Author's Note: At the time we submitted this for publication, the status in Japan was as follows: CNN was reporting a fourth reactor was on fire and the risk of a meltdown as still substantial. Things may have changed materially by the time of publication and your reading of this article.
Several nuclear power and uranium companies have seen 20% of their market value erased in the wake of the nuclear crisis in Japan escalating over the weekend. We are long term bullish on uranium and nuclear power.
We actually think this Japan crisis will end up being a huge boost to the pro-nuclear energy argument as long as the crisis does not develop into a Chernobyl, a full scale meltdown, etc. The reason we think this is very simple: This earthquake was a 9.0 on the Richter Scale -- the biggest in Japan since records have been kept. We do not have access to what “earthquake-resistant” building codes are, but we feel safe assuming that, when it comes to a 9.0 earthquake, most bets are off.
Basically, Mother Nature just threw everything and the kitchen sink at Japan; the nuclear reactors, while damaged, did not turn into a Chernobyl instantaneously.
With that said, and our best wishes going out to those working on the Fukushima Daiichi, we decided now was a good time to take an in-depth look at the uranium mining space.
We have compiled a list of junior uranium companies through various sources for us to consider. We are not mining experts, as such; we have made this list through a review of sources we have found to be experts in the uranium space: xxx
From the outset we are going to set a couple of ground rules in this analysis:
- We are not going in-depth on Cameco because it is the juggernaut of this list; any uranium bull should own some CCJ regardless of their list of juniors because of the potential of Cigar Lake. Also as a major mining company, Cameco is very easy to research, and this report already runs in excess of 5,000 words.
- If there is no National Instrument 43-101 document or the Australian equivalent, then we are putting the company on the sidelines. We are not geologists (and that is the case for many investors), so we are not going to be buying stocks where independent geologists have not weighed in about the deposit. This is a consistent rule we have when discussing junior mining names publicly.
- We are not putting capital into companies holding flagship deposits in regions where uranium mining is currently banned. We do not wait for politicians. We are willing to invest in companies where there are additional deposits in mining-friendly jurisdictions that are at least at the NI 43-101 level of development.
- We will be taking into account geographical diversity in picking companies. As such, the #3 junior in the United States might get passed over for the #1 junior in Africa.
- We are primarily relative strength investors; as such, we do not view “Uranium Black Monday” as the time to go all-in. We do think the sell-off has created an opportunity for those without uranium exposure or who are underweight to add to their positions. We have at the same time advised those who are overweight uranium to not add to positions and perhaps even trim exposure in the event that Japan disintegrates into a worst case scenario.
We are not sure that uranium stocks have bottomed -- they could very well have another 20-30% to go based on technical analysis -- but for the portions of investing capital set aside for pure fundamental calls, this looks like a compelling long-term opportunity. (In hindsight, does it really matter if your cost basis in Berkshire Hathaway (BRK.A) is $1,000/share or $500/share when shares are today over $100k/share?)
The Big Picture Regarding Uranium & Japan
Japan and Our Take: A 9.0 Richter scale earthquake hit Japan last week with an epicenter less than 100 miles off the east coast near the city of Seido. The ensuing tsunami and damage incurred by both the earthquake and tsunami knocked out the backup generators to the three reactors at the Fukushima nuclear power plant on Japan’s east coast. At this time, engineers are pumping a mixture of seawater and boron into at least one of the reactors in an effort to cool the core and prevent an escalated nuclear incident.
This mixture of seawater and boron effectively terminates the useful life of the core due to its corrosive effects, so engineers have wisely chosen to sacrifice these reactors as future power supply in an effort to prevent dangerous effects to the surrounding area.
The Fukushima I nuclear power plant is over 40 years old; its sister plant, Fukushima II, is 30 years old (from earliest “first criticality”) and did not have difficulty shutting down its reactors. At the time of this writing, Reactors 1, 2, and 3 are in cold shutdown, while Reactor 4 is still being cooled at Fukushima II.
The Richter scale is logarithmic; 6.0 is the cutoff for an earthquake to be considered major. This 9.0 earthquake was 1,000 times as strong as a 6.0 magnitude earthquake and is the strongest earthquake to hit Japan since records started being kept. The highest Richter scale earthquake since records were kept was a 9.5 quake that hit Chile in the 1960s.
