Analyst David A. Talbot remains bullish on uranium and sees growing demand
for lithium. In this exclusive interview with The Energy Report, he
tells us why he believes the nuclear plant building boom will continue worldwide
despite the recent setback in Japan. He has positive expectations for select
stocks in both arenas.
Companies Mentioned: CanAlaska Uranium Ltd. - FMC Lithium
Corporation - Hathor Exploration Ltd. - Nemaska Exploration Inc. - Rockgate
Capital Corp. - Rodinia
Lithium Inc. - Sociedad Química y Minera de Chile
S.A. - Talison
Lithium Ltd. - UEX Corp. - Uranium Participation Corp.
The Energy Report: Thank you for joining us today David.
You last spoke with The Energy Report in late January about the
uranium market and the nuclear industry. Two months later we had Fukushima.
What is your analysis of the current state of affairs with nuclear and
David Talbot: We remain bullish on the spot price of uranium. In
January, we said it was all about uranium demand and it largely still is. The
demand picture hasn't really changed as much as the general media portrays.
We might see uranium demand decline about 5% to 10% from where we predicted,
by about 2020. But, we still expect about 240 to 280 million pounds (Mlb.) of
demand per year by then, which is really about an increase of 30% to 55% from
Worldwide, 440 reactors are in operation, 61 under construction and 154
planned. Most of the sentiment over the past several months was driven by
emotion and fear and reaction to what is being shown on the news rather than
reason. Take Germany, Switzerland and Italy for example. Much of the
mainstream media portrays Germany's anti-nuclear stance as the death knell
for the industry. People don't understand that as recently as last September,
Germany was preparing to get out of the nuclear power industry and did a
sudden about face at that time by extending the deadline.
Looking at the numbers, the effect of Germany's shutdown won't be as bad as
most think, either. Germany's 17 reactors only use 5% of current demand. This
was expected to decline to about 3% by 2020. Switzerland only has five
reactors and 1.4 Mlb. of annual requirements. That's less than 1% of world
uranium demand. Italy, no reactors, none under construction, none planned. We
do believe there will be cancellations and delays, but many of those
countries were either on the fence to begin with or really just have smaller
China, India and Russia alone account for about 50% of the new reactor build
and they're all on board. India just announced that its new liability laws
are due by the end of the month. This will likely kick start the nuclear
build in that country. Saudi Arabia had 16 proposed reactors, which was a
pleasant surprise in the land of big oil. That news essentially negated
Germany's news in the long-term. Plus, strong support out of the United Arab
Emirates and the announcement of new build in the U.K. were positive signs.
TER: Are there really any viable alternatives to nuclear?
DT: Not when it comes to a green alternative. Coal and oil definitely
have their environmental drawbacks, even with scrubbers. So does natural gas
even though it's currently favored by the green movement. The other
alternatives just can't handle base load like nuclear.
TER: So what do you predict for the uranium market in the coming year
DT: I believe supply is more of an issue today than it might have been
about six months ago. Development companies need higher prices to make their
projects economic and attract the investment they require. Without higher
prices we likely won't see a lot of the new mine build that is being
We forecast uranium prices between $65 and $75/lb. over the next couple of
years, particularly as the HEU Agreement (Highly Enriched Uranium), or the
down-blending of Russian nukes goes offline in 2013. Spot prices should
strengthen later this year from $53.75/lb. right now. Uranium's term price is
still at $68/lb. according to Ux Consulting, which publishes world nuclear
fuel prices. It's only off about 7% since March 11th, which is telling us
that the utilities are still buying. That's really the price that we should
be watching rather than the spot price.
We often use Uranium Participation Corp.'s (TSX:U) price:NAV (net
asset value) ratio as a proxy for uranium market sentiment. After almost four
months of trading at over a 10% discount to its NAV, we now see only about a
5% discount to that NAV. We've got a buy and a CAD$9.40 target price on
Uranium stocks sometimes lead the uranium price. We saw that during the last
cycle and we're starting to see some of that again with stocks that sold off
too far and are now bouncing back. The developers and the smaller stocks
should rebound a bit more quickly than some of the larger caps or producers.
