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  • Rob Chang Spins Yellowcake Into Gold And Gold Into Green

    The long winter of falling uranium prices is about to give way to a Japanese spring. In an interview with The Mining Report, Cantor Fitzgerald's Rob Chang discusses the return of the small producers as an increasingly hungry market looks to eat up all of the available uranium. Plus, Chang likes gold and enlightens us on how gold miners are shaking profits out of slag.

    The Mining Report: After the governor of Japan's Kagoshima Prefecture approved the restart of two reactors at the Sendai Nuclear Power Plant, the daily spot price of uranium jumped $1.40/pound [$1.40/lb] to $39.25/lb. How do you assess this change going forward?

    Rob Chang: The restart news is very positive, although it is happening at a slower pace than we had originally expected. The Japanese utilities are well organized. They are asking to restart the two reactors that are most likely to gain approval. That said, the jump in the spot price reflects the news out of Japan. However, we think that the price change is more a matter of what is going on behind the scenes. Two sellers have stopped selling. A number of utilities have increased their buying. One large utility recently purchased 10 million pounds [10 Mlb].

    TMR: Who stopped selling and who's buying?

    RC: Uranium spot prices are not traded on the public market. These types of transactions are contracted between producers and utilities with the occasional investor or trading house in between. The uranium spot price is not actively speculated upon like gold or copper, nor can the general public get in on the action. The movement in uranium spot pricing is generally based on transactions by entities that are well versed in the intricacies of that market. They probably would not be trading based on just the Japanese news, especially because most of us were already expecting the reactors to restart.

    TMR: Do you think the uranium equities will echo the spot price move?

    RC: Absolutely. Uranium prices have been going up since June, even as uranium equities recently hit a 52-week low. As the uranium spot price moves higher, the dichotomy between the two will increase and we believe uranium equities will need to play catch up.

    TMR: Are the utilities buying long-term uranium contracts?

    RC: I have not heard about many long-term transactions. But the long-term price made a notable upward move of $4/lb to $49/lb. With the uranium spot price nudging the long-term price along, we expect term prices to be pushed higher as the spot price increases.

    TMR: What juniors do you like in the uranium space now?

    RC: Uranerz Energy Corp. (NYSEMKT:URZ) just started production and sales. We look forward to seeing its cost performance. But as we have been pointing out for quite a long time, there is an unavoidable supply deficit approaching. Uranium producers stand to benefit most. Uranerz is well positioned for earning long-term profits.

    TMR: Uranerz's shares were steady at $1.50 during 2013 and spiked to over $2 last March. They then fell to almost $1, and shot up to $1.50 in the last couple of weeks. What was the cause of that spike about a year ago up above $2? Are we looking to pass the newest upsurge?

    RC: Last March, there was a lot of positive sentiment behind uranium. The prevailing analysis was that uranium was set to move this year because of Japanese restarts. Unfortunately, that did not come to pass. There were a lot of delays with the Japanese restarts, and the uranium sentiment turned sour. At that time, Uranerz was receiving final approval and moving to go into production. Passing through that gateway, plus the positive sentiment toward uranium, contributed to the big rise in March. And in early November Uranerz jumped again, due to the re-emergence of positive sentiment on uranium and the fact that Uranerz is now selling yellowcake. Basically, the same thing is happening with the other producers I mentioned.

    We also really like Energy Fuels Inc. (OTC:UUUU). Energy Fuels is holding several mines on standby. It can start two or three of the mines within six months to a year, and within two or three years of a production decision, it can launch an additional half dozen mines. Production scalability is very high. Energy Fuels owns the only conventional mill for processing uranium in the U.S., and that gives the firm a great strategic advantage. Right now, the mill is on standby because of the previous low-price environment. But as the uranium spot price blasts through $44/lb, a nicely leveraged Energy Fuels will soon be able to pump out profits.

    TMR: How important is it for a company to control a mill?

    RC: Ore extracted by open-pit or underground mining needs to be processed by a mill. A mill is a strategic asset-it is very important because any miner that does not have a mill will have to pay Energy Fuels to use its mill. At current uranium prices, conventional mining is not very economic. But at higher prices, there will be a large demand for milling. There are "mom-and-pop" uranium operations throughout the U.S. that will have to pay Energy Fuels to process their yellowcake.

