A supply crisis is looming in the uranium industry, and today's uranium price, stagnant at an eight-year low, will shoot up quickly when restarts of Japanese nuclear power plants bring back demand with a vengeance, David Talbot tells The Energy Report. Talbot, a geologist and senior mining analyst at Dundee Capital Markets, is excited about the potential of Canada's Athabasca Basin, the world's most prolific uranium source. But beyond the pounds in the ground, he sees money to be made in undervalued companies.
The Energy Report: David, welcome. Let's start with the big picture: What is the general outlook for uranium in 2014?
David Talbot: Thank you, Tom. The long-term outlook on the uranium market remains the same at US$65/pound [$65/lb] U3O8. I think a new reality in the near term has set in. The uranium price has dropped significantly and now appears stable at levels not seen for almost eight years. We believe much of this has to do with the lagging Japanese restarts, cash-strapped sellers impacting the market and probably most important, near-term demand is lacking. We do expect uranium prices to rise, and relatively quickly when they do, but for right now, uranium prices will remain leveraged to the news of the Japanese reactor restarts and a return to term contracting by utilities.
This thesis underpins our $42/lb price estimate for the year, with prices to about $48/lb by Q4/14. When restarts might occur remains the million-dollar question, perhaps starting mid-2014, but the indicators out of Japan are that the government is committed to bringing its nuclear fleet back online now as the 17th and 18th reactors have applied for their restarts. We've had ongoing reviews. They were expected to take about three to six months, and now we're in month eight. So when they start isn't quite certain, but they are moving in the right direction. Their return should actually coincide with the return in contracting, almost completely absent last year as massive uranium requirements loom. We're seeing about 180 million pounds [180 Mlb] due, expected by the 2016-2018 period.
TER: What are the major influences in the uranium market today?
DT: Supply remains a wild card and probably the most important factor, hence the focus of our recent comprehensive sector report. Mines are currently being taken offline, deferred or cancelled altogether. But long-term fundamentals underpin our belief that a uranium supply deficit starting in 2016 will likely increase by 2020, at which time we think we'll see a deficit of about 16 Mlb. So we remain adamant that uranium supply is threatened by current uranium prices, regardless of the difficulties of the mining industry and challenges in permitting. This continues to set the stage for the supply crisis, particularly in light of dwindling secondary supplies as the Highly-Enriched Uranium [HEU] Purchase Agreement has come to a close, taking 24 Mlb/year with it.
The other part of the story is timing. We anticipate Japanese restarts to be the catalyst to kick-start uranium buying and contracting, but the lack of deals in 2013 resulted in the elevated uranium requirements that utilities have mentioned. This means that once the pendulum shifts back, it will shift quickly, and prices will probably rise at quite a torrid pace.
TER: Do you expect that 16-Mlb deficit in 2020 to draw more explorers and producers to the industry, or just to create more opportunity for the current players?
DT: Once the 16-Mlb deficit comes closer, we would expect development for some projects to perhaps expedite on the back of stronger uranium prices. But most of the new supply we see over the next few years is from existing producers, mainly expansion of existing projects, Ranger 3 Deeps, for example, or Cigar Lake. We do model some marginal players coming on-line. But that's a relatively small amount of production and certainly not enough to close the gap. We do think that uranium prices are going to be what's required to incentivize investors. Certainly, there will be a new set of explorers set up as exploration funding comes in. Just look at the explosion of junior exploration companies around the Patterson Lake South discovery. So should uranium prices rise, we would expect investment in the sector and exploration spending to increase.
TER: What was the mood at the NEI Nuclear Fuel Supply Forum in Washington, D.C., in January?
DT: Remember that the Nuclear Energy Institute is an American association that promotes nuclear power to Congress, the White House, state policy forums and the general public. So its message is typically well scripted and relatively even-keeled, and delivered nonpromotionally. I think that feelings were mixed. There were a few uranium-sector participants. In late January, the sector was flying high, so sentiment was generally positive. This was also after the Uranium Participation Corp. (OTCPK:URPTF) [U:TSX]financing, which more than suggests that investors will be coming into the sector shortly as Uranium Participation is mandated to spend about 85% of its raise on purchasing uranium. So at that time, the stocks were doing quite well, and the fundamentals of supply and demand are generally unquestioned by that group of people.
Richard Myers discussed the U.S. nuclear program. He's vice president of policy development at NEI. His message was similar to the one he provided last year at the World Nuclear Association Symposium in London. He started by saying U.S. nuclear power plants are operating well at about 90% of their capacity factor.
Right now in the U.S., they are currently shutting five reactors. These are typically older, smaller, single units that are mostly at risk but, also, larger, multi-unit sites are struggling under current regulations. Essentially, electricity prices are being suppressed by state mandates and federal subsidies. So price signals right now are inadequate to support existing power plants and investment in new capacity. He suggested that all electricity should not be treated the same. Nuclear has some very important attributes that are not being monetized. It's baseload; it provides grid stability, price stability, clean-air compliance, technical and fuel diversity and a huge tax base. So failure to address the importance of nuclear as baseload electricity will compromise reliability, introduce price volatility and frustrate efforts to decrease carbon emissions. This, of course, could have a negative impact on the U.S. uranium requirements, currently in the 45-50-Mlb range.
