|
Rodman & Renshaw
Senior Analyst Alka Singh follows the entire mining
sector, including uranium. Though just a year ago the uranium sector was considered
stalled and possibly moribund, she finds undervalued stocks for her clientele
that includes both small and large institutional investors. In this exclusive
interview with The Energy Report, Alka generously shares some names for growth that investors
might consider to take advantage of burgeoning energy demand that will surely
include nuclear power plants all over the world.
The Energy Report: What is your general
investment theory on the uranium industry? Uranium has had a very nice run up
since the middle of 2010, and that was significant. Can you make a case for
more price appreciation in uranium?
Alka Singh: At Rodman, I cover all of the mining
sectors—precious and base metals, as well as uranium. For the last two
years, and particularly for the last 12 months, I've been telling investors
to take profits from some of the gold equities that have run up
300%–400% and put those profits into uranium equities. People had been
very skeptical in the beginning of 2010. Uranium prices remained at the $41–$42
level for very long; investors thought that the sector was likely dead. Why
invest in uranium stocks when they were already getting crazy returns on gold
and other precious metals? Then suddenly, about two to three months ago, the
price of uranium started coming back. The uranium price went up from $42 to
$62.50, where the uranium spot price is today. Obviously, uranium prices had
to play catch-up and they did for a few reasons.
Supply and demand for the medium and long term was always
very positive for uranium prices, but I think the depreciating U.S. dollar
also played a role. Most commodities—gold, silver, copper, lead, zinc
and, to some extent, even coal—ratcheted up on the tanking USD while
uranium prices did nothing. Uranium had to play catch-up, and that's what
drove the price up.
Together with the supply/demand fundamentals, the uranium
price rose to $62.50 and I don't think uranium price appreciation or uranium
equities are done quite yet. If you look at the last cycle that began in
2005, the uranium price rose sharply to about $139/lb. in 2007 before coming
back down. The difference back then, I think, was that a lot of speculation
fueled uranium's price rise.
This time around, something different is going on. The
Highly Enriched Uranium (HEU) Purchase Agreement accord to convert 500 metric
tons of HEU to low-enriched uranium (LEU) with Russia is supposed to expire
in 2013. Russia has already told the U.S. that it will not renew it. As you
know, 65% of the global uranium supply comes from HEU. This will have a
dramatic effect, and people have now started pricing that in. So, that is my
bullish case for uranium.
Additionally, China has started buying. Recently, China
announced a deal with AREVA (PAR:CEI) and then another
one with Cameco Corp. (TSX:CCO; NYSE:CCJ).
So, it's still trying to get uranium to fuel the country's nuclear power
reactors. I think China will be home to the more than 40 nuclear power
reactors over the next 10–15 years. So, that's driving the uranium
price.
Then there's India, which also has signed a few
agreements. One of the deals was with France to get help in setting up new
nuclear power plants. So, from the demand perspective, uranium demand will
continue to drive the price of uranium in the future.
TER: Alka, as the U.S.
begins to decommission some of its nuclear warheads and does something like
the HEU agreement internally, is there a possibility to produce uranium
stockpiles in and for the U.S.?
Alka Singh: Well, that's another very good question. I don't
think that the U.S. has said anything publicly about what they want to do.
But if you look at what the U.S. has done in the past, it has sold some of
its stockpiles. But they didn't want to have an impact on the uranium's
market prices, and whenever prices were too high they tried to sell some.
Whenever the prices were too low, they actually did not sell any. So, I think
it's more that they tried to stabilize the price rather than do any sort of
market manipulation with the price. But I don't think U.S. is going to start
decommissioning these warheads and putting the uranium out into the market.
At least in the near term I don't think that's happening.
TER: Can uranium get back to the 2007 levels of
$135–$139? Do you believe that's possible?
Alka Singh: That is possible. As we all know, commodity
cycles always go to one side or the other, and when they're going higher you
see them overshoot. When you see them going down, it's the same. When uranium
prices were at $40, there were very few companies that were actually
profitable at that level. You saw that Denison
Mines Corp. (TSX:DML; NYSE.A:DNN)
had to put their projects in Mongolia and Zambia on hold because they
required a uranium price of $60 just to break even. So, a $40 uranium price
was probably OK for the Russians who are just blending down the HEU into LEU.
When I was at Merrill Lynch, before joining Rodman, I used to cover Cameco, which has a pretty low cost of production. At
that time they were producing uranium from McArthur River at $17–$18 a
pound, which was pretty cheap. But not everybody has these same sorts of
projects with such low costs.
So, some of the mines in Kazakhstan, Mongolia and Zambia
that were at a feasibility stage at that time had production costs of about
$45–$50, and then if you add in the capital-expenditure (capex), they needed a $65– $70 uranium price to
break even. It all depends on the circumstances. If demand keeps growing as
it is right now and you see oil prices going up back to the $140– $150
level, you will see uranium prices go back to $135– $138/lb.
