Energy Fuels (UUUU) Falls 15.3% YTD: Should You Buy the Dip?

Energy Fuels UUUU) stock has declined 15.3% year to date against an increase of 27.1% for the industry. It has also lagged the broader Zacks Basic Materials sector’s decline of 3.7% and the S&P 500’s climb of 17.5%.

UUUU Stock Underperforms Industry, Sector & S&P 500

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The UUUU stock is currently trading below its 200-day and 50-day moving averages since Jul 2, 2024.

UUUU Shares Trading Below 50-Day SMA & 200-Day SMA

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Decoding Energy Fuels’ Decline

Energy Fuel’s share price has decreased in tandem with uranium prices so far this year. Uranium prices had surged to 17-year highs of $107 per pound on Feb 2, 2024. This was triggered by the declaration from Kazatomprom, the world’s largest uranium mining company based in Kazakhstan, that it is lowering its 2024 production guidance. Kazatomprom cited difficulties in sourcing sulfuric acid, which plays a key role in uranium extraction.

This spike was short-lived and the uranium market has experienced a moderate pullback in the past few months, attributed to profit-taking among traders and slower spot-buying activity among utilities. Uranium prices have been volatile and currently stand at $86 per pound, marking a 5.9% decline since the beginning of this year.

Additionally, Energy Fuels’ recent moves, including the acquisition of Base Resources in April 2024 and the joint venture agreement with Astron Corporation Limited to develop the Donald rare earth project, have been perceived as risky and are weighing on its share price. These deals are expected to enhance the company’s REE (rare earth elements) oxide production. The REE market is dominated by China, given that it produces nearly 90% of refined REE products. Historically, rare earth companies with no ties to China have found it difficult to compete economically with China-controlled entities. Also, in 2024, short-term prices for these metals have been under pressure.

Given the recent weakness in Energy Fuels’ shares, investors might be tempted to buy the stock. But is this the right time to buy UUUU? Let us find out.

Factors That Will Turn the Tables in UUUU’s Favor

Uranium’s Demand Prospects Solid Amid Limited Supply

Over the past few years, the global uranium market has undergone a paradigm shift from being inventory-driven to a production-driven market. Demand for uranium is surging due to factors like growing electricity needs, decarbonization efforts and data center expansion. Uranium is the fuel for carbon-free, emission-free, baseload nuclear power, one of the cleanest forms of energy in the world. At the COP28 United Nations Climate Change Conference, 22 countries signed a declaration to triple nuclear energy by 2050, supporting additional growth for the nuclear industry and, thereby, uranium demand.

In early May, U.S. President Joe Biden signed the Prohibiting Russian Uranium Imports Act into law, which will go into effect on Aug 11, 2024, and extend through 2040. This law bans Russian uranium imports and earmarks $2.7 billion to bolster the development of the domestic uranium-processing industry.
Underinvestment in uranium mining operations over the past decade has led to a structural deficit between global production and uranium requirements. This is anticipated to widen further. As existing mines deplete resources, new production will be needed to meet existing and future demand. The timeline for new mining projects can take 10 years or longer.

We, thus, believe that the recent downtrend in uranium prices is temporary, and supply pressure and solid demand fundamentals point to higher sustained uranium prices in the future.

Poised to Capture Market Opportunities

The company sells uranium into its existing long-term contracts and evaluates selling a portion of its inventories on the spot market if prices go up. In the first quarter of 2024, the company sold 300,000 pounds of uranium (under one of its term contracts on the spot market) at a weighted average price of $84.38 per pound for $25.31 million. This resulted in an average gross margin of 56%.

As of Mar 31, 2024, the company held 385,000 pounds of finished uranium, and an additional 495,000 pounds of uranium as raw materials and work-in-progress inventory that can potentially be recovered relatively quickly to take advantage of an increase in uranium prices.

The company has three long-term contracts with major U.S. nuclear utilities that require deliveries of uranium between 2023 and 2030, with base quantities totaling 2.50 million pounds of uranium sales remaining over the period and up to 3.70 million pounds of uranium if all remaining options are exercised.

Upbeat Revenue & Earnings Growth Estimates

The chart below shows an upward trend in Energy Fuels’ revenues over the past three years. UUUU has seen a 3-year CAGR of 256% in its top line, whereas the bottom line witnessed a CAGR of 6.6%. The company has outscored its peer Cameco’s CCJ 3-year CAGR of 27.6% and Centrus Energy’s LEU 3-year CAGR of 3.6%.

UUUU’s Revenue Trend in Past 3 Years

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For fiscal 2024, the Zacks Consensus Estimate for UUUU’s revenues indicates year-over-year growth of 37% and that for 2025 suggests a further 234% surge. The Zacks Consensus Estimate for 2024 bottom line is pegged at a loss of 11 cents, which indicates an improvement from the loss of 12 cents reported in 2023. The consensus mark for 2025 is pegged at earnings of 15 cents, suggesting year-over-year growth of 236.4%.

Energy Fuels’ Growth Plans on Track

The company plans to produce 150,000-500,000 pounds of uranium in 2024, aided by ramped-up production at its Pinyon Plain, La Sal and Pandora mines. The company is preparing two additional mines in Colorado and Wyoming (Whirlwind and Nichols Ranch), which could increase uranium production to a run rate of more than two million pounds of uranium per year as early as 2025. The company is also advancing several other large-scale U.S. mine projects to raise the capacity to 5 million pounds per year to bet on the robust uranium market conditions. The company expects to commence an ore-buying program from third-party miners in 2024, which is expected to further increase its uranium production profile.

No Debt on Balance Sheet

As of Mar 31, 2024, Energy Fuels had more than $220 million of liquidity and no debt, which is commendable compared with the industry’s debt-to-capital ratio of 29.1%. Peers like LEU and CCJ have debt-to-capital ratios of 83.4% and 20%, respectively.

UUUU’s P/S F12M Ratio Depicts Stretched Valuation

Energy Fuels’ price-to-sales ratio indicates that it is trading at a forward sales multiple of 8.24, well above the industry average of 3.74. The company is, however, cheaper than peers Cameco and Uranium Energy’s UEC price-to-sales ratio of 13.88 and 24.57, respectively.

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Conclusion

The recently passed ban on Russian uranium imports and $2.7 billion in funding to restore domestic nuclear fuel capacity will increase demand for Energy Fuels’ locally sourced uranium. Backed by its debt-free balance sheet, the company continues to execute its growth plans to capitalize on this demand. However, the risks associated with increasing its exposure to REEs and the consequent competition with China are concerning.

While the recent stock performance has been disappointing, existing stakeholders should maintain their position in this Zacks Rank #3 (Hold) stock to benefit from the solid long-term fundamentals of the uranium markets. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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