The Mining Report: In past interviews with Streetwise Reports,
you predicted that the price of uranium will rise this year. But that has not
panned out. Why not?
David Sadowski: Simply put, there is a short-term
supply problem in the uranium industry. We believe, however, in the long
term, supply will not be able to keep up with demand growth. The point at
which we previously expected demand to outstrip supply has been pushed out by
a couple of years. That development has impacted the price in recent months,
as well as Raymond James' outlook for the price going forward.
The three main reasons
for continued global growth of uranium mine production are the persistence of
long-term fixed-price sales contracts, the intransigence of government
producers who believe that security of supply is more important than mine
economics, and byproduct uranium production. Secondary supply sources also
remain robust.
TMR: Would you explain how these
situations interrelate?
DS: Demand is lagging because Japan
has been slower than expected to resume operations at its nuclear reactors.
The Japanese reactors are not consuming uranium at the moment, but the
Japanese utilities are continuing to take delivery on many of their supply
agreements, causing their inventories to rise. A belief in the market that
uranium might be dumped has, in part, kept other global utilities on the
sidelines, resulting in lower levels of uranium buying and lower prices. And
while uranium oxide "yellowcake" deliveries have continued to
Japanese buyers, those buyers have slowed the movement of that material into
the rest of the fuel cycle, which has decreased demand for conversion and
enrichment products.
On the enrichment side,
excess capacity has resulted in "underfeeding." The centrifuges at
the enrichment plants are always spinning. The plants are paid to supply a
certain level of enrichment to their customers. And during times of lower
demand, they can utilize otherwise empty centrifuges to squeeze out more
uranium product.
An apt metaphor for this
process is orange juice. Imagine that you are running a juice bar with 10
juicing machines that are always spinning. Your customers bring you oranges
and sign a contract to take delivery of a set amount of juice from those
oranges. But suddenly you lose 20% of your customers. They stop bringing you
oranges and they no longer pay you for the juice. What are your options to
make up for that lost revenue? Given that all 10 juicing machines must
continue to run, you can take the oranges that would under normal
circumstances be squeezed by eight machines and instead run them through 10
machines, squeezing more juice out of each orange. The juice in excess to
what the eight remaining customers have agreed to buy is available to the
juice bar owner to sell to other customers.
That is the same type of
activity that is going on in the uranium space. Enrichers with excess capacity
especially during a period of relatively weak enrichment or "SWU"
prices can squeeze more enriched product out of the material being provided
to them, which generates excess uranium that the enrichers sell to others.
Given the protracted outage of Japanese nuclear reactors, this squeezed
source of supply has been greater than expected. In part due to our revised
estimate that only one-third of Japan's nuclear fleet will return to
operations, we expect underfeeding to continue to exacerbate oversupply for
some time.
TMR: What about the uranium extracted
from Russian nuclear warheads?
DS: Similarly, with respect to Russia,
the end of the Megatons to Megawatts high-enriched uranium (HEU) deal was
long anticipated to usher in a new period of higher uranium prices. But the
same plants that were used to down-blend those warheads can now be used for
underfeeding and tails re-enrichment. In this way, the Russian HEU-derived
source of supply that provided about 24 million pounds (24 Mlb) to the market
did not disappear completely; the supply level was just cut roughly in half.
Meanwhile, uranium mines, in aggregate, have increased their output�even though prices are now well below average
production costs. Kazakhstan, for example, has continued to grow its uranium
industry, despite recent guidance from officials in Kazakhstan to the
contrary.
Furthermore, since
Fukushima, only one major uranium mining operation has closed down due to
weak prices, Paladin Energy Ltd.'s (PDN:TSX; PDN:ASX) Kayelekera in Malawi.
The high-cost Ranger mine in Australia, which has been processing its
stockpiles since 2012, has defied protests from locals and restarted
production following a major accident in late 2013. And Cigar Lake in Canada
and Husab in Namibia are charging into production, even in this oversupplied
environment. The bottom line is that oversupply will persist until 2020.
TMR: How will that solemn reality
affect future prices?
DS: Current prices are untenably low
and some producers are refusing to sell at rock-bottom prices. Upward
pressure on prices into the $35 per pound ($35/lb) range should occur as
utilities buy more uranium in the marketplace, and as secondary trading
activity among financial entities picks up. The biggest factor is the
behavior of the end-users of uranium, the nuclear utilities. Given what we
know from available data, global utilities are going to have to sign a lot of
new supply contracts to meet their uncovered reactor requirements in the
years 2017 and beyond.
