Cecil Musgrave: Uranium Is Environmentally Sound, Safe And Undervalued

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Includes: URA
by: Palisade Radio

Summary

The number of reactors is set to double over the next decade.

Reactors have high capital costs but very long lives.

The ultimate run is an uranium run.

Very high head room in the cost of fuel.

Cecil Musgrave informs us it is possible to make long-term projections in the uranium sector. He is a big proponent of nuclear energy for environmental and safety reasons.

Uranium is incredibly cost effective as fuel, the cost of the fuel is trivial compared to the capital and running costs of the plant. Contrary to popular belief there are more reactors open today than before Fukishima. The number of reactors will double in the next decade while the supply of uranium is dropping, though sentiment is still negative. He also gives us a detailed analysis of the top uranium energy companies.

Palisade Radio Host, Collin Kettell: Welcome back to another episode of Palisade Radio. This is your host Collin Kettell. Returning on the show with us today is Cecil Musgrave. He is the publisher of Investors Guru. Many of our listeners might remember we had Cecil on just a few months ago talking about his favorite gold stocks and so far this year has been very interesting. We let off on our last conversation saying that we would have a follow up on uranium and so that is what we are here to do today. Cecil, welcome back on the show.

Publisher of Investors Guru, Cecil Musgrave: Hi Collin. Thanks for having me. Happy New Year!

CK: Happy New Year to you, too. The beginning of the year, this first trading week, has certainly been very interesting. It seems to indicate that something different will happen this year. I am not quite sure what that will be yet, but we are here to talk about uranium today. Uranium is a sector that is always of particular interest to me. It is a very niche sector. It is small and there are very few companies that investors have to choose from so that when things start to move they really get exciting quickly. I remember a couple years back that when uranium stocks were moving that Denison (NYSEMKT:DNN), as an example, would go up 10 or 20% a day for day after day. That is really the only kind of movement that you see in a small sector like uranium. Cecil, I just want to get a broad overview of what you see going on in the sector today.

CM: Uranium is a funny metal. I started following in closely about a few years ago, I would say mid-2010, because you look for uptrends and then you want to find out what is behind it. Uranium is kind of backwards in that you see a lot of visibility in the short or the near term, but you really are not sure whether that growth trend, whether it is a tech stock or a biotech or whatever, is it going to be there ten or twenty years from now? Uber (Private:UBER) looks fantastic right now. But can you see past a couple years in Uber? It is hard to say.

Uranium is kind of the opposite in that the long term seems dead on. I mean there is a growth projector in uranium. I have never seen a business industry that seems so certain probably three, four, five, ten, twenty years from now. It is the short term that has been cloudy and remains cloudy since Fukushima. Let us go into that a little bit and try and clear it up a bit because I can start with the fundamentals of uranium.

Majority of uranium is used in nuclear reactors. I am a big proponent of nuclear power, nuclear energy because it is efficient, it is clean for the environment, does not produce any CO2. Most people do not realize this but it is actually safer than even renewables and it is the most efficient type of power that we have. Now I am also for renewables, do not get me wrong. I mean where you can put in a hydro-electric dam, where you can do wind, solar, you should do that. But when the wind is not blowing and the sun is not shining, you need reliable base load power and nothing beats uranium for that. When the natural gas pipelines were freezing in the states and natural gas spiked a few years ago, the only thing that prevented more blackouts were the nuclear power plants we are running at full capacity without a hitch. I like uranium.

Let me give you another example. A typical power plant that powers, say, a million people in the states might use something like 40,000 barrels of oil a day. Now even with oil down to under $40 a barrel, you are talking $1.5 million in fuel to power those million homes. The same thing might require 9 tons of coal which would be approximately $400,000 a day in today's prices, and somewhere in between there and that million and a half of oil would be natural gas. Compare that to the cost of uranium. We are talking seven pounds at a price right now of around $35 a pound. For under 250 bucks, you have got the equivalent amount of fuel as would a million and a half in oil and $400,000 in coal.

