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  • Who's Afraid Of Middle East Oil? Not David Popowich

    Source: The Energy Report Staff (8/16/12)

    http://www.theenergyreport.com/pub/na/14143

    Some companies will go wherever the oil is-even if that means venturing into war-torn areas. Junior explorers ahead of the game can generate major shareholder value for investors who don't place a circle-slash over the entire Middle East. If you're ready to enter the fray, Macquarie Capital Markets Analyst David Popowich can help you plan your attack. Get his debriefing on Egypt, Kurdistan and which junior explorers to watch for in this exclusive interview with The Energy Report.

    The Energy Report: David, investors need to see big potential returns before they're prepared to shoulder jurisdictional risk. How do you recognize a quality story outside of the typical North American investor's comfort zone?

    David Popowich: We look for extraordinary production and reserve growth potential. It's true that the risk is greater in the international oil and gas space than it is domestically. Therefore, the potential returns should justify the higher risk. Investors looking for near-term appreciation need to watch the operational catalysts, which usually coincide with drilling events. Sometimes a small- or mid-cap producer can prove up material reserves with just a single well.

    TER: What are the dynamics between the seniors and the junior firms moving into former war zones?

    DP: This is where junior exploration and production (E&P) companies typically enjoy first-mover advantage. Juniors tend to enter frontier exploration areas first, and once they reduce exploration risk and prove up resources, the deep-pocketed seniors come in, often through partnerships or acquisitions of the junior companies.

    TER: Let's talk about Egypt. What is the ownership dynamic between the Egyptian government and foreign oil and gas companies?

    DP: You could almost describe it as a partnership, as both parties have a vested interest in successful exploration and development. Oil and gas companies operating in Egypt enter into production sharing agreements (PSAs) with the Egyptian government for each block that the company has an interest in. Terms are laid out under the PSA highlighting the share of production that each party will receive, and this can vary across blocks with royalties and taxes paid out of the Egyptian government's share. Oil and gas producers in Egypt are currently awaiting the results of the 2012 Egyptian General Petroleum Corporation (EGPC) bid round, in which the government tendered 15 blocks. Bids have been submitted by interested parties and results are expected by the end of the summer.

    Egyptian politics have been in the global headlines quite a bit since last year's revolution, culminating in the recent election of President Mohamed Mursi. But while the presidential election generated a lot of news coverage, it has had little to no operational impact on Egypt's oil industry. TransGlobe Energy Corp. (TGL:TSX; TGA:NASDAQ), a company that I cover, reported minimal impact to its operations, even at the peak of the revolution. The company drilled 47 wells in Egypt last year and grew production by 22% year over year. This year, TransGlobe will probably grow production by another 55%.

    TER: Could the EGPC bid to increase TransGlobe's land base in the West Gharib area move the stock?

    DP: Yes, I would definitely expect it to move the stock. All year, we have been highlighting the EGPC bid round as what will probably be the single-biggest operational catalyst for TransGlobe in 2012. The company could nearly double its existing land base in Egypt, for very little cash outlay. This could be a potential game-changer for the company.

    TER: Let's move on to Kurdistan. Now that it's opening up for exploration and development, what is the political climate like for explorers?

    DP: Political risk should certainly be a consideration for people looking to invest in oil companies with exposure to Kurdistan. The Kurdistan Regional Government (NYSE:KRG) halted oil exports through Iraq over four months ago after it alleged that the Iraqi central government owed more than $1.5 billion to oil companies operating in the Kurdistan region. We have seen encouraging signs recently, however, as the KRG has recently resumed oil exports, albeit at a reduced rate. The KRG is trying to build confidence with the central government as it resolves outstanding oil and gas issues.

    Nonetheless, the resource potential of Kurdistan is thought to be immense. The U.S. Geological Survey estimated that Kurdistan holds more than 40 billion barrels (40 Bbbl) of proven oil reserves, and 25 Bbbl of potential reserves. There are not many other opportunities around the world to secure this kind of resource potential. Several material discoveries have caught the attention of the world's oil giants, which have started to acquire land positions in the relatively underexplored region. Most if not all of the prospective land has been taken, leaving new entrants with little choice but to acquire existing blocks in the area. This is occurring through corporate acquisitions or deals with the KRG. In other words, Kurdistan is increasingly becoming the domain of the supermajors.

    TER: Are any juniors making waves there?

    DP: WesternZagros Resources Ltd. (WZR:TSX.V) is our top pick in Kurdistan. It looks like it's sitting on what is potentially a billion-barrel discovery at Kurdamir, which the company is currently testing. WesternZagros has also topped up its bank account with a $56 million ($56M) cash infusion from Gazprom (OGZD:LSE; GAZ:FSE; GAZP:MCX; GAZP:RTS; OGZPY:OTC) and a $57M private placement by Crest Energy International (private). This should allow the company to execute an expanded capital program through 2013.