    TRM: What other companies do you like in the U.S. for uranium?

    RC: Uranium Energy Corp. (NYSEMKT:UEC) is similar to Energy Fuels because it's 100% unhedged and fully exposed to the spot market. Once its sales are up and running again, its share prices will sweeten. We are big on the U.S. producers primarily because the U.S. is the No. 1 consumer of uranium at around 55 Mlb/year. But the country only produces around 3-5 Mlb annually. All of these producers stand to benefit from premiums.

    TMR: How did the stocks of the companies that you have mentioned weather the downturn in uranium?

    RC: For most of the past year, they were beaten up. Relative to the recent movement in the price of uranium, many stocks have traveled in a different direction, which does not make sense, but it does make them cheap. That said, the firms I am interested in are starting to recover; some are showing notable strength.

    TMR: Is now a good time to buy uranium stocks at bargain basement prices?

    RC: The bargain basement pricing may have passed. When the uranium spot price was $28/lb and leading the uranium equities downward, we saw a lot of 52-week lows. I doubt that we will see uranium down to $28/lb again. I doubt that it will fall below $35/lb as demand increases.

    TMR: Thanks for the conversation, Rob.

    RC: A pleasure talking to you, Peter.

    This interview was conducted by Peter Byrne of The Mining Report and can be read in its entirety here.

    Cantor Fitzgerald Canada's Senior Analyst and Head of Metals and Mining Rob Chang has covered the metals and mining space for over eight years for the sellside and the buyside. Prior to Cantor, Chang served on the equity research teams at Versant Partners, Octagon Capital and BMO Capital Markets. His buyside experience includes managing $3 billion in assets as a director of research/portfolio manager at Middlefield Capital, where his primary resource portfolio outperformed its direct peer and benchmark by over 28% and 18%, respectively. He was also on a five-person multistrategy hedge fund team, where he specialized in equity and derivative investments. He completed his Master of Business Administration from the University of Toronto's Rotman School of Management.

    Want to read more Mining Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit The Mining Report home page.

    DISCLOSURE:
    1) Peter Byrne conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Uranerz Energy Corp., Energy Fuels Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Rob Chang: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Uranium Energy Corp., Energy Fuels Inc. and Uranerz Energy Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.Streetwise - The Mining Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Mining Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
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    Dec 09 2:45 PM | Link | Comment!
  • Micro-Cap E&Ps With Less Risky Businesses: Casimir's Philip Juskowicz
    Many small-cap exploration and production companies have had a good run in recent years, but are now getting whacked given their strong connections to oil prices. But the news is not all bad: Philip Juskowicz of Casimir Capital makes a good case for certain micro-cap names. In this exclusive interview with The Energy Report, Juskowicz discusses four companies with strong narratives, two with defensive assets, and notes that natural gas names could see market love as margins widen.

    [Editor's note: This article was updated Dec. 8, 2014.]

    The Energy Report: Your expertise is in the exploration and production [E&P] space. Please give our readers some key investable ideas among those names.

    Philip Juskowicz: We've seen a divergence between the micro-cap space and the small-cap space within the oil and gas E&P companies. The micro caps have underperformed substantially versus the small caps over the past couple of years. I attribute that to enthusiasm for shale plays, yet only small-cap companies have the financing necessary to develop those expensive plays. Micro caps missed out on that investor appetite; that's probably why they had underperformed.

    Given the current oil price environment-uncertainty, downward pressure-the first companies to get hit were the ones with strong exposure to oil prices, even if it was just headline exposure. In fact, my research shows a 58% correlation between the small-cap universe and oil prices, whereas the micro-cap space only vaguely correlates to oil prices. Most small caps are going to be hit regardless of what hedges those companies have in place, whereas many micro-cap companies are one-off value plays, and those value plays are still intact. There is a good case for micro-cap stocks here.

    TER: The predominant oil price theory making the rounds is that surging U.S. oil production from old basins and shale plays has reduced America's dependence on imported oil and will keep downward pressure on the oil price for the foreseeable future. Is that how you see it?

    PJ: I do. Research we published last week showed that the rig count in areas providing the recent U.S. production surge have to drop ~30% to offset higher rig/well productivity and result in lower production that will, in turn, raise pricing.

