Energy Fuels Inc Q4 FY2022 Earnings Call

Good morning. My name is Sylvie, and I will be your conference operator today. I would like to welcome everyone to the Energy Fuels Fiscal Year 2022 Conference Call. Thank you. Mr. Chalmers, you may begin your conference.

Thank you, Sylvie. Good morning and good afternoon to everyone on the call. We appreciate you joining our year-end 2022 call and webcast today. We are eager to discuss our achievements, especially our remarkable successes in 2022, as well as the significant progress we have already made early in 2023. There is much to cover, and we have truly set the stage for an exciting 2023. Energy Fuels has emerged as a prominent leader in U.S. critical mineral production at a critical time. In the presentation, I will detail the highlights and financials. For those unable to join the call today, replays of this presentation will be available on our website for about two weeks. I want to remind everyone that you control the slides in the presentation from your own device, and I will prompt you when to advance to the next slide. We will have time for questions at the end of the presentation. Joining me today are Dave Frydenlund, our Executive Vice President and Chief Legal Officer; Tom Brock, our CFO; and Curtis Moore, our Senior Vice President of Marketing and Corporate Development. Let's dive into the presentation. The first slide showcases the White Mesa Mill and highlights our position as America’s leading producer of critical minerals for the clean energy transition. Next slide. I may make some forward-looking statements, which are included on slide number 2. Next slide. Energy Fuels leads the U.S. production of uranium, vanadium, and rare earth minerals, contributing to clean energy initiatives. Next slide. This slide presents the periodic table, illustrating that Energy Fuels can currently produce or will soon be able to produce many elements essential for clean energy technologies in the future. It's clear that we have a long-standing history as a uranium producer, but we are also advancing our rare earth initiatives. On the periodic table, you can see several elements required for electrification improvements. We also have a history of producing vanadium and exploring the potential for recovering Radium-226 at the White Mesa Mill. Next slide. The products we produce or plan to produce are all vital for clean energy technologies, such as nuclear fuel assemblies, vanadium for vanadium flow batteries, and rare earth minerals for applications in high-performance motor drivetrains, wind turbines, and military defense systems. Next slide. Our product lines are all high value: uranium, which accounts for 50% of zero-carbon energy in the U.S.; rare earths needed for powerful magnets; vanadium used for steel hardening and growing interest in grid-scale batteries; medical isotopes like Radium-226, essential for emerging cancer therapies; recycling of uranium and vanadium materials; and significant financial strength. We concluded 2022 with $117 million in working capital and have large inventories of uranium and vanadium. Following the year’s end, we completed the sale of the Alta Mesa project for $120 million in February. Additionally, the year-end figures do not account for the DOE uranium sale or our significant investments in companies like CUR. Next slide. Our 2022 financial performance shows $117 million in working capital, consisting of $62.8 million in cash and cash equivalents, $12.2 million in marketable securities, and $38 million in product inventory. Adjusted for current commodity prices, we see an increase of over $20 million. I want to highlight that we have zero debt and assets worth up to $1 billion at replacement value. Beginning in Q1 2023, we made the $120 million sale of the Alta Mesa project, receiving $60 million in cash and holding a $60 million convertible note. This will impact our first quarter in 2023. We also announced the Alta Mesa sale and the uranium reserve in 2022, but those funds did not reflect in the 2022 year-end report. Additionally, we sold $18.5 million in uranium, generating a gross margin of approximately $10.8 million from our uranium reserve sale. Next slide. Regarding the net loss of $59.8 million, a significant portion stemmed from a non-cash mark-to-market loss on our investments, particularly in consolidated uranium, which accounted for 30% of that loss. Concurrently, we began startup processes for four uranium and vanadium mines midyear, which introduced substantial cash requirements. The good news is that we could start mining uranium at one or two of those mines in less than 24 hours if needed. We are also progressing with our rare earth capacities and optimizing our rare earth carbonate production, proving it at a commercial scale. We are working on processing monazite, although we faced delays in deliveries that impacted our 2022 economics. We have recently received another 600 metric tons and expect 400 to 700 more at year-end from Chemours. We are actively searching globally for additional monazite in 2023 and are excited about the prospects. Meanwhile, we have successfully developed a uranium and thorium-free carbonate and are enhancing our solvent extraction circuit to recover separated oxides NdPr up to 1,000 tons by the end of '23 or early 2024, which is a remarkable accomplishment. Our medical isotope strategy is advancing, and we've incurred higher expenses related to the Bahia project acquisition and the Alta Mesa project sale. Transitioning back into commercial production requires investment, as we are preparing for an exciting 2023. Next slide. Our guidance for 2023 indicates we will sell 560,000 pounds of uranium, with 300,000 pounds linked to the uranium reserve sale at $61.57 per pound. In the second and third quarters, we aim to sell 260,000 pounds at prices between $54 and $58 per pound. These are contractual sales spread over eight years. We plan to bring at least one uranium mine into production in 2023 or 2024, and possibly more depending on market conditions. Additionally, we are pursuing long-term uranium supply agreements at higher prices, hoping to finalize more contracts in '23. This year will focus on our rare earth initiatives. While we are not planning any finished uranium or vanadium production for now, it's still a possibility. We will process the 600 metric tons of monazite currently underway, with more to come later in the year from Chemours. We will continue