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Uranium Energy Corp. (NYSE: UEC) CEO Amir Adnani on Kazatomprom Supply Cuts: “This is Massive”

December 5, 2017

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is Founder, President, and CEO of Uranium Energy Corp. (NYSE: UEC), Mr. Amir Adnani. Amir, how are you this afternoon?

Amir Adnani: Hey, Gerardo. I'm doing great, and good to reconnect with you so quickly.

Gerardo Del Real: You know, it's excellent to be able to pick back up. I think it wasn’t more than a week or a week and a half ago where we chatted, and we talked about the Cameco news and the production cuts that were slated to commence in January of 2018. We talked about the effect that it had in the market, and how we hoped that that would inspire some of the leaders in the space to come forward and actually contribute to the production cuts.

We talked about how unsustainable uranium at $20 was, at $25, at $30, and frankly, at $35 which I think is where Cameco's financials said they were producing. I would love to get your insights. I want to take it one at a time. Let's start with the news. What was your initial reaction?

Amir Adnani: Surprised, and I would say most analysts and people in the sector were surprised in a very positive way by this. Again, above and beyond what I think anyone was expecting. To go back, we were pleasantly surprised when Cameco announced on November 8th that they were shutting down McArthur River for 10 months. That amounted to about 15 million pounds of production or supply that's going to come off the market.

That's considered to be big, and you and I talked about that in our last interview. We talked about how even Bloomberg called that the biggest catalyst for the sector since Fukushima. This announcement today by Kazatomprom, the Kazakh state uranium mining company, is three times longer in terms of the shutdown. The McArthur River mine is shut down for 10 months, the Kazakhs are talking about three years of reducing production by 20%.

That 20% translates to about 30 million pounds of production, so almost double in size to what McArthur River represents in terms of the shutdown there. This is massive. This was unexpected. It comes as a real shock to the system, a supply shock, and I know I'm comparing it to McArthur River, but in reality we get to have both. This isn't one or the other for us, as participants in the market, and for the market. Both will be added together to be reflected in the market next year, and this is coming, Gerardo, cumulatively, on top of previous cuts earlier this year. If you recall, this whole year started in January with Kazatomprom starting the year with cuts that they announced, and here we are, the theme has continued throughout the year.

Gerardo Del Real: Completely agree 100%. I don't think I could have said it better, and there's a reason why you're one of the best connected and insightful people in the uranium space. Now, for a little perspective, I mentioned that these prices aren't sustainable, and frankly, uranium prices in the low $30s aren't going to be sustainable. They're barely sustainable at the $40 level by low cost, low impact producers like UEC. Can you speak to that a bit, Amir, how you've positioned UEC to benefit from a turnaround?

I mean, looking at the ticker here, everything uranium was up 10-15% at the very least. The spot price surged over $26 a pound. I made a reference earlier in a conversation I had with somebody where I said, "This is the top of the first inning. This is early. These 10-15% increases have a lot of runway." Can you talk a bit about that, Amir?

Amir Adnani: Yeah, for sure. So first of all, let's start backwards and talk about the spot market for a second. I actually think that we could see a stronger response to this news today than we did as a reaction to the Cameco McArthur River news. If we just look back play-by-play. Before the McArthur River news came out, the spot price was at around $20 per pound.

It peaked on the back of that news, got to its highest, $25.50. Then it pulled back a bit and it was sitting at around $23. Then this news came out today, with Kazatomprom, and we're already seeing today the market closed at about $26.50 on the back of this. In a way, the McArthur River news really helped rejuvenate the market a bit. This is now coming on the back of that.

Let's also not forget the Kazakhs have established a trading arm this year that could elect to purchase uranium in the spot market. So, very interesting to see them make this announcement in light of also the fact that they now have this trading arm. But now to come back to your other point that you made, whether it's $22 or $25 or $26 per pound, this price is still way too low compared to where most projects are producing or operations that are producing, and where incentive prices for new mines to be developed.

So, when you look at why we're seeing sector leadership from Kazatomprom and Cameco, the two big producers, it's because they recognize more than anyone else that the cost curve just simply doesn't work in terms of mining uranium at these low prices. With long-term contracts having rolled off, there are no longer hedges available for these producers at higher prices.