    Given the substantial cash flow industry generated this year and its penchant for overspending, we do not foresee the rig count declining to that extent. To date, we've actually seen such companies announce major increases in both rigs and capex for the Eagle Ford Shale; we have seen moderate to significant declines for the Permian and Marcellus, but not to the 30% area.

    Moreover, rig count reductions take months to implement given existing contracts. As a result, we do not expect any impact from rig count reductions-and resultant increase in pricing-until 2016.

    A much more significant decline in prices would be necessary to result in curtailing existing production, given that front-end capex has already been spent. For example, Cabot Oil & Gas Corp.'s (NYSE:COG) unit cash costs in the Marcellus are ~$0.75 per 1,000 cubic feet equivalent [~$0.75/Mcfe]; current gas prices are $3-4/Mcfe.

    TER: What are your near- and mid-term crude forecasts?

    PJ: I'm significantly below the consensus on The Street. The consensus was $86/bbl for 2015 and $92/bbl for 2016. I'm at $69/bbl in 2015 and $75/bbl in 2016. Drilling curtailments should help lower production by 2016.

    TER: In mid-November, JPMorgan Chase & Co. downgraded its 2015 Brent price by $33 to $82/bbl, citing pressures in the Atlantic basin and the inability of the Organization of the Petroleum Exporting Countries [OPEC] members to curtail production. It also lowered its 2016 forecast to $87.80 from $120. What are your thoughts on those moves?

    PJ: The consensus figures out there are too bullish. It feels good that there's a major bank that has lowered its pricing forecasts. JPMorgan Chase is not saying it's going to be an all-out blowout, but that its 2016 price of $120/bbl may have been too high. The company has a lot of quantitative people behind those numbers.

    TER: JPMorgan Chase also warned us that if there is not a new OPEC agreement in place, crude could slip as low as $65/bbl in January. Is that likely?

    PJ: Over the last three years or so, OPEC has become less relevant, less cohesive and, therefore, less able to dictate world oil prices. If the market thinks that OPEC is falling apart, there could be a psychological impact, but not an actual fundamental impact. I don't think OPEC is acting on the basis of supply/demand fundamentals.

    TER: Do you expect the spread between West Texas Intermediate [WTI] and Brent to continue to contract?

    PJ: I definitely don't see it widening. If anything, it should narrow or remain status quo. The main factor is that the petroleum industry has become more global. You see that with Saudi Arabia dillydallying to U.S. pricing; you see that with the U.S. moving toward exporting oil; and you see that with more infrastructure being built in the U.S., which is lessening the gap between WTI, Cook and other benchmark prices.

    TER: It was recently reported that Halliburton Co. (NYSE:HAL) has made a takeover bid for Baker Hughes Inc. (NYSE:BHI) How will this merger impact the energy services sector? Do you project any other major M&A news in the coming months?

    PJ: The consolidation of two major oilfield service companies can only result in stronger pricing power, notwithstanding any Hart-Scott-Rodino-mandated divestitures. This would hurt explorers and producers [E&Ps].

    I expect further consolidation in the oilfield services sector in an effort to compete with the new Halliburton. Any decrease in activity by the E&P space would put even more pressure on the space to engage in mergers and acquisitions [M&A]. A lower pricing environment, which in some cases will constrain E&P balance sheets, should result in M&A activity within the E&P sector, as well.

    TER: What themes do you expect to be dominant in the E&P space in 2015?

    PJ: Number one is that there are value plays in the micro-cap space. These companies have been overlooked in the shale play revolution happening over the past couple of years.

    Another item for investors to consider is good old natural gas, because lower oil prices have reduced the oil-and-gas spread. On an energy-equivalent basis, not that long ago oil was five times as valuable as gas. That number is now three times. And natural gas generally costs less to drill for and produce. The margins for natural gas companies are going to widen.

    Moreover, natural gas has some good demand momentum behind it given that several petrochemical plants and liquefied natural gas facilities [some of the biggest end users of natural gas] are slated to begin production over the next couple of years, while coal-fueled electric generation facilities are being phased out.

    TER: What are your 2015 and 2016 price forecasts for gas?

    PJ: They're $4.16 per thousand cubic feet [$4.16/Mcf] for 2015 and $4.50/Mcf for 2016.