our rare earth separation at the mill using the Phase 1 project, which can produce upwards of 1,000 metric tons of NdPr, and we are designing Phase 2 for even greater capacity. The total cost of the current Phase 1 project is around $25 million, making it one of the lowest cost separations available in the developed world, expectant to be operational by the end of this year or early next year. We are aggressively seeking rare earth offtakes and additional monazite feed. We are advancing our Bahia project in Brazil, having completed Phase 1 drilling and preparing technical reports for a resource there. We also recently purchased a sonic drill rig for about $1 million. Next slide. Our year-end 2022 working capital of $117 million does not factor in the $120 million sale of Alta Mesa, which significantly affects our financial position following its closure in Q1 2023. Our substantial inventories of uranium and vanadium also add value. Comparing our carrying value of uranium on the books under $30 per pound with current prices indicates an uplift of over $20 million not reflected in our working capital. As for our planned sales of 560,000 pounds in 2023, this could yield over $30 million in revenue from uranium alone. Next slide. Our core business continues to be uranium, and I have dedicated 47 years to this field. I remain committed to uranium production. Next slide. You have noticed this slide showing the White Mesa Mill, the hub of our critical mineral program, enabling the recovery of radium, vanadium, and soon separated oxides within a single facility. The Pinyon Plain mine in Arizona, which I developed in the '80s, is in preproduction, with personnel currently working there. We have teams preparing the Nichols Ranch project, and the La Sal complex is also in preproduction, where we could begin mining immediately if we choose to do so. Next slide. In 2022, securing long-term contracts with two U.S. nuclear utilities was a significant achievement, with contracts extending up to eight years and a base quantity of 3 million pounds that could flex up to 4.1 million pounds. Recent events, such as the bipartisan growth in U.S. nuclear support, the Russian invasion of Ukraine, and transportation challenges in Russia and Kazakhstan have influenced our industry. We finalized the sale of 300,000 pounds to the uranium reserve at a favorable price. Next slide. As you've seen before, we are positioned among uranium companies, featuring a solid working capital position that does not include the Alta Mesa sale or recent uranium sales. With zero debt and substantial infrastructure, we have significant uranium inventories recorded at around $30 per pound. Energy Fuels has accounted for about one-third of newly produced uranium in the U.S. over the past 15 years, a notable achievement when compared to our peers. While we are valued as a uranium producer, our advancements in rare earth and vanadium production, along with our medical isotopes strategy, highlight our expansive capabilities. Next slide. We continue to develop a complementary business opportunity combining uranium and rare earth, leveraging the nuclear feeds typically associated with rare earth extraction. Next slide. This graphic from the Department of Energy reveals the global reliance on China for various stages of rare earth production, emphasizing the significant market share held by China, which we aim to reestablish in the United States. Next slide. We have made considerable strides in our rare earth initiatives since entering the sector in April 2020. We have begun processing carbonate and initiated pilot separations, producing high-purity carbonate, and we acquired the Bahia project in early 2023. We are retrofitting our separation capabilities with expectations of completion by the end of 2023 or 2024. We are planning expansion for separation capacity by 2026 and aiming for heavy rare earth separations by 2027. Next slide. Our supply chain efforts are focused on creating an efficient global rare earth supply network, examining all stages from mining to leaching and advancing integration across our operations. Next slide. The Bahia project presents substantial potential, as it could provide monazite resources for decades, with a large land position and ongoing drilling and permitting efforts. Next slide. Here are images from our rare earth production and the lower right corner shows our separation pilot scale setup. Next slide. Our advantages in rare earth processing stem from our ability to manage radionuclides, a strong history in solvent extraction, the construction of tailings facilities, and a skilled workforce, all benefiting from our low-cost approach in Utah. Next slide. In the competitive landscape of rare earth production, we are ranked among the top five producers and remain committed to showcasing our capabilities in a way that reflects our true market value. The premium products we can create, particularly with NdPr and terbium from monazite, promise substantial revenue potential and profit margins as we implement our strategy. Next slide. We have a solid history and increasing potential in vanadium production as market conditions improve. Our medical isotope focus remains an exciting area of growth, albeit further behind our uranium, vanadium, and rare earth strategies. Next slide. Community engagement, ESG efforts, and recycling initiatives continue to grow within our organization. Next slide. Our products align perfectly with ESG initiatives, promoting zero-carbon emissions through uranium, supporting clean energy technology with rare earths, enhancing renewable power via vanadium for grid batteries, supplying medical isotopes, and maintaining a history of recycling initiatives. Our sustainability report reflects our commitment to carbon reduction and electrification. We have made significant strides in community outreach, including a long-term partnership with the San Juan County Clean Energy Foundation, contributing $1 million and committing to ongoing funding equating to 1% of annual mill revenues to support education, environmental health, and economic development programs, emphasizing Native American priorities. Our recycling initiatives aim to reduce carbon emissions, and we are also dedicated to reclaiming Cold War mines on the Navajo Nation. Lastly, we see a very bright future ahead for Energy Fuels, and I will now open the floor for questions. Thank you for your attention, and that concludes my presentation.

