The Mining Report: After the governor of Japan's Kagoshima
Prefecture approved the restart of two reactors at the Sendai Nuclear Power
Plant, the daily spot price of uranium jumped $1.40/pound ($1.40/lb) to
$39.25/lb. How do you assess this change going forward?
Rob Chang: The restart news is very positive, although it is
happening at a slower pace than we had originally expected. The Japanese
utilities are well organized. They are asking to restart the two reactors
that are most likely to gain approval. That said, the jump in the spot price
reflects the news out of Japan. However, we think that the price change is
more a matter of what is going on behind the scenes. Two sellers have stopped
selling. A number of utilities have increased their buying. One large utility
recently purchased 10 million pounds (10 Mlb).
TMR: Who stopped selling and who's buying?
RC: Uranium spot prices are not traded on the public market. These
types of transactions are contracted between producers and utilities with the
occasional investor or trading house in between. The uranium spot price is
not actively speculated upon like gold or copper, nor can the general public
get in on the action. The movement in uranium spot pricing is generally based
on transactions by entities that are well versed in the intricacies of that
market. They probably would not be trading based on just the Japanese news,
especially because most of us were already expecting the reactors to restart.
TMR: Do you think the uranium equities will echo the spot price
move?
RC: Absolutely. Uranium prices have been going up since June, even
as uranium equities recently hit a 52-week low. As the uranium spot price
moves higher, the dichotomy between the two will increase and we believe
uranium equities will need to play catch up.
TMR: Are the utilities buying long-term uranium contracts?
RC: I have not heard about many long-term transactions. But the
long-term price made a notable upward move of $4/lb to $49/lb. With the
uranium spot price nudging the long-term price along, we expect term prices
to be pushed higher as the spot price increases.
TMR: What juniors do you like in the uranium space now?
RC: That depends on what you count as a junior. How about anything
smaller than Cameco Corp. (CCO:TSX; CCJ:NYSE)?
On the exploration side, Cantor Fitzgerald likes Fission
Uranium Corp. (FCU:TSX) and Denison
Mines Corp. (DML:TSX; DNN:NYSE.MKT). Fission's Patterson Lake South is
emerging as a world-class asset. We believe Fission will eventually control
more than 100 Mlb of high-grade U3O8. It is expected to put out its first
resource estimate by the end of the year. Some of the best uranium drill
holes ever reported are on Fission's property, and that is pretty impressive.
We are very positive on Denison Mines. Denison effectively owns everything
of significance in the Athabasca Basin that is not already controlled by
Cameco or Fission. Anyone looking to gain a foothold in the Athabasca Basin,
be it a Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) or a Vale
S.A. (VALE:NYSE), is going to have to deal with Denison, Fission and Cameco.
And if Cameco moves to expand its existing holdings, it will have to deal
with Denison and Fission. On top of that, Denison has an interest in the
McClean Lake mill, which is very important because it has cash flow from
processing Cameco's Cigar Lake feed. Importantly, the mill gives Denison a
piece of a strategic asset, processing material from one of the most
important mines in the world.
In the U.S.-based space, Ur-Energy
Inc. (URE:TSX; URG:NYSE.MKT) is reporting good news on completing contract
sales. This company is near the top of our list because it is producing at
the low end of the cost curve—in the low $20s/lb. It is enjoying incredible
success mining its Lost Creek project, producing uranium at a much higher
rate than expected. Plus, Ur-Energy can scale up as prices rise. We recommend
Ur-Energy for its low-cost and excellent production profile to date.
TMR: Ur-Energy uses the in situ recovery (ISR) method at Lost
Creek. How does that reduce the cost of production?
RC: If the ore is amenable, ISR is the lowest cost recovery format.
It does not involve as much earth moving as the conventional open-pit and
underground mining methods. The engineers dig an injection well and, farther
away, an extraction well. They pump a chemical solution into the injection
well. In Kazakhstan, the solution is acid-based; in Wyoming, it is a sodium
bicarbonate mix—basically water mixed with baking soda. The solutions
dissolve the uranium underground. The liquid filled with dissolved metal is
pumped up from the extraction well. This uranium mining method is less
intrusive and more environmentally friendly than conventional mining. And it
is much less expensive on the front-end capital expenditure (capex) side.