    TER: If investors are doing their due diligence on micro-cap equities and come across companies with working capital issues, should they consider that a red flag?

    PJ: It is a red flag, and I would put those companies down as speculative buys. I had one company modeled as having a negative cash position within a couple of months; my speculative buy assumed the company received a capital infusion. I think that is normal for micro-cap companies. The company doesn't have accounts receivable per se, yet has general and administrative expenses. It's not uncommon to have a working capital deficit.

    TER: You recently upgraded your rating on an oil services name. Please tell us about that.

    PJ: ENSERVCO Corp. (OTC:ENSV) is a relatively small company that provides frack water heating, hot oiling and acidizing services to the E&P universe. I like that the company is increasing its exposure to these defensive types of services. We're in a questionable environment for oil prices. Drillers are being squeezed and rig counts are going down, but even in a down market drillers need someone to pump hot oil down a well to dislodge paraffin buildup or to acidize a well to stimulate production. ENSERVCO has done a good job gaining market share in its existing markets, as well as with making small acquisitions and growing organically into new markets.

    TER: It recently made a small purchase of 12 hot oiling trucks. How is that material to its top line, if not its bottom line?

    PJ: ENSERVCO pointed to about $6M of revenue potential related to that purchase, and that's what triggered my upgrade. The stock recently went down to levels where an upgrade made sense. This is an example of a company being able to develop relationships with much smaller companies so that it can make acquisitions to grow its business.

    TER: What is your rating?

    PJ: It's a Buy-rated company. I have a $2.85/share price target.

    TER: Are there other stories you'd like to share with us?

    PJ: Despite hedges covering 90% of its current oil production at almost $100/bbl, and the majority of its gas contracted at $7/Mcf, Miller Energy Resources (NYSE:MILL) has seen its stock killed, down 75% since July 1. Yet its production has come up and the company has made significant management changes, which should satisfy frustrated investors.

    Miller hired Carl Geisler, former managing director of investments for Harbinger Group Inc., as CEO. At the same time, it's retained former CEO Scott Boruff's deal-making expertise. Miller has done a great job of consolidating assets, acquiring assets, finding new reserves and developing resources. Production should continue to climb. In the latest quarter, Miller produced 3,300 barrels of oil equivalent a day [3,300 boe/d]. We calculate its net asset value per share at more than $7.50. Its midstream and rig assets alone have been appraised at $175M, and that does not include the value of its reserves. This company has the defensiveness of having real midstream assets that are strategic in nature, meaning that they're the only production facility in the regions where Miller operates, and it doesn't have to rely on the oil price to maintain the entire net asset value.

    TER: Miller recently sold its assets in Tennessee, and now is exclusively an Alaskan play. What did you make of that move?

    PJ: It's another example of Miller saving some money on selling, general and administrative expense, and consolidating its focus. It started as a Tennessee company, but production there was about 1% of the company's total production. Shareholders are interested in its Alaskan assets, not Tennessee.

    TER: Thank you for talking with us today, Philip.

    This interview was conducted by Brian Sylvester of The Energy Report and can be read in its entirety here.

    Philip Juskowicz, CFA, is a managing director in the research department at Casimir Capital, a boutique investment bank specializing in the natural resource industry. Juskowicz began his career at Standard & Poor's in 1998, where he was one of the first analysts to recommend Mitchell Energy, credited with discovering the Barnett Shale. From 2001-2005, he worked with a former geologist in equity research at both First Albany Corp. and Buckingham Research. At Buckingham, Juskowicz was promoted to a senior oilfield service analyst position, leveraging his extensive knowledge of the E&P space. From 2006-2010, he was an insider to the oil and gas industry, serving as a credit analyst at WestLB, a German investment bank. In this capacity, Juskowicz was responsible for $500M of loans to energy companies and projects. He earned a master's degree in finance from the University of Baltimore.

