Energy Fuels Ord Shs T.EFR

Great article to read on U

[emiliolargo]

https://l2capital.com.br/wp-content/uploads/2019/04/L2-International-Fund-Newsletter-Mar19-Eng.pdf

Dear partner, We reached the end of the first quarter of 2019 with the Fund delivering a net result of + 2.7% in US dollars. Some events in favor of our central investment thesis, uranium, deserve to be highlighted: 1- The Nuclear Energy Leadership Act (NELA), a US legislative proposal to accelerate the development of advanced nuclear technologies and re-establish the US as a technology leader in this area, was reintroduced in the US Senate with a strong push from the famous nuclear energy supporter, Bill Gates; 2 - China has decided to approve and invest another US$12 billion in the construction of new nuclear reactors for the first time since 2016, which opens space for the construction of several safer and with more improved technology reactors, the so-called third generation. Both news has only come out in the last days of the quarter but reinforce our view that China will be a major player in this sector, perhaps the most important, and that the US is accelerating projects now to compensate for years of neglect and to avoid losing the leading role. Bill Gates showed that he was not joking when he wrote in his annual letter about the benefits of investing in nuclear energy. He also announced in January that he is investing US$1 billion from his own money along with US$1 billion from third parties in developing new nuclear technologies. The lobby seems to be working well and now it has the support of the US congress. Chinese approval for the construction of new reactors paved the way for the construction of 6 to 8 units per year by 2030, in line with the country’s goal to at least triple its installed capacity by then. Putting these numbers into perspective, we are perplexed by the potential. In the worst case scenario, there will be 66 new reactors (on top of the 45 already in operation) or 88, at best. This will entail an extra demand of approximately 70 million pounds of uranium per year. As the Chinese like to have the equivalent to 6 or 7 years of inventory and since they have no production of uranium in their own territory, this will entail the purchase of more than 400 million pounds of uranium only for the reactors that are in the pipeline – not counting on the ones that are already in operation. Few have realized the dimension this is taking. In 2005, the Asian giant’s goal was to have 40 GWe of installed capacity by 2020. They reached this number almost 3 years in advance. Thus, there is no doubt about the capacity of the Chinese to execute the current plan. China is still heavily dependent on coal for electric power generation (about 70%), which in addition to causing huge pollution and public health problems, creates a strategic bottleneck for the country. Nuclear power plants are the perfect solution and they know that. L2 INTERNATIONAL OPPORTUNITIES FUND March 2019 L2 Capital Partners Rua da Paisagem, 480 / 807 | Vila da Serra - Nova Lima - MG | CEP: 34.006-059 t/f. + 55 31 2555 4780 | + 55 31 2531 4790 To meet this projection of uranium consumption, impossible with the production and number of mines currently in existence, it will be necessary to open 5 new mines like McArthur River, which is the world’s largest in size and uranium content. As the price of uranium has been falling for some years now, insufficient resources have been invested in exploration and, over the past 10 years, few discoveries have been made and no private mine has been opened. In fact, several mines were closed. We can even draw a comparison with iron ore, a commodity widely followed in a predictable market with extensive and diversified supply and several mines and new projects in operation. In 2002, when China actually entered the market, the price of the metric ton was close to US$12. In 2011, it surpassed US$180 – and this happened despite an increase of more than 3 times in production over this period. Despite our focus on China, demand drivers are not confined to it. Countries such as India, Russia and South Korea are aggressively expanding their nuclear facilities and even the United Arab Emirates are building reactors. As we mentioned in our year-end letter, we believe our strategy should begin to bear fruit from mid-year onwards, after the decision of the Section 232 investigation in the United States regarding the uranium supply of the country’s power plants, the biggest hindrance to the industry today. Good or bad for some, a decision in this matter will pave the way for new contracting and we will be able to see, for the first time in more than a year, where the price of long-term contract really is. Spot Market The spot market, which traditionally accounted for