TMR: Other juniors?
RC: Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.MKT) just started
production and sales. We look forward to seeing its cost performance. But as
we have been pointing out for quite a long time, there is an unavoidable supply
deficit approaching. Uranium producers stand to benefit most. Uranerz is well
positioned for earning long-term profits.
TMR: Uranerz's shares were steady at $1.50 during 2013 and spiked
to over $2 last March. They then fell to almost $1, and shot up to $1.50 in
the last couple of weeks. What was the cause of that spike about a year ago
up above $2? Are we looking to pass the newest upsurge?
RC: Last March, there was a lot of positive sentiment behind
uranium. The prevailing analysis was that uranium was set to move this year
because of Japanese restarts. Unfortunately, that did not come to pass. There
were a lot of delays with the Japanese restarts, and the uranium sentiment
turned sour. At that time, Uranerz was receiving final approval and moving to
go into production. Passing through that gateway, plus the positive sentiment
toward uranium, contributed to the big rise in March. And in early November
Uranerz jumped again, due to the re-emergence of positive sentiment on
uranium and the fact that Uranerz is now selling yellowcake. Basically, the
same thing is happening with the other producers I mentioned.
We also really like Energy Fuels Inc. (EFR:TSX; EFRFF:OTCQX; UUUU:NYSE.MKT).
Energy Fuels is holding several mines on standby. It can start two or three
of the mines within six months to a year, and within two or three years of a
production decision, it can launch an additional half dozen mines. Production
scalability is very high. Energy Fuels owns the only conventional mill for
processing uranium in the U.S., and that gives the firm a great strategic
advantage. Right now, the mill is on standby because of the previous
low-price environment. But as the uranium spot price blasts through $44/lb, a
nicely leveraged Energy Fuels will soon be able to pump out profits.
TMR: How important is it for a company to control a mill?
RC: Ore extracted by open-pit or underground mining needs to be
processed by a mill. A mill is a strategic asset—it is very important because
any miner that does not have a mill will have to pay Energy Fuels to use its
mill. At current uranium prices, conventional mining is not very economic.
But at higher prices, there will be a large demand for milling. There are "mom-and-pop"
uranium operations throughout the U.S. that will have to pay Energy Fuels to
process their yellowcake.
TRM: What other companies do you like in the U.S. for uranium?
RC: Uranium Energy Corp. (UEC:NYSE.MKT) is similar to Energy
Fuels because it's 100% unhedged and fully exposed to the spot market. Once
its sales are up and running again, its share prices will sweeten. We are big
on the U.S. producers primarily because the U.S. is the No. 1 consumer of
uranium at around 55 Mlb/year. But the country only produces around 3–5 Mlb
annually. All of these producers stand to benefit from premiums.
TMR: How did the stocks of the companies that you have mentioned
weather the downturn in uranium?
RC: For most of the past year, they were beaten up. Relative to the
recent movement in the price of uranium, many stocks have traveled in a
different direction, which does not make sense, but it does make them cheap. That
said, the firms I am interested in are starting to recover; some are showing
notable strength.
TMR: Is now a good time to buy uranium stocks at bargain basement
prices?
RC: The bargain basement pricing may have passed. When the uranium
spot price was $28/lb and leading the uranium equities downward, we saw a lot
of 52-week lows. I doubt that we will see uranium down to $28/lb again. I
doubt that it will fall below $35/lb as demand increases.
TMR: What companies are you watching in other metal sectors?