Not too many mines in the world can make money in the $20 range, and the proof is in the fact that you're seeing these major cuts being announced. If you look at where marginal cost to production is today, it's probably closer to about $40 per pound, and when you look at where the incentive price is to bring new uranium mines into production, it's well north of $60 per pound.

At even $60 or $70 per pound, we're nowhere near the 10-year high on the uranium price, which is $140 per pound. And let's not forget, the uranium price makes up a very small percentage of electricity costs for nuclear power plants and utilities. It's important to have that full picture and perspective. But when you look at where the cost curve is in terms of styles of mining and where UEC fits into that, companies that are focused on In Situ Recovery, or ISR production, are certainly in first quartile costs, toward the low end of the cost curve.

That means these are the lowest cost mines, both in terms of upfront capital requirements, and operating expenses. When you look at a company like UEC, Gerardo, what’s attractive about our positioning is the fact that we're production ready. Our processing plant at Hobson is fully built, fully permitted. Our first mine that we operated from at Palangana in South Texas, where we have proof of concept, operated for over three years. It's fully permitted and built and on standby, and since then, we've added more permitted capacity to our pipeline.

We've permitted our Goliad project, our Burke Hollow project, all of which are in South Texas, part of our South Texas hub and spoke strategy. We've acquired the fully permitted Reno Creek project in Wyoming, with the US Nuclear Regulatory Commission license, at two million pounds per year. At Hobson, you have a physical capacity of two million pounds of per year. That's almost four million pounds of annual production using low cost In Situ Recovery, in the US, in the two most significant uranium mining states in the US being Texas and Wyoming.

Gerardo Del Real: You've gone on record, Amir, and said that you spent the last 12 years positioning UEC to lead the way in regards to United States uranium production. How important is that differentiator for UEC?

Amir Adnani: Today more than ever. I think it's quite a significant differentiator and it's due to the fact that even 12 years ago we recognized this. 12 years ago I was shocked and blown away by the fact that the US was importing 90% of its uranium requirements. Today, it's 96% of US uranium requirements to run 99 nuclear power plants that are not being mined in this country. Hence, they're coming from various sources, but the majority of that is now coming from countries where there could arguably be geopolitical instability associated with.

Bottom line is, even if you put all that aside, you can't sit here and say that a vital commodity like uranium, that is an energy commodity, that's being used to generate 20% of US electricity, 65% of carbon-free electricity, should be imported. It's too vital, and it becomes an issue of both energy and national security. You have now for the first time, an administration that is very much focused on trying to rebuild key, vital industries, support them through more favorable policy.

But in the long run, Gerardo, this is not about handouts. This is not about saying, "Hey, we want preferential treatment because we're a matter of national security importance." US uranium deposits in Wyoming and Texas could be world class, in terms of size and quality. In terms of the fact that ISR, In Situ Recovery, has proven to be a low-cost way of mining uranium. That's how the uranium in Kazakhstan is being mined, and this method was invented in the US, in places like Texas and Wyoming.

So, the tradition, the history, the technical know-how, and the deposits are all here. With more favorable policy that can help stimulate interest in the sector, which is really underway right now, and a resurgence in the uranium price which is also underway, I think one of the biggest opportunities within the uranium opportunity is what is going to happen in US uranium. There's a global story taking place here in terms of the global expansion of low-cost and carbon-free nuclear power, but there's also a story within that story which is US uranium, and the fact that there needs to be a significant growth in US uranium mining to meet demands within the US market.

Gerardo Del Real: Just for context, for people that are newer to the US production story, at its peak I believe, and correct me if I'm wrong, Amir, but I think there were over 30,000 jobs in the US uranium mining industry. And today there's, what, less than 500? 450?

Amir Adnani: You're right and those are exactly the numbers, and it's just staggering. To think about over 30,000 jobs, and these are stats collected by the Department of Energy in the US, compared to 400 today. We're talking about at its peak, US production in uranium being above 44 million pounds of annual production. Today less than two million pounds of annual production.

The fact that the market in the US, the 99 reactors operating, require 50 million pounds of uranium annually. 50 million pounds of annual consumption in the US, and just under two million pounds of annual domestic production. It's staggering. It's quite a profound situation, and companies that are positioned with low-cost, fully-permitted projects, with infrastructure advantage, which UEC checks all those boxes, I really believe we're ideally positioned.

