After two years of uncertainty, David Talbot tells The Energy Report why
he expects 2013 to be the year that the balance in the uranium energy
equation finally begins its tilt toward the demand side, with 2014 marking a
probable supply shortfall. Talbot discusses which uranium producers,
developers and explorers he expects to benefit most from the coming market
Report: It's been
just over three months since we last discussed the nuclear industry and the
market prospects for companies in the uranium space. What have been the most
important developments since then?
have been a number, both on the supply side and the demand side, since early
August. All the catalysts appear to strengthen the long-term fundamentals of
the sector, and while they haven't necessarily moved the market, we believe
they ultimately will help.
demand side, Paladin
Energy Ltd. (PDN:TSX; PDN:ASX), on which we have a Buy rating and a $2.55 target
price, signed an offtake deal with France's EDF
Group to supply a total of 13.7 million pounds (13.7 Mlb)
of yellowcake between 2019 and 2024. It received $200 million ($200M) up
front to secure supplies, with delivery still six years away.
addition, the United Arab Emirates signed a $3 billion ($3B) nuclear fuel
supply contract covering the first seven years of operations at the first
four of its reactors. Uranium Energy Corp. (UEC:NYSE.MKT), on which we have a Buy rating and a $3.50 target
price, is one of the six suppliers involved in that deal. AREVA (AREVA:EPA) also signed a contract to supply more than 66 Mlb of U3O8 to EDF from 2014 to 2075.
demand side, we also see the supply side tightening, with the HEU (highly
enriched uranium) agreement expected to go off-line in about 13 months,
removing 24 Mlb of supply.
price weakness is causing cuts in production forecasts, including for Cameco Corp. (CCO:TSX;
CCJ:NYSE)/not rated. It has deferred its Kintyre project and
dropped long-term production guidance. BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK/not rated), has deferred its massive Olympic Dam expansion. Kazatomprom and Uranium One have canceled the Zarechnoye South project, and Uranium One announced 2014
guidance that was well below expectations. Paladin deferred its Langer
Heinrich Stage 4 expansion (unless we see $85/lb
uranium). Energy Fuels
Inc. (EFR:TSX) closed three mines in the U.S. Southwest. If
current producers can't keep projects going at current prices, we can't
expect investors to pony up the capital to build newer projects, which are
often more expensive, of lower grades and have higher cost than current
TER: Despite the continued positive long-term outlook
for uranium demand, the price has been in a downtrend since midyear. Why is
DT: We believe the recent spot price downturn has to do
with excess short-term uranium supply and low discretionary demand mainly
from utilities. For much of the summer, China was not buying uranium on the
spot market, and many utilities were covered for 2013 requirements.
Uncertainty still surrounds long-term nuclear plans for some developed
nations, including Germany, France and, of course, Japan—although we do
believe some of those decisions are more political than scientific. So
investors weren't touching the commodity either.
TER: Despite this recent price weakness, are you still
bullish on the uranium space overall?
DT: We are still bullish. As we have stated in a couple
of recent sector updates, the uranium renaissance still appears to be moving
forward. There are more reactors planned or under construction today than
before the Fukushima Daiichi disaster and we don't believe that anyone will
step away from nuclear energy entirely. Emerging markets are going to be the
real growth story, specifically China, India and Russia. Despite the current
overhang, we remain bullish and expect to see 240–260 Mlb of demand by 2020, offset by maybe 200 Mlb of combined primary and secondary supply. We expect
demand to exceed supply by 2014. Without higher uranium prices to support
development of new mines, a long-term supply gap does exist.
are pushing expansions off or canceling them altogether, which is negative
from a company standpoint but is actually positive from a long-term
supply-demand perspective. We talked in August about the delays at Paladin, Cameco and BHP taking about 23 Mlbs
off-line. We can now add Kazatomprom and Uranium
One to the mix, and a number of the other projects that will have incremental
impacts as well. Paladin believes the break-even price for projects is
$85/lb. If Paladin is right, that deficit could widen even further, putting
upward pressure on uranium prices.
TER: What do you think will reverse the downtrend in
uranium prices, and when would you expect that to occur?