    TER: Let's leave the Middle East and shift gears to Southeast Asia. What's the situation there for E&Ps?

    DP: Thailand is not traditionally regarded as a global oil powerhouse, but Coastal Energy Co. (CEN:TSX.V) has operations in offshore Thailand, and it's one of our top international E&P picks right now. Coastal also recently entered Malaysia, where it signed a small field risk service contract with Petronas, Malaysia's national oil company.

    Coastal made a significant (potentially more than 200 million barrels) discovery at Bua Ban North in 2011. We think there is good visibility for Coastal to grow into a 30,000 bbl/d producer from this discovery, which could increase on further exploration success. Coastal is about to recommence high-impact exploration drilling, beginning with the Buried Hill prospect.

    TER: Is the international oil and gas space suitable for retail investors?

    DP: Every investor has a different risk profile, so you should carefully consider your personal situation before investing in more speculative oil and gas stocks. Generally speaking, global success rates for frontier exploration are 20% or less. You should do your research to make sure you will be rewarded with a symmetrical return if you are prepared to absorb this kind of risk. Keep an eye on company press releases, and potentially its partners' press releases. If a company is successful, it will make sure the market knows about it! I also look for signs of insider buying, which are positive in that they indicate management views their own company's stock as a good investment.

    TER: Thanks for talking with us, David.

    DP: Thanks for having me.

    David Popowich has covered Canadian-listed international explorers and producers for Macquarie Securities in Calgary since September 2009. He has worked in the investment industry with Tristone Capital, prior to its sale to Macquarie, since February 2006.

    Want to read more exclusive 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 Exclusive Interviews page.

    DISCLOSURE:
    1) The following companies mentioned in the interview are sponsors of The Energy Report: TransGlobe Energy Corp. and WesternZagros Resources Ltd. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
    2) David Popowich: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/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 story.

    Streetwise - The Energy Report is Copyright © 2012 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.

    The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

    From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

    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 Energy Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
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    Aug 30 6:40 PM | Link | Comment!
  • Why Uranium Prices Will Spike In 2013: Raymond James

    Source: George S. Mack of The Energy Report (8/23/12)

    http://www.theenergyreport.com/pub/na/14179

    Analyst David Sadowski of Raymond James sees a lot on the horizon for uranium: a supply shortfall, escalating Asian demand and seasonality, to name just a few. As a former geologist-turned sellside analyst, Sadowski's conviction in uranium's bullish future is rock solid, and he urges investors to get exposure now, as prices in this sector can climb quickly once they're set in motion. In this exclusive interview with The Energy Report, Sadowski shares his favorite names that are set to deliver megawatt-size returns to investors.

    The Energy Report: David, how does your background as a geologist help you to see value and growth potential in mining companies?

    David Sadowski: Defining ounces or pounds is not an easy business. If it was, there would certainly be far more economic deposits out there and metal prices would be a lot lower. Luck is involved, but most companies use systematic evaluations like geological surveys, drilling and other data to take a lot of the guesswork out of finding the next discovery. The ability to interpret these data is equally important, and it allows an analyst to make an independent determination on the growth potential of a project rather than just relying on what management is saying. In this way, I feel like having an understanding of how economic ore deposits form is essential to developing a meaningful forward-looking opinion, particularly on early-stage prospects. In my view that's one of the most important tools for the successful analyst.

    TER: You're also clearly comfortable speaking with engineers and geologists at these companies.

    DS: Yes, quite right. That's a very important element to my role. You have to be able to speak the same language and understand what they're doing on the ground, and that helps the analyst determine whether or not the company is headed in the right direction. It's a key skill to have.

    TER: I was also very curious about your transition to finance as a sellside analyst. You once had a responsibility to the companies for which you worked, but now your stakeholders are institutional and retail investors. What mental shifts did you have to make?

    DS: As an exploration geologist, one is really focused on the rocks, sometimes even at the microscopic level, and that's a much different scope of focus than that of a mining analyst. The financial and operational outlook for the company and its share price must always be on the analyst's mind, and we're not looking at companies in isolation, as a geologist might do. If you're in the business of projecting where the commodity price is going, as I am for uranium, the scope of analysis is global and extends from government policy right down to whether we think a specific ore zone will be amenable to heap leach, for example. As you mentioned, first and foremost I look out for the interest of investors rather than the mining companies, and this responsibility demands even higher levels of objectivity, precision and rigor. It's a constant challenge and that makes it an exciting and fulfilling role.

    TER: Speaking of forecasts, uranium has dipped below the $50/lb level. I'm not sure, but I think these round numbers represent psychological support and resistance levels. What minimum price level must be sustained for small or near-term producers to maintain adequate margins?

