Jeb Handwerger, Gold Stock Trades editor, says coal and
natural gas lobbyists are kicking the uranium industry while it's down in the
shadow of the Fukushima nuclear accident. It's still stormy out there, but
the sector may prove be the pot at the end of the rainbow for contrarian
investors. In this interview with The Energy Report, Jeb Handwerger challenges
investors to take a calculated risk on a sector with major potential.
Mentioned : AREVA :
Uranium Inc. : BHP
Billiton Ltd. : Cameco Corp. : Denison Mines Corp.
Uranium Resources Ltd. : Fission Energy Corp. : Paladin Energy Ltd. : U3O8 Corp. : UEX Corp. : Ur-Energy Inc. : Uranerz Energy Corp. : Uranium Energy Corp.
Related Companies : Ur-Energy Inc. : Uranerz Energy Corp.
Report: Jeb, in a
September post on www.goldstocktrades.com, you opined that nuclear energy is
essentially being kicked while it's down. Can you explain that for our
Jeb Handwerger: We experienced the Fukushima disaster, plus a very risk-off market for
most of 2011 and 2012 in commodities and mining equities, with investors
concerned about the global economic situation. That added up to two major
hits to the uranium sector. In addition, we had many lobbying groups pushing
their individual energy sources, such as natural gas, coal, wind or solar, to
take advantage of the nuclear slowdown. We also saw a large short position
build in many of the uranium miners and we've seen the short-term uranium
price correct. At this point, the uranium miners are trading near 52-week
lows, and I believe they are extremely undervalued. Even Japan is looking to acquire uranium miners.
TER: You think Japan as a country is looking to acquire
JH: There was a report that Japan Oil, Gas and Metals
National Corp. (JOGMEC) is signing a
production-sharing agreement with the government of Uzbekistan. It was also
interesting that the CEO of Cameco Corp. (CCO:TSX;
CCJ:NYSE) went to
Japan to try to buy surplus uranium from utilities, but couldn't finalize a
deal. This indicates to me that Japan is going to turn some of these reactors
back on, especially the newer, safer, more efficient reactors.
next 12–18 months, the uranium sector is going to have a very powerful
rebound based on supply-demand fundamentals. So it's very important to watch
what the smart money is doing when prices are down and the uranium miners are
trading at 52-week lows.
consider the recent deals that have been occurring, including a utility
signing an offtake agreement with Paladin Energy Ltd. (PDN:TSX; PDN:ASX) and Chicago Bridge & Iron Co. (CBI:NYSE) buying
The Shaw Group Inc. (SHAW:NYSE) for its nuclear building capabilities.
TER: Is most of the nuclear rebound wrapped up in what's
happening in Japan or are there other catalysts?
JH: There are other catalysts, such as BHP Billiton Ltd.'s (BHP:NYSE; BHPLF:OTCPK) decision to delay the Olympic Dam expansion because
of the $30 billion cost. This delay may have significant impact on the
uranium spot market.
have the expiration of the highly-enriched uranium (HEU) agreement with
Russia soon. The Russians are signaling that there is not going to be any
increase of the secondary supply. We are heading toward an even larger
uranium deficit right now.
demand side, we're seeing the building of new reactors in the Middle East,
Saudi Arabia and the United Arab Emirates. We recently saw the power outage
in India, which demonstrated the importance and the hunger for power upgrades
in that country. That's one of the major areas of growth. India is building
something like 42 reactors by 2032. China is going full-speed ahead with
nuclear power and is still pushing for 60 new reactors by 2020. We may hear
some major announcements after the transition of leadership on November 8th.
China is already discussing a major infrastructure program. We believe the
nuclear buildout is part of that initiative. The
Middle East issues and rising energy prices are really forcing Asia to think
more about energy, including nuclear energy and uranium. Demand from China
and India alone will push us further into this shortfall. So we don't think
these uranium prices will stay at multiyear lows. Get ready for a
TER: Investors interested in entering the energy sector
have a number of options. These include green energy, natural gas, coal and
uranium. Where is the best place for them to be right now?