    Want to read more Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

    DISCLOSURE:
    1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: ENSERVCO Corp. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Philip Juskowicz: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Miller Energy Resources is currently a client of an affiliate of Casimir Capital L.P. and has been a client during the 12-month period preceding the date of distribution of this interview. During aforementioned period, an affiliate provided non-investment banking-related services and has received non-investment banking-related compensation from the subject company.
    Casimir Capital L.P. intends to seek compensation for investment banking services from the subject companies during the next three months.
    5) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    6) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

    7) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    Dec 08 3:42 PM | Link | Comment!
  • Reactors Restart Uranium Mines: Thomas Drolet

    Thomas Drolet has decades of experience in capitalizing on the movement of international energy markets. The chief of Drolet & Associates Energy Services is not sanguine about the long-term potential of fracking, but in this interview with The Mining Report, he tells us why now is a great time to reinvest in the uranium space.

    The Mining Report: It's been a rough couple of years for uranium prices. Realistically, could news of possible restarts of nuclear plants in Japan positively impact the price of uranium, even if it's only psychologically?

    Thomas Drolet: The psychology of Japan restarts has been driving the spot price; perhaps it will start to move the all-important long-term price, too. The long-term price is the signal that the utilities are buying. It is paramount to core value investing.

    Let's talk about Japan. My observation, after having been there several times post-Fukushima Daiichi, is that there is a giant tug-o-war going on. Pulling on one end of the rope is Japanese industry, which is paying a high price for fossil fuels replacement electricity, and the current government, which is definitely for bringing the nuclear plants back on-line. Tugging on the other end of the rope is a profoundly fearful public. Hanging onto the middle of the rope is Japan's new nuclear regulatory agency. It will take time for this stronger regulator to finish a series of mandated safety checks before it can authorize bringing back some of the mothballed reactors.

    Kyushu Electric Power Co. Inc. (9508:TKY) plans to restart two reactors at Sendai in the middle of Q1/15. This is sending a positive signal to the whole uranium production and supply space. However, the inventory of fuel at the Japanese reactors is very high; the utilities had long-term contracts when they were shut down. And those contracts generally could not be terminated. The large, existing inventory of fuel will be gradually eaten up as reactors restart after wending their way through nuclear regulatory approvals, prefecture approvals, local town approvals and, finally, national government approval.

    TMR: Will the Japanese be building new reactors, as well as bringing back the ones that were mothballed?

    TD: The Japanese have announced the intent to start building a couple of new reactors, but I do not see any real progress yet on the early-stage design efforts. What I do see is that the major reactor suppliers from Japan-Mitsubishi Corp. (MSBSHY), Toshiba Corp. (OTCPK:TOSBF)-are actually doing the opposite; they are concentrating overseas. They are doing deals in the United States, in Europe, in Southeast Asia.

    Two years ago in the U.S., there were 104 working reactors. Six of them were stilled for valid local or contractual reasons: i.e., the argument with a supplier of new heat exchangers for San Onofre took two units out. And there was significant displeasure in the Northeast with a couple of reactors, and one in Wisconsin. Anyway, we are down to 98 reactors in the U.S. now.

    In the U.S., four new AP1000 reactors, each one delivering 1,200 megawatts, are being built by Toshiba/Westinghouse Electric Co. Toshiba is the master contractor, supervising Westinghouse and, among others, Chicago Bridge & Iron Co. N.V. (NYSE:CBI). Until these four reactors are operating successfully, roughly on schedule and roughly on budget, the U.S. is not going to be a high-growth area for nuclear power. Waiting on the sidelines, major utilities like Duke Energy Corp. (NYSE:DUK), Exelon Corp. (NYSE:EXC) and Entergy Corp. (NYSE:ETR) are in the very early stages of applying for new reactor builds.

    TMR: Given this environment, how do spot prices relate to long-term contracts in the uranium market?

    TD: Spot is simply uranium put up by suppliers for short-term cash needs. The price is almost certain to be taken up further by a smart utility, or by the enrichers, the firms that enrich the uranium that goes into the fuel fabrication process and eventually burns in the reactors. Current activity in the spot market is a signal that a corner is turning. Uranium fell to ~$30/pound [$30/lb] on the spot market in the early fall. That is below the average cost of worldwide production by a good US$10. The price obviously cannot stay there because people have to make money to stay in business.

    Although an important corner has turned, I am not saying that there is massive upside for all uranium companies as a result of what is happening on the spot side. There will be a slow and steady climb driven by major utilities coming in on buying cycles that meet their internal needs.

    TMR: How is the stock market treating the Athabasca juniors?