    DS: Well, if we look at existing operations, the majority of them would be losing money by selling their material at $40/lb. But there are a few exceptions, some of which are quite large producers, like Cameco Corp.'s (CCO:TSX; CCJ:NYSE) McArthur River or BHP Billiton Ltd.'s (BHP:NYSE; BHPLF:OTCPK) Olympic Dam. By our estimates, the only two potential projects that are likely to work in the $40/lb range of average realized price would likely be Cigar Lake and the expansion at Olympic Dam, but these are definitely major outliers. Cigar Lake is the second-highest grading deposit in the world, and it's located in an excellent jurisdiction in northern Saskatchewan with significant existing infrastructure nearby. Meanwhile, Olympic Dam only works at that price because its uranium production is a byproduct of much more significant gold and copper output. When we look at the majority of additional projects needed to fill the looming supply gap, we think they need prices north of $70/lb to go forward. This is one of the key reasons why we feel the sub-$50/lb prices are unsustainable.

    TER: What is your case for rising demand for uranium?

    DS: We're definitely bullish on the outlook for uranium. Although prices have softened in recent months, we have a very strong conviction that this trend is soon to reverse and investors should be exposed to uranium today. Beyond the high incentive prices for new supply that we just touched on, there are three primary reasons for our view. The first one is compelling supply/demand fundamentals. Next, there is the seasonality of uranium prices. And, most importantly, there are industry catalysts. Shall we take a look at each one?

    TER: Please, go right ahead.

    DS: After the Fukushima Daiichi accident last year, the nuclear industry has done some soul searching and decided to take a slower, more cautious pace in the construction of new reactors globally. But what many people don't realize is that according to World Nuclear Association (WNA) data, there are nine more reactors in the planned and proposed category today than there were before the accident. Demand for nuclear power has remained resilient with ramping electricity requirements around the world, volatility in fossil fuel prices, energy supply security concerns and a global preference for carbon-neutral sources. The majority of this demand is from Asia. In fact, we estimate 82% of new capacity through 2020 will be built in only four countries-China, India, Russia and South Korea. Part of the reason for that is that state-owned utilities don't face the same problems associated with other regions, like high upfront construction costs, widespread antinuclear public sentiment and lengthy regulatory timelines. So, this continued growth should support commensurate levels of demand for uranium for decades to come.

    All of this demand begs the question, where is this uranium going to come from? Well, we don't think supply is going to be able to keep up. Due to recent soft prices, many major projects have been delayed or shelved, like BHP's Olympic Dam expansion, which I mentioned earlier, and Cameco's Kintyre project, AREVA's (AREVA:EPA) Trekkopje project and the stage 4 expansion at Paladin Energy Ltd.'s (PDN:TSX; PDN:ASX) Langer Heinrich mine. Even the world's largest producer, Kazakhstan, may slow its pace of production growth. And, further complicating this issue is dwindling secondary supplies, like surplus government stockpiles, which in recent years have contributed 50 million pounds (Mlb)/year. But, that number is expected to halve over the next few years. We are projecting a three-year supply shortfall starting in 2014, and that certainly paints a very rosy supply/demand picture for investors.

    Seasonality also favors uranium exposure today. Over the last 10 years, uranium spot prices have dropped on average $4/lb during the third quarter (Q3) but have rebounded by at least that amount in Q4, which is the strongest quarter of the year. This is often correlated with the annual WNA symposium, where many market participants sit down and hammer out new supply agreements. This year's conference is going to be held September 12-14 in London.

    Last but not least, there are several near-term catalysts that we think will start the price upswing. In Japan, all but two reactors are now offline, and there's significant uncertainty and government debate about how many will eventually restart. As the world's third-largest nuclear fleet, it has obvious implications for future uranium demand. For a variety of economic, political and environmental reasons, we think Japan will restart most of its reactors by 2017 with the first batch of reactors likely starting early in 2013. As more units start to return to service, it will provide additional confidence that the nuclear utilities in Japan are unlikely to dump their inventories into the market, which should support prices in the near-term.

    Meanwhile in China, the government paused construction approvals for new reactors immediately after last year's Fukushima accident. But with these safety reviews now successfully completed, they're poised to start re-permitting new projects, and this should undoubtedly support increased uranium contracting. Let's not forget that China will be far-and-away the largest source of nuclear demand growth for the foreseeable future. We expect a six-fold increase in installed nuclear capacity by the end of this decade.

    The final major catalyst is the expiry of the Russian Highly Enriched Uranium (HEU) agreement to down-blend material from nuclear warheads into reactor fuel. This agreement has supplied the Western World for two decades but is due to conclude at the end of 2013. The Russians have repeatedly stated they're not interested in extending this agreement, and we expect this to remove about 24 Mlbs/year or 13% from the global supply. That's equivalent to shutting down the world's largest mine, McArthur River, as well as all six operating mines in the U.S. That's a massive impact. So, for these reasons we think prices are poised to turn here. We forecast prices to average above $60/lb in 2013 and north of $70/lb in 2014 and 2015 before settling to $70/lb in the long-term.