It may take some time to get the general investors back into the sector in
any meaningful way, although lately, and much to our surprise, we have
noticed that many who got into the space in November 2010 after the
AREVA-China contracting news are still kicking the tires on the sector. In
the meantime, some resource funds may come in and target smaller companies
with potential for substantial capital gains but they'll likely target the
better companies first.
TER: In January, you talked about three uranium companies that were at
the top of your list: Rockgate Capital Corp. (TSX:RGT); Hathor
Exploration Ltd. (TSX.V:HAT) and UEX Corp.
(TSX:UEX). What's the story now?
DT: Not much has changed. All three companies have very good projects.
All three remain at the top of the list. Rockgate is my top pick right now
with a buy and CAD$4 target price on the stock. The stock is up about 66%
since June 20th when the sector turned upward. It was fairly hard hit by
Fukushima. Rockgate is working on its 100%-owned Falea project in Mali.
That's a uranium-silver-copper deposit. It shows amongst the highest grades,
up to 6.5% U3O8, that we've seen outside of the Athabasca Basin. It has a
resource of about 28 Mlb. of uranium and 41 Moz. silver, which is likely to
grow through aggressive drilling. We're expecting a comprehensive preliminary
assessment report this month. This should give us further comfort regarding
metallurgy of this high-grade uranium-silver-copper resource with potential
for low-cost, long-life uranium and silver production. We just think the
stock is undervalued and see a triple from here.
Hathor is a buy here with a CAD$5.60 target price.
This stock is unique on the sector. It's up significantly, almost 92% up
since March, is even up 3% since before Fukushima and back to the levels that
we saw last November. We still think there is more room to go. It has joined
the TSX. It has a new very strong management team that has over-delivered.
And it is currently buying out its partner at Roughrider to own 100% of the
property. Resources for a second zone were just announced and a third zone
discovered. The second resource estimate announced in May brought the entire
project to about 58 Mlb. If you look at just the high-grade portions of the
deposit, you can really see about 54 Mlb. grading 12%, making this the
fourth-highest grade uranium deposit on the planet. That should turn some
heads and, we think, essentially make Hathor a potential takeout target. That
is one of the main reasons the stock has been performing so well.
For UEX Corporation, we've got a buy and CAD$3 target price on this stock.
The stock is up 16% over the last two months. It was also very hard hit by
Fukushima. UEX actually started to rally earlier than most of its peers. It
started going up about six weeks ago. This is a tale of two stories. It's
about the Shea Creek joint venture with AREVA (PAR:CEI) and the third-largest
uranium deposit in the Athabasca at 88 Mlb. Mineralization is open in almost
every direction and we see high potential to expand. In the east, the company
wholly owns the Hidden Bay Project. This is the sixth-largest undeveloped
resource in the Athabasca Basin with about 40 Mlb. The preliminary assessment
came out positively. It has a modest cash operating cost and capex (capital
expenditure). This company has potential to toll mill its uranium at a couple
of existing uranium mill facilities, including Cameco Corp.'s (TSX: CCO;
NYSE: CCJ) Rabbit Lake Mill, which is located about 4 km. away from the
project. Cameco already owns about 22.6% of the company.
TER: What do you think the prospects are for a lot of these smaller
companies that are out there looking for uranium? How feasible are these
DT: I think that investors are now entering the small cap companies
with good projects, but some of those microcap stocks haven't started to move
yet. Therein is the opportunity. For example, take CanAlaska
Uranium Ltd. (TSX.V:CVV; OTCBB:CVVUF; Fkft:DH7). CanAlaska is in our
Mineral Exploration Watch List, we have a buy rating
with no target price. We have been following it for quite some time and it
seems to be a bargain right now with a market cap of about $14M. It is a
grassroots explorer with one of the largest
exploration portfolios in the Athabasca Basin. I personally like high grades
and that is why I like the Athabasca. CVV has formed joint venture agreements
with Japanese and Korean strategic partners, raising about $42M through such
partnerships to date. It has between 25,000m and 30,000m of drilling planned
through 2011. The key focus is going to be the Fond du Lac Project located on
the northern edge of the Athabasca where the company recently found 0.5% over
2m. We see potential to follow-up on that hit.
