Energy Fuels (‘Energy’ TSX: EFR) has signed a letter of intent (LOI) to acquire all issued and outstanding common shares Strathmore Minerals Corp. (‘Strathmore’, TSX: STM). Energy Fuels is considered one of the top uranium producers in the United States and Strathmore Minerals is an appetizing target given its strong partnerships with such companies as Sumitomo and KEPCO, as well as two projects in the United States. Energy Fuels has been expanding its control over a number of uranium assets in the western United States. In 2012, Energy took over Titan Uranium with its flagship Sheep Mountain uranium project in Wyoming. This acquisition alone allowed Energy Fuels to join the circle of the largest owners of uranium deposits in North America. Energy Fuels also has uranium assets in Arizona, Utah and Colorado. Last April, the Colorado Department of Public Health and Environment (“CDPHE”) re-issued the final Radioactive Materials License for Energy Fuels proposed Piñon Ridge Mill. Upon completion, the Piñon Ridge Mill will be the first new uranium mill to be built in the United States in over 30 years. Energy Fuels also owns and operates the White Mesa Mill near Blanding, Utah, in the Paradox Valley, which is the only operating uranium mill in the United States. Construction work for the new mill will begin shortly after the CDPHE issues an air quality permit, which Energy Fuels, expects to receive in the next few months.

It is not surprising that Energy Fuels has targeted Strathmore, which is developing two late-stage projects in New Mexico and Wyoming. More importantly, Strathmore has secured off-take and supply agreements with South Korea’s Korea Electric Power Corp. (KEPCO) as part of a joint venture agreement to develop the Gas Hills Project (an open pit mine) in Wyoming. Strathmore also signed a joint venture with Japan’s Sumitomo for the Roca Honda (RHR LLC) underground uranium district in New Mexico. Roca Honda is one of the largest uranium projects in the United States. The Gas Hills deposit features a shallow open pit, easing extraction. The first phase of Gas Hills project has focused on achieving an NI 43-101 compliant resource estimate. KEPCO could also take part in the second phase of the project in the next three years with an additional investment of USD$ 32 million. Toward the end of 2012, Strathmore announced a preliminary economic assessment (PEA) and an updated NI 43-101 resource estimate for Roca Honda, showing combined measured and indicated resources of over two million tons containing “16,783,000 pounds of U3O8 at a grade of 0.404 percent”.

KEPCO (Strathmore’s main partner) is very keen on securing self sufficiency in uranium supplies, investing in other uranium resources in North America as well as Niger, where, in 2010, it has taken a 10% stake in Areva SA’s Imouraren uranium mine in Niger. KEPCO is likely to increase its interest in Strathmore and Canadian or North American uranium sourcing given the sharply increased political risks in Niger, given a resurgence of Touareg nationalist aspirations and Islamic militancy; these risks were all too evident after an attack against Areva’s mine by insurgents on May 22. Indeed, one of the main advantages of North American uranium projects, compared to those in other regions (Russia, Kazakhstan, and Niger among others) is their minimal geopolitical risk, which makes them very attractive for outsiders needing guaranteed supplies.

As for the uranium market itself, the spot price is still on the low side (trading at around USD$ 41-43/lb) – which has certainly encouraged such companies as Energy Fuels to acquire strategic assets with interesting prospects – however there are three developments that could catalyze into a new uranium bull market:

1. China needs more nuclear energy and has deployed an ambitious program. There are 30 reactors under construction, 49 more are in the planning stage. China currently consumers 22 million pounds of uranium currently being consumed, but it only produces three million of that amount, importing the rest. As the new reactors come on line, China’s consumption is expected to rise to 73 million pounds by 2030. China will therefore use every opportunity to increase its reserves and resources of uranium.
2. Japan before the Fukushima incident, in March 2011, was the world’s third largest user of nuclear power; the new government intends to rekindle its nuclear power plants again, especially as the country is has entered a renewed economic growth phase with all the increased energy demand it implies. Indeed, the economic growth, facilitated by a low Yen policy, has made commodities much more expensive for resource-poor Japan. The shutdown of nuclear power has made Japan much more reliant on coal and gas, which has raised energy costs since 2011. Nuclear energy is much more efficient and there will be increasing pressure to re-adopt it on a wide scale. So far, Japan has restarted only two of the 50 reactors in the country; when Japanese demand starts again, there will be a big boost in demand and Energy Fuels, thanks to its acquisition of Strathmore, will benefit from its partnership with Sumitomo.
3. The United States has reached the end of a 20-year contract with Russia that was reached 20 years ago to import processed weapons-grade uranium from Russia to run is processed and delivered to the United States. This made from at least 15% of the global total supply of uranium. The U.S. consumes 55 million pounds of uranium annually, it only produces less than 14% of that (about four million pounds). Even if Russia renews the depleted uranium shipments, it won’t be at the current price, especially in view of a much stronger Russian position vis-à-vis the United States than the last time that contract was signed. Russia is an energy powerhouse and it has been using its resources more strategically to secure geopolitical goals lately.

There are no crystal balls to determine with accuracy when uranium prices will start to rise in earnest but the conditions for a bullish scenario are already in place. As desirable as they are clean energy solar and wind alternatives will certainly represent a welcome addition to the energy production mix, but they will not be able to meet the growing demand in the developing world, which only nuclear power can reasonably be expected to address. The Energy Fuels – Strathmore merger will be in a very strong position to benefit from the forthcoming uranium bull run. Energy Fuels anticipates producing about 1.2 million lbs of uranium, about 25% of total US production and the additional properties being developed in Wyoming, along with those acquired through Strathmore, will easily enable it to boost production when demand increases.