This earthquake in many ways is what any of us think of when we hear the terms “act of God” or “mother nature." We have seen increased seismic activity in the Pacific region “Ring of Fire” in the past 12 months – Mother Nature has taken two swings at Christchurch, New Zealand in the past year, with the second quake resulting in a royal commission looking to revamp building codes.
Because of the extremity of the “worst case scenario” when it comes to nuclear power plants, the building codes of those plants must be very strong. But let’s consider the context of how frequently we see an earthquake of this magnitude: Since 1901 there have been only four earthquakes of equal or greater Richter Scale magnitude to the one that occurred in Japan last week.
The reality remains that, in our opinion, there are certain scenarios in the tail end of the probability distribution that you just cannot fully eliminate the chance of occurring, and it’s our impression at this point that what is occurring at Fukushima I nuclear power plant will be identified as the result of events completely out of the hands of humanity – a 9.0 earthquake.
We had a worst case scenario occur with a fossil fuel about 10 months ago, except it was man-caused. This nuclear worst case seems to have been caused effectively by Mother Nature, based on public information.
Uranium’s Black Monday
The best performing uranium during Monday’s uranium stock massacre was Cline Mining Corporation, with a loss of less than 2%, followed by Cameco, which lost only 12.73%. Most of the stocks in our list took a loss of between 17 and 30 percent. Some of the names are very illiquid, though, with very marginal market capitalizations.
Primary sources were corporate presentations
Paladin Energy, Market Cap: $2.9 billion
Paladin is one of the uranium mining companies that stands out even in the great shadow of Cameco. Paladin already has an operating mine in Namibia and a mine in Malawi ramping up production. The company also has several exploration projects at various stages and highlights that it has a total attributable resource inventory of 543.O Mlbs. triuranium octoxide (from this point forward we will simple use “uranium”). Management forecasts Paladin will be producing 13.8 Mlbs per annum by 2015/2016.
In the quarter ending December 2010, Paladin had annualized production of 5.9 Mlbs. uranium at a cost of $33/lb. Paladin says its two operating mines are cash flow positive before working capital.
As a result of Newmont Mining’s (NEM) acquisition of Fronteer Gold (FRG), Newmont will own 6.7% of Paladin.
Denison Mines, Market Cap: $930 million
Dual listed on the Toronto Stock Exchange and NYSE Amex, Denison is primarily a North American uranium mining company with current production in the United States that is fed to the company's Utah White Mesa mill, with very promising Canadian exploration properties. Uranium production in 2011 is forecast to be 1.2 million lbs. at a net cash cost of $43.50/lb uranium after adjusting for Vanadium credits. The strategic growth objective for Denison Mines is to achieve sustainable annual production of 10 million lbs. uranium by 2020. Denison also has a mill in Canada that will benefit from Cameco’s Cigar Lake mine coming online in 2013, according to the corporate presentation.
UEX Corporation, Market Cap: $302.4 million
Spun out of Cameco back in 2002, UEX is primarily focused on uranium exploration properties in the Athabasca Basin in Saskatchewan, Canada. This region is where 20% of the world’s uranium supply is currently mined. Cameco continues to own 22.58% of UEX, according to the February 28, 2011 corporate presentation, and the 2011 budget of $11.2 million can be covered by cash on the balance sheet.
The Shea Creek joint venture owned 49% by UEX has a resource estimate of 88 million lbs. uranium at a 0.30% cut-off that is based on drilling results through the end of 2009 (the resource consists of indicated and inferred resource levels). Shea Creek consists of four deposits along a 3 km stretch.
UEX has 100% ownership of the Hidden Bay group of three deposits that an independent firm has recommended advance to the pre-feasibility stage of development. UEX has already advanced one Hidden Bay deposit, West Bear, to the pre-feasibility stage, the results of which indicated open pit mining was a possibility according to the corporate presentation.
Uranium Energy Corp, Market Cap: $273.4 million
UEC is an American junior uranium company with two properties in Texas with near-term production potential plus several exploration prospects in the Rocky Mountain states. The UEC corporate presentation focuses on the U.S.-specific opportunity and provides us with the following data:
- Current Russia/U.S. HEU agreement expires in 2013; Russia has indicated no desire to extend it.
