A Glowing Review for Uranium Plays

by: The Energy Report

You don't hear a lot of talk about uranium these days. It's just not as sexy as gold or silver. But with a host of reactors slated for construction, the sector is rife with opportunities. Haywood Securities Analyst Geordie Mark visits numerous uranium projects each year, researching plays at all levels. In this exclusive interview with The Energy Report, Geordie tells us why he's given "sector outperform" ratings to no less than 11 companies. It could be the most comprehensive global roundup of uranium plays anywhere.

The Energy Report: The spot price for uranium was $40.75 a pound on June 21, when the long-term price for uranium was $58—a spread of $17.25, or 42%. What's poised to support a 42% price increase?

Geordie Mark: The spot price actually moved up to $41.75 that night, the first move to the upside in quite a number of months. It's a positive response to demand coming onstream. The long-term contract market is very different from the spot market; and, historically, it's significantly bigger in terms of the volumes that are traded. We're seeing the spot price moving to meet those contract prices going forward. We also think there's a backdrop of significant demand increase due to a delay in the development-stage projects resulting from financial crisis issues and general market conditions.

TER: How far out do you see the spot price and the futures price meeting?

GM: We're looking at a marriage maybe even by the end of 2011, with a spot price of $65 and a long-term move out to $70. We certainly expect to narrow the current gap by that point.

TER: And you said part of that is due to the number of projects coming onstream?

GM: That's right. A few development-stage companies will go into production but, certainly compared to 2007, there have been delays due to equity raising. The number of new projects going forward has been stymied when those projects needed significant capex for development.

TER: At the same time we have a number of new reactors being built.

GM: That's true. Over the last two years, we've seen some significant growth in the number of reactors going into construction. I think something like a 58% increase in the number of reactors are on the planning board; that's a very good size in terms of a steady increase in future demand.

TER: Given the number of reactors being built or scheduled, why haven't uranium stocks performed better of late?

GM: There's a relationship between share prices and general market conditions. Over the last two years, both spot and long-term prices have come off somewhat in response to global financial conditions. I believe spot has come down from about $59 and long-term prices from $80. Company valuations are quite closely linked to commodity prices, so you're basically seeing the relationship to a softening in the commodity price over that two-year period.

TER: So with demand slated to rise significantly, we should see a corresponding rise in share prices of uranium miners and explorers?

GM: That's our target forecast for our covered companies and where we see the commodity price going in response to increasing demand. I think the interesting thing is that increasing demand not only corresponds to the number of new reactors coming onstream but also policies echoing out of Europe regarding extending the life of existing reactor fleets. You're seeing a number of different avenues in which nearer-term demand could increase, which only adds to the longer-term demand of new reactors. There are incremental policy changes toward nuclear power, too, certainly across Europe and coming across through North America. Obviously it's happening in Asia, with China and South Korea furnishing fairly large reactor-unit increases for their countries.

TER: Some of the most promising uranium projects are in Australia. Although the country is considering a new tax on miners, the Mineral Resources Rent Tax (MRRT), a recent change in leadership in the governing party could be a favorable development. Could you update us on the political climate in Australia as it pertains to the uranium players there?

GM: Well, Australia is interesting. It has the world's largest accumulated known uranium resources and the largest uranium deposit—Olympic Dam. At the moment, Australia's federal government allows uranium mining, and other regulations basically filter down state by state. Western Australia is now open to uranium mining. South Australia has an active uranium mining history, as does the Northern Territory. The more recent super-tax proposal, which the Labour Party put forward, created an uncertainty in terms of the value of both current and future mining projects. Julia Gillard, the new Prime Minister, has made motions toward the industry in terms of coming forward and talking about possible modifications to the mining taxation rules. For the time being, it's hard telling how ultimately this will break down.

TER: Your research talks about some sector outperformers among the conventional explorers. You've mentioned Energy Fuels Inc. (EFRFF.PK), Mega Uranium Ltd. and Strateco Resources Inc. Please update us on those companies.

GM: They provide investors with exposure to uranium in different jurisdictions. For example, Mega has the Lake Maitland project in Western Australia, which is opening up for uranium mining and where a significant proportion of Mega's assets are located. The company has good partners in a Japanese consortium, which owns about 35% of the asset at Lake Maitland. Mega provides people with exposure to a near-term uranium producer that has a significant support base in terms of these partners. I think that's one of the more favorable new projects in Australia. We anticipate production maybe in 2013. It would be a lower-cost producer, probably in the high $20s in terms of USD per pound of production.

TER: How much would Mega produce annually at Lake Maitland?

GM: We're looking at about 1.65 million pounds; it's small-scale production. It's basically a thin layer at surface that doesn't require conventional mining. It's unconsolidated mud effectively, so 1.65 million pounds a year for the life of the project.

TER: Does Mega have any other projects in Australia?