And your first question will be from Heiko Ihle at H.C. Wainwright.

Hey, guys. This is Marcus calling in for Heiko. Thanks for taking our questions. So, you bought a total of 301,000 pounds of U.S. origin uranium at an average price of about $8 during the fourth quarter of 2022 and first quarter of this year. Just out of curiosity and since you pointed out this domestic origin, can you provide a bit of color on the price differential between U.S. products and imports from outside the U.S. and maybe even products from outside of North America in general?

Marcus, I don't see, or at least I haven't noticed, a market differential. However, if we come across U.S. origin products priced attractively, we will continue to expand our inventory through selective purchases. One reason U.S. origin materials might be thought to hold a significantly higher value is that they provide us with more flexibility. By making these selective purchases, we can trade some of the materials we currently have in inventory, which can also enhance our flexibility in mining and processing the ores from our operations. Curtis, do you have anything to add?

No, I don't. We don't see a significant difference in price. However, when we identify an opportunity to acquire U.S. origin material or any material at a good price, we will definitely consider it.

Okay. All right. Perfect. Thanks for that. And then, I guess, sort of changing gears here, during 2022, you produced 205 tons of rare earth carbonate or monazite. We're mostly through Q1 at this point, and you've got another 600 metric tons of monazite in the fourth quarter. So, that gives you, say, 375 to 45 tons of rare earth carbonate. And keeping things simple, how much of that should we expect to see by quarter during the year? Should we just divide that number by four?