But one thing I like about uranium is if uranium goes back to where it was in 2007, which is $137 a pound, it really does not make a big difference to the power utilities. It is material but it is only about 15% of their operating costs. The big costs are their operating costs and their capital cost, not their fuel costs. I like that about the industry. Then you got to look at the numbers and see. A lot of people say, "Well, maybe uranium, they are not opening many nuclear power plants." Wrong! There are many more power plants today than there were before Fukushima. China is the big driver. I mean China has somewhere over 200 reactors compared to the US right now with around 99. Even Japan is restarting their reactors around June or July. Sunday, 1 and 2, started in Japan. There have been a few others.

It has taken a lot longer than I had expected, but they are starting to come online, and instead of underfeeding their reactors, which actually produces more uranium, that is going to reverse and they are going to be consuming more uranium. Then, of course, with the additional Chinese reactors and other countries, even Saudi Arabia and the United Arab Emirates are building reactors. India is building more reactors so that worldwide, like as of January, there were 439 operable reactors with 66 under construction and 158 on order or planned and 330 proposed. We are going to double the number of nuclear reactors worldwide within the next twenty years. It is starting to come on now and it is going to accelerate going into 2020. The demand for uranium is going to grow. I think I saw a report recently where at a 6% annualized rate for uranium consumption at the same time when the supply is dropping.

The US had an agreement with Russia, the Megatons to Megawatts supply agreement we saw twenty years. It ended in 2013. The US only produces something like five million pounds out of the fifty million pounds that they consume annually. I don't know if you've noticed but our relationship with Russia is not so good so they are going to depend more on Canadian uranium and growing their own production because they still have close to a hundred reactors right now.

I like it short term. I like it long term. Sentiment is still negative and these stocks have just been trashed. But if you look back at the charts on the uranium price, you will see how when they spike, they spike. I have been wrong. I really thought 2014 was going to be the turnaround year for uranium. This was based on Abe getting elected in Japan, and I felt that they would turn and restart their reactors more rapidly and more of them would be online by now. That has not happened. It has taken longer than expected.

The power utilities, the nuclear utilities, there are two prices for uranium. There is a spot price, which is currently around $35, and then there is the longer term price. I have not looked at it recently, but I am guessing it is probably $45 to $50. Typically, a power utility will want to secure their supply and they will be buying in both markets, but they will want to buy in the longer term market to secure that supply out years. Recently, a lot of them have been just buying in the spot market because it is available. There has been an oversupply and that should go into deficit in the next few years, within the next few years. On the first sign of that, it is going to be like a herd of elephants going through a keyhole because these utilities are going to need to secure their supply, and you will have a rush into the spot price and into the long-term price. At least that is what I believe.

Now I have been waiting for it for a while and 2014 is when I figured the bottom would happen and it did happen. The summer of 2014, the price bottomed out at $28 and started moving up that fall and it has just been there. Went up to $42 thereabout and now it is back to $35, but it has been kind of going sideways, even with oil coming down from $100 a barrel to about the same price. It seems like there is a correlation between all energy prices and even oil and energy, but there should not be. I mean if you have a coal fire plant, maybe you can switch it to natural gas or to oil or some other method. But a nuclear power plant is stuck with uranium, and like I said, it is only 15% of their cost so they are not going to want to switch to fuel in any way. But the incentives for these miners to produce more uranium even as the demand goes up and these utilities start switching from buying in the spot market to the longer term market and you see that spike again, if that is what happens as it has in the past, that supply cannot just come on stream overnight. It takes even longer than for gold or any other type of mining because uranium is the most highly regulated form of mining there is.

I remember reading a few years ago about BHP's (NYSE:BHP) Olympic Dam project in Australia, which is one of the largest suppliers of uranium in the world. They cancelled their expansion plans and they were cutting back and there has been mines closing up. It is going to take years before they come back online and that is after they make a decision, which I do not believe they are going to make until the price is probably north to $75 to $80 a pound, a lot of analysts are predicting because it does not make sense. You could get a quick run. It could be far and it could last long. Longer term, I like it. It's just, is it going to happen now, six months from now or a year from now? I am kind of nibbling on the dips and there are very few companies to choose from. There is really only a handful.

