An Insider's View: The Biggest News Since Fukushima

Written by Gerardo Del Real
Posted November 27, 2017

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.

Gerardo Del Real: Now, for people that are new to the UEC story. Can you speak a bit to the model that UEC has executed. You have ISR projects that are low cost and, just as important, low impact. You're fully permitted. What does your production capacity look like?

Amir Adnani: UEC as a company to start out with, we're about 12 years old. So this business has taken a long time to put together to get it to the point that we are right now. We have three-pronged strategy. So the first one, I already touched on, keep a 100% unhedged book. The second part of it has been making acquisitions during the downturn that we had since Fukushima. So it's been six years, approaching seven years since the Fukushima incident. This bear market has given UEC incredible opportunities to build a future development pipeline at very attractive valuations. The third part of the strategy is where you just touched on, which is our focus on developing projects that are amenable to the low cost in-situ recovery or ISR method in-situ recovery's responsible for about 50% of global production today. Most of this method of mining's history is actually in the U.S., in states like Texas and Wyoming.

And as you point out correctly, not only is it low cost and upfront capital requirements at a fraction of a conventional mining, but it's environmentally friendly because of the low impact to the environment and surface. There's no digging, there's no strip mining, there's no tailings, there's no waste rock. You're simply drilling wells into an ore body that is situated inside a sandstone setting. There's plenty of ability to recover uranium in solution, which again, couldn't be anymore benign in terms of how the recovery process works. So far UEC has focused on this method. We built a hub-and-spoke strategy in South Texas, where the hub is our processing plant at Hobson. That has a physical capacity of two million pounds per year. And we have a handful of projects that act as satellites, that become future feed for the Hobson Processing Plant. One of these projects, Palangana, is already built. It already operated for three years.

So you have the proof of concept, where you know it produces uranium at a cash cost of $22 per pound. This is all from our reported numbers and it was built in six months for $10 million. We expect similar cost profile and capex profile from future projects that we're going to develop. Namely, the next project being our Burke Hollow project. This is an exciting project that we're growing and made discoveries on, and have applied for the various permits. We have our mine permit and the other kind of production-related permits that already have been issued. And by 2018, we expect this project would be fully permitted and Gerardo, as you know, this year we've drilled 130 holes there. So we're very aggressive about growing our Texas pipeline. But at the same time, this year was an excellent year for us to get into the Powder River Basin in Wyoming. This is where we made the Reno Creek acquisition.

I mentioned just now that we have a physical capacity of two million pounds at Hobson in Texas, our Reno Creek project in Wyoming has a permit for two million pounds per year as well. So between Texas and Wyoming, UEC can be looking at four million pounds of U.S., low-cost ISR production. Now, the Reno Creek project, not only is it fully permitted, it has that measured and indicated resource of 22 million pounds. It was a Pre-feasibility study-stage project that was completed in 2014 and since then we've looked at adding other areas that were part of this project historically that were helped by different owners. So recently, we've announced the addition of North Reno Creek, which will add another four to five million pounds of uranium. This deal hasn't closed yet, but by the time it does, we will have one of the largest projects in the Powder River Basin in Wyoming. This is another key jurisdiction for low-cost ISR in the U.S. This is where Cameco and Uranium One are situated.

Gerardo, this is actually where Uranium One has been getting a lot of attention in the media recently, being a Russian state-owned company and also having been in the news with some of the history of how they ended up in that project. So it's a fascinating area to be in. We're really excited to be the only company now that's truly built a significant base in Texas, a significant base of ISR projects in Wyoming to go with some of the development projects that we have also in Arizona and Colorado.

Gerardo Del Real: I mentioned at the top of the interview Amir, that you are one of the best connected people in the uranium space and junior resource space. The chairman of UEC, Mr. Spencer Abraham, who served as U.S. Senator from '95 to 2001 and he was the U.S. Secretary of Energy from 2001 to 2005. How important is the geopolitical advantage, the jurisdictional advantage that UEC has with U.S. production-ready uranium?

Amir Adnani: It's very important and this is a story within a story. The main story is what's happening globally in the nuclear power industry. It's a growth industry globally and the fact that uranium prices have to stage a recovery in order for us to have long-term sustainable uranium business to provide the fuel for the growing nuclear power sector. That's the big story. The story within the story is what is happening in the United States. The U.S. has about 22% of all the operating nuclear reactors in the world. We have over 400 reactors operating in the world and just under a hundred of them are in the U.S. This is the biggest nuclear fuel market in the world. Historically, the U.S. used to be a big producer of uranium and there used to be many jobs in this sector. At its peak Gerardo, there were over 30,000 jobs in the U.S. uranium mining industry.

Today, there are less than 500 jobs in the U.S. uranium mining industry. U.S. uranium mining this year is on track to produce somewhere around 2 million pounds. Now, demand for uranium in the U.S. this year will be about 50 million pounds. So you're talking about 96% dependency on either foreign imports or other ways of getting uranium than mining it domestically. This is a really critical issue that UEC's chairman, Spencer Abraham, a former United States Energy Secretary really understands. As a Republican, when he ran the Department of Energy, he was focused on national security and energy security around all energy resources. He will say to you as he said to me, which is mind boggling, that when he was energy secretary, they felt that the fact the U.S. was importing 60% of its oil requirements at that time, was a national disaster. Can you imagine how they would feel about 96% being imported.