    TER: These catalysts are spread out over the next 18 months, which is not a long time. Stock markets generally look ahead. So, why are prices lagging as they are?

    DS: That's a good question. I think what we're seeing is a significant amount of uncertainty in the marketplace surrounding the availability of some material and who is going to be a near-term buyer. The purchasing side is largely comprised of nuclear utilities, which are usually very conservative and cautious. Based on our experience, they tend not to make rash moves and prefer to wait until all information is available before jumping into new sales contracts. For instance, they would rather have certainty on whether utilities in Japan and Germany are going to be selling any of their inventories before they start buying. This has led to very low volumes in recent months.

    However, we're already starting to see contracting activity pick up with major long-term deals signed by Paladin and one with the United Arab Emirates, both this month. And the WNA meetings are now only a few weeks away. This mounting activity could be just what the market needs for the metal price to shift to higher and more sustainable levels. And recent history shows that when the price moves, it can move really quickly as we saw in 2007, mid-2009 and late-2010 when the weekly uranium spot price jumped in increments of $5-10/lb.

    TER: Could these current low prices force juniors to sell themselves to the larger companies, the producers?

    DS: Well, we certainly expect further consolidation in the space. This industry is pretty much divided into the haves and have-nots. On one side we have state-owned utilities in countries like China and Korea, which essentially have zero cost of capital and the stated intention to build their exposure to uranium production. We also have large producers, like Cameco and Uranium One Inc. (UUU:TSX), that are cashed up and looking to grow. But, meanwhile many have-not companies have been under significant pressure in this current low uranium price environment with weak balance sheets and share prices. They could be looking to either sell assets or be taken over completely. Last year we saw Hathor get acquired by Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK). Extract Resources was bought by the Chinese nuclear utility, China Guangdong Nuclear Power Corp. (CGNPC). And, Mantra Resources was just purchased by Russia's ARMZ Uranium Holding Co. These major deals could just be the start of another major trend of M&A in our view.

    TER: I'm surprised that those acquisitions you just mentioned haven't been a bullish signal to the market.

    DS: We definitely think that they're a bullish signal. It means that the larger companies are willing to lay out capital and put it at risk to build their future pipelines, which is a sign to us that they have confidence in where the uranium price is going and that they want to have higher production in the future to take advantage of those higher prices.

    TER: David, everything you have said sounds to me like you believe that we are now in a legitimate value market in uranium equities. Is that the way you feel?

    DS: Yes, definitely.

    TER: What are your best ideas that you're telling investors about?

    DS: We prefer higher-quality, lower-risk names with minimal capital requirements. One of those is Cameco. It's the world's largest publicly listed uranium producer. Its market cap is over $8 billion (NYSE:B). So that makes it very acceptable for many investors who have certain constraints and mandates to get exposure to the uranium space. It's historically been the go-to name in the space. This company features strong production growth and a very low production cost. And it's got a critical milestone coming up with the startup of its massive 50%-owned Cigar Lake project, which is due to come on-stream in late 2013. When fully ramped up, Cigar Lake is going to be the second-largest mine in the world. Cameco also has a very healthy balance sheet with access to about $4B in capital, and we wouldn't be surprised if it puts that money to work by making an acquisition in the next 6-12 months.

    TER: You have a $28 target price on Cameco, which does not represent huge upside gain from current levels. Is this what you think of as a safer, more conservative play?

    DS: Yes, certainly. It reduces your risk via diversification into the other parts of the fuel cycle, such as conversion, refining and electricity generation, while you're still getting some serious exposure to the uranium space. Even if we don't project a really big return to our target, we think it's a safe play and we recommend it. There's less volatility in this one.

    TER: What's your next idea?

    DS: The next one in terms of lower-risk names we'd recommend is Uranium Participation Corp. (U:TSX). Our target is $8, but we've got a Strong Buy on it because we think this is a great low-risk way to get into the space. It's the world's only physical uranium fund, and it's designed to give investors pure-play exposure to the uranium price without any of the associated exploration, development or mining risks. The fund usually trades at slight premium to its net asset value (NYSE:NAV), but currently it's about 13% below NAV. We think it's trading at a great entry point right now. Its current share price implies a uranium price of about $44/lb. If you're like us and you think spot prices are unlikely to descend to those levels, then Uranium Participation offers good value today. If you're an investor looking for more leverage, it may not be the one for you. But, I think if you're going to buy a basket of equities this is one that you may want to include.

    TER: What about investors who are willing to take on a bit more risk for greater returns?

