Categories: Energy / General Market Commentary
Topics: General Energy / General Market Commentary

Uranium Energy Corp. (NYSE: UEC) CEO Amir Adnani on the Historic Recommendations from the US Nuclear Fuel Working Group

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is the president and CEO of Uranium Energy Corp. (NYSE: UEC), Mr. Amir Adnani. Amir, a pleasure chatting with you again. How have you been?

Amir Adnani: Hey, Gerardo. I've been good, man. I've just been working from home, from the office, from wherever I can like everyone else, the new normal that we've all gotten accustomed to.

Gerardo Del Real: The new normal is right. I trust that you, family, loved ones, everyone's healthy.

Amir Adnani: Everyone's good. My team at UEC, my family at home. We've managed to stay focused on being healthy, being safe and all of that, but at the same time continuing to plug away, make progress, and just got to advance the ball down the field.

Gerardo Del Real: Let's talk about that. You mentioned working from home, and frankly wherever you can work. You've been busy. There is a lot going on in the uranium space. I want to talk UEC specifically because we finally got the recommendations from the Nuclear Fuel Working Group. Very, very aggressive support. 

I'd love your take there, but I also would like an overview because I haven't chatted with you in a month or so. Just in general, the uranium space, what you see, what it looks like. I could tell you my opinions, but I'm as bullish as I've been in a very, very long time.

Amir Adnani: I think we definitely have a setup right now that has some meaningful similarities to 2005, 2006 and maybe 2010 to some extent. Those were all years that were the preludes to the previous uranium bull markets. I think an important part of this similarity is the fact that it's where we've been, not just what has happened recently, but where we've been. And where we've been in the uranium market over the last few years is most instructive and important not to forget. 

Production of uranium was on an upward trajectory after Fukushima and until 2016. I think it peaked out at around over 160 million pounds of production in 2016. It wasn't until 2017 that supply side discipline really started to settle in, especially for the big producers, the Kazakhs, Cameco, and Orano of France.

So you start to see production cuts in 2017, 2018, some in 2019. The big notable one we've talked about was McArthur River, the world's biggest uranium mine that Cameco shut down. And so we came into 2020 with uranium supply from production projected be at around 140 million pounds. That's down considerably from over 160 million in 2016. And demand was not only steady, but in the last 7 years we've seen 47 reactors, new ones, be added to the grid globally, another 54 under construction. So we were definitely looking much better on the demand side. Nuclear generation, in terms of electricity generation from nuclear power, in fact had gone back to its pre-Fukushima levels and was higher.

Then you get your black swan event. So it's important that people realize that we're not seeing a surge in uranium prices just because of COVID-19. It's a question of where we've been. We were seeing very important fundamental supply-demand rebalancing bringing us into 2020. So that is now being accelerated. You have a bit of a tipping point where COVOD-19 comes out of nowhere, like similar to 2006, where the flooding of Cigar Lake happened and it was a black swan event. This time around, of course Cigar Lake is in the news again, but you have COVID-19 impacting not only remote uranium mines, those that are fly-in fly-out operations, but all types of mines globally have been impacted. 

Hundreds of mines from gold and copper to other commodities, and uranium of course, have been impacted. And so if you then break it down on a monthly basis – because again it might be a question of months not years whereby this disruption returns to normal – the monthly production of uranium comes in at around 12 million pounds. So that's just taking the projected annual number, dividing it by 12. And about half of that is impacted right now between the Kazakhs, between Cigar Lake, the Kazakhs, some of the mines in South Africa and Namibia. And not to mention that BHP basically took its guidance down for production at Olympic Dam, which produces number of commodities including uranium, for this year and next year.

So the long and short of it is that if you think about the fact that half of monthly production or supply is currently offline, and it's like that on a month in to month out basis until further notice. Cameco called their shut down of Cigar Lake an indefinite shutdown. Gerardo, whether it's uranium or masks or soybeans, if I said to you half of supply of anything is being taken offline on a monthly basis and demand is steady, that would be quite bullish for the price of whatever that underlying commodity was.

For uranium, you've seen the price impact. Uranium prices finally broke out of the $20-range and into the $30-range. First time in four years that we've seen the spot uranium price with the $3 in front of it. So it's gone from $24 per pound to $34 per pound in a span of few weeks. That's a 35% increase, makes uranium the top performing commodity of 2020 so far. It used to be that people would say, "Well, if the oil price goes down," mind you, even though uranium is not a substitute for oil and vice versa, but there was always this energy mentality. If oil goes down, uranium's going down. Well not in the last few weeks. We've seen oil get decimated and uranium go exactly the other way. So really kind of demonstrating that it's going to dance to its own supply-demand tunes, and those have been good tunes so far this year.

All of that to me is in a way very important before we even talk about the very historic news from the Department of Energy. Because the news that came out of the Department of Energy is quite historic, but it's quite US-centric. The nuclear business is a global business. And supply-demand from a global point of view should be a much more important driver in everyone's mind and I think in investors' minds. 

