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While
Germany and Switzerland have made headlines with sudden phase-out plans,
world leaders from North America to Africa to Asia have reaffirmed their
commitment to nuclear power as a low-carbon, low-cost energy solution. Development
plans continue for the industry, and the long-term growth picture shows
continued uranium demand. In this exclusive interview with The Energy
Report, Rob Chang discusses prospects for both junior and major uranium
developers and producers, and which companies could be the next belle of the
bidding war ball.
Companies Mentioned: AREVA - Cameco Corp. - Energy Fuels
Inc. - Extract Resources Ltd. - Fission
Energy Corp. - Hathor Exploration Ltd. - Kalahari
Minerals plc - Kivalliq Energy Corp. - Rio Tinto - Uranerz
Energy Corp. - Uranium
Energy Corp - Uranium One Inc.
[Editor's note: This
interview took place on October 24, 2011. Mr. Chang's comments were made
prior to Versant Partners' engagement on Fission Energy's financing.]
The Energy Report: Thank you for joining us again. What major
changes have unfolded in the uranium sector since you last spoke with The
Energy Report in June?
Rob Chang: Let's look at uranium pricing first. The spot price went
through the summer doldrums, as it usually does. It dipped slightly but
stayed relatively flat since June. It's down about 3% and is currently in the
low $50s. The long-term price declined by about 6%. It was around $68 when we
last spoke. It's now $64. But there has been some good news. Looking at it
from a global standpoint, the number of nuclear reactors under construction,
planned or proposed has significantly increased. There are currently 565 in
various stages as opposed to 553 back in June. We've also seen some M&A
activity heat up the market. Cameco
Corp.'s (CCO:TSX; CCJ:NYSE) and Rio Tinto's
(RIO:NYSE; RIO:ASX) bids for Hathor
Exploration Ltd. (HAT:TSX.V) were huge news items. More recently, the
China Guangdong Nuclear Power Corp has resumed talks with Kalahari
Minerals plc (KAH:LSE; KAH:NSX) and Extract
Resources Ltd. (EXT:TSX; EXT:ASX) to acquire them as well. It's been a
pretty interesting time for the uranium space since we last spoke.
TER: It sounds like some stability has returned to the sector and
long-term prospects remain positive.
RC: I would definitely agree. The prospects haven't changed in terms
of supply and demand. There was a lot of initial negative sentiment toward
what happened with Fukushima. Since then, what we've actually seen is
something that, in my opinion, is beneficial in the long term for the
industry in that countries around the world reassessed their nuclear
programs. As a result, the overwhelming majority came out saying that they're
fine or that they're putting in place improvements that will make them
better. Outside of the more publicized Germany, Italy and Switzerland news
regarding anti-nuclear decisions and phasing out in Germany and
Italy—those are the exceptions rather than the rule. For example,
Japan's own Prime Minister said he thinks it's impossible for Japan to
maintain its economy without nuclear power. China has completed safety
assessments a month ahead of schedule. Spain has
deemed nuclear power to be irreplaceable. And the Czech Republic came out
with an energy plan wherein nuclear will contribute 60–80% of the
nation's power by 2050. Overall, the worldwide perception of nuclear energy
has been pretty positive.
TER: Looking at the price chart, we've had a bottom around $49. Have
we seen a permanent turnaround in the price of uranium, or do you foresee it
fluctuating in a similar range?
RC: The $49 figure is unnaturally low based on supply and demand
fundamentals. In our opinion, long-term spot prices should be closer to $70
in order for supply to match demand. This would also make new mines economic,
especially low-grade mines in Africa, for example. What we've seen more
recently concerns utility buying, which usually occurs in the last quarter of
the year. Because utilities weren't really buying, we saw a lot more
volatility than we normally do. Instead, producers became the major buyers,
soaking up excess supply rather than selling the uranium they're
producing—it's actually more cost-effective for them to simply buy off
the market and sell it at a higher price, fulfilling their contracts that
way. There will always be short-term volatility, especially since uranium is viewed
as a high-beta commodity.
No matter how we look at it, we're going to see uranium and uranium equities
higher than they are presently. The key question now is, when will they
rebound? Right now the uranium market is negatively affected by the global
economic crisis and investors are not willing to take on risk. Once things
settle down, the supply/demand fundamentals behind the nuclear industry
should take hold.
TER: Can you bring us up to date on the developments that have taken
place with uranium companies you've been covering?