JH: We believe for baseload
energy, uranium is providing a very good opportunity right now because it's
trading near multiyear lows. Because of the low spot price, the assets are
priced as bargains. The upside has great potential. We think that nuclear is
the choice of the emerging nations, such as China, India and the Middle East.
something very interesting going on in that we're seeing Saudi Arabia and the
center of the oil world looking into nuclear energy. This, to us, has
significant implications, meaning that maybe peak oil is here and they're
realizing that, even in their own society, they can't base it completely on
oil, natural gas or coal. If Saudi Arabia, with the largest oil supply in the
world, is building nuclear, shouldn't countries dependent on fossil fuels
also be looking at alternatives? Both Romney and Obama have goals of being
energy independent. Nuclear is a critical part of reaching that goal.
growing in the developed world too. For the first time in 30 years, we're
building three nuclear reactors in the U.S. Canada is building reactors.
Europe is building reactors in Poland, Finland, Spain and Slovakia. In all of
these regions there is significant growth, and it's providing investors with
a great opportunity because you're able to get in at 52-week lows.
investors don't realize that Europe currently has approximately 160 working
nuclear reactors. It has the largest per-capita consumption of nuclear power.
Most people don't realize that France, Lithuania, Slovakia, Belgium, Sweden,
Slovenia, Hungary, Bulgaria, the Czech Republic and Finland have more than
25% of their electricity coming from nuclear power. Despite that, Europe has
only one uranium mine in production. Europe is a major importer of uranium.
TER: Where is that uranium mine in Europe?
JH: It's in the Czech Republic. The other deposit that
is in development is European Uranium Resources Ltd.
(EUU:TSX.V; TGP:FSE). It has a deposit in Slovakia and recently the
nuclear giant AREVA (AREVA:EPA) became a major shareholder and sits on European Uranium's board.
Slovakia recently elected a new prime minister who is a major supporter of
nuclear energy. The party has officially stated that it believes that
domestic assets, such as European Uranium's Kuriskova
project, should be developed.
TER: With juniors trading at near 52-week lows, why
haven't we seen more consolidation?
JH: We have seen some deals. Cameco
raised capital and went into Australia to buy the Yeelirrie uranium project
in Western Australia for $430 million ($430M). Rio Tinto outbid Cameco and bought Hathor for a
large premium in the Athabasca Basin. I think as the uranium prices bottom
and as the large miners' prices increase, we will see more of these deals.
There will be more confidence in the sector for mergers and acquisitions
activity. And as we get closer to some of these supply shortfalls, such as
the 2013 Russian HEU agreement expiring, near-term producers, especially in
the U.S.—where there is already a huge supply-demand deficit—the
near-term U.S. producers, such as Uranerz Energy Corp. (URZ:TSX;
URZ:NYSE.MKT) and Ur-Energy Inc. (URE:TSX;
URG:NYSE.MKT) are going
to become more highly sought after by the majors. We may see consolidation in
these near-term producers, especially as they begin to produce profitably.
TER: Uranium Energy Corp. (UEC:NYSE.MKT) is currently producing uranium from its Palangana in-situ deposit in Texas, and it is developing
the Goliad in-situ project, also in Texas. Is the success of that company
impacting others in the sector? In other words, is this a template that
investors can follow with similar companies?
JH: Yes, exactly. When you start seeing new U.S.
uranium production, it's a huge boost of confidence for the entire sector.
This may impact other companies such as Ur-Energy, which recently received
its permits for construction and Uranerz, which has
a great position in the Powder River Basin and which already has a processing
agreement with Cameco at its nearby Smith Ranch
in-situ uranium asset. It already has an offtake
agreement with a very large utility at much higher uranium prices, at like I
think $60–65/pound (lb). We believe it will
shortly receive its final deepwater disposal well
permit for production.
TER: Do you think there will be further consolidation in
the Athabasca Basin? Or is Texas looking ripe for the picking right now?
JH: You have to look for operations where it is already
working, such as in the Powder River Basin of Wyoming with Uranerz or in the Athabasca Basin. Some names there are Denison Mines Corp. (DML:TSX;
DNN:NYSE.MKT), UEX Corp. (UEX:TSX) and Fission Energy Corp. (FIS:TSX.V;
could attract a major that is looking for exploration plays modeled after Hathor Exploration's success, using some of the same
the Athabasca Basin is explorer Athabasca Uranium Inc. (UAX:TSX.V; ATURF:OTCQX), with its Keefe Lake property. We expect that it is
probably going to do another drill program utilizing Dr. Zoltan
Hajnal's seismic technology at the University of
Saskatchewan. That might be interesting if a company is looking for an
early-stage exploration success. Dr. Hajnal was a
critical player in using seismic data to discover Hathor's
Roughrider deposit. Athabasca Uranium has millions of dollars of seismic
data, which helps the geologists pinpoint exploration targets.
