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An Insider's View: The Biggest News Since Fukushima

Publisher's Note: Mr. Amir Adnani is President and CEO of Uranium Energy Corp. (NYSE: UEC). You'd be hard pressed to find a better connected and knowledgeable person in the sector. With the latest news in the uranium sector, now is exactly when investors should be paying attention. Mr. Adnani recently sat down with the Outsider Club's own mining expert, Gerardo Del Real, for an in-depth conversation. The transcript is below.

To your wealth,

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Nick Hodge
Publisher, Outsider Club


Gerardo Del Real: This is Gerardo Del Real with the Outsider Club. Joining me today is president and CEO of Uranium Energy Corp. (NYSE: UEC) Mr. Amir Adnani. Amir, how are you?

Amir Adnani: Excellent Gerardo and Happy Thanksgiving.

Gerardo Del Real: Thank you very much. Happy Thanksgiving to you as well. We recently had the opportunity to catch up, albeit briefly, at the Silver and Gold Summit in San Francisco. I thought it was interesting that cryptocurrency (not surprisingly) and uranium got the bulk of the attention. You were actually on a panel with Dev Randhawa of Fission Uranium and Jordan Trimble from Skyharbour Resources among others focused on uranium. The big news of course, is the closure of the McArthur mine from Cameco. I would love your insights. You're obviously one of the better connected people in this space. Some people would say you're the most connected person in the uranium space and definitely one of the most active people in the junior resource space. Give me your thoughts Amir.

Amir Adnani: No doubt about it, the conference was very positive for the attention that uranium was receiving. Who would have thought uranium would be right up there, receiving the same level of interest as Bitcoin and the cryptocurrencies. And of course, this all goes back to the McArthur River news that you just touched on. This is significant news, as Bloomberg noted, "The Biggest Catalyst for the Uranium Sectors since Fukushima." That's quite a meaty headline, as the event has a major fundamental impact on the market. So McArthur River amounts to about 10% of global uranium production.

Again, putting it into context with the oil market, this would be the same as waking up tomorrow and discovering almost all of Saudi oil production has been taken off the market. I think Saudi Arabia has something like 12% of the oil market. So you can see and appreciate how significant it is. The actual reduction would amount to about 15.6 million pounds. So you're talking about the world's largest mine and mill complex. It's tier one, low-cost production. So this isn't some high-cost mine that they're taking offline and it's in a geopolitically stable jurisdiction. It's low cost and in fact should eliminate most of the excess uranium supply in 2018. I think it sends a really important message to the market and to the buyers of uranium. If there were complacent utility buyers out there they are likely waking up realizing if Cameco is taking McArthur river offline the oversupply is going to be constrained or move into a supply deficit soon. If it’s not 2018, it will be 2019, but the point is it will accelerate a market recovery.

What's really important here Gerardo is the fact that the Cameco news comes on the back of other important cuts earlier this year and even going back over the past 24 months. Earlier this year, we saw the Kazakhs announce they were going to cut 10% of their production, which amounted to about 3% of global supply. We've seen other production cuts announced by the likes of Areva, with their mines in Niger. And, there's been other cuts with Cameco projects in the U.S. as well as other companies in Namibia and elsewhere. You add it all up, and we're talking about almost 30 million pounds of production cuts that's occurred over the past two years. That's now about 17% of total 2018 global production that has been cut over the past two years.

Whether this is uranium, zinc or nickel, or any commodity where you start to take that much production out of the market it's going to tighten supply and set the stage for a meaningful price recovery. We are already seeing that action begin in the spot uranium price, since this news came out uranium is up over 20%. So we're seeing a good immediate response. This is very positive and had to happen because global production costs are not covered at $20 per pound. Even the lowest-cost Kazakh production was under pressure. Many producers have had long-term contracts with prices much higher than current spot prices. Those higher-priced contracts have been supporting production costs that are significantly above spot market prices. With these contracts ending and rolling out of supplier portfolios, you knew that there was just no cushion and that shorter-term market prices that have been driven by inventory would have to succumb to a production-driven market with higher prices to support production.