TER: Another area that you've been quite hot on is lithium. That's
become a popular metal here in the last several years as the electric
automobile business has taken off and lithium batteries are being used in all
sorts of applications. Can you give us a review of that general market and
what's going to happen there?
DT: Certainly. I believe the lithium industry is fairly concentrated.
About 80% of world production is in the hands of the four largest lithium
Química y Minera de Chile S.A. (NYSE:SQM; SSX:SQM-B; SQM-A) Chemetall,
a division of Rockwood Holdings Inc. (NYSE:ROC), Talison
Lithium Ltd. (TSX:TLH) and FMC Lithium
Corp. (NYSE:FMC). World production is now roughly 120,000 tons per annum
(tpa) of lithium carbonate equivalent. Actual capacity is closer to 180,000
tpa. New projects scheduled to come online in the next few years could
perhaps add another 100,000 tpa. As expected in any fledgling industry,
technical and permitting challenges could result in postponements. So, we
might see some of those newer projects encounter a little bit of difficulty
getting off the ground. Lithium carbonate demand appears to be growing somewhere
between 7% and 15% annually. By 2020, lithium carbonate demand might reach as
high as 240,000-270,000 tpa. If electric vehicle penetration picks up as
expected, primarily in Asia or China, we could see a true renaissance that
might help keep up with the potential production coming online.
TER: Is there potentially more supply than there is demand?
DT: I really think that remains to be seen, but there is that risk.
China right now has about 100,000 electric vehicles and the country is
striving for about one million by 2012 with 5 to 10 million by 2020. It has
programs that urge first-time buyers to purchase electric vehicles of all
kinds—cars, motorcycles, mopeds or e-bikes. We definitely see electric
vehicle use increasing in China. So, it comes down to how well a retail
product is adopted by the masses. We do think it will be adopted, but to what
extent? We're not quite sure. Outside of Asia, a lot of hype is going on in
Europe and North America. No one knows how quickly people in those countries
will adopt new electric vehicles.
TER: How does potential demand affect the price of lithium or is that
a contract market worked out by suppliers and buyers?
DT: Yes. Lithium prices are based on really long-term contract pricing
between the buyers and the sellers and well disseminated to the public.
However, the general consensus is that prices weakened around the financial
collapse and really have just started recovering in the last few months.
Prices right now are bouncing around $5,000/ton of lithium carbonate
equivalent (LCE). Recent announcements by two of the four large producers,
FMC and Chemetall, indicated their prices are going up by about 20% starting
in July to over $6,000/ton. We use about $5,500/ton LCE for our forecast,
which really is at the lower end of some of the studies out there and
possibly below where a couple of the large producers are selling.
TER: You wrote a report dated June 9th, on the lithium industry where
you described some companies you feel have pretty good prospects. Can you talk
about some of those for us?
DT: Certainly. There are two fairly small companies in particular that
I like at this time. Our top pick in the lithium sector is Rodinia
Lithium Inc. (TSX.V:RM; OTCQX:RDNAF), despite its $30M market cap. We've
got a buy with a CAD$1 target price on this stock. RM continues to be one of
the most undervalued stocks on our lithium coverage list. Rodinia is
developing a brine project at its flagship Salar de Diablillos site in the
Province of Salta, Argentina, about 11 km. from the world's second-largest
producer, FMC's Salar del Hombre Muerto. It just reported a couple of pit
samples that were about three times the average lithium grade of the deposit.