RC: Sure. Starting off with Fission
Energy Corp. (FIS:TSX.V; FSSIF:OTCQX), other than the bids for Hathor
coming in from Cameco and Rio Tinto, the company has had some interesting
exploration results. Its Patterson Lake South Project has some exploration
results showing boulder trains of high-grade uranium. It's looking very
prospective and the company just announced that it's doing additional
trenching.
The numbers there look very exciting, with potential for something pretty
significant. It will certainly add another layer of interest to what has
already been a very exciting story, given that Waterbury is right beside
Hathor's Roughrider Project. On top of that, the company also has its Dieter
Lake property and the Macusani as well. We're monitoring Fission's progress
there with a great interest. Just from looking at it, it seems just the
boulders themselves are high-grade enough to potentially have a resource.
TER: Can you clarify for people who aren't acquainted with the geology
of uranium—where do the boulders come from and what is their
significance?
RC: That's the interesting thing. The company is currently doing some
exploration to find out exactly where the boulders originated. The potential
source is northeast of where the boulders were found on the property and
hopefully the whole resource is all still on the property. But, these
boulders are just basically rocks on the surface. Fission has been finding
pretty high-grade mineralization there.
Another company we're covering and very excited about is Kivalliq
Energy Corp. (KIV:TSX.V). It has identified the western and eastern
extensions to their Lac Cinquante Deposit, which has 14.15 million pounds
(Mlb) of 0.79% uranium—the highest-grade uranium deposit in the world
outside of the Athabasca Basin. It's located in Nunavut. The western
extension has shown a high-grade intercept of 2.25% over 2.3 meters (m).
That's just one hole, but we've seen interesting results from both sides. It
may potentially be a much larger resource. The Lac Cinquante Deposit itself
is a very small part of the overall area that Kivalliq can explore. Looking
at some of their target maps, it seems like there are many targets the
company can potentially test that will last them quite a long time. It's
quite exciting for them as well.
TER: Nunavut—that's pretty remote.
RC: Yes, but there are other projects being developed right now in the
area. AREVA
(CEI:PAR), to the northeast of Kivalliq, is currently working on their
Kiggavik uranium project. It is reassuring for investors to see a large
uranium miner currently moving forward on an asset in the area. But you are
correct; there is less infrastructure and the deposit will definitely have to
be high grade and relatively large for it to be economic. However, it is the
highest-grade uranium deposit outside of the Athabasca Basin, so it's got the
potential.
TER: What other companies do you like?
RC: Energy
Fuels Inc. (EFR:TSX) recently announced that it's purchased the Skidmore
Lease in southeast Utah's Sage Plain District from a private company. This
lease contains 921,000 pounds of historic resources that need to be proven
up. More importantly, that lease is located near EFR's current Calliham,
Crain, Sage and other nearby leases, which enables them to continue their
strategy of consolidating the area. It can now start the permitting process
for their third potential mine behind its Whirlwind and Energy Queen Mines,
which are already waiting to go.
TER: What's the general outlook for uranium mining in the U.S. versus
Canada?
RC: Mining in the U.S. tends to be a little
bit more difficult, given the anti-uranium sentiment in some areas. In
Canada’s Athabasca, there has been consistent and well-accepted uranium
production for many years. In the U.S. it's a little bit more difficult. You
can see that in Virginia, for example, where there's been a lot of pushback
toward uranium. Even with Energy Fuels right now, a Colorado federal judge
issued a stay against the Department of Energy's activities in granting
licenses for uranium exploration, or any type of uranium-focused activity.
The regulatory regime is a little more difficult and more protective in the
U.S. compared to the Athabasca region.
TER: Would you say the safest jurisdictions are in Canada or overseas
at this point?
RC: Yes, but I think the U.S. has some very good resources, strong
companies and good projects being advanced. Uranerz
Energy Corp. (URZ:TSX; URZ:NYSE.A) is progressing with its deposits in
Wyoming and Uranium Energy Corp (UEC:NYSE.A) is now producing in
Texas. There are, however, a few more hoops to jump through in the U.S.
compared to other countries such as Kazakhstan or African countries, where
the regimes are more favorable toward mining development. I had a good chat
with the management at Uranerz recently, and, it seems that the development
of its assets has been progressing very well. We're quite anxious to see when
it starts producing and we're very positive on the company.
TER: Let's shift gears again to M&A activity. There were at least
two competing offers for Hathor from Rio Tinto and Cameco. Rio Tinto upped
Cameco's bid by about $0.40 a share. Is this going to be a bidding war that
attracts more players, or are these two going to fight it out to the end?
