Supply & Demand
China plans to build two new nuclear reactors every year for the next 14 years, which would more than triple their annual uranium demand from 3 million pounds currently to over 10 million pounds by 2010. India has also stated its intention to ramp up nuclear capacity, which will double their demand for uranium from 1 million pounds currently to 2 million pounds in 2010 and 4 million pounds by 2020.
We can also add Russia and the United States to the list of countries committed to nuclear energy and needing to secure massive amounts of uranium to keep up with increasing energy demands.
But there is one tiny problem with this increased interest in nuclear power — demand for uranium is already outstripping supply. Total global uranium consumption is currently estimated at 176 million pounds, with less than half of that amount being supplied from uranium mining companies. In other words, new mine supplies are already running about 40% behind demand. That means the majority of demand is being met from inventories that are rapidly depleting. With demand estimates at 212 million pounds per year by 2015, it is clear that there will be severe uranium shortages for at least the next decade. Which of course means much higher prices for uranium and even greater increases in the stock prices of quality uranium miners.
We agree with the analysis provided by Doug Casey and Marin Katusa, who state:
Uranium is still cheap by any measure, including: what the market is willing (and able) to pay, prior highs and supply/demand ratios. Speaking of prior highs, in inflation adjusted terms, the price of uranium has been as much as 70% higher than it is today, a price level we see being taken out in this cycle. During this second phase of the cycle, the uranium price is headed to $100, then $200.
You can read the full article here: Profiting from the Next Phase of the Uranium Bull Market.
Clean Energy Solution
Another factor fueling the uranium craze is concern over global warming. Unlike energy derived from coal and other carbon-based fuels, nuclear energy production emits no greenhouse gas. However, experts are still grappling with a safe and sustainable method of storing or disposing of nuclear waste. While the current solution is not perfect, there is support even amongst members of Greenpeace, with founder Patrick Moore stating that nuclear power offers a “non-greenhouse gas-emitting power source that can effectively replace fossil fuels and satisfy global demand.”
One solution offering promise is using Thorium rather than Uranium in nuclear reactors. Thorium, a close cousin of uranium, is cleaner and safer than current nuclear fuel, and more of it can be extracted from the ground. There is far less dangerous waste and the leftover material is not suitable for weapons use. Speaking of Thorium, we have been researching a company that has been partnering with the U.S. and Russian governments on a new technology to use Thorium to generate power. The stock price is still extremely cheap and could be a home run if the technology comes around. Make sure to subscribe to our articles via the email subscription or RSS, as we plan to profile this company in the near future.
But let’s move on to a company that is sizzling hot at the moment and well-positioned to reap the rewards of higher prices in not only uranium, but gold, silver and base metals as well.
Fronteer Development Group is a diversified mining company focused on creating shareholder value by discovering large new deposits of gold, silver, copper and uranium. Their tag line “The Science of Discovery” is reflective of their concentration on the sweet spot in the mining cycle, which is “the discovery.” This is the point of the cycle that moves the stock price the most and can significantly increase a company’s value, often overnight. We think this is a lucrative area to play and we like the prospects of Fronteer moving forward.
Fronteer has built a core competency in the discovery process and utilizes advanced technology to be able to detect concentrations of mineral deposits from the air. With this bird’s-eye perspective, Fronteer can scan areas that are not easily accessible via ground transportation and determine the feasibility of building the infrastructure necessary to drill and quantify resource estimates. After this initial discovery, Fronteer determines whether to partner with a senior producer, spin-out the asset to unlock value or use their own team for development.
Projects & Properties
Fronteer owns several promising properties, all within politically stable countries. Their largest project, in the Canadian Uranium District of Labrador, is estimated to be worth over $600 million. This deposit recently increased from a historic resource of 18.3 million pounds, to a new Measured and Indicated Resource of 22.2 million pounds with an additional Inferred Resource of 13.4 million pounds. Recent drill results from Jacques Lake and Otter Lake were successful, intersecting uranium mineralization at both locations, resulting in two new uranium discoveries. These assets are 100% owned by Aurora Energy, of which Fronteer owns 47%.
In addition to the Canadian Uranium project, Fronteer controls two drill-ready gold projects in Northwest Turkey with defined resources of over 2 million ounces. The combined resources of the Agi Dagi property include:
217,000 indicated and 1,043,000 inferred ounces of gold 425,000 indicated and 4,697,000 inferred ounces of silver
The second property in Turkey is the Kirazli project (pronounced Ker-As-Li). This property includes a large target area measuring 2 kilometers by 1 kilometer, with a very high-grade gold zone. Fronteer spent the 2005 exploration campaign delineating and expanding this high-grade gold zone and testing other targets on the property. Results have now defined a large gold zone that is approximately 1,000 meters long, 100 meters wide, and averaging 40-60 meters in thickness.
A recently completed resource estimate of the Kirazli gold zone has yielded the following results:
244,000 indicated and 563,000 inferred ounces of gold 1,693,000 indicated and 3,859,000 inferred ounces of silver
Fronteer also continues to expand its gold portfolio in Mexico with the addition of two new discovery-stage projects optioned from Teck Cominco. The San Pedro and Clara projects are located in the western state of Jalisco, approximately 60 kilometers west and southwest of Guadalajara. The projects are 100 kilometers apart and have large gold epithermal systems similar in style to Fronteer’s advanced gold projects in western Turkey.
With the properties mentioned above and a market cap of under $600 million, we believe that Fronteer remains undervalued. We aren’t the only ones with this position, as traders have pushed the stock price up from about $4 to over $10 during the second half of 2006. Naturally, you must be asking: Is the party over?
With the Canadian Uranium project currently valued at over $600 million ($282 million worth owned by Fronteer) and over 2 million defined ounces of gold, we believe Fronteer still has plenty of room to run. Fronteer had been trading in the $8 - $9.50 range for a number of months and will find strong support in this range. Although the recent breakout is a bullish indicator, we believe that the stock price is a bit toppy at these levels and we will wait for an entry point anywhere below $9.50. Both the RSI and MACD indicators are suggesting that Fronteer will need to take a breather. We have set a target price of $16 for 2007. This does not factor any additional discoveries or resource updates, which seem to be occurring on a monthly basis with Fronteer.
Another wild card for Fronteer in the strong possibility that they will be acquired by a larger miner. Specializing in the discovery process makes Fronteer a company that is ripe for acquisition. The majors look for smaller companies that have done the grunt work necessary to find new resources and companies that have verified “pounds in the ground.” Fronteer is a likely takeover target from our perspective, as they have already amassed an impressive array of gold, silver and uranium properties and are continually discovering new resources. These are exactly the conditions that trigger takeovers from larger companies with the infrastructure and experience needed to move projects into production. Fronteer’s stock price could easily reach towards $16 on any such news.
In terms of the overall gold and silver market, we remain optimistic in the medium and long term. Many analysts and commentators are predicting a correction from the recent run, but we think it will be more of a short break than a correction. We are looking for consolidation and downside of no more than 4% over the next month. Given this, it might be prudent to keep some cash on the sideline and watch how things develop. Then again, it isn’t unusual to see the gold bull really start kicking just when the analysts start predicting a bout of profit-taking and correction. Good luck and happy investing!
Disclosure: The author does not currently own stock in Fronteer, but will be looking to purchase on dips below $9.50.