But looking at current
utility-held inventories and the global supply/demand picture over the next
five years, we predict that the utilities will not be rushing to sign new
deals. A major upswing in prices toward mine incentivizing levels of $70/lb
is thus at least a couple of years down the road. The spot price is $28/lb
today. It should average $35/lb in 2015�a 20% rise and we see US$70/lb in
2018. Furthermore, it should be noted that this outlook can change in a split
second. A flood at Cigar Lake, sanctions against Russian nuclear fuel
exports, a major mine shutdown�if any of these events occur, the
equation changes and prices could rise a heck of a
lot faster, comparable to the rise in 2006�2007 and in late 2010.
TMR: What do you look for in a uranium
mining junior?
DS: The best junior opportunities are
to be found in companies with best-in-class assets, access to capital, and
the potential for value-added news flow. Solid management teams, clean
capital structures and trading liquidity are also key.
For example, Denison
Mines Corp. (DML:TSX; DNN:NYSE.MKT) has world-class discovery
potential at Wheeler River, and also another high-grade project that it is
aggressively exploring. Denison will generate up to $7 million ($7M) annually
in Cigar Lake toll milling revenues. And the company could bring several
deposits into production in the medium term. Valuation is an obvious
consideration when looking at investing in the juniors, but after peaking in
late February and early March, most of the junior equities are now trading at
attractive levels. Denison is one of our top picks among juniors in the
Athabasca Basin.
TMR: What other companies do you like
in the Athabasca Basin?
DS: Fission Uranium Corp. (FCU:TSX.V) has similar qualities to Denison. Fission's Patterson Lake South has
emerged as the best undeveloped uranium project in the world. There simply
are no other high-grade, open-pit uranium assets left un-mined, so the value
of Patterson Lake is off the charts. Based on assay results released by
Fission through the winter program, we estimate 70�80 Mlb of contained metal has been defined.
We anticipate that its aggressive summer exploration campaign will add even
more to that total. All of the zones are wide open along the strike and to
the north and south, not to mention the numerous coincident geophysical and
radon anomalies in the region. There are question marks, such as the price
and timeline to construct a new mill, but we look forward to seeing a maiden
resource estimate at the project, which should come out in early 2015.
TMR: Fission Uranium spun out of
Fission Energy Corp. (FIS:TSX.V) last year. Was that
a good move?
DS: It was a great move. Fission
Energy sold its Waterbury Lake and other uranium assets and spun out the
Patterson Lake South project and ancillary assets, including a project on the
Macusani Plateau in Peru. It turned out to be a fantastic deal for
shareholders. Not only did they get shares in Denison Mines, they also got shares
in Fission Uranium. Fission subsequently acquired Alpha Minerals Inc. and is
now the 100% owner of the Patterson Lake South project, which in our view has
lowered the hurdle for the company to get taken out. Fission is our top pick
among uranium juniors at current price levels, with a Strong Buy rating and
$2 target price.
TMR: Which uranium producers do you
like in the United States?
DS: Ur-Energy Inc. (URE:TSX; URG:NYSE.MKT) is our top pick among uranium producers.
Since starting up production in late 2013, its Lost Creek mine in Wyoming has
performed exceedingly well. Ur-Energy has a good operating team,
well-executed plant build, solid ore body and is in
an attractive jurisdiction. One of the company's key advantages over its
competitors is the high fixed prices in its contract book. Over the balance
of 2014, we estimate that Ur-Energy will deliver into sales agreements with
an average realized price of more than $60/lb. Meanwhile, cash costs are
expected to be very close to $20/lb, implying a stellar operating margin.
In a higher uranium price
environment, Ur-Energy looks even better with its ability to scale production
to 1 Mlb/year at its core operation at Lost Creek. Plus, it can go to 2
Mlb/year by incorporating its low-cost satellite mining operation at Shirley
Basin. The company is highly leveraged to improved uranium prices, but it is
also downside protected by its attractively priced contracts, which extend to
2019.
TMR: Is there synergy in going after
both uranium and gold?
DS: Uranium deposits can occur
alongside other metals, improving mine economics. In South Africa and
Australia, uranium is mined as a byproduct of gold with a positive impact at
those mines. In other cases, gold, nickel, molybdenum, and other metals can
be an encumbrance to primary uranium production and can negatively impact
costs.
TMR: What gold success stories are out
there?
DS: We like Probe Mines Limited (PRB:TSX.V). Its Borden gold discovery is 2 million ounces (2 Moz) at 5 grams per
ton (5 g/t) amenable to bulk underground mining techniques one kilometer off
a highway and 90 minutes from Timmins, Ontario. In fact, at its 3 g/t cutoff,
the high-grade zone hosts 1.8 Moz at a 5.9 g/t average grade. We believe
additional drilling along the strike to the east will further extend the
deposit and underline what is already one of the best undeveloped gold assets
in Canada.
