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As a rare uranium miner with significant cash reserves, strong management and substantial asset diversification, Energy Fuels Inc. (UUUU) represents a potential contrarian play. As I discussed previously, the company offers considerable long-term opportunities for investors patient enough to wait out the long down cycle.
Energy Fuels has certainly had a hard time of things recently due to a multiyear decline in uranium prices. Despite the cyclical demand woes afflicting the whole uranium mining sector, the company's unique strengths make it quite well positioned to ride out the worst of the cycle - and to prosper when demand eventually ticks up once again.
With the federal government at last stepping up to bolster the uranium industry, Energy Fuels may offer considerable upside for patient investors.
Federal working group gives the greenlight
On Dec. 4, U.S. uranium miners received a welcome piece of news in the form of a set of recommendations published by the U.S. Nuclear Fuels Working Group, a White House-appointed task force with a mission to bolster American energy security. As Bloomberg reported at the time, the working group's findings were highly favorable to the nuclear fuels industry:
"A White House task force's recommendation that President Donald Trump direct the federal government to buy more uranium from domestic producers sent shares of U.S. mining companies higher Thursday. The purchase of uranium by the U.S. Defense Department is among the recommendations being made by the U.S. Nuclear Fuel Working Group, comprised of cabinet level and other high-ranking officials... Any government intervention could be a windfall for the handful of domestic uranium miners."
Energy Fuels saw its share price spike on the news, rising as much as 20% before eventually retracing slightly. Closing at $2.18 per share on Monday, Dec. 9, Energy Fuels was up nearly 15% since the announcement of the working group's findings.
Fresh catalyst for critical mass
The White House working group's decision is a welcome one for the uranium mining industry, but it remains to be seen what action President Trump will opt to take in response.
A significant catalyst building during the latter months of 2019 has been the imminent review of a petition for relief submitted to the federal government that, if accepted, could pave the way for industry-wide financial relief, including subsidies and tax breaks to uranium miners. The federal working group's findings should bolster the petition's prospects substantially.
Submitted jointly by Energy Fuels and Ur-Energy Inc. (URG), the federal petition has been seen by industry analysts as a big opportunity for the uranium mining and refining sectors. In a research note published last month, Crux Investor, an independent stock market analyst group, discussed this potential catalyst:
"Energy Fuels and Ur-Energy are hopeful their petition to the United States Government under section 232 and the subsequent announcement of a 90-day Working Group may bear fruit. If the group's report is favourable to the nuclear industry, it is possible President Trump could subsidise U.S. uranium companies via tax breaks and other federal financial boosts, thus allowing prices to rise and profit to be made for investors who climb aboard while prices are still low."
Not a sure thing
In an Oct. 7 interview, Energy Fuels CEO Mark Chalmers said he would be "shocked" if the government were to decide against his company's petition, as the Trump administration has shown considerable support for nuclear energy (and thus for the uranium fuel production sector).
However, Trump has already rejected one such petition by Energy Fuels. In July, the president demurred when it came to offering desired relief. Hence, it may not be quite so sure a thing as Chalmers and Energy Fuels bulls would have us believe.
Still, in the event of a positive decision, investors should expect demand to pick up in the near-term, resulting in substantial price improvement. Moreover, acceptance of the petition would likely send uranium miners' stocks surging in considerable excess of what was witnessed last week when the U.S. Nuclear Fuel Working Group made its recommendations.
Energy Fuels looks well positioned for the next up-cycle, but its near-term outlook will be driven by the imminent federal catalyst. If the president decides to offer relief, Energy Fuels should see a significant upswing in share price. If the petition fails, the stock will likely get knocked back down toward where it stood pre-working group decision.
Thus, Energy Fuels presents an interesting investment challenge. As a short-term catalyst-based play, there is considerable upside if the Trump administration accepts the company's petition for relief, but playing the catalyst also risks taking a hit if the result is unfavorable.
A prudent strategy may be to split the difference: take a half-sized position ahead of the catalyst, then add in the event of a negative decision.
Disclosure: No positions.
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This article first appeared on GuruFocus.