I really would like to remind everyone about what the incentive price is to bring new uranium mines online. It takes 7 to 10 years, at best, to develop a new uranium project. Most feasibility studies out there for conventional uranium projects are looking at an incentive price north of $60 per pound to develop a new project. We knew that a $20 spot market wasn't sustainable and now we've seen something come through with this McArthur river shutdown that truly validates that view. It’s a substantial development. I think we have a perfect storm developing here because you have the supply-and-demand-side constraints coming in at exactly the same time. Japan looks to be accelerating the restarts in Japan, on the back of Prime Minister Abe's recent election victory, where he's really consolidated power now. In 2016 and '15, there were more reactors connected to the grid than any other time in the last 25 years.

We finally have more reactors under construction today than pre-Fukushima. So the sector's really come around and turned a positive corner in terms of long-term growth, which is consistent with our growth profile. I think the key is to pay attention to this developing perfect storm, Gerardo. The fact is, this McArthur news comes at a time where other developments and news in the sector has all been turning positive. I think we're going into 2018 with probably the best dynamics for the uranium sector we have seen since before Fukushima.

Gerardo Del Real: Now, you mentioned the cyclicality of the business and you've done an incredible job of positioning UEC during the bear market for better times. I think shareholders are going to reap the benefits of that positioning and I want to touch on that in just a bit. Beforehand though, I want to say I was reading through Cameco financials and I believe their costs are somewhere in the mid $30s. The closure of the McArthur mine is a clear signal to the market that you can't make it up on volume as Rick Rule likes to say. Where do you see the price needing to be before we bring something like McArthur river back online?

Amir Adnani: That's a very good question and ultimately depends on the specific project and management expectations. From our perspective, this is probably going to be in the $40 per pound neighborhood. You brought up Rick Rule, he's referred to $75 per pound as the incentive price needed to bring new uranium mines into production. And that's from the point of view of the financier, right? Because it's one thing for the companies to say what the incentive price is, but he doesn't have to write the check to build these mines. I think they're going to want to see higher prices with good prospects for higher returns before investing capital into a new uranium mine.

So ultimately, we will have to wait and see what prices Cameco itself is going to be looking for to bring McArthur River mining operations back online. I think it's also going to come down to the cost structure of your operations. If you have key advantages of building and operating in-situ recovery or ISR projects like what we're doing at UEC, where the capital requirements are low and the production lead time is short. It's a night-and-day difference compared to conventional mining. As you know, we built the Palangana Mine for $10 million and $10 million wouldn't even cover the cost of doing a pre-feasibility study in a conventional mining setting. And of course, we have the added advantage of having the Hobson Plant, which is already built and permitted.

I think it comes back down to looking at the cost curve and saying, "What's the first quartile cost." Right now, first quartile costs are in the $20s-per-pound area and would mostly be from worldwide in-situ recovery projects. Most conventional projects will just need a higher uranium price, and that's good news for all of us because conventional projects are still about 50% of global supply. So, while we're not developing conventional projects and are focused on ISR, much of the bigger supply has to come through conventional mining and that will require prices to be closer to their pre-Fukushima levels at about $70 per pound. But you know the key for us Gerardo has been to remain unhedged in the bear market and preserve our resources for a more rewarding price environment.

Not to pick on Cameco but back in 2006, when uranium prices were starting to march and eventually by 2007 got up to $136 per pound, Cameco was hedged and locked in at $36 per pound for most of their production. And that shouldn't be lost on anyone. That's the really key aspect of why we believe a 100% unhedged strategy is going to really reward investors in a rising uranium market environment. These hedges in contracts that are sold traditionally to be put in place in the uranium mining business, actually are not the best way to be leveraged to the uranium price. You leave a lot of money on the table when you do that. So the discipline that we've had to stay 100% unhedged will really lead to an outperformance and rewarding our investors in an improving uranium market environment. All we have to do is look at the last time the market really made a run in 2006 and 2007 to see why it's critical to be 100% unhedged.

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