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Uranium
and potash prices seem to be inversely correlated lately: As potash prices
reach their highest levels, uranium prices have suffered. But Richard (Rick)
Mills, host of Ahead of the Herd online and editor of the Ahead of the
Herd newsletter, believes the prospects for both industries are bright.
In this exclusive interview with The Energy Report, Rick explains why
the U.S.' commitment to nuclear power and even biofuels is helping to propel
both markets.
Companies Mentioned: Agrium Inc. - BHP Billiton Ltd. -
Encanto Potash Corp - Exelon Corporation - PotashCorp - Uranerz
Energy Corp. - Verde Potash
- Western Potash Corp.
The Energy Report: German Chancellor Angela Merkel
recently decided to shut down the country's nuclear reactors that began
operating prior to 1980. Germany will ultimately disband its nuclear energy
program in favor of gas and wind power following the fallout from Japan's
nuclear disaster in March. Meanwhile, Japan is also attempting to lessen its
dependency on nuclear power. How has that disaster permanently changed the
uranium market?
Rick Mills: It's a short-term hiccup and it's probably presenting us
with one of the greatest buying opportunities for carefully selected uranium
stocks that a retail investor can get. The global nuclear renaissance that
was underway in early 2010 was happening for specific reasons: concerns about
climate change, reducing carbon footprints, energy security and the rising
cost of fossil fuels. And then the disaster hit. It gave pause to the
renaissance, but none of these reasons have gone away.
Germany's kneejerk reaction shut seven of its nuclear reactors. They won't be
opened again. Its other reactors will also be completely mothballed by 2022.
But the thing is that in 2002 Germany's center-left coalition enacted a law
to phase-out nuclear power. Last autumn, Merkel's center-right coalition government
decided to extend the lifetimes of the country's 17 reactors by an average of
12 years. That decision was based on a judgment that Germany could not meet
its power demand using only natural energy sources, such as wind and solar.
The country doesn't have abundant natural gas reserves. So, I find it pretty
ironic what's happening over there. I think Germany may suffer when it finds
it can't maintain its manufacturing competitiveness. Germany is now burning
more coal, and already buying more nuclear power-generated electricity from
France and the Czechs, who use the old Soviet-style reactors.
TER: There's a lot of talk right now about thorium replacing uranium
as the fuel in nuclear reactors. These reactors could use thorium, which is
much more stable than uranium, and roughly performs the same function. Do you
think that thorium will ultimately replace uranium?
RM: Ultimately, but we're 35 to 40 years away from incorporating that
technology. Uranium's got a long way to run. I believe thorium will be the
answer one day, but not for several decades at least.
TER: What about the U.S.? It has some reactors slated to come onstream
over the next 5 to 10 years. Do you think that the U.S. is going to follow
suit with Germany?
RM: The U.S. is going to ramp up its nuclear power. On April 21, the
U.S. Nuclear Regulatory Commission renewed the operating license for the
U.S.'s largest atomic plant, the Palo Verde nuclear generating station in
Arizona, for 20 years. The U.S. Department of Energy just dedicated a new
research facility on May 3. The U.S. is accelerating the advancement of
nuclear reactor technology. It's studying the performance of light water
reactors and developing highly sophisticated modeling that will help
accelerate upgrades at existing nuclear plants.
That doesn't sound like the U.S. is in any way, shape or form going to cut
back. As a matter of fact, U.S. Secretary of Energy Steven Chu just said
nuclear energy is the nation's largest source of carbon-free power and it is
an important part of the U.S. energy mix moving forward.
Uranium supplies are going to get very tight. There's going to be fierce
competition for available material in both the spot and long-term markets.
Investors should be looking at uranium-focused juniors with money in the
treasury. We're being set up for the perfect storm in uranium.
TER: Since the disaster at the Fukushima plant in Japan, the spot
price for uranium has fallen to about $50/lb. from around $73/lb. in early
March. Many junior uranium miners and explorers have seen their share prices
fall dramatically since then, too. What are some companies that you think
offer a lot of value as a result?
RM: Uranerz
Energy Corp. (TSX:URZ; NYSE.A:URZ) is one of the best uranium companies
out there. The management is top-notch. These guys wrote the book on in-situ
leach mining.
Uranerz is going to be included in the Russell 3000 Index again. If you want
to see something interesting, pull up a chart from June 2009 when it was
included on the Russell the last time. Funds that track that index have to
include these new additions. We're talking about an awful lot of money. It's
going to be interesting to see what happens to Uranerz' share price as this becomes
common knowledge.