So now look at who is at the Department of Energy, Rick Perry, former governor of Texas. The longest-serving governor in the state's history. For the 12 years that we've had the company as Uranium Energy Corp., almost 10 of those 12 years, Rick Perry was the governor of Texas. We worked with his office and his government very closely in getting into production at our Palangana project and permitting our Goliad project. When I interacted with Rick Perry as governor, I always thought that he had an attitude that we need an energy mix, and that's why Texas is the energy capital of the U.S. That's why we see a real strong energy backbone in that state. And he's bringing a lot of that attitude and policy to the Department of Energy. When I met with him in July of this year, we discussed many of the same topics and I was able to address some on this point and talk about the fact that it's not sustainable to have 20% of U.S. electricity come from nuclear power, yet to have such a small domestic uranium mining industry, and they fully agree.

I think this is the opportunity in the sense that as we move forward we have an administration in U.S. that clearly sees this as being an area that needs to be addressed where favorable policies can be introduced to help rejuvenate the U.S. uranium mining industry because it's a matter of national and energy security. I think this is the moment where a company like UEC can take a real leadership role. We've positioned ourselves with low cost, fully-permitted projects and a processing plant and in the two key areas you want to be in for uranium mining in the U.S., Texas and Wyoming. We want to be absolutely leading the way when it comes to becoming the number one U.S. uranium producer. With low cost that could be competitive globally, but it can provide a much needed fuel for our domestic market that is now becoming of growing interest to the administration and the utilities as they look at the geopolitical issues.

I'm bringing back the McArthur River situation, because Gerardo, until this McArthur River news came out, 40% of U.S. imports of uranium are coming from Niger, Kazakhstan, Uzbekistan, Russia. But then, they could look and say, "Well, look there's McArthur River and there's the Canadian production and we can get some of the production from Canada, which is about 20% or so of the imports." But now, with McArthur River being shutdown, that takes more production out of the equation from politically stable or nearby jurisdictions for the U.S. market. It further intensifies this issue around security of supply. That's the opportunity I think, and that's the story within the story about what's happening in the U.S. uranium market and why I think UEC is so ideally positioned.

It's not just the fact that we're the only uranium company that has the former U.S. Energy Secretary as Chairman, but Scott Melbye, our executive VP, who has 33 years experience in the uranium mining business. He is a former Cameco executive and was the previous president of the Uranium Producers of America., and the rest of our team who've all been involved either the U.S. Geological or nuclear fuel Industry or worked their entire careers in U.S. uranium mining and exploration. The human capital within UEC is absolutely unparalleled compared to big or small companies when it comes to being fluent and capable and proficient in tackling this opportunity within the U.S. and globally.

Gerardo Del Real: Amir, it's been insightful as always. What can we expect from UEC in the next 12 months? You've been very, very opportunistic, I would say, in bringing in creative assets and making accretive acquisitions. I think the North Reno Creek project that you recently brought in, that consolidated the land position was an important acquisition for you, but you used the bear market to the benefit of shareholders. What can we expect in a better uranium market from you and from UEC?

Amir Adnani: I think it starts with first of all, knowing that we have a strong treasury and that goes back to earlier this year, when we had a very successful, strong capital raise. At that time, we came out and said, "This really gives the company the necessary working capital in addition to funds for acquisitions." That was January of this year. Since then, we've stuck exactly to that plan, as you point out. I've made two acquisitions with the Reno Creek project and North Reno Creek and at the same time, have the funding on hand in terms of working capital requirements to continue to go strong into 2018 and 2019. This is important because obviously it starts with a strong balance sheet.

From there, we have the closing of the North Reno Creek project, which upon doing that, we will then issue a new 43-101 report, consolidate all those resources and then look to do an updated pre-feasibility study in 2018. We're going to continue to advance the assets in Texas. As I mentioned, this year, we've drilled a 130 new holes. We have this new exciting resource report on our Burke Hollow project, where we continue to grow that resource and we're going to continue drilling and advancing Burke Hollow in 2018, including the fact that we expect to have the project be fully permitted in 2018. We're going to then continue to have an eye on acquisition opportunities just for the reasons that we've discussed up until now, continue to be aggressive on that front and really have those combination of acquisition opportunities coupled with our organic growth driving the story.

Thirdly, and I know we don't have a lot of time for this Gerardo, so hopefully it's something that your audience might look into. This has been a strictly uranium interview, but as you know, and you and I have talked about news we had this year about a project that we acquired in Paraguay. Our titanium project, which based on a resource report we put out in September, is now the world's largest and one of the highest-grade titanium projects that is in pre-production in the world. This is an important asset that in 2018, I think will have some extra news flow on. It doesn't add on to our uranium, but it was an opportunistic acquisition at the time when titanium had crashed in 2015. Here we are, 2017 and prices have already recovered and titanium has been one of the better performing commodities in the whole commodity complex. This will be an exciting project for us to advance a bit more before we look to either monetize it or joint venture or sell it.

Nonetheless, it gives UEC shareholders another value driver, that while not part of our core focus, it's always good to have an extra value driver especially when it's a significant deposit and within the context of an exciting commodity and within a country that we know very well. As you know we've been in the country of Paraguay for six years, with our focus there being our Oviedo and Yuty ISR uranium projects. That's how this acquisition opportunity became available to us. So it should be actually a fairly busy 2018, when you consider the various moving parts that we have in the company.

Gerardo Del Real: You've done an amazing job with the company and the bear market. I'm definitely looking forward to seeing you in a better uranium market and seeing what you're able to do for shareholders at UEC. Amir, it's been great. I want to thank you for your time. Is there anything else that you'd like to add?

Amir Adnani: I really appreciate coming back and sharing all of this with you. It's an exciting way to go into the end of 2017. And like you said, I think it's going to be a really exciting 2018 and UEC has taken 12 years to build itself and to position itself to take advantage of this market. So looking forward to coming back and updating you soon with the other developments and news.

Gerardo Del Real: Thanks Amir.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.

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