The project also features a 2.3 Moz, 1 g/t pit-constrained low-grade zone
that makes sense for open-pit mining, either in a higher gold price
environment or as funded out of cash flow from the underground mine. The
company is now closing a $26M flow-through financing, which will enable it to
complete a maiden preliminary economic assessment at Borden in the fourth
quarter, close an acquisition to tie up the regional land package, and
facilitate aggressive exploration drilling through 2015. We believe Probe is
a story that is seriously misunderstood. It is a real opportunity for investors
looking at higher-grade, earlier-stage names.
TMR: How is Probe's share price
performing?
DS: After being one of the darlings of
the TSX Venture Exchange in 2013, Probe had a leg down this year. There were
a few reasons for that. Agnico-Eagle Mines Ltd. (AEM:TSX;
AEM:NYSE) had been viewed as a natural buyer for Probe. When Agnico made a
bid for Osisko Mining, the market surmised that Agnico may not want to buy
Probe in the short term. Also, some analysts regard Probe's recent resource
update as ho-hum, a view I certainly do not agree with. Probe has a stellar
underground deposit and maintains the open pit as a great option in a higher
gold price environment.
TMR: What other gold firms do you have
an eye on?
DS: We cover Kaminak Gold Corp. (KAM:TSX.V); it owns the Coffee gold project, a nice leaching deposit in the
Yukon that could host a highly economic open-pit heap-leach mine. Roxgold Inc. (ROG:TSX.V) is advancing its high-grade Yaramoko project in Burkina Faso into
development later this year. Orezone Gold Corporation (ORE:TSX) is moving its Burkina Faso Bombor� heap-leach gold project into the feasibility and permitting stages
over the balance of 2014. We are bullish on each one of these companies.
TMR: What about precious metal plays in
silver?
DS: MAG Silver Corp. (MAG:TSX; MVG:NYSE) is our top pick among silver juniors. MAG is
truly an asset-rich company. It owns 44% of the world's highest grading
silver project, Juanicipio, which is currently under development with its
joint venture operating partner, Fresnillo Plc (FRES:LSE). We model production startup in
2018 with extremely low cash costs and low operational risk. Fresnillo has
been engaged in very similar underground epithermal vein mining for decades,
and it is one of the world's top silver producers.
MAG's second asset,
100%-owned Cinco de Mayo, is very intriguing. Cinco is a zinc-dominant
carbonate replacement deposit or "CRD" target featuring very high
zinc grades and a massive exploration upside. MAG has been temporarily
expelled from the property by the locals, but we remain hopeful for
resumption of drilling in the near future. It is an excellent undervalued
company and we have a Strong Buy rating on it.
TMR: What will it take for MAG to
reopen Cinco de Mayo?
DS: MAG is working to sign an
agreement with the local ejidos in a small town called Benito Ju�rez, which is located in the Cinco de Mayo
area. MAG negotiated a similar deal to restore access at its flagship
Juanicipio project and given the particular circumstances surrounding Cinco,
we believe an analogous outcome is likely.
TMR: Thanks for your time, David.
DS: My pleasure, Peter.
David
Sadowski
is a mining equity research analyst at Raymond James Ltd., and has been
covering the uranium and junior precious metals spaces for the past six
years. Prior to joining the firm, Sadowski worked as a geologist in western
Canada with multiple Vancouver-based junior exploration companies, focused on
base and precious metals. Sadowski holds a Bachelor of Science in geological
sciences from the University of British Columbia.
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DISCLOSURE: 1) Peter
Byrne conducted this interview for Streetwise Reports LLC, publisher of The
Gold Report, The Energy Report, The Life Sciences Report and The
Mining Report, and provides services to Streetwise Reports as an
independent contractor. He owns, or his family owns, shares of the following
companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of
Streetwise Reports: Fission Uranium Corp., Probe Mines Limited and MAG Silver
Corp. Streetwise Reports does not accept stock in exchange for its services.
3) David Sadowski: I own, or my family owns, shares of the following
companies mentioned in this interview: None. I personally am, or my family
is, paid by the following companies mentioned in this interview: None.
Raymond James disclosures are available here. I was not paid by Streetwise
Reports for participating in this interview. Comments and opinions expressed
are my own comments and opinions. I had the opportunity to review the
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responsible for the content of the interview. All ratings, facts and figures
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