Rodinia also has its Clayton Valley Project in Nevada adjacent to Chemetall's
Silver Peak brine operation and the only U.S. producer of lithium. Given the
company's significant resource in Argentina, good brine chemistry, lack of
competition on the Salar and its three aquifers, we think now is a good entry
point for investors looking to share in Rodinia's growth. Our target price
suggests a triple from here.
TER: And the other one?
DT: Nemaska Exploration Inc. (TSX.V:NMX; OTCQX:NMKEF) is
located in mining-friendly Québec. We've got a buy and CAD$1.10 target
price on it. Nemaska's hard-rock Whabouchi Project is expected to start
production in 2012. It has a high-grade resource of 29 Mt. of ore grading
over 1.5% lithium oxide. So, this is one of the higher grade lithium oxide
pegmatites in the world. Not as high grade as Talison's in Australia, but it
definitely does the trick. Nemaska anticipates production of a 6% lithium
oxide concentrate that it could very quickly export to China where it has a
strategic alliance with China's largest lithium battery materials provider
Tianqi Lithium, a company that already owns 10% of Nemaska. Its projected
initial gross margins are estimated in the 50% range based on a preliminary
estimate from earlier this year and a modest $86M capex. This project has
good infrastructure, support from the provincial government, the local native
community and we think this is a good way to participate in short-term
lithium concentrate production potential.
TER: Do you see any technological developments on the horizon that
could significantly impact the lithium market, either negatively or
DT: I think most of the technical advancements are going to be
positive. The term "lithium-ion battery" actually comprises a range
of battery designs. Many of them are still experimental and research is
underway. But really, designers are looking to improve lithium's already
high-energy density, take advantage of its ability to hold a charge and its
lack of memory effect that allows it to recharge over and over again. But
failure to reduce costs while maintaining and improving safety and durability
could hamper growth prospects for electric vehicles. That would be a negative
for the industry in general. Now, beyond vehicle applications, we may start
seeing some lithium batteries being used for large-scale electrical storage.
Single batteries storing dozens of megawatts might power a small town or
factory. That application could potentially drive demand further.
TER: Is there any competing technology on the horizon that could knock
lithium out of the market at some point?
DT: Not when it comes to the smaller applications. Lithium is pretty
light. It's ideal for use in iPods and laptops. And because it's light, I
think it'll be used more in vehicles. When it comes to long-term storage
applications, vanadium could be substituted.
TER: Do you have any final thoughts you would like to leave with our
DT: To summarize, we're bullish on the prospects for the uranium
sector. Because of the undeniable long-term demand, we are on course for a
uranium shortage by the year 2014. We expect that uranium prices will begin
to reflect that situation. Beyond that, we do see a
little bit of a rally here in the uranium stocks. We think that they are
definitely undervalued. And, we've seen some pretty good news lately. The
U.K. is expanding its fleet of reactors, which is a
very positive signal to the market, and the Indian nuclear build is finally
getting its own kickstart.
In the lithium space, we're optimistic demand will continue to increase in
the manufacturing of greases, glass and ceramics. But we really think it will
explode in the lithium-ion battery segment where small batteries, laptops and
iPods will be joined by growth in electric vehicle and large-storage
batteries. We will keep an eye on supply over the next few years.
TER: So, as far as you're concerned, things generally look pretty
positive and this looks like a good time for people to be buying. Is that
TER: Well, thank you very much for taking time out of your busy
schedule. I'm sure that our readers will find this all very interesting and
DT: I appreciate the conversation.
Dundee Securities Senior Mining Analyst David Talbot worked for nine years as a geologist in the
gold exploration industry in Northern Ontario. His field experience included
three years with Placer Dome and six years managing projects for
Franco-Nevada Corp. and its successor, Newmont Capital. David joined Dundee's
research department in May 2003; in the summer of 2007 he took over the role
of analyzing the fast-growing uranium sector, and has since launched the
lithium sector. David is a member of the Prospectors and Developers
Association of Canada, the Society of Economic Geologists and graduated with
distinction from the University of Western Ontario with an Honours B.Sc.
degree in geology.