David Talbot of Dundee Securities sees the tides
rising in uranium markets, but not every stock price will recover in-step.
Talbot's strategy is to focus on a good story, and he has identified uranium
exploration, development and production companies with compelling growth
profiles. In this exclusive interview with The Energy Report, Talbot
explains why investors should build positions while the spot price is still
The Energy Report:
In your last interview, "The Uranium Industry Is Alive and
Well," Germany and Japan looked determined to shift
away from nuclear power. Now, it looks like Germany is having second thoughts
on its plans to shut down all nuclear plants by 2022, and Japan has restarted
one reactor, with more to come. What's your general industry view at this
David Talbot: We
are still bullish on the uranium sector because the nuclear power industry is
moving forward and demand is behaving somewhat predictably. Supply will make
all the difference in the world. The U.S./Russia Megatons to Megawatts
program will go off-line in 2013, which will remove 24 million pounds (Mlb) of secondary supply from the equation. Meanwhile,
there are five more reactors in the planning or construction phases globally
than there were before the disaster at Fukushima occurred. There are 430
reactors currently in operation worldwide, and 160 reactors are being planned
now. The trend is clear: There is still growth in nuclear power.
On the supply
side, the world uses 176.7 Mlb of uranium each
year, according to the World Nuclear Association. The reactors under
construction alone will account for a 13% increase in demand, approaching 200
Mlb of uranium required annually. This does not
factor in any reactors in the planning stages. Mining companies are not
matching that in the short to mid-term—they need higher uranium prices
to make larger-scale and typically low-grade projects economic,
and miners are optimistic that will happen. Uranium exploration expenses rose
to about $2 billion worldwide last year.
As for Germany,
its demand accounts for only 9 Mlb a year, or about
3% of world demand by 2020. I believe its government did overreact, and it is
apparently having second thoughts, based on economic realities. We don't
think Germany's opinion on nuclear power has changed much. But the country is
struggling with rising electricity prices and facing pressure from industry.
Finally, China matters. Its 15 reactors now produce just 2% of its
electricity, and there are 26 reactors under construction and 51 more
planned. Last year, China produced only 10% of the electricity that the U.S.
reactors produce. It already uses 17 Mlb per year,
and that figure is climbing quickly and should be in line with U.S. figures
in the next seven years. Chinese demand is a major force driving the
industry. While we believe that renewables should be a growing part of the
energy mix, they are intermittent generation sources and can't necessarily
handle a large proportion of baseload demand. Many
alternative energy sources are still in their infancy and expensive.
despite the negative thoughts about nuclear power, it really is the only
viable alternative to coal at this point, other than natural gas.
think so. We are seeing a lot more natural gas use these days, primarily in
Japan, which is spending about $100 million (M) a day on energy imports. If
Japan wants to maintain its way of life, it really must turn the reactors
back on or risk losing jobs. A couple of reactors have started up and two
more restarts are under discussion. I think this is going to help boost
sentiment in the sector and ultimately increase uranium demand, which should improve
spot prices from the current U.S. $49.50/lb level.
What are your expectations for short-term uranium prices? Even major
companies like BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) and Cameco Corp. (CCO:TSX; CCJ:NYSE) are
having trouble justifying their respective Olympic Dam and Kintyre projects.
supply/demand balance in the mid-to-near-term may impact pricing. BHP
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 8.8 Mlb
currently. Recently, Cameco warned that rising
costs and mediocre uranium prices have made its Kintyre
Project in Australia uneconomic. Cameco is still
pushing ahead but needs around $67/lb to break even
by the planned production start in 2015. That's another 6 Mlb
of uranium supply up in the air. Cameco needs to
make some acquisitions to reach its Double U strategy production goal of 40 Mlb by 2018, which would partially replace its lost
Megatons to Megawatts supply.
year, Paladin Energy Ltd. (PDN:TSX; PDN:ASX) postponed its
stage-four expansion of Langer Heinrich until prices rise. That expansion
would nearly double mine production from 5.2 Mlb to
about 10 Mlb annually. These three projects alone
total about 23 Mlb, which is 64% more uranium than Cameco's Cigar Lake is scheduled to produce annually.