Uranerz is waiting for its final permit to start well field construction and
build its production facility. Currently, the company has $45M in the
treasury; that's $0.60 a share. Costs to get into production are estimated to
be $35M, so the company has some money for contingencies. I expect Uranerz to
be in production in 12 to 15 months. Currently, two drill rigs are performing
exploration drilling. Uranerz has identified over 483 kilometers (km.) of
alteration-reduction trends on its project areas which cover 38,000 hectares.
Uranerz has explored only 15% of the identified trends. One drill is doing
delineation drilling for the construction of the well fields.
TER: We're talking about the Powder River Basin Project in Wyoming?
RM: That's right. The Nichols Ranch project is expected to produce a
maximum of 2 Mlb. of yellowcake annually. Initially, the project is targeting
600,000 to 800,000 lb. per year. The company has long-term offtake agreements
signed for a portion of production with two major U.S.-based nuclear
operators, including Exelon Corp. (NYSE:EXC). The U.S. produces 27% of the
world's nuclear power from 104 nuclear reactors—these reactors use
50–55 Mlb. of uranium a year but the U.S. only produces 4 Mlb.
Uranerz is a company that has its act together and is definitely sitting at a
sweet spot for investors. While there's a little bit of blood in the streets
right now concerning uranium, people should be looking at this sector.
TER: That production could be coming on-stream right about the time
when uranium prices could be rebounding.
RM: The spot market is definitely going to tighten up before then and
people are going to be looking for long-term contracts. This setback, if
anything, makes the market stronger. Prices will eventually move higher.
TER: Potash has somewhat of an inverse relationship to uranium prices.
Earlier this month, corn futures reached an all-time high, which ultimately
means higher food prices for all of us. It also means there's a greater need
for fertilizer and that bodes well for junior mining companies looking for
potash. Do you believe that potash prices will remain as high as they are
now?
RM: Yes I do and going higher. Food and how we grow it are going to be
dominant investment themes for decades to come. Our population increases
geometrically. Our food supply can only increase arithmetically. We've got
major problems in addition to our growing population. One of the biggest
threats we are facing is the loss of arable land that was used for food
production. Land is being used for biofuels, topsoil is being eroded away and
the agricultural land base is being paved over. We're destroying our
freshwater aquifers. But world population growth and three billion people
climbing the protein ladder are the elephants in the dining room. Tonight,
220,000 new mouths will need to be fed at the dinner table.
TER: How does potash mining differ from gold or copper mining?
RM: Unlike other resource plays, potash does not have a cycle. Demand is always going to be there, which makes
potash an excellent play in a long-term agricultural commodities bull market.
Potash markets are never disrupted by political interference. Food shortages
will always trigger social and political instability, such as the riots in
the Middle East and Africa. All governments fear a hungry populous.
Companies like Agrium Inc. (NYSE:AGU) and PotashCorp
(TSX:POT; NYSE:POT) have very solid bottom lines, but they are mature
companies. Investors should start moving down the value chain to junior
companies with big potash resources that are going to create value for their
shareholders.
TER: What companies fit that bill right now?
RM: We've been following three companies on Ahead of the Herd for
quite some time now.
Verde
Potash (TSX.V:NPK), formerly Amazon Potash, is putting together a fairly
large project in Brazil. By the time it finishes, I wouldn't be surprised if
it had enough potash to supply the Brazilian market, the largest potash
market in the world, for 30 years.
The company also has phosphate at the Apatita Project and should have a
resource calculation out by the end of the third quarter. It is also planning
drilling on five other targets bordering their thermal potash product, the
Cerro Verde. Recent news suggests they will have a limestone resource as
well. This is a company that is definitely in the right area at the right
time with the right resources.
The thing about this company that most people don't realize is that if the
potash price is $430/t in Saskatchewan, Canada, it would take $100/t to reach
a port in Brazil. Then it would take another $100/t to get it to a blending
facility near farmers. The price that Verde's competing against is not
$430—it's $630—they are already close to that blending facility.
According to the last test the company did on its product, thermal potash is
about 17% to 19% more effective than KCI, or typical potash.
TER: Verde's chairman, Peter Gundy, was an executive with PotashCorp.
He certainly has some significant background in the potash mining business.
He also has the right connections to get the money necessary to bring this
company forward.
RM: Absolutely true, and let's not forget to mention the tremendous
efforts of President and CEO Cristiano Veloso, who has done an amazing job
pulling it all together, and VP of Corporate Development Jed Richardson, who
has been there from day one. Also the government of the Brazilian state of
Minas Gerais has signed a memorandum of understanding regarding support for
potential financing.
TER: What's the next name you're following on Ahead of the Herd?