    DS: If you want more leveraged exposure to a potential spot-price rebound, we would consider a couple of other companies. The first one is Ur-Energy Inc. (URE:TSX; URG:NYSE.A), and we've got a $1.80 target and a Strong Buy rating on this one as well. It's got an excellent flagship project called Lost Creek in mining-friendly Wyoming. We see production starting up there in the second half of next year. The project's got low capital and operating costs and it's scalable as well. Despite a somewhat small 1 Mlb/yr mine plan, the design of the backend of the Lost Creek plant should accommodate about 2 Mlb/year of uranium. It should be able to incorporate other satellite deposits, such as those acquired from Uranium One earlier this year as well as from Areva last month. Ur-Energy is also a catalyst story. It's got only one final mine permit required before construction can start, and we have strong conviction that final approvals from the Bureau of Land Management (BLM) will come in by the end of September, particularly following release of the Final Environmental Impact Statement (NYSEARCA:EIS) last week-a major milestone. Currently Ur-Energy's valuation is very attractive, trading at the lowest price/NAV (0.5x) of any of our covered equities, and we think receipt of that approval from the BLM could help close the gap towards developer valuations.

    TER: Over the past four weeks it's up 34%. I'm guessing that the near-term expectation of this BLM permit is the reason for this stock's very high relative strength.

    DS: I think so. I think we're trending towards that date, and it's become very important because this company has faced a little bit of difficulty over the last few years with some of its permitting timelines. It has missed a few targets, and that has really hurt the share price. And, yes, when this permit comes in we think it should be a great catalyst for the stock to re-rate towards developer valuations.

    TER: Would you mention another name?

    DS: Uranium One is another one of these stocks with a bit higher risk profile, but we think this risk is justified, and that is demonstrated by our higher target price. We are rating it Outperform with a $3.60 target. It's got an excellent suite of low-cost in situ leach mines in Kazakhstan. It's the world's fourth-largest producer, and it's also one of the fastest-growing producers out there as well. We modeled over 15 Mlb of production in 2015, up from only 10.7 Mlbs in 2011. Uranium One has the highest exposure to spot prices than any other company in our coverage universe, so it's a great way to play this space if you're a strong believer in uranium prices going upwards. Uranium One is 52% owned by ARMZ Uranium Holding Co., a strong partner, and that's allowed it to access the Russian ruble bond market, which has been a boon for the company. It's at a great entry point at current levels, with a 0.7x current price/NAV.

    TER: David, Uranium One has a $2.3B market cap, and because of that there are a lot of mutual funds that could buy this stock. But it strikes me that its market value is a quarter the size of Cameco. Mutual funds could get some very significant upside from Uranium One.

    DS: That's a really good point to make. There are very few universally investable uranium equities. And by that I mean that there are very few publicly listed uranium equities in Canada, for example, that exceed that $1B market-cap threshold. Cameco is the biggest one at over $8B in market cap, and then you've got Uranium One, and Paladin Energy. And, beyond that there are very few places that you can put your money if you're the type of investor that's got the specific size and liquidity constraints or mandates, like you said, as a mutual fund. Those are pretty much the top three go-to places if you want uranium exposure.

    TER: Is there one more you could mention? You have a Market Perform rating on Denison Mines Corp. (DML:TSX; DNN:NYSE.A). I'm interested in hearing about it because the company is once again an explorer.

    DS: Denison Mines has a great management group lead by Ron Hochstein, and it has a 60%-interest in an excellent exploration project called Wheeler River, which is one of the best discoveries that we've seen in about a decade, perhaps trailing only Hathor's Roughrider. It's also one of the highest-grading uranium deposits that has ever been discovered. We think that the project could nearly double its resources at depth, along strike and on regional targets, and so we model 70 Mlbs at 12% target resources at Wheeler River. Denison also has a 22.5% ownership of the state-of-the-art JEB mill, which is one of only four active conventional uranium mills in North America. It's unique in that it can process high-grade ores without having to downblend. That's a strong competitive advantage. For those reasons, we think Denison is a good takeout target. Cameco and Rio Tinto's faceoff for Hathor last year was probably their first battle in a larger war for the prime assets in the basin, and Denison has two of them. That said, we are cautious on the name today given limited visibility to production at its minority-held Canadian projects and in Mongolia and Zambia, as well as potential financing risk next year. We have a Market Perform rating and $1.80 target on the company.

    TER: I have enjoyed meeting you very much, David.

    DS: Thanks for having me George. It was a pleasure to speak with you as well.

    David Sadowski has been a member of Raymond James' mining team since June 2008, and now covers the uranium and junior precious metal spaces as a research analyst. Prior to joining the firm, David worked as a geologist in Central and Northern B.C. with multiple Vancouver-based junior exploration companies, focused on base and precious metals. David holds a Bachelor of Science in Geological Sciences from the University of British Columbia.

    Want to read more exclusive 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 Exclusive Interviews page.

    DISCLOSURE:
    1) George S. Mack of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of The Energy Report: Ur-Energy Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
    3) David Sadowski: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/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 story.

    Streetwise - The Energy Report is Copyright © 2012 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.

