(Editors' Note: This article covers micro-cap stocks. Please be aware of the risks associated with these stocks.)
On January 7th, I had the pleasure of interviewing the, "Mercenary Geologist," Mickey Fulp. In the past few weeks Mickey has published two excellent articles on the uranium sector. One is on global supply & demand and the other a, December 27th missive on his favorite undervalued uranium company Energy Fuels Inc. (UUUU).
PE: Mickey, you've put out two substantive pieces on uranium in the past two weeks. Why now?
MF: As we ended 2013, it seemed to me a subject that needed to be addressed. As many know, I'm bullish on the intermediate and long-term fundamentals of uranium. As a contrarian play, uranium could be a big winner in coming years.
PE: While almost everyone agrees that the uranium price will go up, when do you think that might happen? How much of an increase do you think is necessary to get uranium stocks to move meaningfully higher?
MF: I don't think we will see a significant uptick in the uranium price this year, but by 2015 [PE: 2015 consensus ~ $55/lb] I expect the price could be materially higher. The uranium stocks should be performing much better when the spot price hits $45-$50/lb. But remember, uranium prices can move fairly rapidly (both up & down). In July, 2010 the spot price was at $40/lb. By February, 2011 it had jumped to $73/lb.
PE: Does the market need to see the beginning of Japanese reactor restarts before the uranium price rebounds?
MF: Yes. I think it does and we might see a few restarts in 2h 2014. Pundits are now forecasting about 6-8 reactors back online by the end of 2014.
PE: Do you have a view on the, "incentive price," i.e. the long-term uranium price required for large-scale development projects to be viable?
MF: I agree with the analysts and company management teams that say a price greater than or equal to $75, say $75-$85/lb, is necessary to get the big projects into production.
PE: Do you think there's too much focus on the spot price?
MF: Absolutely. But, that's what the market focuses on, so it is the paradigm we are given. Spot transactions account for no more than 15%-25% of annual mine production. In a more balanced market, the long-term price should be fairly close to the spot price. I think the long-term uranium price will revert to $75/lb or higher, but the big unknown is the time frame for that to happen.
PE: In your supply/demand piece you mentioned potential problems in Kazakhstan, supplier of 35% of global uranium in 2012. Can you elaborate?
MF: All of Kazakhstan's uranium production is through In-Situ Recovery, or "ISR." ISR projects are similar to shale gas projects in that there's a fairly steep production decline curve. The best Kazak projects are located in the north, but this low-hanging fruit has largely been harvested. As production now gravitates to central and southern Kazakhstan, projects are deeper and economics less robust. That's why Kazatomprom is putting growth projects on hold. I wouldn't be surprised to see production decline modestly this year. That's a huge change given that Kazakhstan accounted for nearly 80% of the global increase in supply over the past 10 years.
PE: Who will pick up the slack? Niger & Namibia are key global producers, ranked 4th & 5th respectively. Can we be comfortable with security of supply from these countries?
MF: In Niger, French giant Areva is having some serious issues now. In my opinion, Niger does not have a stable government and it is corrupt. There was a military coup in 2010 and there is ongoing terrorist activity on the northwest border. Uranium mines have been attacked. The geopolitical risk in Namibia is certainly much lower, but their uranium deposits are very low grade, and marginally economic even at higher prices. Uranium mining there is conducted in one of the most arid places on the planet and there are protracted water issues.
PE: On the demand side, how critical is the restart of Japanese reactors?
MF: Extremely critical. With its 50 reactors offline, that's about 12% of global uranium demand that has gone away. I think the situation in Japan has been a big factor in today's spot price. In the longer-term, China, Russia, India and others are more important to demand than what eventually happens in Japan. The real question is how many reactors will get turned back on. Only 16 have applied for restarts so far. We won't see all 50 come back, that's for sure.
PE: What do you think about the prospects for Small Modular Reactors, "SMRs"? Might the widespread adoption of SMRs increase or decrease overall demand for uranium?
MF: That's a great question. I'm very bullish on this technology and think it will be an important part of the nuclear energy picture, but not for at least a decade. SMRs could greatly enhance the market for nuclear power, especially in remote parts of the Earth. These are much smaller units that could be deployed in remote locations around the world and would be much better than having no electricity and much cheaper than running diesel generators.