- This agreement supplies 13% of world or 45% of U.S. annual uranium needs.
- Current blending HEU to commercial grade fuel is expected to exceed new mine production costs.
- The U.S. has globally the fourth largest recoverable resources of uranium.
- The U.S. consumes 55 million lbs of uranium per year to generate 20% of electricity, while only producing 4 million lbs per annum.
With regard to UEC's flagship South Texas project, the Texas Commission on Environmental Quality issues all required mining permits. The company has an ISR processing plant at Hobson and its Palangana ISR project 100 miles south of the Hobson processing plant is currently producing. This project has a N43-101 compliant resource of 2.2 million lbs.
The company's Goliad ISR project is expected to start production in the fourth quarter of 2011 and has a N43-101 compliant resource 6.9 million lbs. (indicated + inferred).
After starting production at Palangana in late 2010, UEC has inventoried 21,000 lbs of uranium concentrate it has stockpiled for future sale on the spot market as of January 31, 2011. The cast cost of production was approximately $18/lb.
Rockgate Capital, Market Cap: $219 million
Rockgate Capital’s flagship deposit is its 100% owned Falea uranium/silver/copper deposit in Mali. The most recent resource calculation puts the size of this resource at 27.7 million lbs. of uranium, 40.5 million ounces of silver, and 55 million pounds of copper. The deposit hosts uranium grades of up to 6.45%, which the corporate presentation claims is similar to those found in the Athabasca Basin. The deposits total uranium grade is 0.125% for the indicated resources and 0.095% for the inferred resources.
A scoping study is currently underway on the Falea deposit.
Pinetree Capital (PNPFF.PK) as of December 31 owned approximately 7% of Rockgate Capital.
Uranez Energy Corporation, Market Cap: $205.5 million
URZ is very similar to UEC as it is focused on producing uranium in the United States via the ISR method in Wyoming. The company hopes to have first production in first half 2012 and has $47 million in cash currently. URZ has already signed long-term off-take contracts with two major U.S.-based nuclear operators.
The corporate presentation focuses on the merits of this ISR uranium mining technique, highlighting the low operating costs and capex. The proposed Nichols Ranch plant will have a maximum annual production of two million pounds of uranium.
The preliminary economic assessment of the Nichols Ranch ISR Project in 2008 suggested a production life of 5.25 years with capital costs of $35 million. Including taxes and royalties, the operating costs would come to $35/lb. The IRR on the project was 56%, assuming a market price of $64/lb. for uranium.
The primary near-term catalyst is the start of mine construction in the first half of 2011. The one thing that stands out about Wyoming ISR uranium production is the presence of Cameco and Uranium One, which have already established production in the Powder River Basin using the ISR method.
Uranium Resources, Market Cap: $161.90 million
Unlike its fellow U.S. junior uranium companies UEC and URZ, URRE has both ISR and conventional method projects in its portfolio of properties. These properties are located in both New Mexico and South Texas (the same region as UEC's South Texas operations). URRE has a total resource of 101.7 million lbs. of uranium.
URRE expects to have a feasibility study completed by the end of 2011 on its New Mexico properties. We did not find a proposed start of production date in the corporate presentation.
Mega Uranium, Market Cap: $138 million
The CEO of Mega Uranium is also the CEO of Pinetree Capital, a major investor in junior mining companies, including several junior uranium companies. Mega has properties in Australia, Canada, and Cameroon. The flagship property for Mega is the Lake Maitland deposit in Western Australia that it is looking to bring into production during 2013. The company also has the Ben Lomond deposit in Queensland, but Queensland currently bans uranium mining and it is our opinion that will not change in the near to medium term.
The company has several Canadian exploration prospects, but the primary focus and driver for the company is the development of the Lake Maitland project. A definitive feasibility study is expected to be released in the first half of 2011 on the project. If the results are positive, the outlined plan is to commence construction in 2012 with an eye to starting production in 2013. The project has been joint ventured with JAURD and ITOCHU in exchange for capital to help fund the development of the deposit which suggests to us that Japan has the potential to be a destination for Lake Maitland’s product.