CK: Yeah, well, let us get to that in just a second. Just to recap your point, you just laid out a great fundamental reason why uranium is going to be a great place to be over the coming years. One thing that took me a little while to understand years back when I first looked at uranium, you touched on a bit there. You said the operating cost, even when the price is at a decent price for uranium, the operating cost for utilities is relatively low as opposed to oil or coal wherein the oil price goes up double, where your energy prices are going to probably go up by something close to double. I have heard, and I am not sure if this number is correct, but from the inception of building a nuclear power plant, the actual cost to fuel over the life of the nuclear power plant is close to just a couple percent.

The pressures of the price going up is not really a concern for people to stop using utilities to stop buying and people to stop powering with nuclear power. That is really a unique situation that can only be found with nuclear. I will let you touch on that but I also, as time is limited, want to start leading into what places you are looking, what kind of stocks you are looking for investors to get involved in that they can get this upside?

CM: Yeah, I guess the point I was trying to make is that like an average reactor you are looking at $8 billion versus hundreds of millions to build maybe coal fired or natural gas, so the capital costs are not as onerous, but the fuel costs, as I mentioned earlier, are much higher. The fuel cost is a percentage of the total project. Now it all translates into your power costs, but those capital costs are amortized over, say, forty years. If the fuel cost goes from $35 to $135, you may not see any increase in your power bill because it is such a small percentage of the overall cost. The other cost had been amortized and they were worked in so it is hard to make the initial decision to come up with that $8 billion.

I guess the point that I am trying to make is that nuclear power plants are amortized over like forty years. Once the decision is made, once they have the ability to raise the $8 billion to build a nuclear power plant, your cost should be stable because even if uranium goes from $35 a pound to $135 a pound, it represents such a small percentage. Do not hold me to that 15%; it may be a little less or a little more depending on the plant. But the point is that just because the price has quadrupled does not mean your power bill is going to quadruple. You may not see any change at all, whereas if you are talking natural gas or coal, and your input costs double, you are going to see your power bill shoot up and we have seen some of that.

That is another advantage of nuclear power in the long term. It is a stable, base load power. The birds like it because there is no windmill, no turbines turning. It is steam coming out of those stacks. It is not smoke and there is no CO2 going in the atmosphere and it is reliable. You wanted me to mention a few different companies right now?

CK: Yeah, so let us start with kind of your three or four favorite companies and go from there.

CM: Well, I guess you've got to start with Cameco (NYSE:CCJ). They are the largest producer, the largest publicly traded uranium company in the world. That is CCJ on New York and CCO on TSX. The things I like about Cameco is they are focused on the Athabasca Basin. They have the largest resources of any uranium company, especially in the Athabasca Basin. They are still on track but need to do their 18 by 18 - 18,000,000 pounds by 2018. I think they just put on a report that said that Cigar Lake is one of, if not, the highest grade uranium mine in the world. I think their largest is their McArthur River. But it is coming on strong and should produce 16 million pounds per year as long as they can get the permission to expand the production at their plant, at their mill. They own 50% of that.

They are in plays all around the world, I mean Athabasca Basin play has but a 2.5%, 3% dividend yield right now. It is now showing positive earnings on my screen. It was in the negative there for a while. They are one of the lowest cost producers in the world. They are also in the uranium marketing and they are in I think five different continents. They are the go-to uranium play and the stock is at probably a 10-year low right now. It is breaking lows as we speak at around $11 on the US side, on CCJ.

There is one thing that I do not like about Cameco right now is this tax liability that they have and I am trying to get a handle on it. I have seen analysts' reports where they are saying that they think it is already in the stock, but there are some big numbers and it has to do with their European marketing where they are selling their uranium through there and the Canadian government wants taxes on that. I think the IRS is involved now, too, with basically the same argument. The numbers are like in the hundreds of millions to over billion dollars. I am trying to get a handle on it. I do not know if the market has fully factored that in. I do not know what the implications are. It looks like another year and a half, two years, before it is ever going to be resolved.