TER: As you said, we've had a very steep rise, to
over $62 today. Is there any chance that we're in a short-term or
intermediate-term bubble?
Alka Singh: I really don't think so, especially since the
utilities have just started coming into the market. They had been sitting on
the sidelines for two years. They probably had enough inventories for 2009
and 2010, and so they did not actually participate in the spot market at all
for the long term. But now we are seeing the utilities coming back.
In fact, right now is actually the slow season. December
is holiday time, and I don't think a lot of deals are getting signed. If you
saw the recent UX Consulting report, you would see that most of the deals
were only done on the spot. There were no term deals done this week. So I
think things will start picking up early next year when utilities start
coming back to the market to get more security and supply for the next five
to eight years. They typically do between three- and eight-year contracts.
When I was at Merrill, we did this report where we looked at uranium prices
for the last 20 years, and between February and May we saw the largest
increase in uranium prices. So, if utilities again come to the market between
February and May of 2011, you could see another leg up. I wouldn't call it a
spike because that's coming from real demand. I'll call it a seasonal
increase in demand and an increase in uranium prices.
TER: Alka, it sounds like
you do not believe that uranium is a mature industry but rather still a
growth industry.
Alka Singh: No, I really don't think that uranium is a mature
industry at all. If you look at the cost of electricity generation comparing
nuclear to gas, nuclear to coal or nuclear to hydro, you will see that
nuclear is the second cheapest source of energy after coal. But with coal you
have other problems with environmental concerns. So, the only other
alternative is nuclear. Most of the hydroelectric projects in the world have
already been built, so it would be very difficult to double hydroelectric
generation. It's just not doable. But with nuclear, you can do it, although
it's more expensive.
Nuclear power plants are very, very expensive. Permitting
is a big risk and very time consuming. Nuclear is the only way you can get
more electricity generation at a low cost and be stable enough to provide
base load power. I don't think that wind power or any other green power
generation is actually suitable for base load. Wind power is great when the
wind is blowing and you actually generate electricity. But when there's no
wind, the windmills themselves actually draw electricity from the grid. So,
that's not good for base load. For base load you need hydroelectric, coal,
gas and nuclear—that's it. And with nuclear being the second cheapest,
you have to go nuclear.
TER: Now that you've established this growth
hypothesis, what catalyst should investors anticipate going forward for
uranium equities?
AS: Well, I cover three uranium names. I cover Uranium One Inc. (TSX:UUU), Uranium Energy Corp (NYSE.A:UEC)
and Ur-Energy Inc. (NYSE.A:URG;
TSX:URE) in the U.S. My two favorite
names right now would be UEC and URG just because there are really a lot of
short-term catalysts that can keep these equities going higher.
URG has a few permits that they are waiting on, but the
key one is the Nuclear Regulatory Commission (NRC) permit. If they don't get
it next week then it has to be in early January. They need that one, but
after that they have to get another permit from Wyoming Department of
Environmental Quality (WDEQ) and then another one from the Bureau of Land
Management (BLM), which is the last permit that they need. So, every time the
company gets a permit that would be a catalyst for the stock to go higher.
UEC just got their permit for the Goliad project, which we
had anticipated, but there had been a lot of negative news on Goliad such
that the company might not have been able to get their permits. But they did.
So now they're waiting for radioactive material license (RML) from the Texas
Commission of Environmental Quality (TCEQ), which they'll probably get by
January to start construction at the Goliad project.
So, these are the two companies with a lot of catalysts
happening in the near future. I really think these are the two companies in
which investors should definitely be long on in order to take advantage of
this rally in uranium prices. That's especially true because both of these
companies are new producers (UEC just started production at their Hobson
plant and URG will commence production in early 2012) and will be producing
uranium through the in situ recovery (ISR) facility, which is much cheaper
than conventional mining.
TER: What about additional expansion with UEC?
AS: In 2011, UEC will probably be producing close
to a million pounds (Mlbs.) of uranium. In 2012, I think they're going to go
up to 2 Mlbs. with no additional capex required because the Hobson facility
is actually built for 2 Mlbs. They can actually take the Hobson processing
facility up to 2.5–3 Mlbs. if they really wanted to by adding an
additional dryer for another million dollars. All they need to do is find more
uranium in the ground. So, I don't think the Hobson plant is a bottleneck.
The bottleneck would be getting Goliad and Palangana projects up to
2.5–3 Mlbs. a year in total.
TER: How long will it take to get the Goliad
Project up to that level of production?
AS: If they get their permits in January, they will
start building the satellite project at Goliad, which will probably take
three to four months to get up and running.
TER: You said you were very positive on Uranium
Energy as well.