Mega also has an extensive portfolio of minority investments in other junior uranium miners.
Laramide Resources, Market Cap: $126.40 million
Laramide Resources has three main deposits, two of which are in the United States and one in Australia. The most impressive of these three deposits in the one in Australia with a possible production date of 2015. Unfortunately, the deposit in question is in Queensland (discussed above).
On the value drivers slide of the corporate presentation, the first bullet was “Political Change in Queensland,” which is very telling about what drives the future long term value of Laramide.
Fission Energy, Market Cap: $77.90 million
Fission Energy has exploration properties in the Athabasca Basin plus an NI 43-101 compliant deposit in Quebec. The company also has an exploration property in Peru.
The primary focus of the company seems to be its Athabasca Basin projects; the corporate presentation highlights that as of March 1 the company had $20 million in cash, which represents a substantial portion of the market capitalization.
Mawson Resources, Market Cap: $65.10 million
Mawson is a junior miner of Scandinavian uranium deposits in both Sweden and Finland, plus a copper gold prospect in Peru. This is not a pure uranium play, which is both a positive and negative depending upon what you are looking for (pure uranium exposure or a little diversification).
The big ticket deposit here -- which is very early in the development process -- is the Rompas deposit in Finland, where over a 6km strike where “bonanza grades” have been found, suggesting a potentially world class Au + U system.
That being said, there is no NI 43-101 document on Rompas, though it does appear one is coming in the near term. Pinetree Capital owns approximately 6.79%; we have great respect for the Pinetree team, so this does look interesting to us.
U308 Corp, Market Cap: $56 million
U308 has several South American exploration prospects, including one with an NI 43-101 compliant resource; the corporate presentation indicates that some of the other prospects could receive a NI 43-101 document in the near term.
Management is looking to expand its Kurupung Project in Guyana which is currently NI 43-101 compliant for 7 million lbs. up to over 20 million lbs.
Titan Uranium, Market Cap: $46.6 million
The flagship project for Titan Uranium is its Sheep Mountain project in Wyoming. The deposit was mined from 1956 to 1988 and a new resource estimate puts the deposit at over 30 million lbs of uranium.
The preliminary economic assessment suggests capex of $118 million and average operating costs of $28.67/lb. with a pre-tax IRR of 25% and Net Present Value pre-tax of $101 million with a 7% discount rate assuming $60/lb. price of uranium. Annual production rate would be 1.5 million lbs.
An updated pre-feasibility study will be released in the second half of 2011, with a proposed production start date of late 2013.
Titan also has Canadian exploration projects in the prolific Athabasca Basin.
Pinetree Capital and Mega Uranium own 21.5% of Titan Uranium. Sheldon Iwentash (Pinetree & Mega) and Richard Patricio (Mega) are both on the board.
Tournigan Energy, Market Cap: $38.80 million
Tournigan is a junior uranium company with the Kuriskova flagship deposit in Slovakia. The corporate presentation describes Kuriskova as a high-grade underground resource with a preliminary economic assessment (PEA) completed in June 2009 and the resource was updated in March 2010. Kuriskova has indicated resource of 20.5 million lbs. uranium and an inferred resource of 17.5 million lbs. with a cutoff of 0.05% U. The June 2009 preliminary economic assessment came to the following conclusions given an assumed price for uranium of $65/lb.:
- Average life of mine operating costs of $32/lb. triuranium oxide including molybdenum credits at $12.50/lb.
- Initial capex of $168 million.
- Royalty payment of $3/lb.
- IRR of 35.8%.
- Net Present Value Pre-tax of $135 million at 12% discount rate.
- 4.5 year construction period.
- At 12% discount rare and uranium price of $55/lb. the NPV pre-tax would be $65.5 million.
The catalysts in 2011 are a pre-feasibility study and environmental analysis, with a feasibility study and permitting discussions to take place in 2012. We also note that Pinetree Capital, Mega Uranium, and Sheldon Iwentash (CEO of Pinteree and Mega) controls over 18% of Tournigan.
Southern Andes Energy, Market Cap: $37.7 million
Southern Andes is a very early stage junior uranium exploration company with significant land holdings in Peru, spinning out its NI 43-101 compliant silver deposit assets into a new company to focus on uranium. While several of the prospects sound interesting, none of them are NI 43-101 compliant at this time.