It's a valid point. The situation can be a bit variable. I anticipate that production will happen, likely in the first or second quarter. There is additional material expected later in the year, but the timing is still uncertain. We need to ensure the material arrives, gets processed, and then is transported to Neo or wherever it needs to go. So, Curtis, I'm not sure if you have any insights on that.

No, I have nothing to add there.

Okay, perfect. Yes. That's it for me. And congrats on the year.

Thank you. Next question will be from Joseph Reagor at Roth MKM. Please go ahead.

I guess, first on the uranium front. Any comments on the Senate Bill introduced yesterday with the intention of banning uranium and enriched uranium imports from Russia, and how that might impact you guys directly?

I believe we are making progress, but it’s clear that we have become overly reliant on certain resources, which doesn't seem reasonable to maintain. However, breaking away from this dependency is challenging without some key products still being imported. I haven't had the opportunity to review the details, Joe, but Curtis, I understand you have had some discussions related to this. Do you have anything to add?

Yes, I think it's positive. We believe U.S. utilities should not be supporting the war in Ukraine. Recently, it was revealed that Rose Adam was directly involved in the war effort. However, we also want to ensure that U.S. utilities and nuclear power plants are not adversely affected. We haven't thoroughly reviewed the legislation yet, but it appears to prohibit Russian uranium imports starting around 2028 or 2029. The ban actually starts in 90 days, but utilities can apply for waivers extending to 2028 or 2029. I see this as a gradual reduction, which is a positive step. Most U.S. utilities seem to be moving away from Russian supplies and are also cautious about the risks associated with Kazakh supplies, especially related to transportation. This shift has contributed to an increase in contracting interest. For our next round of contracts, we are anticipating higher prices, and discussions are definitely continuing.

Okay. That's good commentary. Second thing, Mark, you mentioned $25 million investment in the rare earth business for additional equipment. Any rough number on what the expected after-tax IRR is on that investment?

I don't have an estimate on that. We need to secure the necessary materials, Joe. Along with Chemours, we are making significant progress in several areas. Our ability to separate really hinges on the cost of the monazite we acquire. We're developing a hybrid model that isn't solely linked to what we refer to as the China price through our acquisition of Bahia, our agreement with Chemours, and other purchases we're making. However, I can say that we're optimistic about the low capital requirements for that $25 million, which positions us well for those separations. Ultimately, it depends on the cost of the monazite we obtain and how it integrates with two or three of our existing and future sources. The strike rate itself is exceptionally low.

Okay. Another point regarding rare earths: Tesla recently mentioned that the next generation of their vehicles would revert to using engines that do not rely on rare earth-based magnets. Are there any concerns that this could affect the domestic rare earth market, especially if other manufacturers decide to follow this trend for environmental, social, and governance reasons? What are your thoughts on this?

We don't see any material impact. If you want the best performing electric vehicle, there are no smoking gun substitutions at this point in time, you get the most efficient electric motor. I mean, if you look at Tesla, they started as an induction motor company for electric vehicles, which did not include rare earth. And really, I believe it was a Model 3, they started putting rare earth into it. Yes, look, the people I've talked to that are very close to the rare earth market, including some of the trade groups, don't see it as anything immediate, and they don't see it as materially impacting the market. Now, it did shake up the market on the day, but I don't see any real concern on that front at all.

Next question will be from Mike Heim at NOBLE Capital Markets. Please go ahead.

Thanks for taking my questions, a handful of them. First one, do you have a timetable where we might start to get a little firmer cost numbers on Phase 2 or even Phase 3 at White Mesa?

We're aiming to complete much of the work on Phase 2 this year. I would anticipate that by late this year, we'll see favorable progress in developing the additional steps and capacity in the western region. The advantages stem from the existing infrastructure, including power, water, laboratory facilities, and personnel, which are already established. While I don't want to commit to a specific timeline now, we believe our success rate will be surprising to many, given that it's an existing site we are enhancing. In Phase 1, we are utilizing the current SX building and the uranium mill for the cracking and leaching process.