AS: Yes, I am. There are four permits required, and
hopefully they will get the first one in early January. The last permit will
be from the BLM, which they expect to get in the second quarter of 2011. Once
they get that permit they'll take six months to build the project, and then
they'll be in production in early 2012. So those are the catalysts—four
permits over the next six months, then they'll announce construction, and
then they'll announce production startup in early 2012. That's the kind of
timeline that we are talking about right now for URG. So as you can see, URG
has more short-term catalysts than UEC just because UEC is already permitted.
TER: Do both UEC and URG have the ability to expand
with new leases and potentially M&A?
AS: Yes, they do. You're absolutely right there for
both of these companies. URG has two projects, Lost Creek and Lost Soldier.
Just between those two, they can actually get up to 2–2.5 Mlbs. of
uranium production per year. UEC can also get up to that 2–2.5 Mlbs.
level with Palangana and Goliad, and they also have other leases they are
looking at in Texas. URG is looking at some leases in Wyoming, and they have
other projects as well, but we are not giving any value to them right now.
Even with what they have, URG can get up to my target price of $3. For UEC,
my target price is $6.50, which it has recently exceeded and then went down
to $5. Those are my target prices which don't even include any additional
leases or any increase in production from the 2 Mlbs. level for either
company.
TER: Will UEC and URG need additional financing to
proceed with these projects?
AS: UEC already has $36 million in the bank, thanks
to the last financing that they did about a month ago. These guys did the
financing at $3.40 and three weeks later the stock was at $7.70. Obviously
UEC's new shareholders have done very well as have the old shareholders. I
don't think they need any more money.
In the case of URG, I think they have enough money ($37.7
million in cash) to build their project and start production in 2012. Then
maybe later on they'll need more money if they are looking at other lease
acquisitions or acquisitions elsewhere for other ISR projects. But I don't
see any new needs for cash in the very near future for either of them.
TER: What commodity price level must uranium
maintain for these companies (UEC and URG) to grow like you expect?
AS: That's a very good question because for some
companies $40 uranium was just not working. But both UEC and URG are ISR
projects, which are lower cost compared to the other traditional underground
mining projects. So, they would both have been profitable even at $40
uranium. So, UEC has a cash cost of about $13/lb. This is just a cash cost,
and they spent about $28 million on their Hobson project. So, not including
the capex, they would've been very, very profitable even at $40 spot price
uranium. URG's cash costs are slightly higher. Their cash costs would be in
the $23/lb. range. But they would still be profitable even at $40 uranium
when long-term uranium prices are much higher than that. Even when spot
prices were at $40 where URG could be profitable, the long-term price of
uranium was at $62.
TER: Going back to Uranium One. You obviously don't
feel quite as positively about it as you do UEC and URG.
AS: That is true. But I like Uranium One. The only
thing I think the other two companies have that Uranium One doesn't have is a
lot of short-term catalysts. But for Uranium One, I think they had the last
catalyst last week when they announced the special cash dividend. I don't see
any short-term catalysts for the company.
TER: If an investor is taking a longer-term
viewpoint over several years, does Uranium One have potential upside like UEC
and URG?
AS: Uranium One had a very bad experience with
their Dominion Project with the decline in uranium prices. The company will
always be leveraged to uranium prices. If you see spot uranium prices going
to $70, $80, $90 and you see long-term uranium prices also following, you
could easily see Uranium One back at $6. Back in 2007 it used to be a $16
stock when uranium prices were at $139. Then it went down to $1. Now it has
started coming back.
I still like it for the long-term exposure because there
are not that many pure uranium producers in the world. There's Uranium One,
Cameco Corp., UEC, URG and there are number of other companies that I don't
cover where you can actually get quite good exposure as well. Of course, the
lowest risk would be Uranium One and Cameco because they are already in
production. UEC is now in production also, but Uranium One would be the
safest.
TER: Let me go back to URG for one moment. The
stock was up 214% over the past 52 weeks. Do you feel like there's day
trading activity here that could make this stock subject to sharp declines?
AS: Well, that's another good question. These
uranium stocks have been very liquid for the last three to four months. So,
obviously, there's definitely been day trading activity going on. But as long
as it's not enough to disrupt the prices, it's always healthy because it
gives you a lot of liquidity.
TER: We appreciate the views on uranium. Thank you.
AS: No problem. Thank you.
Alka Singh is a managing director and senior metals
& mining analyst at Rodman and Renshaw. Prior to joining Rodman, Ms. Singh was a Merrill Lynch VP covering
Canada's metals & mining sector for two years. Before Merrill, she worked
as an associate analyst covering gold and base metal companies at Orion
Securities. Ms. Singh holds an MBA from Schulich School of Business, York
University in Toronto, Canada, and a Bachelor of Science in geology from the
University of Delhi in India.
Want to read more exclusive Energy Report
interviews like this? Sign up
for our free e-newsletter, and you'll learn when new articles have been
published. To see a list of recent interviews with industry analysts and
commentators, visit our Expert
Insights page.
© 2009, Oil & Gas Investments Bulletin
The Energy
Report
|
|