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Uranium
prices may be down, but so are supplies. Demand for the heavy metal is rising
fast, says Independent Researcher Alka Singh of
Mine2Capital. In an exclusive interview with The
Energy Report, Singh notes that with the flow of enriched uranium
from Russia drying up, the pressure is on for the mining industry to produce
millions more pounds of yellow cake each year.
The Energy
Report: Alka, how
robust is the global supply of uranium fuel?
Alka Singh: There are 433 currently operating nuclear power
reactors around the world. Annually, they consume 177 million pounds (Mlb) of uranium. The world does not produce that much
yellow cake. Last year, production was 130 Mlb. The
gap is currently being filled largely by the Highly Enriched Uranium
Agreement (HEU) with Russia and by other sources. As we approach the 2013 HEU
Agreement expiry date, the supply/demand fundamentals will prove positive for
uranium prices, and that will boost the price of uranium equities.
TER: Who has the pricing power in this market?
AS: When electrical power utilities buy uranium through
long-term contracts, the agreements run as long as 8–10 years. That's
why utilities have pricing power. The challenge now is that spot uranium
prices are at $48 a pound (lb). But for many mines,
the cost of production is $50–60/lb. The utilities have an enormous
amount of power when it comes to determining the price of yellow cake. They
are happy to sit on the sidelines and jump in to buy supply at basement
prices. When spot prices compare favorably to the long-term prices, the
utilities will buy supply from the short-term market. But, over time, the
long-term prices determine where the market is heading.
TER: Globally, do state-owned energy utilities have a
competitive advantage over the private utilities when it comes to obtaining
uranium?
AS: Yes. Since state-owned utilities receive government
backing for resources and loan guarantees, it's always easier for the public
enterprises to be more successful. But, that is more so in developing
countries, such as South Africa, than in the developed countries.
TER: How significant is military demand for uranium
globally versus demand from electrical utilities?
AS: Most of the demand comes from the civilian nuclear
reactors rather than military need. Some military applications require
enriched uranium, but they compose a very small percentage of market demand.
TER: How can the HEU Agreement supply gap be filled?
AS: That's the question that every uranium investor
should be considering. The HEU Agreement annually supplies about 24 Mlb of uranium. The uranium producers are having
difficulty in scaling up production to fill the looming gap. For example, BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) recently announced a decision to delay expansion at
Olympic Dam by at least a couple of years. The initial expected expansions
would have brought production up to about 20 Mlb
from about 9 Mlb.
Kazakhstan
is the world's largest uranium producer, followed by Canada and Australia.
However, at the current market prices, production in these regions cannot
increase a lot. The supply/demand fundamentals for uranium are looking good,
because the long-term prices and the spot prices will have to increase
to catalyze enough production to meet demand.
Foreseeable
events are priced into stocks, before the events actually occur. The HEU
Agreement is slated to expire late in 2013, so by late 2012 uranium equities
and prices should be discounting the market's loss of 24 Mlb.
Obviously, there will be some increase in production from Kazakhstan and
Australia and Canada. But that is not likely to fill the expanding gap. The
U.S. has 104 operating nuclear power reactors out of the 433 reactors in the
world. But last year, the U.S. produced less than 4 Mlb of uranium while consuming 55 Mlb.
TER: Are there any uranium producing regions in South
America?
AS: Exploration is picking up pace in South America. For
example, Uranium Energy recently acquired an asset in Peru, which is amenable
to in-situ leaching. There are a few companies exploring for uranium in
Argentina, Bolivia, Brazil, Chile, Ecuador and Guyana. But 65% of the world's
uranium production still comes from Kazakhstan, Canada and Australia. There
are several upcoming uranium producers in Russia, Niger, Nigeria and other
parts of the world. But, most of the current production comes from only three
countries.
TER: Let's talk about U.S. uranium supply solutions.
There are several junior firms developing properties in uranium-rich regions
in Wyoming and Texas. Where do these projects stand right now?