You look at some of the individuals that we have as part of our team. You look at the Chairman of our company, Spencer Abraham, who's a former US Energy Secretary. You look at Scott Melbye, our Executive VP who was part of the executive team at companies like Cameco and Uranium One. You look at the experience and the depth, you truly see both the skill set and the experience of the company be a perfect fit for the assets, the location of the assets, and the strategy that we have to be a total market leader when it comes to the US uranium industry.

Gerardo Del Real: One last point, Amir. You referenced the utilities earlier, and I know that Rick Rule and Jeff Phillips and a lot of the very experienced people in the uranium space, in the natural resource sector, that have made fortunes off the cyclicality of this business, have said that they made an absolute fortune during the last uranium bull market. A large part of that explosive upside was because the utilities, when they come into buy, don't really care, as crazy as this sounds to most people, don't really care whether they pay $40 or $60 or $120 for a pound of uranium. Can you explain why that is, Amir, for those that aren't familiar with the utilities and their influence in the market?

Amir Adnani: I think one of the best ways to probably look at that is when we look back to 2007, and in 2007 the uranium prices reached $100 per pound. They busted through $100 per pound, and went on their way to $138 or $140 per pound. Gerardo, in that entire timeframe, I don't think there was a single article out there in the mainstream press where someone was complaining about the rising cost of electricity from nuclear reactors due to the rising uranium price environment.

Point being again, to exactly what you're talking about here, the price for a pound of uranium makes up quite an insignificant portion of the overall cost to operate a nuclear power plant. So, for that, it comes down to availability of supply. You have to have uranium. These reactors run off of uranium. You can't replace it with something else. They're quite insensitive to the uranium price, the buyers. But they just can't come in and pay way above the market. They have to stay within whatever the market pricing is, and follow that.

What I really like, bringing it back to today's announcement, is I think the announcement really sends another further signal, and I'm talking about Kazatomprom's announcement with their production cuts, this sends a critical signal to utilities that future uranium supplies are by no means guaranteed at current prices. So, if there was any kind of market psychology developing where utilities were becoming complacent, and why wouldn't you? I mean, if you're a buyer of anything, if you're a buyer of stocks or widgets or uranium, if you see the price stay low and not have any reason to go up or perhaps that’s the mindset that they may have had, you become complacent in that mindset.

So, I think it's critical to think about the fact that the price really makes a very insignificant difference to their bottom line. And now we've had enough production cuts this year, in my opinion, that it really sends the right message to the utilities. And, Gerardo, we may look back and we may say, "2017 will go down as the year of uranium production cuts" because I mean, it's mind boggling.

I don't think I've seen this in any other sector in terms of so many cuts announced in one year. This is so positive. I mean, this is where that classic thing that Rick Rule always talk about, where he says the bear markets are the authors of the bull markets. This is it. What happened in 2017 is exactly that dynamic.

And guess what? If the utilities don't necessarily spring into action fast enough, I believe there's going to be more cuts where they came from. I think the Kazakhs are prepared to do more cuts, I think Cameco's prepared to do more cuts. These guys have seen too much in terms of margins erode, and they don't have those long-term contracts and hedges in place anymore, and they just simply can't run their businesses and make money at these levels.

This is really an ideal position and I think it sets the stage in a very exciting fashion for 2018. Many of these cuts, remember, take effect January 2018 onwards. Including today's announcement, including Cameco's McArthur River news. I just can't think of a better way to enter 2018 for the uranium sector. This is very positive and bullish posture for the sector that we're entering the New Year with.

Gerardo Del Real: I agree again, Amir. 2018 is going to be a very, very exciting year. I encourage speculators and investors to get familiar with UEC. It's unhedged. Is that correct, Amir? You're still unhedged?

Amir Adnani: We're still unhedged since last week when you and I spoke. We're going to remain unhedged.

Gerardo Del Real: Just making sure. It's a fast-moving news cycle here, so I wanted to double check before I put my foot in my mouth. Amir, I want to thank you for coming on. Thank you again for the insight. I don't believe this will be the last time that we speak. I have the feeling that the production cuts are going to keep coming, and again, I agree that it's going to be an exciting 2018.

Amir Adnani: Agree with all of that, and pleasure to connect with you again, Gerardo. Look forward to our next conversation. Thank you.

Gerardo Del Real: Thank you, Amir.

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