RC: Rio Tinto came into the game pretty late already. If I were to
guess, I would expect it would be just between these two. We're more than
likely going to see a second offer from Cameco. The common view, as well as
mine, is that both bids are a little low relative to what Hathor should be
worth. Cameco is in the best position to provide synergies and pay the
highest amount for Hathor. It is the dominant player in the area, with two
mills and extensive experience developing Athabasca-based mines. On the other
hand, Rio Tinto is one of the largest miners in the world and if it wants
something, it can get it. It'll be interesting to see how things shake out.
TER: What are the implications here for Fission? Is the company going
to end up getting taken over too, or is it a little premature?
RC: I think Fission will definitely eventually be taken out by whomever
wins the Hathor battle. Fission's property, even though the exploration is
probably two or three years behind Hathor's, is very prospective. Based on
the drilling results that we've seen already, Fission's J East zone is the
likely western extension to Hathor's Roughrider zone. Then, 30m just to the
west of J East is the J Zone. That's a pretty large tabular ore body that's
near to surface relative to Roughrider's deposit.
Further to the west of J Zone there are several other perspective targets that
Fission's currently exploring. There could potentially be more pearls in that
string of mineralization. The mineralization is shallower on the west side
with these pearls of mineralization going deeper toward the east. Potentially
there is more further to the west of what Fission has in its J Zone. Since
its property package is larger than Hathor's, it could potentially have more
mineralization than Hathor. But that remains to be seen.
TER: When do you think someone will take a shot at Fission?
RC: I would assume that whomever wins the Cameco/Rio Tinto battle will
want to consolidate the whole area. More than likely this battle will
continue into 2012. Bids for Fission will probably happen a few months after
that. Meanwhile, Fission will obviously be trying to prove up as many
resources as possible to increase its value. Within a year, Fission will
likely no longer be a standalone company.
TER: What's happened with the stock prices on Fission, Kivalliq and
Energy Fuels since last June, and what are you expecting in the near future?
RC: All three have moved up. Hathor will probably go up with the
potential bids. I think the key one to look at really is Fission. Given that
Fission does not have a resource, many investors don't know what type of
valuation to assign to it. It's trading in the $0.80 range as we speak. My
expectation of a resource is somewhere between 15-20 Mlb, now just shy of 18
Mlb. We believe that Fission is probably worth double its current share
price. Will Hathor be worth more? Probably, but a
double from its current level is unlikely. I do know some investors who
believe that Hathor should be worth $10.00 a share. Looking at it from that
perspective, I'm very excited about the prospects for Fission.
TER: How about Kivalliq and Energy Fuels?
RC: I like both those companies very much as well. Unfortunately they
don't have a take-out scenario happening right next door but, valuation-wise,
are very strong. We believe Energy Fuels is still a buy with a $1.30 price target. On Kivalliq, we also have a
Speculative Buy rating with a $1.00 price target.
TER: So there's still some potential upside on all of these plays. Are
you looking at any other companies you'd like to mention at this point?
RC: As far as our favorite producer names, even though we don't cover it, we are positive on Uranium One
Inc. (UUU:TSX). It is the one producer that is 100% exposed to the spot
price, meaning it does not have any hedge to sales. In our opinion, it is in
the best position to get good leverage and torque from when the spot price
inevitably goes into the $70s. Other producers will be stuck at lower price
points with their contracts.
TER: What do you think our readers should be looking at now at if
they're interested in the uranium market in North America?
RC: Fission is an exciting opportunity, because you have that
immediate take-out story happening next door. An NI 43-101 resource coming at
the end of this year that will be somewhere between 15-20 Mlb makes for an
exciting story that has tremendous upside. For those who want to position
themselves for a good turnaround in the uranium spot price, Uranium One
probably would be a very strong candidate. Looking a
little longer-term, we're very positive on Energy Fuels and Kivalliq Energy,
with our target prices being significantly higher than where they're trading
now.
TER: Plenty of food for thought and interesting prospects. We
appreciate your time today and we'll look forward to talking with you again.
RC: Great. Thank you.
Versant Partners Analyst Rob Chang has extensive financial markets experience
dating back to 1995. He was a member of a five-person team running a
multi-strategy hedge fund, a base metals research associate at BMO Capital
Markets, a manager of resource funds at a boutique investment management
company and an equity analyst covering the global mining sector at an
independent investment bank. Rob has an MBA from the Rotman School of
Management at the University of Toronto and holds a Chartered Investment
Manager designation.
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