AS: In those areas, I've been tracking Uranium Energy Corp. (UEC:NYSE.A) and Ur-Energy Inc. (URE:TSX;
URG:NYSE.A).
Ur-Energy
will soon be in production; it has been permitted by the Bureau of Land
Management to construct the Lost Creek project in Wyoming. Production could
commence in Q2/13 at a cash cost of $20/lb. That is economical, even given
today's relatively low uranium prices.
UEC is
producing from its Palangana deposit. It is also
making progress at its Goliad project. Uranium Energy Corp., Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.A) and Ur-Energy are all low-cost producers that
utilize in-situ recovery (ISR) methods. The ISR technique is similar to water
purification, which is also an ion-exchange
technology. One environmental benefit is that nothing is mined in the
traditional sense. The ISR method entails injecting oxygen-fortified water
into the deposit. The liquid dissolves the uranium underground, and
the mineral-laden water is then pumped up to the surface, where the heavy
metal is recovered.
TER: How prevalent is ISR?
AS: The ISR technique is not applicable to every kind
of deposit. Sandstone-hosted, roll-front uranium deposits are especially
amenable to ISR. In 2011, 45% of world uranium was mined through ISL
operations. Most uranium mining in the U.S. and Kazakhstan is now executed
using ISR.
TER: Let's talk about advanced technology mining (ATM)
techniques, such as audio magnetic geophysical exploration. Are these
techniques cost effective?
AS: As with gold and silver deposits, uranium deposits
are discovered through geochemical and geophysical techniques. The audio
magnetic geophysical exploration technology is relatively new. It uncovers
the deeper deposits. ATM, generally, has been very successful in unearthing
new uranium deposits in Canada's Athabasca Basin. Clay mineralogy is another
technology used to find new uranium deposits. None of these technologies are
very cheap—but it's getting tougher and tougher to find large deposits
these days.
TER: Will the uranium juniors be able to hang on for as
long as it takes for the demand metrics to substantially improve their
stocks?
AS: That's the big question. Equity prices are
depressed, but mergers and acquisitions (M&A) are taking place. Cameco Corp. (CCO:TSX;
CCJ:NYSE) recently
paid $430 million for BHP's Yeelirrie Uranium Project in Australia. Rio Tinto Plc
(RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) bought Hathor.
Mantra was also taken over by ARMZ Uranium Holding Co. early last year. Some
juniors are also looking for assets. And, there could be a merger of equals
in the U.S. uranium space. The bottom line is that M&A will continue
apace, especially because the asset valuations are currently depressed.
When the
price of uranium improves, the junior mining sector will take off. But, until
then, if I were investing, I would invest in producers with positive cash
flows. My top picks are Paladin Energy Ltd. (PDN:TSX; PDN:ASX), Uranium One Inc. (UUU:TSX), Cameco and Uranium
Energy Corp. I also like Ur-Energy, because it is within reach of an
important milestone as construction starts at Lost Creek. Fission Energy Corp. (FIS:TSX.V; FSSIF:OTCQX) is another one to watch in Canada.
TER: Thanks for talking with us, Alka.
AS: You are welcome.
Alka
Singh started
her career as a mining research associate with Wellington West Capital
Markets in Toronto. Since then she has worked for Orion Securities and
Merrill Lynch in Canada. She then moved to New York City to build the mining
franchise for Rodman and Renshaw, where she covered
24 precious metals, base metals and uranium names. Singh has since started
her own independent research firm, Mine2Capital, to provide unbiased research
for clients. She holds a Bachelor of Science in geology and a Master of
Business Administration in finance. She
is a CFA charter holder.
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DISCLOSURE:
1) Peter Byrne 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: Uranium Energy Corp., Uranerz,
Ur-Energy and Fission Energy Corp. Interview are edited for clarity.
3) Alka Singh: I personally and/or my family and
Mine2Capital may own shares of the following companies mentioned in this
interview: None. 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 story.
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