    The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

    From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

    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 Energy Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
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    Aug 27 2:01 PM | Link | 1 Comment
  • Who Will Fill The 24 Million Pound Uranium Supply Gap?: David Talbot

    Source: Zig Lambo of The Energy Report (8/14/12)

    http://www.theenergyreport.com/pub/na/14121

    David Talbot of Dundee Securities sees the tides rising in uranium markets, but not every stock price will recover in-step. Talbot's strategy is to focus on a good story, and he has identified uranium exploration, development and production companies with compelling growth profiles. In this exclusive interview with The Energy Report, Talbot explains why investors should build positions while the spot price is still sluggish.

    The Energy Report: In your last interview, "The Uranium Industry Is Alive and Well," Germany and Japan looked determined to shift away from nuclear power. Now, it looks like Germany is having second thoughts on its plans to shut down all nuclear plants by 2022, and Japan has restarted one reactor, with more to come. What's your general industry view at this time?

    David Talbot: We are still bullish on the uranium sector because the nuclear power industry is moving forward and demand is behaving somewhat predictably. Supply will make all the difference in the world. The U.S./Russia Megatons to Megawatts program will go off-line in 2013, which will remove 24 million pounds (Mlb) of secondary supply from the equation. Meanwhile, there are five more reactors in the planning or construction phases globally than there were before the disaster at Fukushima occurred. There are 430 reactors currently in operation worldwide, and 160 reactors are being planned now. The trend is clear: There is still growth in nuclear power.

    On the supply side, the world uses 176.7 Mlb of uranium each year, according to the World Nuclear Association. The reactors under construction alone will account for a 13% increase in demand, approaching 200 Mlb of uranium required annually. This does not factor in any reactors in the planning stages. Mining companies are not matching that in the short to mid-term-they need higher uranium prices to make larger-scale and typically low-grade projects economic, and miners are optimistic that will happen. Uranium exploration expenses rose to about $2 billion worldwide last year.

    As for Germany, its demand accounts for only 9 Mlb a year, or about 3% of world demand by 2020. I believe its government did overreact, and it is apparently having second thoughts, based on economic realities. We don't think Germany's opinion on nuclear power has changed much. But the country is struggling with rising electricity prices and facing pressure from industry. Finally, China matters. Its 15 reactors now produce just 2% of its electricity, and there are 26 reactors under construction and 51 more planned. Last year, China produced only 10% of the electricity that the U.S. reactors produce. It already uses 17 Mlb per year, and that figure is climbing quickly and should be in line with U.S. figures in the next seven years. Chinese demand is a major force driving the industry. While we believe that renewables should be a growing part of the energy mix, they are intermittent generation sources and can't necessarily handle a large proportion of baseload demand. Many alternative energy sources are still in their infancy and expensive.

    TER: So, despite the negative thoughts about nuclear power, it really is the only viable alternative to coal at this point, other than natural gas.

    DT: I think so. We are seeing a lot more natural gas use these days, primarily in Japan, which is spending about $100 million (NYSE:M) a day on energy imports. If Japan wants to maintain its way of life, it really must turn the reactors back on or risk losing jobs. A couple of reactors have started up and two more restarts are under discussion. I think this is going to help boost sentiment in the sector and ultimately increase uranium demand, which should improve spot prices from the current U.S. $49.50/lb level.

    TER: What are your expectations for short-term uranium prices? Even major companies like BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) and Cameco Corp. (CCO:TSX; CCJ:NYSE) are having trouble justifying their respective Olympic Dam and Kintyre projects.

    DT: The supply/demand balance in the mid-to-near-term may impact pricing. BHP announced a decision to delay expansion at Olympic Dam, by at least a couple of years. The initial expected expansions would have brought production up to about 20 Mlb from about 8.8 Mlb currently. Recently, Cameco warned that rising costs and mediocre uranium prices have made its Kintyre Project in Australia uneconomic. Cameco is still pushing ahead but needs around $67/lb to break even by the planned production start in 2015. That's another 6 Mlb of uranium supply up in the air. Cameco needs to make some acquisitions to reach its Double U strategy production goal of 40 Mlb by 2018, which would partially replace its lost Megatons to Megawatts supply.

    Earlier this year, Paladin Energy Ltd. (PDN:TSX; PDN:ASX) postponed its stage-four expansion of Langer Heinrich until prices rise. That expansion would nearly double mine production from 5.2 Mlb to about 10 Mlb annually. These three projects alone total about 23 Mlb, which is 64% more uranium than Cameco's Cigar Lake is scheduled to produce annually. Each of these reminds us that many projects simply are not economic at current uranium prices and something has to give.

    The current supply deficit should put upward pressure on prices, eventually making projects like Kintyre more feasible. We'll be lucky if annual uranium production reaches 180 Mlb by 2020. And that would require sustained spot prices of $70-80/lb. Our current forecasts for next year and 2014 are $70/lb and $67/lb, with a long-term forecast is $65/lb.

    TER: How have the uranium stocks performed this year?