    TD: The stock prices are down about 30% from the peak of a year ago. Investors exited uranium mining en masse because Japan did not appear to be coming back. And, not well reported, China's reactor program temporarily slowed down after Fukushima Daiichi as well. Now, new Chinese reactor developments are back with a vengeance. Both the spot and the long-term prices will benefit from China's immediate and near-term nuclear fuel needs.

    In the Middle East, four reactors are being built by South Koreans for the United Arab Emirates. These will need a reliable fuel stream. The Russians just signed up for building two reactors, and maybe four more, in Iran. The Russians have a particularly unique and clever marketing business strategy-compared to majors like AREVAs and Westinghouse. They are doing turnkey operations for their customers. The Russians will design the reactor, build it, and either run it directly or train the client to operate it. They will supply the fuel and, also, take it back for disposal.

    TMR: Will Russia have to go into the global market for uranium?

    TD: Russia will supply the uranium, enrich it and fabricate it within the boundaries of Russia. Also using the Kazakhstani reserves, Russia will supply yellowcake for the reactors that it builds, be they in Pakistan, Iran, Turkey, Indonesia or Bangladesh. Russia is the most aggressive nuclear reactor exporting nation on the face of the earth at the moment.

    TMR: Leaving uranium, what are the driving forces affecting the price of oil and gas today?

    TD: There are several forces driving these prices. Nation states such as Venezuela, Saudi Arabia and Iran are taking over the place of the international integrateds. Nation states with large oil reserves are attending to their own needs and gradually blowing off the integrateds.

    Second, the revolutionary advance of fracking and horizontal drilling has taken away a lot of the uncertainty about future supply. There is indeed a large supply of tight oils and shale gas, with the new technology to extract it. However, the price is not going to stay down forever. There is a new and important phenomenon emerging.

    We will soon start to run out of shallow, easy-to-access, reasonably permeable, low decline rate tight oil and shale gas zones. President Obama has said that fracking and horizontal drilling will provide a transitional fuel source for the next 50 years. I personally doubt that that super supply will last that long, simply because the decline rates are huge and have a long, low tail. Frackers have been able to get their money back in one to two years, but as production drops, I worry about the high, never ending, poke-a-new-hole drilling cost syndrome.

    TMR: How does the strong dollar affect junior miners in Canada?

    TD: The cost of operating a drill rig is paid in Canadian dollars, which is substantially below the U.S. dollar. That means that the capital and operating costs for oil and gas companies is denominated in a currency that is 15% less than the currency tied to the sale of the product!

    TMR: What shale oil and gas firms are poised to do well as the energy environment continues to evolve, as you say?

    TD: The big guys: the Chevrons (NYSE:CVX), the Exxon Mobils (NYSE:XOM), the big integrateds in North America stand to last the longest in this necessary constant high cost drilling environment.

    TMR: Are oil and gas juniors doomed?

    TD: Most of the juniors will survive. Eventually, the good ones will be bought up because that is the way of the world. The little ones get bought up by the big guys.

    TMR: Is now a good time to invest in major electrical utilities?

    TD: Yes. A lot of them have been beaten down, because we are still emerging from a difficult period in the U.S. But as the U.S. economy picks up steam, the big, well-managed utilities-the Dukes, the Exelons, the Entergys, the Pacific Gas and Electrics (NYSE:PCG)-are good places to invest for the long term.

    TMR: Thanks for your insights, Thomas.

    TD: You are welcome, Peter.

    This interview was conducted by Peter Byrne of The Mining Report and can be read in its entirety here.

    Thomas Drolet is the principal of Drolet & Associates Energy Services Inc. He has had a four-decade career in many phases of energy-nuclear, coal, natural gas, geothermal and distributed generation, with expertise in commercial aspects, research and development, engineering, operations and consulting. He earned a bachelor's degree in chemical engineering from Royal Military College of Canada, a master's of science degree in nuclear technology/chemical engineering and a DIC from Imperial College, University of London, England. He spent 26 years with North America's largest nuclear utility, Ontario Hydro, in various nuclear engineering, research and operations functions.

    Want to read more Mining Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit The Mining Report home page.

    DISCLOSURE:
    1) Peter Byrne conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
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    Dec 02 2:14 PM | Link | Comment!
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