PE: Is the future use of thorium a threat to uranium demand and therefore uranium pricing, if so, how soon?
MF: Thorium will be a significant contributor in the long run. I wrote a detailed article on thorium in 2011. But commercialization is still at least 10 years away. Rest assured, thorium will not replace the use of uranium to any degree. There's simply too much infrastructure and investment in place that utilizes uranium. Thorium has potential to supplement the power provided by uranium-based nuclear energy.
PE: Switching gears a bit, let's discuss your recent report on Energy Fuels Inc. From a valuation standpoint, do you like Energy Fuels better than the U.S. ISR players such as Uranerz (URZ), Uranium Energy Corp. (UEC) and UR-Energy (URG)?
MF: I've been a committed shareholder of both Uranium Energy Corp. and Uranerz for quite some time and I used to own shares of UR-Energy. Energy Fuels is simply trading at a much lower valuation than its U.S. peers, even though its production growth potential is a lot higher. Energy Fuels has in-sight potential to produce up to 6 million pounds per year when the uranium price rebounds. The ISR players all appear to max out at annual production of about 1.0-1.5 million pounds in the short-to-mid-term. That's about what EFR is producing now.
PE: Do you consider the investment opportunity in Energy Fuels to be highly risky? What magnitude of upside is possible?
MF: When a good company's valuation is heavily discounted, I consider the risk to be low. I'm looking at EFR as a long-term investment. The main risk is a low uranium price in the mid-term, as it is highly leveraged to price. If in 2-4 years, as the company's long-term contracts roll-off, uranium prices remain depressed, then Energy Fuels would be in trouble. My investment philosophy is to sell half after a stock doubles.
PE: How important an asset is Energy Fuels' White Mesa Mill?
MF: White Mesa is key to what they do. They reinvented themselves with the acquisition of White Mesa from Denison Mines (DNN). White Mesa is not just important, it is their most important asset. Owning the only operating conventional uranium mill in the U.S. has immense strategic value and growth potential when uranium prices recover.
PE: Some believe that old fashioned hard rock mining is more expensive than ISR. Can you discuss the economics of hard rock mining vs. ISR?
MF: Generally speaking, ISR is cheaper than hard rock mining. However, that's just a rule of thumb, it comes down to factors like the grade, size and depth of the deposit, the mining method, transportation costs to the processing plant, etc. Many of the deposits that Energy Fuels control are high-grade, for example its assets in the Arizona Strip. The company's standby operations in Colorado and Utah are also fairly high-grade. Energy Fuels benefits from vanadium credits in some cases and of course owns its own uranium mill. Based on recent financial statements, Energy Fuels' costs are about the same as its peers, all ISR producers in South Texas & Wyoming.
MF: Energy Fuels' key development projects are much larger conventional uranium deposits. They include the Sheep Mountain-Gas Hills-Juniper Ridge project in western Wyoming and the Roca Honda project in the Grants Minerals Belt of New Mexico. While I like some of the ISR projects just starting up or proposed by the companies you mentioned, again those companies appear to max out at about 1.0-1.5 million pounds per year. Energy Fuels is already producing that much and has existing capacity and mid-term potential to grow to 6 million pounds per year.
PE: You made a great call on Strathmore Minerals which was acquired by Energy Fuels last year at a substantial premium. How important are Strathmore's assets to Energy Fuels and what synergies do you see there?
MF: Yes, over time, the Strathmore assets will prove to be strategic. That acquisition was an excellent decision and a milestone event. They bought a lot of, "pounds in the ground" at an industry-related depressed valuation. Energy Fuels now has the ability to develop a very meaningful second regional production center in Wyoming in the mid-term and the Roca Honda deposit after that.
PE: Since your report on Energy Fuels, the stock is up almost 15%. What do you think is driving it higher? Is there room to run?
MF: I will take at least some credit for alerting the market to its substantial undervaluation. A factor in my thinking was the end of tax-loss selling. That's why I put out my piece in late December, thinking a price recovery was imminent. The stock was a screaming buy, and it remains a very compelling opportunity. Just look at its "pounds in the ground" valuation. Energy Fuels is still trading at a significant discount to U.S. peers. And Peter, your very well done interview of CEO Stephen Antony on December 16th no doubt has been a contributing factor to the recent run-up as well.
Peter Epstein: Thank you Mickey Fulp, the Mercenary Geologist.