RM: Western PotashCorp (TSX.V:WPX) has done really well for
its shareholders and we were early into this one as well. It's adjacent to BHP Billiton
Ltd. (NYSE:BHP; OTCPK:BHPLF) and Agrium's exploration permits, and within
13 km. of PotashCorp's Rocanville facility. The company has 34 Mts. of
indicated potash with 245 Mts. of inferred.
Pat Varas and his team have done an exceptional job advancing this project so
quickly. The company is doing a prefeasibility study to be completed in the
fall, and is planning to start on its feasibility study in August. That's an
amazing amount of engineering going into the project right now. WPX has a
memorandum of understanding signed with the city of Regina for water. It's
doing environmental studies and community visits.
Western's land acquisition program has now successfully secured over 2,550
acres at the company's preferred plant site location. Securing the plant site
location is an important aspect of the ongoing feasibility process as the
environmental and regulatory approval processes and project schedules are
dependent on it.
TER: Is it a takeover target given its proximity to PotashCorp?
RM: It could be. One of the majors might want to take it and put it on
the shelf; the Chinese or Indians have to be interested. I think that's very
possible.
TER: Is there a point where juniors get on
the radar screen of larger companies and wake up the sleeping giants like BHP
Billiton?
RM: Definitely. I think the major players, the BHPs of the world, are
probably looking for at least a prefeasibility study. They want to see solid
numbers—capital expenditures and costs of production, net present
values and internal rates of return that actually have solid studies behind
them. None of these majors have a history of moving
too quickly. They're trudging behemoths that do things at their own pace and
need surety in a deal.
TER: There was one more potash company you wanted to talk about. What
was that one?
RM: Encanto PotashCorp (TSX.V: EPO) in Saskatchewan, Canada.
What makes this one interesting is that they are collaborating with several
First Nations groups to develop projects on their lands.
TER: In fact, Encanto was developed with that in mind, right? It was
developed with the idea that it would work with First Nations to develop
these resources.
RM: Absolutely. The first project Encanto started was developing an
80-to-100-year resource on the Muskowekwan's land. The goal is to develop a
producing mine as quickly as possible. EPO's upcoming preliminary economic
assessment (PEA) remains on schedule to be released in the first half of
August. The PEA is designed to determine the most economical method for
potash extraction and will make a recommendation on
a solution or conventional mining operation.
It hasn't had the success in the market that Verde and Western have seen
because the necessary reserve vote on continuing with development of the
project hasn't happened yet and that creates uncertainty. The vote will
happen in the fall; it's scheduled for late September.
TER: The whole operation hinges on that vote?
RM: Yes. Newly elected Chief Bellerose ran on a pro-potash forum. The
majority of candidates also ran on a pro-potash forum, as did all eight
successful councilors. I firmly believe it's going to be passed. But there
seems to be some hesitation in the market over it.
TER: If the vote does go through as expected, we could we see a bump
in the share price. It's at $0.23 right now.
RM: The band has approximately 1,050 eligible voters, many of whom
don't live on the home reserve. For the vote to be considered a legal vote,
at least 51% of eligible voters must cast a vote. For the vote to be
successful, at least 51% of those voting must cast in favor. If a sufficient
number of voters don't participate in the first vote then the vote is
considered a failure; a second vote will be held on the home reserve 35 days
after the first vote. For the second vote to be successful, a simple majority is required from those who vote. In an
effort to ensure that all band members are fully aware of the benefits
offered through the partnership with Encanto, Bellerose is holding open
sessions in Regina, Calgary, Winnipeg, Saskatoon and Edmonton.
There are really two drivers for the stock: the vote and getting the Home
Reserve Lands, which will double the land acreage (and potentially the
resource). It's been a long haul, but I believe that this is going to be a
successful company and we're going to see it move forward.
TER: What are some things that investors should keep in mind when
investing in potash companies?
RM: It's a long-term investable trend and with surging prices for
agricultural commodities, farmers are looking to boost crop yields, opening
the door for fertilizer makers to raise prices. There might be temporary
weaknesses, but everybody has to eat and there are 220,000 more of us at the
dinner table every night. So there are compelling reasons to be looking at
these companies. Also, these are not cheap mines to build. The companies need
management teams capable of going out there attracting the interest from the
institutions and raising the money necessary (all three companies I mentioned
do). Their neighborhood is also important. Who's in the neighborhood? Could a company be a takeover target?
TER: Thanks, Rick.
Richard is host of www.Aheadoftheherd.com
and invests in the junior resource sector. His articles have been published
on over 300 websites, including: The Wall Street Journal, SafeHaven,
Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell, Uranium
Miner, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine,
Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy
Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FNArena,
Uraniumseek, and Financial Sense.
The
Energy Report
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