In a released statement, the company said, “the delay is related to the unavailability of the nuclear fuel HALEU (High-Assay Low-Enriched Uranium). … The delay pushes the project completion date to 2030, instead of the previously planned 2028. According to the statement, Russia’s invasion of Ukraine caused the only commercial source of HALEU fuel to no longer be a viable part of the supply chain for TerraPower, as well as others in the industry.” In response to the announcement, U.S. Senator John Barrasso (R-WY) remarked,

“…the announcement underscores what I’ve been saying for years: America must reestablish itself as the global leader in nuclear energy. Instead of relying on our adversaries like Russia for uranium, the United State must produce its own supply of advanced nuclear fuel.” In his statement Barrasso said he has introduced legislation to “make this a reality and I’ve repeatedly called on the department of Energy (DOE) to accelerate and expand its efforts.”

Wyoming Governor Mark Gordon added that, “The delay TerraPower is experiencing demonstrates how critical it is that our nation has domestic sources of uranium – it makes no sense to depend on Russia anymore.”

This is a remarkable situation and not unlike others we are witnessing with other strategic metals where the United States “outsourced” our production to adversarial countries and their primary trading partners. In the case of uranium ore, former USSR member Kazakhstan accounts for 45 percent of global supply with Russia’s tentacles extending elsewhere including into Canada and even here in the US.

Three Pure-Play Companies

Enter Uranium Energy (UEC) and Energy Fuels (UUUU) the US’s two leading producers of uranium, with primary operations in Texas, Wyoming, and Utah – all red states that are more welcoming of miners. Add to them, Centrus Energy (LEU), an enricher of uranium ore in the form of HALEU, defined by the Department of Energy as…”

“… enriched between 5% and 20% … for most U.S. advanced reactors to achieve smaller designs that get more power per unit of volume. HALEU will also allow developers to optimize their systems for longer life cores, increased efficiencies, and better fuel utilization.

The World Nuclear Association and Forbes have argued that globally we have more than enough HALEU to meet current needs. At the same time, they acknowledge that 57% of worldwide supply emanates from Russia and China with almost none refined in the United States. Thus, the Energy Act of 2020 established the Advanced Nuclear Fuel Availability Program in the US Department of Energy (DOE) that is, “intended to stimulate the domestic development of a commercial HALEU supply chain, particularly uranium enrichment capacity.”

Then, in 2021, the US Nuclear Regulatory Commission licensed Centrus as our first HALEU production firm while DOE began funding for such a demonstration facility in Ohio. The DOE’s fiscal 2022 budget request included a record $1.8 billion for the Office of Nuclear Energy – its highest ask ever – to scale up commercial deployment of smaller and more flexible advanced reactor designs requiring HALEU for longer life cores, increased efficiencies, and better fuel utilization. Global tensions have reinforced the imperative to move forward swiftly.

So, there you have it – the United States is attempting to reestablish our position as a miner and enricher of uranium with Uranium Energy, Energy Fuels, and Centrus Energy being the public companies involved. At this point, theirs are more strategic stories than financial ones. These companies are not the steadiest financially and most investors should avoid them. Still, they are showing potential that may fully emerge with continued supply-push help of the feds, and demand-pull by nuclear reactor capitalists.

• Uranium Energy recently benefited from a multi-million-dollar contract awarded by the Energy National Nuclear Security Administration of DOE. The company’s financial condition is otherwise marginal through its P&L and over to cash flow notwithstanding a strong balance sheet.
• Energy Fuels also received a large DOE contract, $18.5 million. The company has experienced uneven progress with revenues that they have not yet been able to bring through to their bottom line and further. Their solid balance sheet should give them time to become consistently profitable.
• Centrus Energy, as noted above, is benefiting its own cost-sharing contract with DOE. Its revenues are see-sawing and, in any given quarter, find their way down their P&L and over to operating cash flow. Here though, the company is running with negative equity although the trend line indicates some progress.

