Energy Fuels Inc Q2 FY2023 Earnings Call

Good afternoon, and welcome to the Energy Fuels’ Second Quarter 2023 Conference Call. All lines have been muted to minimize background noise. Following the speaker’s remarks, there will be a question and answer session. Thank you. I will now turn the call over to Mr. Chalmers, CEO of Energy Fuels. You may begin.

Thank you very much for the introduction. And good morning or afternoon, depending on where you're joining from. And I want to thank everyone for joining the Energy Fuels Q2 '23 conference call and webcast today. We are always excited to discuss our results and our significant accomplishments that we continue to make. For those that cannot join the call today, there will be replays of this presentation available for two weeks on our website starting later today or tomorrow. Every quarter, I say we're making remarkable progress on many fronts, and this quarter is no different. Energy Fuels is likely one of the biggest success stories in decarbonization and electrification while we also emerge as a clear leader in U.S. critical mineral production. This is at a time when it has never been more important. We are a unique investment. No other company I know has the ability to advance uranium, vanadium, and rare earth production capabilities, while at the same time advancing our medical isotope aspirations. And we're doing this while we continue to maintain a very strong balance sheet with zero debt. Today, I'll elaborate on these accomplishments for the quarter and provide details of what I think the rest of the year will look like. I also want to remind everyone that you are controlling your slides to the presentation from your own device, and I'll try to remember to tell you when to say next slide. There will be time for questions at the end of the presentation, and during the question and answer session, Dave Frydenlund, our Executive Vice President, Chief Legal Officer, and Tom Brock, our CFO will be available to answer any questions I cannot address. So let's jump into the presentation. This first slide shows a picture of the remarkable White Mesa mill, which is the critical mineral hub, it's our main asset for the company, producing critical materials for the clean energy transition. And there is really no facility like it that I know of in the world. Next slide. I may be making some forward-looking statements, and those are included in this slide number two. Next slide. So, Energy Fuels is a leading U.S. producer of uranium, vanadium, and rare earth elements, creating clean energy for a better world. Next slide. I've talked about the periodic table before, but it is also good to talk about it again because I want to remind people of all these new elements that are required for decarbonization and electrification that nobody even talked about 10 or 15, 20 years ago. In Energy Fuels, between our uranium activities, rare earth activities, vanadium, and potential to recover radium for medical isotopes, we're able to recover between eight and ten of these elements on the periodic table. I don't know of any other company that will be able to say they'll be able to recover that many elements in due course. It's very important; it’s the future of decarbonization and electrification. We're very proud of that and the way that we've been able to position the White Mesa mill in our assets to do this effectively. Next slide. So, again, just to remind people, uranium for nuclear energy provides 50% of U.S. zero carbon electricity, which is vitally important for decarbonization, and it's almost impossible to meet the goals of decarbonizing without nuclear energy. Rare earths are critical elements used for the powerful magnets found in electric vehicles, wind, and other high-tech appliances, which is truly remarkable. If you want the highest efficiency electric vehicle, it needs rare earths to be the most efficient. Vanadium is primarily used for high strength steel, but it's also increasingly used in grid-scale batteries. The medical isotopes, as I mentioned, we're advancing our strategy to recover primarily Radium-226 and 228 for emerging cancer therapies. We also continue to recycle uranium and vanadium-bearing materials. No one else in the U.S. has the ability to do that like Energy Fuels, which has been an important part of our business up and down markets, particularly in down markets. We're always very proud of our financial strength, with significant cash in inventories, and I'll talk about that more later. Next slide. So now for the Q2 highlights. Here's a picture of the Pinyon Plain Mine, which I built in 1987, and it's a remarkable deposit. Next slide. We ended the quarter on June 30 with $134 million of working capital, which is made up of $35 million in cash, $64 million of marketable securities, and $33 million of product inventory. If you adjust to current commodity prices, you can easily add another $18 million to that working capital at the current market value of that inventory. As I mentioned, we have zero debt, which we're very proud of, because we have probably around $1 billion worth of assets. We still hold 766,000 pounds of finished uranium, about 900,000 pounds of finished vanadium, and about 37 tonnes of finished high purity partially separated rare earth carbonate in inventory. Next slide. During Q2, we sold some uranium to a major U.S. nuclear utility, about 80,000 pounds. That was around $4.3 million at around $54 a pound, with a gross margin of about 46%. We're still operating four