Okay. Then moving on to the medical isotopes, is that the type of thing we'll be hearing developments over the next couple of years? Or is it really somewhat dependent on completing Phase 2 or Phase 3?

No, it's not dependent on Phase 2 or Phase 3 at all. We've submitted a research and development application to the state of Utah. So, we're working through that. But the recovery of the Radium-226 is really largely focused on our mining of our conventional mines, not so much, at least at this point in time, on the rare earth processing.

Okay. Then, a couple of questions on the Chemours agreement. Are they technically in violation? And is there any recourse to you, or given that you're kind of negotiating to extend beyond this year that that's nothing you would consider anyways?

A number of people did not meet the obligations of that agreement. However, we maintain a close relationship with Chemours and are working through the agreement as well as potentially exploring other opportunities in the future. It is unfortunate because we were relying on that feed in the early days of our rare earth program. Nevertheless, they are still supplying us, are located in the United States, and are collaborating with us. So, we are resolving the situation with them.

And have you ever said how long it might take for Bahia to get to the point of producing monazite?

We are looking about three years out. We need to finish the drilling, and a consulting company is assisting us with the permits. Some smaller permits are already secured. We're also in discussions with several heavy mineral sand producers interested in Bahia and possibly partnering with us. So, we expect a timeline around three years. Overall, we're trying to develop a hybrid approach to ensure we supply and feed the White Mesa Mill with the necessary materials moving forward.

I hate to throw out a hypothetical, but if the Chemours agreement ends at the end of this year, you don't reach another agreement with somebody else and Bahia is three years away. Is there a chance that the rare earth element development stalls a bit?

I don't believe so at all.

And your next question comes from Puneet Singh at Eight Capital. Please go ahead.

Just a quick one on the decision not to recover uranium at the mill this year. If the price stays where it is, would you take the decision to add more alternate feed sources to produce uranium through the mill versus going to the market to build up inventory? Thanks.

One of the unique aspects of our operation is that we can fulfill our contracts using our existing inventories. We accumulate alternate feed and typically select the optimal time to process it. We are preparing to restart our mining operations. Our primary focus right now is on completing Phase 1 of separated rare earth oxides. We want to concentrate on this task and minimize distractions. Completing Phase 1 within a year is a significant effort, and we are confident we will achieve it. Currently, our main challenge is managing our bandwidth, but it is important to note that circumstances can change.

Okay. Thanks, Mark. Yes. The only reason I asked is just because I know you get pretty good margins on the alternate feed. Thanks.

Yes. The alternate feed comes from various sources, and we allow it to build up before we decide when to recover it. We have existing inventories and substantial stockpiles of other uranium sources available at the mill that we can utilize when the timing is right. Our main focus is on completing the construction and modifications for Phase 1 this year and ensuring our team stays concentrated on that.

Did you have any further questions?

That was everything. Thanks.

Thank you. And at this time, Mr. Chalmers, we have no other questions. Please proceed with closing remarks.

Thank you everyone for joining the call, and for those listening later, we appreciate it. We are in an incredible position. Many may not realize our long history as a uranium producer, the assets we possess, and our ability to respond with flexibility. Additionally, what we are doing in the rare earth sector presents a unique opportunity in my career, one that may not arise for generations. We are truly excited. In 2022, we invested significantly to reignite our operations. With the closing of Alta Mesa and our uranium sales in the first quarter, we are in a very strong position. We likely have the strongest balance sheet among North American uranium miners, maybe only surpassed by Cameco. We are moving forward aggressively but not recklessly. A strong balance sheet, the right team, and solid relationships are crucial to us. We are known for taking action. Our focus is on building a substantial company that addresses critical elements that few others in the world are concentrating on. We are working hard and remain optimistic about 2023 being a very exciting year for us, looking forward with confidence in our plans and execution. Thank you again, and we look forward to providing further updates as the year progresses.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines. Have a good weekend.