I guess the way I am trading it is I do not own any right now. I would like to own a little bit. The stock has been a great trading stock over the last year. It will drop a couple bucks. It will make a new low by about 5%, and then it will run up a couple bucks. Cameco I am actually going to trade in a little bit. Every time it comes down, breaks its old low, goes 5% lower, I am probably going to step in and buy a little bit. When it runs up a couple dollars, I will probably sell it and hold on to a little bit for when it does finally make the turn because, fundamentally, I like the company. It was $50 a few years ago and now it is sitting around $15 CAD. That is the big one. That is the one that has the liquidity that institutions look at. It is safer, bigger....

Then I am also looking at some of the juniors. I am looking at Energy Fuels which is UUUU on the NYSE MKT, EFR on Toronto. I am looking at Fission Uranium, FCU on Toronto; OTCQX:FCUUF, I think, on the OTCQX, and Denison, which is DNN on the NYSE MKT and DML in Toronto. I have liked all three for a while. I own a little bit of Energy Fuels by way of I was an investor in Uranerz Energy (NYSEMKT:URZ) which sponsored on our site and were one of our features since 2010. I have actually learned a lot more about the uranium industry because of contacts with the company and learning about the ISR process and their plays.

Energy Fuels, the thing I like about them is they have one of, if not, the largest uranium research in the US right now. They have the only operating conventional mill in the US. They are positioned. They have a lot of resources. They can develop quickly if the price goes higher. In the meantime, they have some production, and in addition, by buying, merging with Uranerz Energy mid last year, they got hold of their Powder River Basin assets; their Nichols Ranch project, which is a low-cost ISR operation, which can help them produce additional ounces at low costs to feed in Energy Fuels' sales contracts which are at a premium. They are at like $55 or $60 a pound versus the spot price at $35. They can use that production to help them meet those premium sales contracts in addition to their own production.

Energy Fuels has a lot of inventory right now that they can turn into cash and they have got a pretty clean balance sheet. I like the news that they just put out like a week ago that their insiders had bought over a million shares of the company, has not performed that well over the last year like every other uranium stock. Maybe there is an opportunity there looking out short term, near term, mid-term. You got to pick your points. This is a good time. January to May, for all mining, is typically the best time of the year to trade mining stocks, and then like I said longer term. You do not want to be caught out if we do get one of those big uranium spikes that I mentioned. You want me to just go on to the next one?

CK: Yes, let's keep moving. We still have a couple you call them juniors, but more of the sizeable juniors. I know you have some information on those.

CM: Okay. Well, I will move on to Fission. Fission has been on my top 30 stock list since 2012, I think, at around a quarter, and then it spun up. It was called Fission Energy then and spun up to a little over a dollar when Denison bought them out. This was for their eastern Athabasca assets. I think it was Waterbury Lake. You got some Denison shares and then they spun out the new shares which became today's Fission Uranium that focused on the Patterson Lake South deposit which has right now their PEA, I think last year on the resource report shows they have over 105 million pounds. They have done a lot of drilling since then so that will probably be revised this year. They have a big drill program going on over this winter. That is typically when they move, it is over the winter when they are doing all the drilling.

The stock is weak right now. The shareholders' equity, the stock came down right to the shareholders' equity value which was around 55, 60 cents last fall and just spun up recently on a Chinese investment at 85 cents a share. The stock you will see has gone straight up. I think it could actually pull back a little bit before maybe it makes another leg up going into their drill programs.

The thing I like about them is they have a very good exploration team. I mean not only did they show up five million pounds but it is the grade, very high grade, very shallow, and that looks like deposit is definitely going to be developed and probably bought out. Now the thing that knocks the stock back from it was like a dollar, $1.10-$1.20 to that 50-cent level was this merger that they were going to do with Denison which is another one of the stocks that I am very interested in. I was happy to buy Denison at over a dollar, but, luckily, for technical reasons, I did not. Now it is down to around 50 cents this year and trading near its shareholders' equity.