conventional uranium and vanadium mines, including the La Sal Complex, the Beaver Shaft, the Whirlwind, and the Pinyon Plain Mine in Arizona. Final production decisions on these projects will be made based on our inventory levels and market conditions. We also sold PFN technology to Encore for $3.1 million. We had bought the PFN for around $500,000; we made a gain of $2.75 million on the sale of the PFN. We also have the rights to use that if we need it in the future. Right now, we don't have any projects that require the PFN, so we made a nice profit on the sale of the PFN. In addition to the 766,000 pounds of finished uranium inventories, we have nearly 400,000 pounds of uranium in circuit and in raw materials at the White Mesa mill. Thus, we really have an order of 1.2 million pounds of uranium in inventory, in circuit, or in raw materials. Next slide. Rare earth production. We produced approximately 99 metric tons of high purity partially separated rare earth carbonate from monazite, which included approximately 44 metric tons of total rare earth oxides. We are producing the most advanced rare earth material being produced in the United States today. On our Phase 1 Rare Earth Separation project, which should be operational in the last quarter this year or the first quarter next year, we're very excited about that. We are modifying and enhancing the existing solvent extraction circuit at the mill to produce separated oxides. This is the only example of this that I know of in the world where we will have a uranium circuit, vanadium circuit, and rare earth circuit all in one building. We expect to have the production capacity of the rare earth circuit up to 1,000 metric tons of NdPr per year. Development work has begun, and we have ordered most components that are expected to be delivered in Q3. We expect the Phase 1 cost to build out the separation plant to be a remarkable $25 million, which is very low cost relative to others, primarily because we're doing it within existing infrastructure. Next slide. Our Phase 2 Separation Project is undergoing further engineering work to position us, given enough monazite feed around 2026, to produce three to four times what the Phase 1 project is capable of. The Phase 2 project will also include a standalone cracking and leaching circuit at the mill, enabling us to produce and refine both rare earths and uranium and vanadium simultaneously. Phase 3 is focused on the heavies, but we do plan to conduct heavy separations later this year in the laboratory, focusing on the Dy and Tb, which are two very valuable heavy rare earths required to make the most robust electric engines that withstand higher heat capabilities, than the Dy and Tb or the dysprosium and the terbium. We also acquired the Bahia project in February and are advancing that. We have a substantial land position of around 60 square miles, with a potential in time to produce between 3,000 to 10,000 tons of monazite sands. We've completed our Phase 1 drilling, purchased a drill rig, and are currently training personnel on that rig. We're also shipping the rig down to Brazil in the next month or so and will start our Phase 2 drilling campaign with our own rig. Next slide. Vanadium sales. We didn't make any vanadium sales in Q2, but we still have the ability to go back into vanadium production quite quickly. What we did sell in Q1 had about a 37% margin. Although vanadium is not the main focus of the company, it remains an important part of our business plan as the only conventional vanadium processing facility in the United States. We have nearly 900,000 pounds of vanadium in inventory. Next slide. Again, looking at our working capital, the $134 million I mentioned, with zero debt, and considering our uranium inventory that I reported, we can adjust for current prices, and the inventories are worth $20 million more than what's included in the working capital. I want to add that it does not include our note with Encore or some of our other investments. So we are in a very strong and enviable position with our balance sheet. Next slide. Regarding our guidance, we expect to sell approximately 560,000 pounds of uranium this year, at an average price of between $58 to $60 a pound. We've already sold 300,000 pounds to the U.S. uranium reserves, the 80,000 pounds I mentioned earlier, and we'll sell another 180,000 pounds, which is equivalent to about another $10 million of revenue that is already contracted to be sold. We expect to put at least one new uranium mine in production later this year or early next year, and we're seeking additional long-term supply agreements at higher prices. We're primarily focused on the rare earths sector at the mill this year and are not planning to produce any uranium or vanadium in 2022. We still plan to process around 600 metric tons of monazite and recover around 150 to 270 metric tons of REO in '23. We plan to advance and commission our Phase 1 separation plant later this year or early next year. We are also seeking rare earths off-takes and are building our supply of monazite. We're in advanced discussions with several parties, and it'll be a good day when I can announce more information on that. We're advancing the Bahia project as mentioned earlier through SK-1300 Assessment Reports and 43-101. So, in closing, next slide is just a beautiful photo of the sun setting in Southern Utah. I'd like to open it up for any questions anyone may have.

Your first question is from Heiko Ihle from H.C. Wainwright. Please ask your question.