GM: Lake Maitland is their primary project. Their second main asset in Australia is Ben Lomond, up in far northern Queensland, just outside the city of Townsville. It's a modest-grade deposit; it's got potential. They've got a bunch of other exploration plays around the world, particularly in Canada.

TER: What's your target price on Mega?

GM: $0.80.

TER: Before we go further, could you give us an overview of cash costs—low, medium and high—in terms of uranium production?

GM: Sure. Certainly low cash costs now would be below around $25 a pound. Medium would be upper $20s and $30s. High costs are $40s and above.

TER: Okay. What can you tell us about Strateco?

GM: Matoush is a very nice deposit in Québec; very handsome grades, close to 0.6% U3O8. It has a resource of about 20 million pounds of uranium U3O8—small, but higher grade. Our interpretation is that Matoush is the most advanced project for a development-stage company in Canada. Strateco has a big program going at the moment —another 60,000 meters of drilling this year to look for extensions of mineralization, and another 60,000 meters planned for 2011. The orebody is still open. Guy Hébert, the president and CEO, is also working out permitting. We're looking at permits for the project to start underground development for bulk sampling.

TER: How long would it take for them to get the assay results from that bulk sample?

GM: We're looking at a couple of years, probably 2012. They have to develop the underground workings first. The main thing in the interim is the underground development itself, and also the exploration drilling they're doing. It takes time. That's why we think Strateco is ahead of its peers in terms of submitting proposals to the Canadian Nuclear Safety Commission (CNSC) for licensing and permitting approval. Canada is highly regulated, which is a good thing. It's mandated, and these things take time.

TER: Alright, what about the others?

GM: Energy Fuels, that's a uranium-, vanadium-oriented company in Utah and western Colorado. We like them because of the duality of the commodities. In addition to uranium, they have the vanadium, which is an integral component in steel manufacturing. That gives them a bit of a boost. Energy Fuels would be a moderate to higher-cost producer and shares many similarities with Denison Mines Corp. (NYSEMKT:DNN) and its mining and processing operations in the United States.

TER: What are some of their assets?

GM: They have the Piñon Ridge Mill project, permits for which are under review. That process should be complete by early next year. They have a couple of mines that are fully permitted and will be underground mining on the Colorado Plateau. Energy Fuels has the potential to go into production at their Whirlwind Mine, but they don't have a mill there yet.

TER: A recent edition of Haywood Securities' Uranium Weekly gives sector outperform ratings to Paladin Energy Ltd. (OTCPK:PALAF) and Denison. What upsides do you see there?

GM: I favor Paladin simply because they have two conventional open-pit mines in Africa where they're ramping up production. There's one in Namibia, which is the world's fourth largest uranium-producing country. The new mine that they commissioned last year in Malawi is Kayelekera. Paladin's a conventional player with production costs of around $30 a pound; it's a Tier-2 producer at the moment and is looking to expand from there. The company also has development plans in Australia and elsewhere in Africa. They've done quite well—they've proven themselves to be the new player in terms of conventional mining and milling in the uranium sector.

TER: Are they approaching Cameco Corp. (NYSE:CCJ) status?

GM: No, not yet. Cameco is fairly substantial, quite diverse; but Paladin is a Tier 2. There are not many Tier 2 producers out there; they include Uranium One Inc. (OTC:SXRZF), Paladin and Denison in that fold.

TER: Tell us about Denison.

GM: Denison is basically a North American uranium producer and also produces vanadium from its Utah operations. It's a higher-cost producer, and certainly the leveraged play in the space. Denison has basically reconstituted itself over the last year and a half in terms of raising equity to minimize long-term debt. They've also brought in KEPCO as a partner—Korea Electric Power Company (NYSE:KEP). Basically, Denison is slowly ramping up its production in the U.S. They've cut down a few of the higher-cost producing mines to be more prudent in their mining and producing operations. For example, they have a partnership with AREVA at the McClean Lake facility in Canada, which is probably going on care and maintenance in July.

TER: Why is that?

GM: AREVA operates that, so it's largely their decision. . .probably looking toward future prices to see when it comes back onstream. Denison also produces vanadium, and they have a very exciting discovery in the Athabasca Basin—the Phoenix Zone in the Wheeler River joint venture. Phoenix has had some outstanding drill results over the last year. They're aiming to get a resource estimate out on that by the end of 2010. Quite an exceptional discovery, I think.

TER: In that same issue of Uranium Weekly, you talk about some in-situ miners. Among your sector outperformers are Uranium Energy Corp. (NYSEMKT:UEC), Ur-Energy (NYSEMKT:URG) and Uranerz Energy Corporation (NYSEMKT:URZ). Tell us about those.