These companies, you are not paying premiums. If anything, you are buying them at discounts to what they are showing and there is a lot more than that is reflected in those book values; clean balance sheets on both of the companies. Fission needs to continually raise money because they are doing their exploration. But I think Denison in itself could be an acquisition target at some point. Denison, back in 2007, I think was $15 a share. Now it is 50 cents and much bigger. They have got resources in Africa and all over the place. I have seen some of their transactions and they have been creative. They are picking up companies for cash values with resources and a lot of potential to develop them further. There are not a lot. There is only a handful of uranium stocks.

While I am focused mainly on gold and silver right now or have been since the summer, I do not want to take my eye off uranium because while you have hundreds and hundreds of other resource companies, you really only can count them on one or two hands, the uranium plays that are not government-owned, that are publicly traded, and that have value that you want to invest in. I mentioned Denison. I mentioned Fission. I mentioned Energy Fuels. I also find Kivalliq (OTC:KVLQF) interesting.

CK: Yeah, and like you were just saying, there is really only a handful of quality stocks. I think if you go down to a more speculative position, there might be another 20 or 30 juniors at this point that you could comb through and reasonably say have something actually material in the uranium space.

CM: Correct.

CK: We are going to talk about a couple of them right now. But another thing is we just had an interview a couple weeks ago with David Morgan. He said, "There is no run like a gold run except for a silver run." For me, I think that, really, the ultimate run is really the uranium run and it is for exactly the point that you just outlined - that there are so few outlets for investors to go into. One of them that you are going to mention right now is a company that I am actually going to disclose that I am invested in, Kivalliq, and I want you to tell us a little bit about that.

CM: Sure. I am not invested in Kivalliq but I am watching it now. I watched it a few years ago but kind of lost track. Recently, I talked to them to get updated. They are focused in Nunnavit in the northern territories of Canada. They have I think around 43 million pounds of 43-101. It is a district-scale potential uranium and some of the highest grades outside of the Athabasca Basin. The company has no debt, has a market cap of around $20 million which they are showing. I am looking at the balance sheet and it says that there is a little over $50 million in shareholders' equity. Collin, you might know better than me. Do they have any cash at this point?

CK: Their cash balance is quite low as to be expected at this point in the market.

CM: Of course, yeah. This stock was 75 cents back in 2011. I think it represents a lot of optionality, leveraged too high uranium prices. They are going to need to do more drilling, but I do not know in this market right now. If you want to raise money that might represent dilution to spin your wheels just to raise more pounds at this point. Maybe they need something a little higher grade or whatever to tie it all together to get the market excited again. They have other plays I think in... I do not know if it is northern Saskatchewan in the Athabasca, the Genesis project. I do not know anything about it. I am just getting into the play right now.

But right now I am looking at a company with a market cap that is trading at less than half of what they are showing on the balance sheet for shareholders' equity, like I said with no dash, no debt, trading it under a dime, and waiting for... probably going to be quiet until the uranium price goes up, and when it does, there is a lot of leverage there. That is probably all I should say is, I am just starting to get my teeth into this play and I am watching it; it is on my radar. There are a couple other plays like that, but I do not want a pure exploration play that does not have a theme. I want to have those resources and just for that reason alone, because of the grade, because of the size. If you see uranium prices push into $50, this company should react quite nicely.

CK: Yeah, and you provided a pretty good spectrum there. From institutional, the only real company that exists for institutional interest is Cameco, and then Denison and Fission, of course, have very strong assets that have done decently well in a bad market. Some other ones on the small side for listeners to look at and I do not really know, too, too much about all of them, but U3O8 Corp. (OTCQX:UWEFF) and Plateau Uranium (OTC:PLUUF) both have well in excess of 60 million pounds between their deposits. If you are really interested in the Athabasca Basin, even though there are no pounds included, ALX Uranium (OTCQX:ALXEF), a very small market cap right now.