DT: Price is the only catalyst that uranium sector
investors care about right now, in our opinion. The main trend reversal will
likely be in spot uranium buying from China and Japan, as well as from
investors. In the second half of next year we'll hopefully see some movement,
as the Japanese get restart approvals. China has already resumed its
purchasing in the spot market and started importing uranium again. That's
helping to remove some supply overhang in the spot market.
underestimate China's impact—it currently has 15 reactors in operation,
26 under construction and 51 planned, according to the World Nuclear
Association. We estimate that China is going to need 45–50 Mlb annually by 2020. That's the same as what the U.S.,
the largest nuclear power generator, uses today. Japan is going to have to
resolve its nuclear regulatory issues before it comes back on-line in any big
way. In general, we could see a more robust spot market in 2013 as utilities
cover requirements for 2014 and beyond. The market is waiting for the end of
the HEU agreement, which is going to take 24–28 Mlb
out of the secondary supply at the end of 2013.
TER: Has the recent price performance of spot uranium
had much effect on your evaluation models for the uranium producers?
DT: It has. On Nov. 1 we adjusted our price assumptions
downward to $49/lb for 2012 and $54/lb for 2013. We are leaving our long-term price
assumption at $65/lb. Prices had previously been in the $65–70/lb range. This decrease in our short-term spot price
largely impacted current or near-term producers, but made few meaningful
impacts on our long-term NAV estimates for some explorers and developers.
TER: Speaking of producers, over the past year Energy
Fuels Inc. has gone from a midlevel development company to the largest
conventional producer in the U.S. Do you have any thoughts on that?
DT: We have a Buy recommendation and $0.75 target price
on Energy Fuels, as it has indeed become one of the largest producers in the
U.S., having bought operations from Denison Mines Corp. (DML:TSX;
DNN:NYSE.MKT). It owns
the strategic White Mesa Mill, the only conventional and permitted mill
operating in the U.S., which has saved the company about $150M since it
doesn't have to permit and construct a mill of its own. The company has
recently shifted production to lower-cost and higher-grade operations in
Arizona. We expect production to drop to just over 1 Mlb
next year. But the company has a lot of leverage to uranium prices, and once
those pick up we expect Energy Fuels to benefit significantly.
TER: Among the developers, which look particularly
interesting at this point?
DT: We are looking downstream these days, toward names
that have catalysts down the road. As peer groups go, the developers and
explorers are doing a little better than the producers.
(UEX:TSX) is still our top developer pick, with strong
takeover potential. With 88 Mlb of compliant
resources, its 49%-owned Shea Creek joint venture (JV) with AREVA is the
third largest deposit in the Athabasca region after McArthur River and Cigar
Lake. The company is currently wrapping up a $10M program though which it
discovered a new high-grade zone called Kianna
East, and that will likely help the JV partners get Shea Creek over the 100 Mlb mark. UEX also wholly owns the 40-Mlb Hidden Bay
project, in the northeastern part of the Athabasca Basin. UEX has the right
projects in the right places, surrounded by majors and ample infrastructure,
including existing mills with excess capacity, and a large, high-grade asset
with the potential to grow even larger. We see takeout potential here, and Cameco is a likely choice.
TER: Where is UEX trading these days? When do you think
a takeout might happen?
DT: UEX is trading at $0.57 right now. We have a Buy
rating on it and a $1.70 target price. We have seen takeovers in the range of
our target prices lately. We may not see a triple if somebody goes after the
company today, but I do think that if someone makes an offer, there might be
TER: You mentioned Denison earlier. What is the story
DT: We recently launched coverage on Denison Mines with
a Buy rating and a $2 target price. Its recent transaction with Energy Fuels
transformed it from a producer with uranium price risk to a leading
explorer/developer with exciting assets worldwide. Its 60%-owned flagship
Phoenix deposit, at Wheeler River in the Athabasca Basin, is likely the third
highest-grade uranium project on the planet. The company holds a 22.5%
interest in the McClean Lake project, which includes
the fully permitted, licensed and highly strategic JEB mill, the only mill in
the world capable of handling ultra-high-grade uranium ore like that found at
Cigar Lake. Denison also holds a 25% interest in the 50-Mlb Midwest project
nearby, and majority ownership and operatorship of projects in Mongolia and
Zambia. Plus, the company has steady cash flow from its environmental
services division and its management of Uranium Participation Corp. (U:TSX/Buy, CA$7.50 target price), a uranium holding company.