Pinetree Capital owns 18% of Southern Andes Energy if it chose to exercise all its warrants.
Virginia Energy Resources, Market Cap: $36 million
Virginia Energy holds the Coles Hill deposit in Virginia which is 43-101 compliant, is the seventh-largest undeveloped deposit in the world and the 13th-richest undeveloped deposit in the world. Based on the preliminary economic assessment completed in October 2010, the deposit has a Net Present Value of $404 million with a 7% discount rate with every $5 change in the price of uranium. Virginia Energy has 30% ownership of this project.
Like many other juniors in the list we researched, VAERF has exploration prospects in the Athabasca Basin. The prospects consist of nine properties both wholly owned and in joint ventures with Denison (see above) and Forum (see below). VAERF also has prospects in Otish Basin, Quebec and is seeking a JV to fund a drilling program at six high grade uranium targets.
The main story, however, is the Coles Hill deposit, which would consist of an underground mining operation requiring $173 million in capex with $30/lb. operating costs in the first decade of production with average operating costs of $36/lb. over the 35-year life of the mine.
The corporate presentation has a compelling graphic highlighting the list of undeveloped deposits by size and, with the exception of Cameco’s Cigar Lake in Athabasca, there is not a single deposit we recognized from this junior uranium research of greater size that Coles Hill. On a grade basis, we recognized Shea Creek owned by UEX as being of a superior grade.
The market capitalization on this stock just was perplexingly low to us, versus other junior uranium mining companies, until we noticed that unfortunately the state of Virginia has a current moratorium on uranium mining.
Pinetree Capital owns approximately 6% of Virginia Energy.
Tigris Uranium, Market Cap: $30.3 million
Tigris Uranium is focused on its New Mexico assets, which include a total indicated resource of over 34 million pounds of uranium (NI 43-101 compliant). The resource is amenable to ISR mining and is close to the processing facility of Uranium Resources. The frequent mentions of the proximity to URRE suggested to us there is hope for a partnership down the road or consolidation of some sort.
Pinetree Capital owns over 10% of Tigris Uranium.
Forum Uranium, Market Cap: $27.3 million
Forum Uranium has no NI 43-101 compliant uranium resources and is in the early exploration stage. It has influential shareholders in Pinetree Capital and Agnico-Eagle Mines (17% together) and is participating in joint ventures with Agnico and Mega Uranium. This suggests to us that if one of the Forum deposits hits it big, there will be companies higher up in the food chain that will look at it with consideration.
Crossland Uranium, Market Cap: $27.10 million
We were unable to find much information on Crossland Uranium; there were no quarterly reports on the company website for any quarter since the one ending March 31, 2010. We did not find evidence that Crossland has either a NI 43-101 compliant or Australian equivalent resource.
There has been no trading in Crossland since early February based on data from our editor’s broker.
JNR Resources, Market Cap: $26.80 million
The most recent corporate presentation on the website of JNR is a little outdated (one slide was titled Summer 2010 Exploration Program, and was talking about what would be done versus showing drill results). To the best that we could determine, JNR Resources does not have a NI 43-101 compliant resource.
Cue Resources, Market Cap: $17 million
Cue Resources is focused on its Yuty Uranium Project in Paraguay that has an indicated resource of 8.3 million lbs. of uranium (NI 43-101 compliant). The primary focus of the company at this point in time is drilling to expand the size of the NI 43-101 compliant resource.
Pinetree Capital owns over 10% of Cue Resources.
Silver Spruce Resources, Market Cap: $14.20 million
Like a couple of companies we come across in the rare earth space, it appears Silver Spruce went looking for uranium in Eastern Canada and stumbled across some higher-than-normal concentrations of rare earths and that appears to now be the primary focus of the company, based on the corporate presentation we viewed on the company website.
Mesa Uranium, Market Cap: $11.5 million
Mesa has a couple of interesting uranium properties in Northern Arizona near historic mines and current mines. However, we did not see in the corporate presentation that it was NI 43-101 compliant. It seems to us that NI 43-101 compliant resources merit at least a $20 million market capitalization based on what we found in our sample of junior uranium companies after we broke below that threshold. According to the corporate presentation of Mesa, Pinetree holds 20% of the company’s shares.