about 10% of the entire market and was used mainly for the sale of a possible over-production or coverage of last-minute demand, suffered a sharp decline this quarter. Uranium started the year quoted at about US$29/pound and fell to around US$25/pound. Since no new long-term contracts are being signed, the spot market ends up becoming the main indicator, although in our opinion, it does not represent the true price that is derived from the dynamics between supply and demand. L2 INTERNATIONAL OPPORTUNITIES FUND March 2019 L2 Capital Partners Rua da Paisagem, 480 / 807 | Vila da Serra - Nova Lima - MG | CEP: 34.006-059 t/f. + 55 31 2555 4780 | + 55 31 2531 4790 The drop in price is attributed to the decision of a Japanese trading company to settle its position in the commodity before the end of the fiscal year in this country, which coincides with the end of the first quarter. This movement was so irrelevant and anticipated by the players, that some stocks in the sector actually rose in the period. Cameco, aware of this liquidation, decided not to buy the spot and let the sellers clear their positions in the market. We met in person a few days ago with the CFO and COO of the company and they said they still have to buy about 11 million pounds of uranium this year. For a market in which total production was less than 140 million pounds in 2018 and probably be even less in 2019, a purchase of 11 million pounds over the next 9 months is not something to sneeze at. How are we seeing the market today? Cameco is expected to “wipe out” excess inventory on the market in 2019 and buying volume should be the same next year as its main mine, McArthur River, has been put into care and maintenance for an indefinitely period of time, due to low prices. So, we expect to see the beginning of negotiations for long-term purchases by utilities as of the second half of 2019 and these negotiations should continue for the next few years. Over time, utilities will find out that there is not enough uranium to guarantee their operations going forward and as soon as it becomes apparent that there is no mining capacity from 2022 onwards, a spike in the commodity price will be, in our view, the most likely outcome. For comparison purposes, the last bull market was driven mainly by the expectation of increasing Chinese demand, which raised fears of fuel shortages for the utilities, triggering a “shopping spree” to secure the raw material they so much need to run their reactors. There was no supply destruction like the one we are observing today nor a real increase in the number of nuclear reactors, but just the thought of not having enough uranium resulted in a more than 11-fold increase in the price of the metal. According to our calculations, production at McArthur River should only be resumed in 2022-23, which should put even more pressure on prices. That’s because Cameco should only start negotiating contracts for McArthur River when its other mine, Cigar Lake, is 100% - or close to it - contracted (Cigar Lake runs out by 2029 - maybe before). In addition, the company will wait until it has a very robust book for McArthur River before actually restarting production. With this in mind and taking into consideration the fact that it should take about 1 year between the day one decides to restart a mine and the actual day one of resumed production, it is difficult to imagine that McArthur River will be operating normally before 2022-23. L2 INTERNATIONAL OPPORTUNITIES FUND March 2019 L2 Capital Partners Rua da Paisagem, 480 / 807 | Vila da Serra - Nova Lima - MG | CEP: 34.006-059 t/f. + 55 31 2555 4780 | + 55 31 2531 4790 The opportunity We reaffirm that we have never seen such a good investment opportunity, in which the risk-return ratio is so attractive. After several years of falling prices, the uranium supply market has become a fraction of what it used to be in 2011, both in terms of market capitalization and number of operating companies. A forgotten niche tied to an unappreciated and unloved commodity has turned into an ideal scenario for a contrarian investor in search of opportunity. The favorable news continues to appear, inventories fall daily, production is being cut and demand only grows. We believe we will see this market starting to unlock value from this year onwards and that several “analysts” will have to revise their models and start paying more attention to the sector. Arriving early will have made all the difference. As stated since the beginning, we are investing together with you, our business partner, under the same conditions. We always invest at least 50% of the performance fee in the L2 International Opportunities Fund itself, to make sure our interests are always aligned. We would like to thank you once again for your confidence and prestige.