    DT: Equities in general have really dropped off since the beginning of the year. As a group, uranium stocks are down about 30% year-to-date and much of the downward action occurring within the last 3-months. These companies have been under the same pressure as the broader market, with low liquidity and European debt worries. In the long term, I think the producers will outperform developers. But over the past few weeks we've seen some movement in the smaller stocks, with no clear winner between producers, developers or explorers. But however harsh the market is, you have to pick good stories, and right now we have a couple of suggestions for each of those categories.

    TER: Paladin Energy has been showing some pretty exciting production results, but the stock has continued to languish and now there are some takeover rumors floating around. What's the situation there?

    DT: Paladin is our top producer pick. We have a Buy rating on the stock with a $2.65 target price. Right now, we like what we see. We think the company has really turned the corner with good production numbers, a strong outlook, resource growth, advancement of the pipeline, asset sales and strategic alliances that are expected shortly. Those alliances could not only improve the balance sheet, but it could also add value to the projects that are still in the pipeline.

    A Bloomberg article last month suggested that Paladin is a takeover target at these levels. We think that potential acquirers could include Cameco, Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK), Uranium One Inc. (UUU:TSX) or other senior miners looking to get into the uranium space. We have a Buy rating on Uranium One and a $4.50 target price. But I think that Paladin is going to make the first move with strategic alliances before anything else happens.

    TER: What do you think is the most likely strategic alliance?

    DT: There is probably going to be a JV at Mount Isa in Queensland, Australia. That's a potentially large operation that could produce about 5 Mlb annually but it's going to have a big price tag, probably well over $500M. I could see Paladin selling a minority position in this project to raise upwards of $350M, bringing in a partner that's responsible for its share of capex. That would help decrease financing risks and the cash generated could really take a bite out of Paladin's debt. The other possibility here is a strategic alliance to tap some value at the mine level. Kayelekera and Langer Heinrich are two of the very few uranium mines built anywhere in the world over the last 20 years and are now running at or near capacity. I'm sure there's an Asian utility somewhere that would jump at the opportunity to share ownership of one of these mines through an offtake agreement and have access to production over the next 25-30 years.

    TER: There's also been some M&A action here in the U.S. In April, Energy Fuels Inc. (EFR:TSX) made a deal to acquire all of Denison Mines Corp.'s (DML:TSX; DNN:NYSE.A) U.S. mining uranium mining assets and operations. Where has that gone since then?

    DT: Energy Fuels has emerged from a couple of deals as the second-largest uranium producer in the U.S., with a resource base of 70 Mlb. We have a Buy rating on the stock and a $0.90 target price. They bought the White Mesa mill from Denison, which is the only operating conventional mill in the U.S., plus several operating mines. This saved Energy Fuels about $150M by not having to construct its own mill, where it just received its NRC license in Colorado. Synergies with projects in Utah, Colorado and Arizona might fill that mill, keeping costs as low as possible. That's very important because these smaller mines in the Southwest U.S. tend to have higher operating costs.

    We view Energy Fuels as a good opportunity with cash flow and significant leverage to rising uranium prices. It's preparing its pipeline of projects with two mines that are already permitted, Whirlwind and Energy Queen. Pinenut is also approaching production within the year. The management team has operating experience with the old Energy Fuels nuclear company, and its Sheep Mountain project up in Wyoming could bring this company to a whole new level.

    TER: There's also been some takeover drama with UEX Corp. (UEX:TSX) and Cameco, as Cameco failed in their bid for Hathor. What's the latest on that situation?

    DT: We have a Buy recommendation for UEX and a $1.85 target price. This is our favorite development story right now. Cameco did lose in its bid for Hathor and it needs to make an acquisition to meet its production goals of 40 Mlb by 2018, as we mentioned before.

    UEX has projects in the Athabasca Basin and Cameco is its largest shareholder, with 23% of the stock. Earlier this year, Cameco put up a fuss when UEX attempted to implement a shareholder rights plan because Cameco really believed this would have breached some of its preemptive rights when UEX was spun off in the mid-2000s. Cameco participated in a UEX equity issue earlier this year, and failed to replace its UEX board representative when he retired. So there are signs that Cameco is still interested in UEX. But we aren't sure when a potential takeover can happen.

    UEX's Hidden Bay has about 40 Mlb located about 4km away from Cameco's Rabbit Lake mill. An open-pit operation on that property could ultimately act as a tailings management facility, which is something Cameco's Rabbit Lake mill will need in the next few years. UEX also has 49% interest in the world-class 88 Mlb Shea Creek project to the west, which could easily be added to Cameco's pipeline. Cameco is probably the best company in the world to develop these high-grade, particularly deep deposits, and could potentially partner with AREVA (AREVA:EPA). UEX is one of our favorite developer stories, with high-grade drill results continuing from Shea Creek. In the short term, Hidden Bay is moving into development stages with geotechnical, geochemical and metallurgical studies underway.