There are opportunities and it will be interesting, Cecil, to see which ones play out the best. I want to end here asking you a difficult question that hopefully you do not take an excuse to get around. What is the prediction for this year and next? Do you have any indication of when you think these things are going to start going up?

CM: I think you are going to see the usual winter run. A lot of these stocks are probably going to trade anywhere from 25% to 50% higher from now until May. Going into PDAC, a lot of companies schedule their drilling programs and their big announcements to come out around that conference and other mining conferences over the winter. Then you will probably see the usual selloff into June and July and the summer doldrums, and that is another opportunity to get back in. That applies to Cameco as well as the juniors. I mean Cameco is kind of on its own because it has earnings and has production, whereas a lot of the others are just developing. You want to know where I see the price of uranium this time next year?

CK: Yeah, let us start with that. Where do you think it will be a year from now?

CM: Well, my charts tell me it could probably be north of probably $50, $55, but I still do not consider that a spike. I mean when you see a spike you are going to see this thing pop ten bucks in a short period of time. It will pull back a good chunk of that and then start trending higher after that, but you want to be in before that spike. If you look back, the low is $28. It ran up I think around $42, pulled down into the low $30s. It is now around $35. The next move, my guess, would be late summer, August, September.

There is a lot of utility contract buying that goes on and that is what moved it from $28 to $42 in 2014. At that time, my guess is we could see maybe a bump up through $52 thereabouts, $55. But the big push is will the restarts in Japan accelerate? That is another good question. That could move things along. Will the utility buying that I mentioned in the spot market start to accelerate going into 2017? There are a lot of those long-term contracts. They are naked right now. They need that security of supply. They are not going to be able to get all that in the spot market, so that is going into 2017. That is the big spike you could see.

You could always have another Fission-like, Fission Uranium-type discovery that could excite the market for a while, that is possible, or Fission itself. Like I said, they are drilling I think 11,000 meters this winter, if not more. There are a number of events like that. On the negative side, pray there is not another Fukushima-type event. You could have a general selloff in the market going into the US elections next year. I mean we are due for some type of correction. Maybe we are seeing it. This January reminds me a lot of two years ago. I wrote an article at that time talking about the January effect and how it has been a good predictor for how the market is going to do for the whole year.

I am interested to see where the market closes at the end of January as a sort of an indication on how we might do all year round. All stocks are affected by those types of things. But I am still willing to take that risk longer out because I mean I have looked at something like on the uranium participation units on the TSX symbol U and I do not get it. I mean, sure, if the price of uranium doubles, you will double that investment, but you have got no leverage. If you would have bought the mining stocks, you probably would have made five times, ten times your money, so why buy it? It is a parking place I guess.

I guess the way I would trade it is they publish their book values every month, and if you see a deep discount to the price of the uranium, then maybe you want to step in and buy it and then wait till it goes up to value. Why pay the management fee? You cannot hold uranium like you can hold bullion. There is no taking physical when it comes to uranium because it is radioactive. There is no futures market that I know of, and I would not trade futures anyway. You want exposure and leverage to uranium, you have got to buy it at uranium miners. Yeah, oh, boy, you are going to hold me to those numbers, are you not?

CK: Well, thank you for giving us specifics there. Like you said nobody really knows exactly, but the long-term picture is there and I do not think anybody is going to hold you down at least to a month by month numbers.

I really appreciate you coming back on the show, Cecil. I might have to title the interview Everything and Anything About Uranium because that was very comprehensive. We certainly touched on every stock worth knowing. Thanks so much for coming back on the show.

CM: Thank you, Collin

Cecil Musgrave is Investors Guru's Editor-in-Chief. Prior to this Mr. Musgrave worked for bank owned and private brokerage firms. In 1988 he completed the Cdn. Securities Course, and while registered as an investment advisor expanded his licensing by completing the RR Manual Exam, Cdn. Options Course and Cdn. Futures Exam. Mr. Musgrave was also a director of Starpoint Goldfields, a Congo Africa gold and diamonds explorer listed then on the VSE. He has also owned and operated several private businesses, before and after working in the securities industry.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.