The Energy Report: Mick, some prime assets are available in
the junior market, but uranium prices continue to languish by and large. In
Japan, the Kyushu Electric Power Co. Inc. (9508:TYO) recently restarted a
Sendai reactor on the west coast of Kyushu. It is the first start-up of a
nuclear reactor in Japan since 2013, in the wake of the Fukushima meltdown in
March 2011. How does Haywood view the impact of this news on near-term
uranium prices?
Mick Carew: The start-up of the nuclear reactors in Japan is definitely
considered a positive for the uranium sector. But there are uncertainties in
terms of the backlog of uranium stored in inventory in the country. With the
reactor fleet being offline for four years now, Japan certainly has a
significant supply of uranium on hand. How much it will purchase in the spot
market in the short to medium term is uncertain. Needless to say, with the
reactor restart and a good likelihood of further reactors to follow suit,
demand is now lifting.
TER: The Canadian government recently granted an exemption to
foreign ownership restrictions on producing uranium mines. Do you see
consolidation as a dominant theme in the uranium space, especially in Canada,
in the near and medium terms?
MC: We've seen the beginning of consolidation in the sector, which
includes the recent merger of Energy Fuels
Inc. (EFR:TSX; UUUU:NYSE.MKT; EFRFF:OTCQX) and Uranerz Energy Corp. [Editor's
note: On July 6, Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT) and Fission
Uranium Corp. (FCU:TSX) announced a consolidation agreement as well.] It
is certainly a ripe environment for consolidation, with uranium prices the
way they are, having plummeted following the Fukushima disaster.
The number of players in the uranium sector is small, particularly in the
Athabasca Basin. Being a niche commodity in terms of the number of companies
involved in the sector, the prospect of consolidation is more limited when
you compare it to, say, the gold sector. In terms of small-cap juniors, we
see the potential for consolidation as access to capital dries up. Among the
majors, there's already been ample opportunity for consolidation. But
consolidation has not been overly significant in the sector. We see the
southern margin of the Athabasca Basin in particular as a newly discovered
region where mid-large cap miners will continue to focus, whether it be
through consolidation or exploration. There is definitely potential to have
further consolidation in that regard.
TER: What companies is Haywood Securities following in the uranium
space?
MC: In the Junior space, we have followed NexGen
Energy Ltd. (NXE:TSX.V) closely; the company was recently featured in
Haywood's last "Junior Exploration Report." The southern margin of
the Athabasca Basin has become the new hot spot for uranium discoveries in
the last three to four years, through the discovery of Fission Uranium's
Triple R, followed by NexGen's Arrow. Prior to these, discoveries were in the
eastern part of the basin, with a couple of exceptions. These discoveries have
opened up a new, highly prospective region.
More important, Fission and NexGen have accumulated significant lease
holdings surrounding their respective projects. NexGen, in particular, is an
earlier-stage explorer. Not only does it have the Arrow discovery, but it
also has significant land holdings around that discovery.
TER: Winter drilling at the Arrow zone in Saskatchewan expanded the
high-grade core A2 Shear zone on the Rook 1 property. Do the intercepts
suggest that NexGen does indeed own property hosting the extension of
Fission's Patterson Lake South discovery?
MC: The results from Arrow are certainly significant—concentrating
on the high-grade zones known as the A2 and A3 Shears. Through aggressive
drilling, NexGen has been able to expand the extent of those zones, which is
obviously a positive.
But the Triple R and the Arrow deposits are actually on different
conductors, so to say that Arrow is the extension of Fission's discovery is
not really accurate. What it does say is that, in effect, there is more than
one structure in that part of the basin with potential for significant
uranium mineralization, so it's not just a one-off. There are, potentially,
multiple structures, which open the door for further discoveries in that part
of the basin. Arrow is not an extension, but a separate discovery. I see this
as a positive for the southern part of the basin.
TER: There was one structure, and now there are two. Could there be
three? Four? Is that the thought process there?
MC: If you consider the number of pounds of uranium that have been
discovered in the eastern part of the basin over the last several decades,
and if you look at the strike rate and the amount of drilling being completed
in the southern part of the basin versus the level of discovery of
significant intersections, that suggests there's enormous potential. There
are a number of conductors, or structures, that have been tested in that part
of that basin, but it's still very much in its infancy. In terms of
exploration, there's no reason to suggest there are not more discoveries to
be found. I think it is the next growth area in the uranium sector.
TER: How did Fission's recent drill results compare with those of
NexGen, in your view?