So to see an environment where we're seeing a meaningful rise in the uranium price, we're seeing supply-demand fundamentals really come in to being an important force, and then the historic DOE news, in my mind, becomes a cherry on top. I don't think we could have asked for a better sort of turn of events. Of course, none of it was by design, but it's just the way it's played out, Gerardo. I think it's quite positive and bullish.

Gerardo Del Real: Let's talk about how UEC is positioned to take advantage of it. We know the cliche in the uranium space is that bull markets tend to have violent upside. We've seen that with the 30-plus percent increase in the spot price. But more importantly, the equities like UEC are finally starting to catch not just speculators', but investors' capital. We're seeing big volume, we're seeing percentages increases that are encouraging.

How do you maintain that momentum, Amir? And how do you continue that moving forward, UEC specifically?

Amir Adnani: Well, first of all, again, this is all starting to really unfold positively recently, and there's so much to come. Again, let's quickly touch base or expand a bit on the development and news out of the US government, which is this report that finally came out from the Nuclear Fuel Working Group, which again, going back is something that was established out of a directive issued by President Trump. So the highest office in the country really was behind this push. 

It really should be stated that support for nuclear energy and the idea that we've got to regain lost leadership in nuclear energy and uranium mining really has bipartisan support and resonates across the aisle. Because I think it's unacceptable to most Americans that you're importing 100%, that 100% of uranium requirements are being imported, that we get 20% of our power from nuclear energy and yet we don't produce any uranium domestically. And this idea that, oh, well we're going to get it from Canada. Well no, because Canada now has no uranium mines operating with Cigar Lake shut down. The uranium mines are all offline. In fact, this is the first time in the history of nuclear energy where there's no uranium mines operating in North America.

Ultimately, what is really important here is the fact that the the US government, as organized by the Department of Energy, wants to establish a national uranium reserve similar to the strategic petroleum reserve that has been there. This national uranium reserve, it will have an initial budget of up to $1.5 billion to acquire uranium for government stockpiles, for strategic stockpiles. 

What's important about this is really twofold. Not only does it add a new source of demand to the market, because this US government buying, this $1.5 billion buying, this is in addition to utility demand, the 180 million pounds of annual demand that I talked about earlier, that's utility demand. US government comes in on top of that. But in addition to becoming a buyer, US government has also announced that it will stop selling uranium, something it has been doing for a long time since the end of the Cold War, from its stockpiles as part of barter programs that it's been doing. So not only does it take away supply, inventory or secondary supplies from the market, but it adds new demand. That's a very exciting setup.

Now, to qualify, to be a competitive supplier to the Department of Energy, first you got to be a US company with US assets. So UEC, our company, we can check that box. You got to be a licensed producer. It takes up to 7 years at best to produce uranium in the US. We can check that box. We have a licensed uranium plant and built processing plant in South Texas at our Hobson plant. We have three mines in South Texas that are fully permitted, one in Wyoming, Reno Creek, which in fact is the largest pre-construction uranium mine there. You've got to be competitive, right? This is not a government bailout. This is not something that's going to just bail out some mine that's uncompetitive. 

The most competitive way to mine uranium today in the world, as proven by the Kazakhs, who have become the dominant force in uranium mining in the last 15 years, the most competitive way to mine uranium is in-situ recovery. Every pound of uranium mined in Kazakhstan is in-situ recovery. And the Kazakhs have been able to grow their production 50-fold. They were producing 1 million pounds of uranium in 1995, and now they're producing 50 million pounds of uranium, all with in-situ recovery.

So the good old ways of mining uranium, conventional mining, open pit mining, underground mining, that in fact hasn't been the source of production growth in the industry. It's all been ISR. And that's what the US has. The US has deposits that are amenable to in-situ recovery, they have sandstone-hosted deposits, and expertise and history with this method. That's what Uranium Energy, our company, has invested 15 years of our time, of our resources, of our capital, acquiring these types of deposits and assembling. 

Gerardo, I'm really proud of the fact that today, UEC, for US companies, we have the largest space of fully permitted pre-operation in-situ recovery projects of anyone. I say pre-operations because obviously all production's on standby right now in the US.

What really puts us in an important position here is to A, have that new customer that we can sell to, which is the US government once they start with this national reserve program, once they get going, which hopefully is expected to be in this year, in 2020. But you've got the US government you can sell to because they're going to buy US-mined uranium only. But you also have US utilities. You've got 98 reactors in the US who also want to be diversifying their supply sources. What COVID-19 has done more than ever is highlight the importance of reliable domestic supply chains, whether it's for uranium, whether it's for ventilators or masks, you name it. This is an important topic now. So a reliable supply source and one that could be cost effective is what we want UEC to be for the US government, for US utilities.

To demonstrate that, our fully permitted assets that put us in the driver's seat to be able to produce uranium quickly, can also be low cost because it's the in-situ recovery method, and to ultimately lead US production higher. I don't think we're going to look back five years from now and say we're still producing nothing in terms of uranium in the US. It's going to change. I think this sector is going to grow tremendously. It's going to create thousands of jobs, if not tens of thousands of jobs. That's quite exciting as well, because there's less than 400 jobs in US uranium mining right now. At its peak in 1980 when the US led the world in uranium mining, there were over 20,000 jobs. 