Each of these reminds us that many projects simply are not economic at
current uranium prices and something has to give.
supply deficit should put upward pressure on prices, eventually making
projects like Kintyre more feasible. We'll be lucky
if annual uranium production reaches 180 Mlb by
2020. And that would require sustained spot prices of $70-80/lb. Our current
forecasts for next year and 2014 are $70/lb and
$67/lb, with a long-term forecast is $65/lb.
have the uranium stocks performed this year?
Equities in general have really dropped off since the beginning of the year.
As a group, uranium stocks are down about 30% year-to-date and much of the
downward action occurring within the last 3-months. These companies have been
under the same pressure as the broader market, with low liquidity and
European debt worries. In the long term, I think the producers will
outperform developers. But over the past few weeks we've seen some movement
in the smaller stocks, with no clear winner between producers, developers or
explorers. But however harsh the market is, you have to pick good stories,
and right now we have a couple of suggestions for each of those categories.
Paladin Energy has been showing some pretty exciting production results, but
the stock has continued to languish and now there are some takeover rumors
floating around. What's the situation there?
Paladin is our top producer pick. We have a Buy rating on the stock with a
$2.65 target price. Right now, we like what we see. We think the company has
really turned the corner with good production numbers, a strong outlook,
resource growth, advancement of the pipeline, asset sales and strategic
alliances that are expected shortly. Those alliances could not only improve
the balance sheet, but it could also add value to the projects that are still
in the pipeline.
article last month suggested that Paladin is a takeover target at these
levels. We think that potential acquirers could include Cameco,
Rio Tinto Plc
(RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK), Uranium One Inc. (UUU:TSX) or
other senior miners looking to get into the uranium space. We have a Buy
rating on Uranium One and a $4.50 target price. But I think that Paladin is
going to make the first move with strategic alliances before anything else
What do you think is the most likely strategic alliance?
There is probably going to be a JV at Mount Isa in Queensland, Australia.
That's a potentially large operation that could produce about 5 Mlb annually but it's going to have a big price tag,
probably well over $500M. I could see Paladin selling a minority position in
this project to raise upwards of $350M, bringing in
a partner that's responsible for its share of capex.
That would help decrease financing risks and the cash generated could really
take a bite out of Paladin's debt. The other possibility here is a strategic
alliance to tap some value at the mine level. Kayelekera
and Langer Heinrich are two of the very few uranium mines built anywhere in
the world over the last 20 years and are now running at or near capacity. I'm
sure there's an Asian utility somewhere that would jump at the opportunity to
share ownership of one of these mines through an offtake
agreement and have access to production over the next 25-30 years.
There's also been some M&A action here in the U.S. In April, Energy Fuels Inc. (EFR:TSX) made a deal to acquire all of Denison Mines Corp.'s (DML:TSX;
DNN:NYSE.A) U.S. mining uranium mining assets and operations.
Where has that gone since then?
Energy Fuels has emerged from a couple of deals as the second-largest uranium
producer in the U.S., with a resource base of 70 Mlb.
We have a Buy rating on the stock and a $0.90 target price. They bought the
White Mesa mill from Denison, which is the only operating conventional mill
in the U.S., plus several operating mines. This saved Energy Fuels about
$150M by not having to construct its own mill, where it just received its NRC
license in Colorado. Synergies with projects in Utah, Colorado and Arizona
might fill that mill, keeping costs as low as possible. That's very important
because these smaller mines in the Southwest U.S. tend to have higher
We view Energy
Fuels as a good opportunity with cash flow and significant leverage to rising
uranium prices. It's preparing its pipeline of projects with two mines that
are already permitted, Whirlwind and Energy Queen. Pinenut
is also approaching production within the year. The management team has
operating experience with the old Energy Fuels nuclear company, and its Sheep
Mountain project up in Wyoming could bring this company to a whole new level.