MC: In some ways, you are asking me to compare apples to oranges,
in the sense that these two companies are in very different stages. Fission
has released an Inferred resource of +100 million pounds. It's a significant
resource. The results that Fission has released of late are aiming to extend
the R780 Zone and are very good results. NexGen, on the other hand, is in an
earlier phase of discovery, very pre-resource. The company is testing the
extension potential of the higher-grade uranium mineralization it has
discovered. NexGen needs to follow up this extensional drilling with infill
drilling to determine the continuity of the uranium mineralization between
the widely spaced holes it has just released.
TER: Consolidation is also happening in the fertilizer space with PotashCorp
(POT:TSX; POT:NYSE) making multiple overtures for Germany's K+S
Aktiengesellschaft (SDFG:FSE). What should investors learn from those
repeated attempts to complete a takeover?
MC: The recent takeover bid by PotashCorp reflects a similar trend
in other commodities. You have lower prices and oversupply globally,
particularly in North America, encouraging consolidation. There are concerns
over the impact that increased supply will have on the potash market after
K+S' Legacy project in southern Saskatchewan is brought on line. There's no
doubt streamlining operations in Saskatchewan, where PotashCorp has a major
position, could reduce costs and improve returns.
This is not the first time PotashCorp has gone after K+S. PotashCorp tried
to purchase 51% of K+S back in 1997. It has made a number of overtures of
late. Funnily enough, PotashCorp was blocked by Germany over antitrust
concerns, which ironically is the same issue that prevented BHP Billiton Ltd.
(BHP:NYSE; BHPLF:OTCPK) from acquiring PotashCorp last year.
Consolidation in the potash space, particularly among the larger
producers, will likely continue to attract antitrust concerns. Overseas, projects
might be scaled back to stabilize global supply. In addition, similar to the
uranium sector, the fertilizer sector has been a niche market, so there are
fewer companies in the sector compared to other commodities. This limits the
potential for significant consolidation in the sector.
TER: Do you expect other large players to seek upstream or
strategic assets?
MC: In the fertilizer sector, again, it will be more limited
because there are only a few key players in the space. I certainly think some
of the other major players will be looking at these types of assets given the
depressed commodity prices.
TER: What fertilizer equities do you follow?
MC: We have followed DuSolo
Fertilizers Inc. (DSF:TSX.V) for some time. The company has successfully
brought its flagship Bomfim phosphate project in Brazil to production this
year, and is currently producing direct application natural fertilizer (DANF)
from high-grade phosphate rocks. Once modifications to its processing
facility are complete, DuSolo will have the capacity to produce approximately
160,000 tons (160 Kt) of DANF per annum.
We note that the company has secured numerous sales contracts for the 2015
plantation season, totaling approximately $8.5 million, demonstrating its
ability to negotiate sales contracts in the local Brazilian market. The last
sales contract it secured was with a major Brazilian fertilizer distributor
for approximately 60,000 tonnes at a price of BRL230 for BRL13,800,000, or
$5.2 million at today's exchange rate (Aug. 17, 2015).
DuSolo recently issued a press release in which it explained that the
planting season in Brazil has been hampered by an unusually long rainfall
season. The company has received a $750,000 bridge loan to see it through the
period while it ramps up to full production. Despite the setback, we see a
bright future for DuSolo in the medium to long term given its location—it's
within one of the fastest growing agriculture districts in the world. While
Bomfim has considerable expansion potential, we note DuSolo also holds an
impressive exploration portfolio. In addition, there is potential to produce
alternative phosphate products to meet both global market and local market
demand, given the high grade of the phosphate material at Bomfim and
elsewhere.
TER: DANF is basically material you can put directly on a soil,
right?
MC: Exactly. DANF is very simple to produce from the original rock.
You just grind it and sort it and send it away. The properties are such that
it's a very in-demand fertilizer. As long as you have sufficient grade to
produce DANF, it's very simple to process,
TER: Does the size of this company affect the market's confidence
in it?
MC: I think so. The key is transparency in terms of price
assumptions. We're dealing with a local market here. We're not dealing with a
floated commodity, as with gold and some others. Both transparency and
confidence in supply and demand in that local market are more difficult to
ascertain. It was unfortunate that the rainy season endured as long as it
did. The weather did hamper production and limit the level of production and
sales DuSolo could achieve. Once the company has been able to demonstrate
that it can produce this product, sell it to its customers and fulfill the
sales contracts that it has negotiated, then I think investors will have more
confidence in the company moving forward.
TER: Do you have any parting thoughts for us on the energy space?
MC: The uranium sector has been depressed, but all commodities have
been. With Japan coming on line, I think investors are feeling more confident
of the sector now. And if Japan comes on line with confidence in uranium as
an energy source, I think the uranium space is the place to be. We'll see
that reflected in the uranium price accordingly.
TER: Thank you for your time, Mick.