Resources Ltd. (LAM:TSX), which has outperformed most of its peers over the
past year. Its flagship is the 52-Mlb Westmoreland project in Australia.
Recent drilling is starting to fill a four-kilometer (4km) gap along the
7km-long trend of uranium mineralization, where higher-than-average resource
grades are being returned. Just as importantly, uranium has been discovered
for the first time on the east side of the Redtree
Dyke, opening up significant additional potential.
most important for Laramide is the news from Queensland
that the uranium mining ban has been overturned. Laramide
has also announced that its La Sal project, in the southwest U.S., is fully
permitted and could potentially be put into production next year. The project
is close to Energy Fuels' White Mesa Mill, where the company hopes to
orchestrate a toll milling agreement. The company also has a royalty interest
in the Church Rock deposit in New Mexico. It was able to sell forward some of
that royalty; the remaining royalty is valued at somewhere between $15M and
$75M, depending on uranium prices. This highlights how undervalued the stock
is at this point.
TER: What is your target on Laramide,
compared to where it is now?
DT: It's $2 and right now the stock is trading at
roughly $0.80. That is about a 150% lift.
TER: That's decent upside. How about other developers?
DT: A couple of interesting companies that have
significant catalysts coming up are Ur-Energy Inc. (URE:TSX; URG:NYSE.MKT) and Uranerz Energy Corp. (URZ:TSX;
URZ:NYSE.MKT). We have
a Buy rating and a $2.30 target price on Ur-Energy. The company recently
received the green light from the Bureau of Land Management (BLM) on its Lost
Creek project, which is now fully permitted, likely fully financed and under
construction. We anticipate low-cost production to begin by the middle of
next year, ultimately ramping up to 2 Mlb per year
over a total mine life of eight years. The company is also working on its
project pipeline after having announced definitive agreement to acquire
Pathfinder Mines Corp. that would bring another 15 Mlb
of historic resources into development. The Shirley Basin project would
likely be the next one developed by the company. Ur-Energy would also acquire
a massive database, which management is more than capable of monetizing, plus
a tailings management facility that could prove a future source of cash flow
through waste disposal agreements with surrounding miners, some of which are
already in place.
out of Uranerz recently was the receipt of its deep
disposal well permit, which essentially clears the way to production by
mid-2013 via toll milling at Cameco's Smith
Ranch-Highland in situ recovery plant. We believe the company can ramp up to
between 300–700 Klb over the next two years.
Upcoming catalysts include the installation of the first deep disposal well,
expected to begin shortly, followed by a second disposal well and initial
TER: How about explorers? They usually provide the most
excitement if they find something investors weren't expecting.
DT: Explorers definitely provide the most excitement.
Quite a few have been finding uranium and gold, for that matter, even though
the developers and producers have not fared as well.
recently launched on Mawson Resources Ltd. (MAW:TSX; MWSNF:OTCPK; MRY:FSE) with a speculative Buy rating and no target. This
gold-uranium exploration company is focused on its 100%-owned Rompas project in Finland. It is an early-stage story
with huge potential. We think that Rompas may hold
multimillion-pound uranium potential and, more importantly,
multimillion-ounce gold potential along its 6km strike length. We've visited
almost 80 uranium projects and dozens of gold projects around the world, and
we've never seen so much high-grade uranium outside of the Athabasca Basin,
let alone massive uranium with significant visible gold at surface.
project has returned grab samples that average 4.25% U3O8 and 1,127 grams per
tonne (g/t) gold. Channel samples have averaged up
to 51% uranium and 22,700 g/t gold. Recent drilling has returned 617 g/t gold
over 6 meters (6m), including almost 3,500 g/t gold over 1m. We expect
significant results down the road.
permitting risk still remains, as parts of Rompas
lie on a Natura 2000 natural heritage preservation
site. But we are encouraged by the recent receipt of 100% of legal rights to
the core of the Rompas claims. Mawson
is conducting environmental studies for an application to modify the claim
decision that will hopefully allow full exploration on the Natura area as well, with a decision expected in 2013.
TER: Where is that stock now?
DT: Mawson is trading at
TER: Considering the exciting upside, it seems that
somebody will want to enter some kind of a JV with Mawson
or maybe even take the company over.
DT: That's definitely possible. It could be a uranium company
or a gold company. Some seniors are poking around Finland, including Cameco, which is planning to produce uranium in Finland.