There's also been some takeover drama with UEX Corp.
(UEX:TSX) and Cameco, as Cameco failed in
their bid for Hathor. What's the latest on that
have a Buy recommendation for UEX and a $1.85 target price. This is our
favorite development story right now. Cameco did
lose in its bid for Hathor and it needs to make an
acquisition to meet its production goals of 40 Mlb
by 2018, as we mentioned before.
projects in the Athabasca Basin and Cameco is its
largest shareholder, with 23% of the stock. Earlier this year, Cameco put up a fuss when UEX attempted to implement a
shareholder rights plan because Cameco really
believed this would have breached some of its preemptive rights when UEX was spun
off in the mid-2000s. Cameco participated in a UEX
equity issue earlier this year, and failed to replace its UEX board
representative when he retired. So there are signs that Cameco
is still interested in UEX. But we aren't sure when a potential takeover can
Bay has about 40 Mlb located about 4km away from Cameco's Rabbit Lake mill. An open-pit operation on that
property could ultimately act as a tailings management facility, which is
something Cameco's Rabbit Lake mill will need in
the next few years. UEX also has 49% interest in the world-class 88 Mlb Shea Creek project to the west, which could easily be
added to Cameco's pipeline. Cameco
is probably the best company in the world to develop these high-grade,
particularly deep deposits, and could potentially partner with AREVA (AREVA:EPA).
UEX is one of our favorite developer stories, with high-grade drill results
continuing from Shea Creek. In the short term, Hidden Bay is moving into
development stages with geotechnical, geochemical and metallurgical studies
initiated coverage in May on U3O8 Corp. (UWE:TSX.V;
OTCQX:UWEFF). What do you like about that one? And why did you
decide to start covering it now?
have a Buy recommendation and a Speculative Risk rating on U308 Corp., but no
target price right now because we are awaiting a little more economic
information to derisk this company a bit more. This
is a small company with many moving parts. It has three projects, any one of
which could likely sustain a junior exploration company. We picked up
coverage as we became more excited about the upside potential offered by its
multi-element flagship Berlin project in Colombia. The current resource only
covers the southernmost three kilometers of a known 10 1/2 kilometer long
sandstone trend. There's a misconception here that it's a black shale
deposit. It's really a carbonaceous sandstone.
That's a big difference. At 21 Mlb U308 plus
byproducts, the resource has just started growing, with the potential to
double and ultimately triple in a couple of years. Besides uranium, it will
also be getting vanadium, phosphates, rare earth elements and base metals out
of this calcite-rich rock.
project, Laguna Salada, is located in Chubut
Province, Argentina. Mineralization occurs within three meters of surface in
soft, unconsolidated sandy gravel that should be amenable to low-cost mining
techniques. The grades are very low but the geology lends itself to
considerable beneficiation, in some cases by a factor of ten, which could
boost the grades by ten times before it goes through the mill. While
resources are currently only around 10 Mlb, there
is potential to double this amount by year end through drilling, not to
mention potential M&A targets in the area.
project is the Kurupung project in Guyana, which
was once its flagship project. We still love its high prospectively with
potential for hosting several massive uranium projects. However, exploration
will be expensive and time consuming, plus U308 has two other projects in
jurisdictions with better infrastructure. Those projects are likely to be
advanced in the scoping study stages more expeditiously. Ultimately we think
this is a very undervalued development story. The
stock trades at about half the level of its peers, and we expect its
resources to double during this year.
What else do you like at this point?