RC: We follow a range of precious metal names. We are particularly
excited about Pershing
Gold Corp. (PGLC:OTCBB). It is currently listed on the OTC Bulletin
Board, but it does have designs to uplist onto a larger exchange. We're very
excited about Pershing because it has a property, Relief Canyon, located in
Nevada near Coeur Mining Inc.'s (CDM:TSX; CDE:NYSE) Rochester mine. Relief
Canyon is a past-producing mine with an open pit. Most important, it has a
mill that was barely used on site. It was shut down because the previous
management team ran out of money. The upshot is that Pershing has a
relatively new mill on the site of a past-producing pit in a well-known
precious metals, primarily gold, jurisdiction with some silver.
We assess that Pershing can get up and running at a very low cost. Money
managers often ask us to suggest cheap investments that can produce in the
short term. Pershing Gold fits the bill because it will only cost, say, $20
or 30 million of capex to ramp up into production. The asset is fully
permitted. In addition, Pershing has had excellent exploration success that
is encountering grades that are three to five times greater than what is
listed on the official NI 43-101 resource for the project.
TMR: Is there a cost of production below which it doesn't make
sense for Pershing? How low can the price of gold go before Pershing's Nevada
project would not be viable?
RC: We estimate the all-in cost at $850–900/ounce, which is very
low. The reason is this is run-of-mine material. You basically take it out of
the ground, stick it right on the leach pad and start leaching. It does not
cost much to take it out of the ground because much of the overburden is
already stripped. Plus, it does not need to be crushed, because it is
run-of-mine material.
Another selling point for Pershing Gold is its excellent management.
Executive Chairman and CEO Stephen Alfers is the gentleman responsible for
discovering Long Canyon, which was sold to Fronteer Gold and later on to
Newmont Mining Corp. (NEM:NYSE). He later became the head of U.S. operations
at Franco-Nevada
Corp. (FNV:TSX; FNV:NYSE). He saw the opportunity at Pershing and decided
to leave Franco-Nevada to become Pershing's CEO. That is a very strong vote
of confidence in the solid project.
TMR: Pershing's stock was at $0.40 in April, and now it is down to
$0.28. Is there a reason for that decline?
RC: Pershing Gold has outperformed gold over the past month. Over
the past three months, it's been in line with the gold price movement. As an
under-the-radar, near-term gold producer, we think Pershing Gold is quite
valuable.
TMR: Are there any other precious metal companies on your radar
scope?
RC: Paramount
Gold and Silver Corp. (PZG:NYSE.MKT; PZG:TSX) has a 100-million tonne
gold and silver resource that is located right beside Coeur Mining's Palmarejo
operation in Mexico. The Palmarejo operation is a significant part of Coeur
Mining's total value. Palmarejo is on its last legs production-wise. Coeur
owns a gigantic mill on site, and it has announced a deal with Franco-Nevada
to develop a nearby mine called Guadalupe and mill high-grade material from
it. Franco-Nevada has a royalty on all of the ore coming out of Guadalupe.
Now, here is the kicker: Paramount's deposits are located within a few
kilometers of the Palmarejo operation. Based on the size of the mill at
Palmarejo, Coeur Mining likely needs more material than it is expected to get
from Guadalupe. The acquisition of Paramount would give Coeur access to mill
feed that is free of the Franco-Nevada royalty encumbering the gold and
silver produced from Guadalupe. It makes a lot of sense for Coeur Mining to
buy Paramount Gold and run its ore through the mill. That way, it can take
more of the revenue. This is an obvious takeout story.
TMR: Thanks for the conversation, Rob.
RC: A pleasure talking to you, Peter.
Cantor Fitzgerald Canada's Senior Analyst and
Head of Metals and Mining Rob Chang has covered the metals and mining space for
over eight years for the sellside and the buyside. Prior to Cantor, Chang
served on the equity research teams at Versant Partners, Octagon Capital and
BMO Capital Markets. His buyside experience includes managing $3 billion in
assets as a director of research/portfolio manager at Middlefield Capital,
where his primary resource portfolio outperformed its direct peer and
benchmark by over 28% and 18%, respectively. He was also on a five-person
multistrategy hedge fund team, where he specialized in equity and derivative
investments. He completed his Master of Business Administration from the
University of Toronto's Rotman School of Management.