This really checks so many boxes. I get excited. We're finally seeing all these things that for so long we've been building towards are starting to pan out. It's just kind of frustrating that you have to kind of move at this reduced speed of COVID-19. But look, things come and go at sometimes strange times.

Gerardo Del Real: Amir, you mentioned UEC controlling the largest resource base of fully permitted ISR projects in Texas and Wyoming of course. How quickly can you move? How nimble can UEC be to turn the key per se and get production going again? What would that look like in the bullish scenario that we're all anticipating with the robust support of the US government and the DOE?

Amir Adnani: Well, really I think the most nimble in the US, because let's just look at what we did at Palangana in 2010. I think this is very important. It's the proof of concept that UEC has. UEC was able to get into production in 2010. At the time it was the first mine to go into production in the US in over a decade. And in 2010, we were able to build the Palangana mine in 6 months, $10 million of CapEx. 

Of course, the CapEx was also low for two reasons. We were just drilling wells and building a satellite, which was then going to ship uranium-loaded resin after it had been mined with in-situ recovery to the Hobson processing plant. This is the benefit of our hub and spoke strategy.

When we operated Palanga, over the three years of production there, the average cash cost came in at less than $22 per pound. And we were able to demonstrate, and to this day point to the fact that there's your proof of concept that A, the company has the operating know-how to build in-situ recovery mine quickly, on time, on budget, and have capital costs and operating costs that puts it in the lowest quartile globally for both capital intensity and operating expenses. And that future projects that we will look to develop in South Texas would have very similar cost requirements or CapEx requirements, and hence why after we shut our production in 2014, we went and focused on projects like Burke Hollow, advancing those, permitting those, and getting them to the position so that when we do see a uranium price that we like to see as trigger for restart. 

We're looking at a price of around $45 to restart in South Texas, around $50 to build in Wyoming, that we can do, we can move quickly, we can move within months. And the capital requirements with a hub and spoke strategy in an area that doesn't involve a fly-in fly-out operation, where you're basically drilling water wells to inject solution and recover uranium using the ISR method. These are the very important cost advantages and quick turnaround advantages and the scalability advantage that in-situ recovery has.

Gerardo Del Real: It's an exciting time in this space. I know you don't tend to use a lot of adjectives, so to hear you excited, Amir, is encouraging to say the least. One last question before I let you go. Do you believe that with all the supply destruction we've seen that we finally get the utilities to move?

Amir Adnani: I think it's a good question. Yes. I mean look, it's going to have to happen because ultimately there is the anticipation of a utility contracting cycle because when you look at the levels of uncovered reactor requirements starting next year and the year after that, every year it gets larger and larger and larger. The utilities' last really major contracting cycle was in 2010. Of course contracts have been signed along the way, but contracts at levels that also ensures the development of new supplies coming online. And when you think about the fact that uranium prices need to be north of $50, the incentive price to build a new uranium mine in the world starts at $50 and it goes to $75. So clearly no developer or no one able to bring a new uranium mine online can do it signing a contract at $34. So if utilities are signing contracts at $34, they're not ensuring that new supply comes online, which is what they need in terms of making sure their availability of fuel is there for them in the years ahead.

So I think the next driver of this really has to be seeing increased activity by utilities on the contracting side. That's bound to happen because again, when you look at uncovered reactor requirements, it's got to be covered, it's got to be filled at some point. That will be an important driver. And it's exciting that the price has already moved so far without that being driven by a utility contract thing. And when you look at Cameco, which is again a major producer, they have as of their latest announcements and quarterly results, I think up to 15 million pounds I saw in one of the analysts reports, one-five, 15 million pounds that they need to still buy this year. Because again, remember they shut all their mines down and they're buying uranium in the market to deliver into contracts. 

It seems like for the time being you've got other sources of buying in the market than utilities. And utilities are nibbling away, but not in a big way, but when they do, Gerardo, I think that's what takes the price to even new highs and over the $40 level. So it's exciting that it's come this far, but without a significant amount of contracting to get us to this position of this $34 uranium price.

Gerardo Del Real: Well said. Amir, insightful as always. Exciting times. I think that's the right word. I think this is the perfect storm for a bull market that many people a lot smarter than I have called for for years, but I think we're finally here. Anything you'd like to add to that, Amir?

Amir Adnani: It's exciting times, I agree with you, and love to come back and talk more as we get more updates and developments. There's been a lot of wait and see both with the Nuclear Fuel Working Group and the uranium price, and frankly, getting a bit frustrating sometimes for investors as well that have been following the sector. I think everyone deserves, who's been in this for a long time, some of the momentum that we're seeing in the sector now are well-deserved. And companies that have been in this in a very committed, long-term fashion I think stand to really benefit. UEC definitely is in that camp, and I'm excited for what we have coming here for the rest of this year and into next year.

Gerardo Del Real: Amir, thank you again. Look forward to chatting soon.

Amir Adnani: Okay, likewise.

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