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Energy Fuels: Contrarian Opportunity With Explosive Potential, Pt. 1

Uranium miners have had a rough go of things in recent years. However, there are a few uranium companies that have continued to hold on. One of these, Energy Fuels Inc. (UUUU), appears to be especially well placed to profit from both near-term catalysts and long-term demand improvements.

A harsh market cycle


Uranium prices have fallen precipitously since 2007; consequently, many companies in the sector have either been forced to shutter high-cost mines or gone under altogether. According to Brett Moldovan, a uranium production specialist at the International Atomic Energy Agency (IAEA), uranium companies face differing cost profiles that will impact their ability - and willingness - to reopen closed-down mines:


"The required uranium price for restart is different for each mine as their operating costs vary. Peaks in the price of uranium are often short-lived, while valleys can last for decades."



Lower prices have prevailed due to oversupply and inventory buildup over the past several years. Crimped demand and higher production have been at fault, according to Moldovan:


"Over the past few years a surplus of inventory of uranium ore concentrate has developed, leading to lower prices. This is a result of a combination of increased production and reduced demand. Operating many of the mines under the current price for uranium is a challenge economically."



Waiting for the cycle to turn

Given the grueling nature of the uranium ore market, poorly funded players have struggled financially. Energy Fuels is unusually well placed among its peers in this regard. With more than $40 million in the bank, the company enjoys a decent cash cushion.

Moreover, Energy Fuels enjoys the benefit of "multiple shots on goal." It has a portfolio of geographically diverse mining assets, including promising opportunities in Arizona, New Mexico, Utah and Wyoming.

The company is further strengthened by its relative diversification. Pure-play uranium miners have been especially exposed to the multiyear price compression. Energy Fuels, on the other hand, is also the largest producer of vanadium in the United States. The company is also a key provider of "low-cost environmental cleanup and uranium recycling services, including potential involvement in the EPA clean-up of Cold-War-era uranium mines," adding another valuable source of revenue beyond uranium mining.

Track record is key

Uranium mining can be a brutal industry. Without an experienced management team, uranium companies can rarely succeed, as analyst Crux Investor discussed in a research note published last month:


"Uranium is an incredibly complicated commodity to work with. From permits, licences, safety, legislation, regulation, transportation to refinement there are numerous difficulties, not to mention the difficulty of mining itself. The sale of uranium is also far from straightforward, because the buyers are utility companies with long buying cycles and complex purchase criteria. If a management team has not already been through this process from start to finish, they are learning on the job with my money."



With more than 40 years of uranium mining and refining experience, Energy Fuels has a long history of operating successfully in a challenging industry. That track record makes the company stand out markedly from the pack, which is largely composed of wildcatter-types with questionable records of management and operational expertise.

Next time

Energy Fuels presents an interesting long-term opportunity based on its positioning within the industry and capacity to survive the current down cycle. However, there may be more opportunities in the short term, as we will discuss in our next entry.

Disclosure: No positions.

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This article first appeared on GuruFocus.