The quarterly results below, compliments of SA, show the “chatter” in the numbers of these three companies. For readers who haven’t discovered it, next to each row header in SA’s financial displays is a small bar graph. By clicking on it, one can gain a better sense of the respective trends:

Uranium Energy	Jan. 2022	Apr. 2022	Jul. 2022	Oct. 2022
Revenue	$13.2M	$9.9M	$0.1M	$57.3M
Gross Profit	$1.8M	$0.4M	($3.5M)	$98.M
Op. Income	($2.3M)	($3.1M)	($9.0M)	$2.5M
Net Income	($5.5M)	$7.3M	$5.5M	($3.8M)
Op. Cash Flow	($5.4M)	($19.3M)	($15.9M)	$36.5M
Working Capital	$61.8M	$88.2M	$93.7M	$37.3M
Current Ratio	16.8x	20.2x	12.0x	3.1x
Net Worth	$279.8M	$307.5M	$326.9M	$581.4M
Liabs./Equity	0.1x	0.1x	0.1x	0.2x
Forward P/E	n/a	n/a	n/a	246.3

Click to enlarge

Energy Fuels	Dec. 2021	Mar. 2022	Jun. 2022	Sep. 2022
Revenue	$1.7M	$2.9M	$6.5M	$2.9M
Gross Profit	$0.6M	$0.0M	$3.0M	$1.4M
Op. Income	($9.9M)	($10.2M)	($6.7M)	($13.7M)
Net Income	$31.1M	($14.7M)	($18.1M)	($9.2M)
Op. Cash Flow	($7.3M)	($10.5M)	($10.8M)	($8.1M)
Working Capital	$143.2M	$136.6M	$134.1M	$122.3M
Current Ratio	24.5x	28.3x	36.3x	27.0x
Net Worth	$295.5M	$287.1M	$270.5M	$259.9M
Liabs./Equity	0.07x	0.07x	0.07x	0.07x
Forward P/E	n/a	n/a	n/a	(Negative)

Click to enlarge

Centrus Energy	Dec. 2021	Mar. 2022	Jun. 2022	Sep. 2022
Revenue	$89.0M	$35.3M	$99.1M	$33.2M
Gross Profit	$36.2M	$6.3M	$60.9M	$2.3M
Op. Income	$76.4M	($0.1M)	$48.5M	($8.4M)
Net Income	$116.2M	($0.4M)	$37.4M	($6.1M)
Op. Cash Flow	$49.2M	($12.6M)	($43.6M)	$21.1M
Working Capital	$72.6M	$70.6M	$122.9M	$111.0M
Current Ratio	1.2x	1.2x	1.4x	1.3x
Net Worth	($141.9M)	($133.M)	($94.9M)	($100.3M)
Liabs./Equity	(Negative)	(Negative)	(Negative)	(Negative)
Forward P/E	n/a	n/a	n/a	12.3x

Click to enlarge

A Note on the Majors

I call it our [Periodic Table of the] “Elements” portfolio that, including hydrogen, comprises 25% of our holdings focused on strategic metals – cobalt, gallium, nickel, rare earths, vanadium, and uranium. On top of smaller pure-plays, we hold positions in four of the global majors that are active in these areas including BHP (BHP), Glencore (OTCPK:GLNCY), Rio Tinto (RIO), and Vale (VALE). I built these four positions in 2022 and, whether by luck or insight, they were, collectively the best investment decision I made during a grim 2022.

That said, compliments of MarketWatch, professional analysts believe that further upside on the majors is unlikely. However, I will continue to hold them both because they trade at low multiples and return attractive dividends in contrast to the small names that pay no dividends and could be value plays into 2023 and beyond. Incidentally, SA’s quants have UEC and UUUU as “Sells” with LEU as “Hold”; they are a “Strong Buy” on GLNCY and neutral on BHP, RIO, and VALE.

	Buy	Over	Hold	Under	Sell	Target	Friday	Appr	Div
UEC	6	0	0	0	0	$6.89	$3.94	+75%	nil
UUUU	8	0	0	0	0	$10.19	$6.98	+46%	nil
LEU	2	0	0	0	0	$60.50	$37.07	+63%	nil
BHP	9	2	13	2	3	$61.00	$69.30	-12%	10%
GLNCY	1	0	1	0	0	$14.00	$13.67	+2%	4%
RIO	3	1	6	0	0	$76.02	$77.56	-2%	9%
VALE	14	2	8	0	1	$17.96	$18.42	-2%	8%

Click to enlarge

“We’re seeing governments and companies return to nuclear with an appetite that I’m not sure I’ve ever seen in my four decades in this business,” Tim Gitzel, Cameco (CCJ) president and CEO, said on an Oct. 27 earnings call. Indeed, to fulfill its own orders, Cameco, Canada’s largest uranium miner and one of the largest in the world, has taken to buying product from China.

The federal government now is serving in the role of catalyst to open up our US supply-chain for uranium ore and metal. To believe in our miners / refiners as worthy investments starts with believing that we must produce more uranium ourselves: a) as demand increases by many countries for non-carbon energy, and/or b) as wariness grows over the reliability of geopolitical adversaries as suppliers of fuel. For me, both going-in assumptions seem reasonable.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.