Another developer story I like is in Ur-Energy Inc. (URE:TSX; URG:NYSE.A). We have a Buy
recommendation and a $2.30 target price on this stock. The timing might be
right for investors on Ur-Energy. It's waiting for final U.S. Bureau of Land
Management permits that would allow it to build and operate its Lost Creek
Mine in Wyoming. The company expects to build a plant that could produce up
to 2Mlb annually, starting at 1Mlb from Lost Creek with low operating costs
of about $20/lb. We've liked this story for a while and think there's
considerable upside. It's cheap, it's located in a good jurisdiction and it
has good economics, good management and quite a deep technical team. It
recently picked up a couple of good-looking projects from AREVA for its
pipeline. Look for some news out of Ur-Energy in the next couple of months.
exploration stories; Kivalliq Energy Corp. (KIV:TSX.V) might be our
top explorer pick now, with one of the best exploration teams in the
business. We have a speculative buy without a target price on this one. Kivalliq is now drilling its Angilak
property in Nunavut. The company seemed to have hit uranium mineralization in
every place they've put a drill in 2011/early 2012 and surprised us by
doubling its high-grade Lac Cinquante resource to
27 Mlb at 0.69% U308. This is one of the highest
grades outside the Athabasca Basin. It's discovered about 10 new zones, many
within 3km of the Lac Cinquante deposit itself.
Others are located within 25km of the deposit and some of these are
potentially big, like the BIF Zone that extends for about 3km along strike at
surface, where grab samples often assay between 16% and 30%. As more
discoveries are being announced, the company has to reprioritize its targets
as it goes. We think they're in a uranium district and this story is going to
be exciting to watch.
explorer that is front and center for us is Fission
Energy Corp. (FIS:TSX.V; FSSIF:OTCQX). We
have a Buy Venture Risk rating with no target price. The company has a
project immediately west of Rio Tinto's Roughrider deposit in the Athabasca
Basin. It's likely that Fission's high-grade J Zone discoveries are the same
deposit as the Roughrider West Zones. The J Zone now measures about 680m
along strike. We think there's considerable room to expand this, not only
along strike but also to the north and south. Some impressive high-grade
areas need follow-up there, including 15% U3O8 over 6m and 21.6% over 3.5m.
It doesn't take a lot of area to add significant pounds when you're getting
grades over 15%. That's one of the reasons why we like this company. The
initial resource covers about one-third the strike length and totals about 9 Mlb. About 7.4 Mlb of that is
Indicated, grading about 2%. Drilling continues on a second project to the
west. That might end up as another Athabasca uranium discovery, if we give
Fission sufficient time to search.
What kind of timing are we looking at before we see some real activity in
believe uranium prices may be at the bottom right now, around $49/lb.
firming, especially as the Japanese reactors come back online. We may see
some price appreciation later this year and into 2013 as the Megatons to
Megawatts agreement expires. We are calling for higher uranium prices down
the road, ultimately to our $65/lb long-term price.
Investors have to pick good and improving companies before we see these
stocks run. There's already a lot of volatility in the uranium sector but
stocks tend to take off before you know it, so you can't necessarily choose
cash flow over near-term production or potential blue-sky upside, as you can
in a bull market. All the stocks will likely lift, but at different rates.
Among producers, maybe look at Paladin and Energy Fuels; for developers, UEX,
U308 Corp and Ur-Energy, and explorers, Kivalliq
Energy and Fission Energy. We suggest that investors buy a basket of these
stories. I really think this sector will be one that's going to outperform in
the coming years.
Very good. We appreciate your insights today David. Thanks for talking with
Certainly. Thank you.
Securities Senior Mining Analyst David Talbot
worked for nine years as a geologist in the gold exploration industry in
Northern Ontario. Talbot joined Dundee's research department in May 2003 and
in the summer of 2007, he took over the role of analyzing the fast-growing
uranium sector. He is a member of the PDAC, the Society of Economic
Geologists and graduated with distinction from the Univ. of Western Ontario,
with an Honors Bachelor of Science degree in geology.
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1) Zig Lambo 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: Energy
Fuels Inc., U308 Corp., Ur-Energy Inc. and Fission Energy Corp. Streetwise
Reports does not accept stock in exchange for
services. Interviews are edited for clarity.
3) David Talbot beneficially owns, has a financial interest in, or exercises
investment discretion or control over, companies under coverage: Energy Fuels
Inc., U3O8 Corp. and Kivalliq Energy Corp. David
Talbot was not paid by Streetwise Reports for participating in this