Hey, Mark, can you hear me okay?

Yes, you're fine, Heiko.

Perfect. I'm calling in from some little island zone in Italy. So apologies if the reception is not all that great. Anyway, I'm excited for all these avenues in your future to bring in some money. So let's keep that going. Walking through the 400,000 pounds of U3O8 that you have in raw materials work-in-progress inventory, can you walk me through where we might stand by the end of the year, both on the vanadium level as well as on the U3O8 level, please?

Okay. Well, we're not planning to produce any additional finished uranium products this year, Heiko. We mentioned the 400,000 pounds because we have alternative feed, but we also have various uranium ores. For example, we have material that came from the Mount Taylor project, which is sitting in stockpile at the mill. We can process that when we decide to make that 400,000 pounds into finished goods to complement the 760,000 pounds we already have. We're mainly focused on the rare earths to get this Phase 1 operational by the end of this year and early next year. We're looking at a potential mill run in the next year or two when we decide we want to do the mill run for uranium ores and potentially vanadium ores.

That's helpful. Thank you. Do you want to perhaps share some longer-term expectations as well?

Yes. As we said, when we look at the uranium business, we have the assets to increase production to between 1.5 and 2 million pounds of uranium annually. We want to build that out when we have more contracts. Right now, our contracts are around 500,000 pounds a year, so we don't have the need to produce significantly more than that unless uranium prices increase substantially. We're continuing to underpin that production with more contracts. However, we can scale up to 1.5 to 2 million pounds with limited capital, mostly just working capital. On the rare earth front, we should be able to produce up to 1,000 metric tons of NdPr in Q1. We believe we are starting to see progress toward perhaps half of that, but it's not guaranteed. We are hopeful of reaching about half of that looking into 2024 and plan to continue building additional feeds of monazite to fully book Phase 1 at full capacity in the next year or so. Additionally, we’ll continue engineering and permitting as required for Phase 2, which will produce 3x to 4x the Phase 1 output, subject to securing a significant amount of monazite to enable the build-out of Phase 2. However, we are being proactive in our outreach as we begin conversations with various parties regarding potential feed arrangements.

That's helpful. Thank you. Moving on, one sentence in your release really struck my curiosity when you discussed the engineering and enhancements for the plants for the NdPr. Could you walk me through some of the investments into this area? What exact amounts are you planning for the upcoming year, and what are your longer-term monetary expectations?

Yes. Well, as I said, the Phase 1 cost is around $25 million, and that gets us up to about 1,000 tonnes of NdPr per year, which is low because we're performing the cracking and leaching in the mill. This also uses the existing SX building for the separation stage. So, that's quite economical relative to others. We do not have all the final engineering completed for Phase 2 yet, but we believe it could be between $250 million and $350 million, which would fund a facility capable of producing 3,000 to 4,000 tons a year of NdPr. The Phase 1 facility may also still be operational in conjunction with the Phase 2 facility. The Phase 2 facility will include its own cracking and leaching circuit, which means we won't have to alternate between uranium runs and rare earth runs. We believe that our operating costs will be competitive, not quite as low as anyone outside of China, but still very favorable.

I can see the financial implications if we were running at peak production as described. However, what about the heavy rare earths? Can they still be sold off, or would you hold them until a better time?

The heavy REEs, or what we refer to as SM+ (samarium-plus) and heavier elements, will be concentrated. They can either be sold or held, but more likely, we opt to hold them. These include elements like Dy and Tb, which are of significant interest not just to the U.S. government but globally. The market dynamics are tricky, especially since we believe that the Chinese continue to manipulate the market in order to maintain their dominance in rare earths. Therefore, we're trying to position ourselves to develop our own capabilities as much as possible.

Thanks. Hi, Mark. You just mentioned that you believe your operating costs for NdPr should be competitive with anyone outside of China. If I were to look at gross margins, could we be thinking about margins in the 50, 60, or even 70% range?

Well, yes, it depends largely on various factors, Michael. We're still conducting our engineering studies and, consequently, don’t have all the granular details yet. However, we believe these will present robust margins. A significant aspect is the price at which we acquire our monazite. We're examining a blended pricing strategy that integrates purchasing from different sources, leading to hybrid cost structures. These factors will ultimately influence our overall cost. Still, I do believe we will be competitive with the individuals and companies you mentioned because we operate in a region with low water costs, low power costs, and very relevant labor skills compared to Australia, making our jurisdiction highly favorable.