TER: Do you think Cameco or a
company like Cameco is more likely to do an offtake agreement or an outright takeover?
JH: Based on Rio Tinto (RIO:NYSE;
RIO:ASX) buying Hathor Exploration in 2011 for
$650M, we think Cameco will outright buy.
Especially in the Athabasca Basin, we think that it is going to do takeovers
and have more equity deals. The Hathor deal was
very significant for Rio Tinto and the industry. This was the first major
takeover since the credit crisis. It may be forecasting a commodity
deficit—especially in light of BHP not expanding its Olympic Dam, which
hosts a whole wide range of commodities. Uranium is a byproduct of that, and
BHP's decision is really based on the economics of other metals and the costs
assets around the globe could be significantly cheaper than Olympic Dam and
produce a lot of uranium. U3O8 Corp. (UWE:TSX;
has the Berlin deposit in Colombia, is coming out with a preliminary economic
assessment (PEA) by the end of 2012. It has rapidly expanded its resource
base over sevenfold. It just announced recent results showing an increase in
the size of the deposit, which may be able to go up to 100 Mlb uranium. It also has credits for vanadium
phosphate and rare earths that are going to pay down the cash costs for the
uranium. What's really interesting is that it has shown recently some
positive metallurgy. That has always been the concern from the majors about
this project. Progress with metallurgy and an official PEA could be the
criteria for a major to make a buyout offer. Assets like U3O8's Berlin
deposit could become very attractive for the majors who want to expand and
produce profitably at lower costs.
TER: Paladin recently signed a $200M offtake
agreement with an energy utility, but most of that money will go toward
paying down some bonds that are going to be due in March 2013. Is the Paladin
Energy situation unique or should investors look forward to more of these
deals over the next few years?
JH: I think it shows that the utilities are concerned
about long-term supply. Over the short term, we're seeing some weakness
because of all of these different macroeconomic situations. That's really
where uranium investors need to look, 18–24 months down the road. Yes,
we do think that there are going to be more deals like this and that the
supply-demand equation is already in a major deficit. Utilities are going to
lock in at these record low prices.
TER: What's your strategy for buying these stocks? Are
you a buy and hold investor? Are you buying them and then going to exit your
positions on a price rally or when uranium gets to $80/lb?
JH: We're contrarian investors. We use a whole mix of
signals to buy. Right now, we believe that the sector is hitting 52-week lows
and is off investors' radars, making it a great contrarian investment
opportunity with possibly exponential gains. When we see that it becomes overbought
and extended, as we saw in early 2011, that's when we're going to recommend to sell.
mainstream is beginning to accept the new nuclear reactors—which are
smaller, safer, more economical—and we're even seeing smart investors
such as Bill Gates and his company, TerraPower get
behind the sector. Major deals are taking place such as the one between
Chicago Bridge and Iron and Shaw Group, which is a major builder of nuclear
reactors. These large corporate entities see the long-term picture and are
investing in nuclear energy's future because it has no carbon footprint and
it is safer, cleaner and more economical than all other power sources. We are
going to see a lot of growth in the sector over the next 18–24 months.
When people see the uranium price basing at lows and there's concern for the
future of the sector, those are the opportunities for investors who have the
courage and the foresight to realize the upside growth in this burgeoning
sector. Investors may look back at this time one day and see it as one of the
great investment opportunities that comes around
once in a generation.
TER: Let's end on that note. Thank you, Jeb.
Jeb Handwerger is a newsletter writer who is syndicated
internationally and known throughout the financial industry for his accurate
and timely analysis of the equities markets—particularly the precious
metals sector. Subscribe to his free newsletter.
read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when
new articles have been published. To see a list of recent interviews with
industry analysts and commentators, visit our Exclusive
1) Brian Sylvester 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: U3O8 Corp., Athabasca Uranium Inc., Fission Energy Corp., Uranerz Energy Corp., Ur-Energy Inc., Uranium Energy
Corp. and European Uranium Resources Ltd. Interviews are edited for clarity.
3) Jeb Handwerger: I personally and/or my family
own shares of the following companies mentioned in this interview: European
Uranium, Uranerz, Ur-Energy, Athabasca Uranium,
U3O8 and Denison. I personally and/or my family am
paid by the following companies mentioned in this interview: None. I was not
paid by Streetwise Reports for participating in this interview.