Why Red-Hot Energy Fuels Stock Dropped Today

Key Points

• Energy Fuels is raising debt to fund expansions of its uranium and rare earth projects.

• While that could dilute shareholders' wealth later, Energy Fuels wants to prevent significant dilution.

• 10 stocks we like better than Energy Fuels ›

Is the fire in Energy Fuels (NYSEMKT: UUUU) about to die? The uranium stock, which gained a jaw-dropping 222% this year until yesterday's market close, dropped 10.2% early this morning.

Energy Fuels is planning to raise debt, but is that necessarily a bad thing?

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A fundraising effort

Energy Fuels has just announced plans to offer $550 million in convertible senior notes due in 2031 to raise funds. Investors are often wary of companies issuing convertible bonds because of the potential share dilution, since the purchaser has an option to convert the bonds into stocks. Also, when a company deep in losses and a high rate of cash burn adds debt, it makes it a riskier investment.

Let's tackle the second point first. Energy Fuels primarily produces uranium and sells uranium oxide concentrate to nuclear reactors that process it into fuel to generate nuclear energy. It also produces rare earth elements, mineral sands, and vanadium.

Energy Fuels already generates revenue, but is making losses. However, the company has no debt, and that gives it significant financial flexibility to borrow money for growth. That's precisely what Energy Fuels is raising $550 million for.

Why Energy Fuels stock may not stop

Energy Fuels expects to use the proceeds mainly to fund projects, like the expansion of rare earth separation circuit at its White Mesa uranium mill and the development of Donald, its rare earth and heavy mineral sands project in Australia.

As for share dilution, Energy Fuels wants to minimize it and therefore expects to enter into capped-call transactions with the buyers of its notes. In its most simplified form, that means Energy Fuels gets the right to buy shares at certain prices, therefore limiting the number of shares it must issue to the lender when they want to convert the notes. That effectively reduces dilution for existing shareholders of Energy Fuels.

Investors are possibly taking note of this and already helping Energy Fuels stock recover. As of noon today, the stock was down only about 4%. With President Donald Trump keen to boost the domestic nuclear energy industry and Energy Fuels holding substantial uranium inventory in anticipation of a rise in uranium prices, the stock is likely to stay in the spotlight.

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Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.