If we consider 100 metric tons or a million kilograms with potential gross margins at peak levels, what does that mean for the heavy rare earths? Will they be sold or held in inventory until favorable conditions arise?

They can certainly be sold. We plan to create a concentrate that can be marketed or held. However, we’re inclined to hold them since the Dy and Tb are critical elements that are sought after by the U.S. government and globally. The market for these rare earths is nuanced and we are wary of the ongoing dynamics in the industry, especially with the operations of companies like China.

Hey, Mark and team, thanks for taking my questions. Firstly, regarding your G&A expenses, I’ve noticed they seem elevated over the last four quarters. Is there something driving that, or is this the new norm we should expect?

Well, the elevated G&A is largely due to our increased operational activities across the company. Since the beginning of the year, we’ve hired about 30 people, as we’re developing various projects across different locations. We're capitalizing some of that; however, this is the new normal as we transition from a standby mode to an operational mode, which requires a certain amount of burn rate to get there.

No, Mark, thanks for the question. I concur that as we transition out of standby care and maintenance, moving into an earnings mode requires additional staffing. Additionally, in G&A, we’ve recorded $2.7 million in stock-based compensation for the three months and six months ending June 30. So as we add more personnel, that will inherently increase our units; however, it's non-cash.

Understood, that makes sense. Regarding a moratorium on mining uranium in specific regions of Arizona, will this have an impact on your operations, or do your assets lie outside of these areas?

No, we don’t believe it's going to impact us as we have valid existing rights. We have several assets that are fully permitted and ready to go, such as Pinyon Plain. We are actively advancing that project. There are discussions around a potential monument, but we don’t believe it will affect Pinyon Plain.

To clarify, your asset is either outside of the proposed monument's region or has an exemption?

It is inside the region, but it's a project that has been fully permitted and supported by the U.S. Forest Service for 35 years. We believe that our valid existing rights will be upheld.

Mark, I think you summarized it well. Under the law, any national monument declaration is subject to established existing rights. The area where our Arizona mines are currently under a mining withdrawal, but these rights are intact. Our established rights are sound, and we will continue to move forward with the project.

Thanks for the clarity on that. Lastly, as you evaluate current operating expenses and the potential to grow the business, when should we expect you to start selling excess inventory, or will operations restart based on fixed pricing or timelines?

We're really focused on building a book where we have at least a $20 margin on our uranium production. As seen with many of our recent sales, we're achieving margins above this with a lot of our inventory sales. That said, much of that has derived from alternative feeds. We're working to ensure profitability throughout, and we intend to build our book. Currently, we would like uranium prices to exceed the $70 mark before we actively pursue building that book further.

Mark, Niger produced 5% of uranium worldwide, and the mine there is owned by a French company. Do you have any insights into what might happen there?

Look, there is certainly unrest with the coup happening in Niger. It's a nation with a long history of uranium production. However, I'm not close enough to assess the situation accurately. Nonetheless, it emphasizes how important supply sources are from politically stable regions. Countries like Niger, Russia, Kazakhstan, and Uzbekistan pose risks that could impact the industry, so pertinent dynamics could lead to price fluctuations.

Are there any implications for today's pricing?

Historically, when we examine uranium market trends, we observe that when prices begin to shift, it isn't often due to a singular factor. Looking back to 2005 and 2006, we saw floods affecting mines like Athabasca and Ranger in Australia. Therefore, multiple factors tend to work concurrently to influence prices. Presently, there are indications that the price of uranium is too low to encourage new production when factoring in demand, reactor developments, and geopolitical issues like what’s happening in Niger. Therefore, rising demand, active reactors, and conditions in key production regions could enhance the pricing, which should ideally reach around $70 or better to stimulate new production efforts. Thank you, Reed.

Thank you. There are no further questions at this time. Please proceed, sir.

Well, firstly, again, thank you for your interest in Energy Fuels. It is a unique story, as I mentioned earlier. We're working hard, and we're performing well as a company, and I believe we have an extraordinary future ahead. It's a challenging landscape to deliver new production, but as a company, we're committed to creating new production. We're not merely a promotional entity; we aim to build fundamentals that capitalize on the clean energy technology of the future and the ongoing energy transition. I appreciate the unwavering support from our shareholders, so thank you very much, and have a good day.

Thank you, ladies and gentlemen. The conference has now ended. Thank you all for joining. You may all disconnect.