GM: Uranium Energy, Ur-Energy and Uranerz are all in the U.S., all looking at in-situ uranium recovery—so no physical mining, all sandstone-hosted. We see near-term production out of all three of the companies. That's this year for Uranium Energy, probably next year for Ur-Energy and late 2011, early 2012 for Uranerz.

TER: This year for Uranium Energy?

GM: Yes. We're looking at Uranium Energy entering production in October from their Hobson plant and mining from their well fields at Palangana—both in Texas; so, with this timeline, it will effectively be the world's next uranium producing company. It's quite an exciting development for the space and the company. They have another project, Goliad, which could potentially add to their production and should get its final permitting by the end of this year. We like Uranium Energy's lower-cost production base. They're not large but their cash costs are probably around $22, so quite good there. Production scale potentially 1M–2M pounds annually.

TER: Has the share price moved in anticipation of production?

GM: No, not as yet.

TER: Given that its pending production profile hasn't been taken into account, might it be a good buying opportunity?

GM: We certainly like them. Our target there is $3.90. They're trading at around $2.40, so we think that offers a good opportunity. They have a number of catalysts going forward and a big exploration plan around their existing resources. They will update their resource estimate in September; production in October. We're looking at getting a second well field project 'Goliad' permitted by the end of the year. A third project called, Seager-Salvo, could have an initial resource estimate by year-end, as well.

TER: What about Ur-Energy?

GM: Ur-Energy and Uranerz are good peer companies. They're both in Wyoming, and both submitted applications to go into mining around the end of 2007, beginning of 2008. We're looking at production next year for Ur-Energy and early 2012 for Uranerz. Let's go through Ur-Energy. They've got a very good cash position and have the Lost Creek and Lost Soldier deposits. They've been operating from Lost Creek first—they're looking at development there. We're looking at the Nuclear Regulatory Commission (NRC) ultimately providing final permits and licenses to go into production in the second half of this year. It's the same for Uranerz. We're looking at probably starting to build at the end of this year, beginning of next year. Lower-cost producer, small scale.

TER: Let's go back to what's happening in Africa. Haywood's research would seem to agree that Africa has a number of promising uranium explorers and developers. Could you talk about some of the juniors Haywood thinks are poised for significant share appreciation?

GM: Africa is blossoming as a region for uranium discovery. Mantra Resources Ltd. (OTC:MNRZF) and Extract Resources Ltd. have made some genuine new discoveries there over the last year or two. I think the best thing about Africa is the probability of making discoveries that are more easily exploitable in terms of being at or near surface, so they're amenable to open-pit mining. Mantra has an exceptional deposit, the Mkuju River Project in Tanzania. I think the company published its first resource estimate at the beginning of last year. . .more than doubled it within a year and still has the potential to increase that resource. They're looking at production in the second half of 2012. That's a very quick timeline to production. They're still looking at increasing the capacity from their plant and milling operation. We're looking at a modest cash cost of about $25 a pound. Mantra has a lot of positives going forward.

Extract made an outstanding discovery at Rossing South in Namibia. This is 6 km. south of the existing Rossing Mine that Rio Tinto Ltd. (RTP) operates. They have close to 300 million pounds of defined resources, which they identified in rapid time. Their resources are significantly higher grade than the existing Rossing operation and they're looking at expanding on that. It's a world-class discovery, a fact that their share price has reflected over the last 18 months.

TER: That's great. Any others?

GM: Bannerman Resources Ltd. has done a lot of work in terms of defining the Etango deposit, which has about 160+ million pounds of uranium. It's tens of kilometers away from Extract's Rossing South. They're all very close together, and all alaskite-hosted. That means the mining and processing techniques are well known and understood given the long history of mining at the Rossing Mine.

The Etango deposit is defined over 6 km. of strike length. It crops out—it's at surface and shallow. Bannerman doesn't have the grade that Extract has, so they're a more leveraged play in the space; but we still like Bannerman in terms of a large strategic resource. We're looking at cost of production in the high $30s or maybe $40 a pound.

The big thing there is that they should get their ultimate mining license over the next few months, so they'll be one of only three operations to have licenses to go into production. The big players are looking for resources with potential for large-scale production in areas that allow uranium mining. And that's where Bannerman, Extract and Mantra all come out quite well.

TER: Thank you, Geordie, for updating us on all of these exciting developments.

Dr. Geordie Mark, a research analyst with Haywood Securities, focuses principally on uranium companies involved in exploration, development and production. He joined Haywood Securities from the junior exploration sector, where he was vice president of exploration for Cash Minerals, which concentrated on uranium and iron oxide-copper-gold targets across Canada. Immediately prior to joining the exploration industry full-time, Dr. Mark lectured in economic geology at Monash University, Australia and served as an industry consultant. He completed his Ph.D. in geology in 1998 at James Cook University's Economic Geology Research Unit in Australia, specializing in aqueous geochemistry and igneous petrology applied to ore-forming systems.