The Energy Report: How do you see the big picture for
uranium? Spot prices have dropped recently. Are you still bullish?
Joe Reagor: It's a matter of time horizon. Many analysts, myself
included, believed that the uranium price recovery was going to happen in
2014. Then when 2014 didn't happen, we thought 2015. Then when 2015 didn't
happen, we said 2016. Here we are in 2016, and uranium is back under
$28/pound ($28/lb) again. The recovery isn't happening.
There are two parts to why we're not seeing a spot uranium recovery. First
is the uranium spot market has been rather tight in terms of overall
percentage of production, and there have been some nuclear plant closures in
addition to shutdowns in Japan after Fukushima. Add to that a lot of production
growth already build into pipelines that has come on-line and ramping up
production and creating a larger amount of spot uranium to be sold into a
weak market. Cameco Corp.'s (CCO:TSX; CCJ:NYSE) Cigar Lake is an example of
that. So we're getting this extra pressure on the spot market, but if you
look at contract pricing, it has remained relatively stronger, in the low
$40s. Producers are making decisions based on the contract price, not the
current spot price. So there is a disconnect between spot and contract
pricing.
The other reason we aren't seeing a spot uranium recovery is Fukushima had
a longer and more lasting impact on the overall market than any of us thought
was possible. The restarts in Japan have been slow, but that's just one
country in the overall puzzle. Other countries have looked at Fukushima as a
reason to change regulations, which has stalled the development of additional
reactors. China, for example, had a three-year hiatus from allowing any
nuclear reactor project to be developed, as it rewrote its regulations.
So, as the supply has come on-line and demand hasn't, we've created and
prolonged this oversupply. As we look out to 2018-2019, I see a decline in
production and expect a significant rise in supply. Most analysts are forecasting
a 2018-2019 shortage. We look to that time frame as having the potential for
a full recovery in uranium prices to more sustainable long-term levels of
$50-60/lb.
TER: All four uranium companies in your coverage are North
America-based. Would you talk about this jurisdictional preference and why?
JR: The U.S. consumes a significant portion of the world's uranium for
nuclear power, yet it produces only a few million pounds of it. Our thought
process, as the country has tried to focus on energy independence, is that at
some point there is going to be a push to potentially even subsidize U.S.
production of uranium in order to avoid reliance on imported uranium to
supply power plants. If that situation were to occur, a number of projects in
the U.S. that are currently not economic and are sitting on the shelves could
become economic overnight. So there is this potential catalyst that has no
specific date-more of a call option-on those names. That's one reason we
focus there.
Also, the U.S. regulatory body has set forth known laws that if you follow
the letter of the law, you can get your permits to build mines, to run mines,
for water disposal, etc. So the potential time horizon for companies to reach
production becomes more predictable. One of our companies that we have under
coverage, Uranium
Resources Inc. (URRE:NASDAQ), recently purchased assets in Turkey, which
doesn't have a very finite set of regulations regarding uranium mining. The
company might have a short time horizon to production or it may find that the
government elects to complicate matters for it. We're trying to take a
conservative approach with that, and that's not a jurisdiction that we
normally handpick. That said, the project appears to be world class.
Denison
Mines Corp. (DML:TSX; DNN:NYSE.MKT), which we cover, doesn't have U.S.
assets, but it's in one of the most prestigious locations for finding
uranium, the Athabasca region of Canada. We picked up coverage of Denison
because it could easily supply the U.S., which generally doesn't have
concerns about getting energy supplies from Canada. With that in mind, we
think Denison's assets are elite and high-grade; the theory is the higher the
grade, the better the cost numbers will eventually work out. It's also in a
jurisdiction with known regulations and a clear path and time horizon, albeit
it a longer one, to production.
TER: How about some of the other companies in your coverage
universe?
JR: Two other ones that we cover are Ur-Energy
Inc. (URG:NYSE.MKT; URE:TSX) and Energy
Fuels Inc. (EFR:TSX; UUUU:NYSE.MKT; EFRFF:OTCQX). Energy Fuels is
somewhat of a higher-cost producer today. With its Uranerz Energy Corp.
acquisition last year, it has moved to being a lower-cost producer and to
have a mix between conventional and in situ recovery (ISR). When a uranium
price recovery happens, Energy Fuels has a significant number of assets that
could be brought into production, some former producers, some larger assets
with large capital budgets. So Energy Fuels has a little bit more leverage to
the uranium price than some of the other companies we cover.
TER: In your most recent note on Energy Fuels, you say
consolidation continues. Would you talk about that consolidation?
JR: Energy Fuels has done a good job of selling some of the assets
that it had smaller stakes in and purchasing the remaining interest in some
of the assets that it thinks are more elite. Energy Fuels also purchased an
ISR mill in Texas, which gives it another potential location to process
uranium. The company had a number of smaller projects in Texas, and it picked
up some more projects with the mill.
The industry has been consolidating so that everyone has 100% interests in
their projects, and avoiding joint ventures where everybody has to be on the
same page at the same time to move forward. There's definitely a movement
toward ISR and lower-cost production as well. Some of Energy Fuels'
liquidations have been assets that need a significantly higher uranium price.
I believe management's view is if the price of uranium increases to where
those assets would have been economic, no one would care that it sold them at
a discount during a down time; everybody is going to be happy the uranium
price is back up and share valuations have moved higher. In contrast, if the
company continues to hold those assets and has to raise equity, that could
dilute shareholders further. So I think Energy Fuels has been making the
right choices to purchase lower-cost assets on the cheap and liquidate some
of its higher-cost assets.
TER: You mentioned Ur-Energy. Would you tell us about the company?
JR: Ur-Energy is an ISR
producer with industry-leading, low-cost production, and it is best suited to
survive a down uranium price for the long term. The company has contracts in
place to help its bottom line today, and it has the potential to keep adding
contracts in the longer term. Ur-Energy had to do a capital raise at the
beginning part of the year, which upset some investors, but we attributed it
to one of its utility customers that had to push out some shipments. As a
result, Ur-Energy had built inventory to sell to that utility. It then didn't
want to sell that inventory into a weak spot market, so it was forced to
raise equity, which was unfortunate. But in the long run, Ur-Energy
should come out of this year with more cash in the bank than previously
expected, which will set it up to have more cushion moving forward. Ur-Energy
has a second project in Shirley Basin that could provide value to
shareholders in the form of growth if the uranium price begins to improve as
well.
TER: Any parting thoughts?
JR: Investors who have been involved thus far with uranium need to
keep a longer-term outlook. With most metals, they're dead until they're not.
People who invested in gold and silver names when gold and silver collapsed
and held out are finally seeing some return on those investments. People who
have been purchasing these uranium assets at lows can continue to take
advantage of slight volatility. If spot prices jump up from $28 to $35/lb
again, you could take some profit off the table. But also, you can take a
longer-term outlook and wait until the recovery eventually does happen. At
that point, it could take a number of years before the supply shortage could
be rectified because with mining, it's not a quick turnaround when supply
crosses demand. There's a time frame, three to five years, sometimes even
longer, during which you can't get assets into production fast enough to
offset the shortages. That's usually the time when most of these equities see
their peak valuation.
TER: Thanks for your time, Joe.
Joe Reagor is a research analyst with ROTH
Capital Partners, providing equity research coverage of the natural resources
sector. Prior to ROTH, he worked in equity research at Global Hunter
Securities and at Very Independent Research, covering a wide array of
resources companies including metals (steel and aluminum), mining (gold,
silver and base metals) and forest products (containerboard, OCC, UFS and
pulp). Reagor earned a Bachelor of Arts in economics and mathematics from
Monmouth University.