Pacific Bay Minerals, Market Cap: $7.3 million
Pacific Bay has land holdings in the Otish Uranium district in Quebec but no compliant resource. There does appear to be substantial exploratory activity in this region, though. The company also has some exploration prospects in Argentina. Pinetree Capital owns over 10%.
Kirrin Resources, Market Cap: $4.3 million
Of the 34 million fully diluted shares outstanding, Pinetree Capital owned over 8 million at the end of 2010.
Kirrin has five exploration projects in Canada split between uranium and rare earth elements.
The Uranium Long Term Investment Case & Our Picks
The political reaction to Japan’s nuclear crisis has been fierce. Germany has reiterated its intent to reduce its nuclear power output over time, and here in the United States we are reading a lot about if Japan’s crisis is killing the nuclear renaissance before it even really got started.
But you know what nation has actually reiterated its faith in nuclear power? China. And China is the big factor when it comes to the uranium/nuclear power story long term. If China stays the course -- as it plans to at this point -- then we feel comfortable dipping our toes in the water.
We are not advocating an all-in move on uranium – we think there is a possibility that the space cracks an additional 20-40 percent, depending on how Japan turns out. But this is an excellent opportunity to make an initial entry into a space that, like it or not, is currently the most economic alternative to fossil fuels.
Nuclear offers us a very realistic, space-efficient, secure supply of electricity, with uranium deposits prevalent in many politically stable nations.
The obvious counterpoint to this argument is that we can use natural gas, but environmentalists protest the drilling process that is required to produce the shale gas prominent here in the United States. Also, at the end of the day, natural gas is a fossil fuel -- a relatively clean one, but still a fossil fuel.
As a result, we see nuclear and thus uranium as pragmatic long-term components of western world and Asian energy policy (China imports a lot of oil, but there is a reason it is building out nuclear power plants and stockpiling uranium.)
With that in mind, here is the basket of uranium stocks we think investors should consider buying a partial position in to profit from the current mass fear in the uranium space (as a play on nuclear power plant construction we have also included Shaw Group):
- Cameco – the industry juggernaut
- Shaw Group (SHAW) – nuclear power plant builder
- Paladin – current producer, geographically diversified
- Denison – current U.S. producer
- Pinetree Capital –investment group, expertise with junior uranium miners
- UEX Corp – Shea Creek deposit in Canada, Cameco big investor
- Rockgate Capital – promising deposit in Mali
- Mega Uranium – Lake Maitland in Australia, invests in other juniors
- Titan Uranium – Sheep Mt. historical mine, 21.5% owned Mega/Pinetree
- Tournigan Energy – Slovakia/Europe-focused, 18% owned Mega/Pinetree
Give each of these positions 9% allocation of nuclear/uranium investment capital and make small equal purchases of each of these companies (perhaps a third of full position). With the remaining 10% of capital we would give consideration to Mawson Resources and Virginia Energy for the potential of the Rompas gold/uranium deposit and the extremely large Coles Hill deposit, respectively.
If that is a little too risky for your liking, then we would suggest just making your capital allocation 10% each across the 10 stocks above. If Mawson and Virgina Energy interest you as very high risk speculative plays, the capital breakdown is then 9% for each of the 10 stocks above plus 5% each for Mawson and Virginia Energy.
The only reason we are considering making an exception about our politicians rule with regard to Virginia Energy is simple: The deposit is just so big, and it will mean tax revenue, jobs, and secure energy supply. It just makes too much sense to approve that project long-term.
The reason we are making an exception for Mawson is because we think the Rompas grades suggest the potential for gold and uranium mining where the uranium mining is very low cost due to the gold byproduct. First to market only matters when operating costs are similar; low-cost producers win price wars.
To close, we reiterate that we would not go all-in to the uranium/nuclear power investment thesis right now. We think shares can go lower, but for those looking to gain exposure, this is an opportunity to put some capital to work and take advantage of the fear present in this space.
Disclosure: I am long PNPFF.PK
Additional disclosure: I may initiate long positions in any of the stocks mentioned in this article in the next 72 hours.