TER: Dundee Capital Markets was expecting 87 Mlb new production from 22 uranium operations between 2007 and 2013, but only 17.8 Mlb materialized. What happened there?
DT: I think this is the trend in the industry. You'll see these plans to develop uranium projects and, ultimately, a fraction of that effort ever materializes. Many of those mines that we expected to come on-line in 2007 never started. In one or two instances, there were technical issues. The timing of that report also coincided with the global financial crisis in 2008, so that was certainly one of the main factors. Capital dried up. But in general, development is becoming much more expensive, with timelines for projects ranging up to 15 years or more between discovery and production. That's because of several challenges that face the uranium space. You have increasing environmental and regulatory constraints. Public perception has darkened post-Fukushima. Significant community consultation is now required, and stringent radiological and groundwater controls are being put in place. Detailed tailings management plans are required, and comprehensive decommissioning strategies with upfront financial commitments are now commonplace.
TER: You mentioned the high costs of development. What role does the Canadian Non-Resident Ownership Policy play in that?
DT: That policy states that a foreign company cannot own 50% of a uranium project. This hasn't concerned me too much in the past. It is just a policy. We have seen some companies get around that policy, not necessarily grandfathered but just moving toward the expectation that that policy will not be there when they need to go and get their licenses. For example, more recently, we've seen Rio Tinto Plc (NYSE:RIO) come in and take out Hathor Exploration Ltd. for its Roughrider deposit. So there are foreign companies that are acting in Canada. They're acting as if this policy will be overturned and, certainly, the Saskatchewan government would like to have it overturned.
TER: Is the uranium market heading for a wave of mergers and acquisitions [M&A] to achieve efficiencies of scale and maybe increase production capability in a low-price market?
DT: We do expect further consolidation. Financing is more difficult than ever. Project timelines are lengthy and costly. With some companies unable to secure supplies to advance projects, we expect further delays and/or corporate insolvencies. What often happens is the predator comes in and takes out its prey at pennies on the dollar relative to its underlying net asset value [NAV].
Many certainly look at Cameco (NYSE:CCJ) as the top predator. With about 1 billion pounds [1 Blb] in resources and reserves, it says it doesn't need more pounds in the ground, but bolting on production makes a lot of sense to us. Cameco has long said it seeks more production growth in the U.S., and while some of that's happening through organic growth, newer companies like Ur-Energy Inc. (NYSEMKT:URG) look exciting to us. You also can't count out Denison Mines Corp.'s (NYSEMKT:DNN) Phoenix project in the Athabasca Basin. Cameco is a partner there, but that's the world's third highest-grade project at 16% U3O8. There are about 60 Mlb there right now. Plus, Denison has interest in the McClean Lake mill, and I know Cameco would probably be interested in having a feed at the mill that is processing its own Cigar Lake ore.
TER: Are you excited about any other uranium companies?
DT: There are two others. Ur-Energy-we have a Buy on this one. It has a $2.20 target price. Ur-Energy is our top pick in the sector right now. This is a U.S.-based, Wyoming-based, in-situ recovery producer. It officially entered production last year. Early indications are the well fields are performing exceptionally well. It produced 135 Klb last year. We expect about 1 Mlb this year, 1.2 Mlb next. Flow rates and front end are operating above expectations. The back end elution and precipitation circuits are performing as designed. Notably, head grades have been significantly above expectation, leading to less header houses and volumes that are required, pointing to lower costs. Right now, the company sells about 40% of its production forward at about $60/lb between 2014 and 2016, so it makes Ur-Energy less sensitive to spot price fluctuations than some of its peers. It's actually getting prices much, much higher than spot. It was in the $63/lb range for last quarter. Shirley Basin is another project it just purchased. That could be up next. It could come online by 2017, ramping up to 1 Mlb/year within a couple years there. Ur-Energy trades at a discount to its producer peers.
TER: Do you have any parting thoughts to share on the uranium market generally?
DT: I think it all hinges on supply. Demand is relatively consistent. It's predictable, Japan restarts notwithstanding. But I believe it's the strengthening fundamentals based on supply that really drive this. Mines are closing. We've seen Zarechnoye close, La Sal, Beaver, Pandora, Daneros. Projects are being deferred, big projects including Olympic Dam, Trekkopje, Imouraren, Cameco's Double U, plus no more Kazakhstan production. The HEU agreement is gone, and we're getting unexpected disruptions, such as Ranger, Rossing, Cigar Lake and assets in Niger. So I think investors should focus on that. When uranium prices come back, I think they're going to come back quite quickly, not because Japan is going to come back seeking supply but because the other 90% of the world hasn't been buying like it should.
TER: Thanks for sharing your thoughts.
This interview was conducted by Tom Armistead of The Energy Report.
Dundee Capital Markets, V.P. and Senior Mining Analyst David Talbot worked for nine years as a geologist in the gold exploration industry in Northern Ontario. David 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. David is a member of the Prospectors & Developers Association of Canada, the Society of Economic Geologists and graduated with distinction from the University of Western Ontario, with an Honors Bachelor of Science degree in geology.
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