All Eyes on ConverDyne

Uranium is cool again.

But unlike every uranium price cycle since the 1970’s, demand is driving prices higher, not supply.

For the first time since the Three Mile Island, Chernobyl and Fukushima meltdowns, public opinion is shifting back in nuclear’s favor.

In Japan, a majority of citizens are pro nuclear now, compared to 71% against only three years ago.

Japanese Poll on Nuclear Acceptance

Source: Asahi Shimbun

The same story is happening across other developed markets including Europe, Canada and the UK. The UK has gone from a split opinion on the benefits of nuclear two years ago to 24% more citizens in favor today.

United Kingdom Poll on Nuclear

Source: Stonehaven polling from June 2021 to today. Net Support = Percent of people who support nuclear minus per cent of people who oppose. Each date minimum n=2,000 Nat Rep respondents (Image: Stonehaven)

The winds are finally blowing in nuclear’s favor and investors are taking notice.

Though Uranium prices are already up 70% in the last three years, they have been rangebound since early 2022, causing investors to scramble in search of the next catalyst.

The restart of the ConverDyn uranium conversion facility could be that catalyst.

In this report we break down the timeline to a restart of the only operating conversion facility in the US, the impact it could have on the uranium market and the investment opportunities we think it will create elsewhere in the uranium value chain.

Lets dig in…

Enter ConverDyn

ConverDyn is a partnership between General Atomics and Honeywell to provide uranium hexafluoride (UF₆), conversion to nuclear power plants in North America, Europe and Asia.

Uranium concentrate, “yellowcake” in industry jargon, needs to be converted to uranium UF6 before it can be concentrated and formed into pellets used by nuclear facilities.

From 1970 to 1992, there were two operating uranium UF6 conversion facilities in the US: Allied Signal’s Metropolis Works Facility (ConverDyn) and General Atomics’ Sequoyah Fuels Facility in Gore, Oklahoma.

Both companies faced low conversion prices and excess market supply in the late 1980’s and by 1992 the companies agreed to close the Gore, Oklahoma facility and take joint ownership of profits from the Metropolis Works Facility in Metropolis, Illinois.

Metropolis Works closed in 2017 due to weak conversion margins and has been closed every since.

All UF6 produced at Metropolis Work is marketed and sold by ConverDyn.

Russia Reminding the World about Security of Supply

In 2020, almost 40% of the world’s uranium conversion capacity came from Russia.  American producers have said that a major concern is that the US heavily relies on foreign sources from potential hostile nations like China and Russia.

World Uranium Conversion Capacity (Source: Radio Free Europe /World Nuclear Association)

In light of sanctions against Russia due to the invasion of the Ukraine, many in the industry believe that Russia will lose its leadership as a major supplier of UF6 and U3O8 to Europe and North America.

ConverDyn’s recent success in signing long term conversion contracts from fuel buyers supports the industry’s belief that domestic demand will start to replace at-risk Russian imports.

Corey Dias, CEO of uranium producer Anfield Energy explained the US opportunity well in a recent interview.

The US Gov’t Is Breathing New Life into ConverDyn

The ConverDyn uranium processing plant has received a $14 million award for conversion services from the US Department of Energy (DOE), under its $75 million program to create a uranium reserve to shore up energy security as the Russia-Ukraine war escalates.

The government also committed to buy up to 1 million tons of UF6 from the facility over 5 years, a significant economic incentive for the facility to restart even if uranium prices weren’t sitting at multi-year highs.

This government contract alone will equal 3% of annual US uranium demand, which is why the industry is watching the ConverDyn restart so closely.

Government buying of uranium concentrate (U3O8) will equal another ~3% of demand in 2023 and is responsible for at least five idle mines planning to restart production over the next few years.

In a 2020 letter ConverDyn submitted to the Office of Nuclear Energy it mentioned a restart timeline of 24-30 months from a restart decision. The decision to restart the plant was made in January 2021 which means Metropolis Works could start back up as soon as July 2023 with industry research group Energy Intelligence calling for a restart by early April.

ConverDyn is the Tension on the String of the Uranium Value Chain

The uranium market is like a string attached to blocks at multiple points of supply. Uranium bearing ore is one block, while uranium concentrate (U3O8) and UF6 gas are others.

Demand from nuclear power plants are like a hand pulling on the rope. An increase in power plant demand trickles down to more demand for UF6 then U3O8 and finally uranium ore.

The ConverDyn restart will increase demand for U3O8 feedstock produced at uranium mills and eventually this will require more uranium ore to be mined.

Source: National Energy Education Development Project (NEED)

We believe increased conversion capacity in the US will trickle down to mills potentially leading to a spike in mill profitability in the near future.

Uranium Milling is the Next Investment Opportunity

As electric utilities increasingly value the safety of domestic uranium supply we think the market is setting up for a shortage of domestic uranium.

ConverDyn can process over a third of North America’s annual uranium demand and requires significant amounts of milled, concentrated uranium to function.

This creates a unique opportunity for the two companies with permitted and constructed uranium mills.

With US uranium mills possessing a combined theoretical milling capacity of 2,750 tons or only 2.3 million pounds per year, compared to ConverDyn’s 16 million pound processing capacity, small increases in domestic conversion demand could lead to much higher milling profits to incentivize new capacity to come online.

Only three Permitted and Operational US Uranium Mills

Source: EIA

With the Sweetwater mill in the table above shut down since 1983 and still many years and millions of dollars from restarting, the only two investable milling companies are Energy Fuels and Anfield Energy.

Energy Fuels (Ticker: UUUU)

Energy Fuels operates the only active mill in the US, White Mesa, though the facility was on standby for part of the last three years due to the pricing environment.

The facility has the capacity to process 2,000 tons of uranium ore per day or 3.3 million pounds at an average concentration of .23% uranium per ton. The facility only processed 162,000 pounds in 2022 with demand not being high enough to require 100% capacity utilization.

Energy Fuels recently sold its Texas properties for $120 million and will be recycling the money back into the ramp up of four uranium mines and the expansion of the company’s rare earth element business.

Energy Fuels has a market cap of $851 million and generated $12.5 million of revenue in 2022

Source: Bruce Gordon/EcoFlight

Anfield Energy (Ticker AEC.V).

Anfield operates mainly in Utah and is currently commissioning a PEA (Preliminary Economic Assessment) to evaluate the economics of restarting its Shootaring Canyon Mill, one of only three permitted uranium mills in the US.

Shootaring Canyon can process 750 tons of uranium ore a day or 1.3 million pounds of uranium concentrate (U3O8) per year.

Anfield estimates it has 6 million tons of reserves or more than 22 years of production once the Shootaring Canyon Mill restarts, giving it plenty of resources to work with.

Anfield Estimated Uranium and Vanadium Resource

Source: Anfield Energy

Anfield is pre revenue and trades at a market cap of $40 million.

Anfield Stands Above on Valuation

Though both Anfield Energy and Energy Fuels share many operational similarities, from an investment angle they couldn’t be more different.

Anfield’s valuation is only a fraction of Energy Fuels, providing a margin of safety in our view, should US demand take longer to develop than expected.

Looking at the dollar of market cap per ton of processing capacity, Anfield trades at a 90% discount to Energy Fuels.

Market Cap per Ton of Annual Capacity

Source: YCharts.com, Capital10X Estimates, Company Filings

At full capacity Anfield’s Shootaring Canyon Mill would to generate $65 million a year at $50 uranium, more than the company’s entire market cap.

Ultimately, we think a diversified ownership in the entire milling value chain, Anfield and Energy Fuels makes the most sense, but the upside is clearly in Anfield’s favor based on potential capacity and current valuation.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

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