TER: Any others?
DT: Another company we're looking at is Kivalliq Energy Corp. (KIV:TSX.V), which we have recommended as a Buy with a
speculative risk rating and no target price. This company has been very
successful with drilling and finding new zones at its Canadian sites over the
past two years. It's now up to 11 new zones just outside its main high-grade
resource area, with dozens of new high-grade targets. We expect another
aggressive drill program to begin in 2012. A resource update is expected in
the first quarter of 2013, which could potentially add about 10 Mlb to the 27 Mlb on the books
Energy Corp. (FIS:TSX.V; FSSIF:OTCQX) is a stock we rate as a
speculative risk Buy with no target price. This company has had incredible
success with its Patterson Lake South JV with Alpha Minerals Inc. (AMW:TSX.V), formerly ESO Uranium, (not rated). It has made a
new high-grade discovery on the southwest side of the Athabasca Basin, with
massive pitchblende that exhibits off-scale radioactivity on several holes.
Fission's stock has rallied, rising 70% on this news over the last couple of
weeks alone. We await initial assay results for further proof that the
companies may be onto something big.
flagship is the J Zone deposit in its 60%-owned Waterbury Lake JV, on the
east side of the Athabasca Basin next door to the Roughrider deposit. This JV
is with Korea Electric Power Corp (KEPCO), one of the world's largest nuclear
utilities. The J Zone hosts 9 Mlb of uranium, with
7.4 Mlb classified as Indicated grading 2%. The JV
has about $6M to spend before it completes its first three-year, $30M
commitment. We expect this will be spent on a resource update this fall and
an upcoming winter drill program.
TER: Looking forward into 2013, what is the best
strategy for making money and minimizing downside?
DT: We almost always recommend buying a basket of
juniors to mitigate risk, particularly if the stocks are small, but an
investor's strategy must also depend on his or her view of where uranium
prices will be in 2013. We recently divided the uranium sector into
producers, developers and explorers, tracking their relationships with spot
prices over the past two years. Explorers have the highest leverage to spot
prices, with a 2.79 beta, followed by the developers with a 2.27 beta and
finally the producers with a 0.81 beta.
bullish on uranium, invest in developers and explorers. If you're more
defensive, look to the more stable producers. Investors are watching the spot
market, which represents only 17% of total uranium trading so far this year,
and has little to do with the actual long-term fundamentals of this sector,
which are just getting stronger.
TER: Do you think things are at a bottom, and that it is
just a matter of when the turn comes and how quickly it moves?
DT: We believe a large, rapid and more sustained rally
might be deferred until the second half of 2013, when Japan gets things going
again. We have seen a bit of a rebound over the last couple of weeks, with
the uranium prices rising for the first time in five months. Hopefully there
are brighter days ahead.
TER: We'll all stay tuned and hope for the best. Thanks
for talking with us today, David, and for all your insights.
DT: My pleasure.
Securities Senior Mining Analyst David Talbot worked for nine years as a geologist in the gold
exploration industry in Northern Ontario. David joined Dundee's research
department in May 2003 and in the summer of 2007, he took over the role of
analyzing the fast-growing uranium sector. David is a member of the PDAC, the
Society of Economic Geologists and graduated with distinction from the
University of Western Ontario, with an Honours
B.Sc. degree in geology.
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1) Zig Lambo of The
Energy Report conducted this interview. He personally and/or his family
own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Energy Report: Fission Energy Corp., Laramide
Resources Ltd., Ur-Energy Inc., Uranerz Energy
Corp. and Energy Fuels Inc. Interviews are edited for clarity.
3) David Talbot beneficially owns, has a financial interest in or exercises
investment discretion or control over, companies under coverage: Energy Fuels
Inc., Mawson Resources Ltd. and Kivalliq
Securities Ltd. and its affiliates, in the aggregate, beneficially own 1% or
more of a class of equity securities issued by companies under coverage:
Energy Fuels Inc.
Securities Ltd. and/or its affiliates, in the aggregate, own and/or exercise
control and direction over greater than 10% of a class of equity securities
issued by companies under coverage: None.
Securities Ltd. has provided investment banking services to the following
companies under coverage in the past 12 months: Energy Fuels Inc., Fission
Energy Corp., Ur-Energy Inc. and Kivalliq Energy