    TER: You initiated coverage in May on U3O8 Corp. (UWE:TSX.V; OTCQX:UWEFF). What do you like about that one? And why did you decide to start covering it now?

    DT: We have a Buy recommendation and a Speculative Risk rating on U308 Corp., but no target price right now because we are awaiting a little more economic information to derisk this company a bit more. This is a small company with many moving parts. It has three projects, any one of which could likely sustain a junior exploration company. We picked up coverage as we became more excited about the upside potential offered by its multi-element flagship Berlin project in Colombia. The current resource only covers the southernmost three kilometers of a known 10 1/2 kilometer long sandstone trend. There's a misconception here that it's a black shale deposit. It's really a carbonaceous sandstone. That's a big difference. At 21 Mlb U308 plus byproducts, the resource has just started growing, with the potential to double and ultimately triple in a couple of years. Besides uranium, it will also be getting vanadium, phosphates, rare earth elements and base metals out of this calcite-rich rock.

    Its second project, Laguna Salada, is located in Chubut Province, Argentina. Mineralization occurs within three meters of surface in soft, unconsolidated sandy gravel that should be amenable to low-cost mining techniques. The grades are very low but the geology lends itself to considerable beneficiation, in some cases by a factor of ten, which could boost the grades by ten times before it goes through the mill. While resources are currently only around 10 Mlb, there is potential to double this amount by year end through drilling, not to mention potential M&A targets in the area.

    U308's third project is the Kurupung project in Guyana, which was once its flagship project. We still love its high prospectively with potential for hosting several massive uranium projects. However, exploration will be expensive and time consuming, plus U308 has two other projects in jurisdictions with better infrastructure. Those projects are likely to be advanced in the scoping study stages more expeditiously. Ultimately we think this is a very undervalued development story. The stock trades at about half the level of its peers, and we expect its resources to double during this year.

    TER: What else do you like at this point?

    DT: Another developer story I like is in Ur-Energy Inc. (URE:TSX; URG:NYSE.A). We have a Buy recommendation and a $2.30 target price on this stock. The timing might be right for investors on Ur-Energy. It's waiting for final U.S. Bureau of Land Management permits that would allow it to build and operate its Lost Creek Mine in Wyoming. The company expects to build a plant that could produce up to 2Mlb annually, starting at 1Mlb from Lost Creek with low operating costs of about $20/lb. We've liked this story for a while and think there's considerable upside. It's cheap, it's located in a good jurisdiction and it has good economics, good management and quite a deep technical team. It recently picked up a couple of good-looking projects from AREVA for its pipeline. Look for some news out of Ur-Energy in the next couple of months.

    Among exploration stories; Kivalliq Energy Corp. (KIV:TSX.V) might be our top explorer pick now, with one of the best exploration teams in the business. We have a speculative buy without a target price on this one. Kivalliq is now drilling its Angilak property in Nunavut. The company seemed to have hit uranium mineralization in every place they've put a drill in 2011/early 2012 and surprised us by doubling its high-grade Lac Cinquante resource to 27 Mlb at 0.69% U308. This is one of the highest grades outside the Athabasca Basin. It's discovered about 10 new zones, many within 3km of the Lac Cinquante deposit itself. Others are located within 25km of the deposit and some of these are potentially big, like the BIF Zone that extends for about 3km along strike at surface, where grab samples often assay between 16% and 30%. As more discoveries are being announced, the company has to reprioritize its targets as it goes. We think they're in a uranium district and this story is going to be exciting to watch.

    Another explorer that is front and center for us is Fission Energy Corp. (FIS:TSX.V; FSSIF:OTCQX). We have a Buy Venture Risk rating with no target price. The company has a project immediately west of Rio Tinto's Roughrider deposit in the Athabasca Basin. It's likely that Fission's high-grade J Zone discoveries are the same deposit as the Roughrider West Zones. The J Zone now measures about 680m along strike. We think there's considerable room to expand this, not only along strike but also to the north and south. Some impressive high-grade areas need follow-up there, including 15% U3O8 over 6m and 21.6% over 3.5m. It doesn't take a lot of area to add significant pounds when you're getting grades over 15%. That's one of the reasons why we like this company. The initial resource covers about one-third the strike length and totals about 9 Mlb. About 7.4 Mlb of that is Indicated, grading about 2%. Drilling continues on a second project to the west. That might end up as another Athabasca uranium discovery, if we give Fission sufficient time to search.

    TER: What kind of timing are we looking at before we see some real activity in these stocks?

    DT: We believe uranium prices may be at the bottom right now, around $49/lb.

    We expect firming, especially as the Japanese reactors come back online. We may see some price appreciation later this year and into 2013 as the Megatons to Megawatts agreement expires. We are calling for higher uranium prices down the road, ultimately to our $65/lb long-term price. Investors have to pick good and improving companies before we see these stocks run. There's already a lot of volatility in the uranium sector but stocks tend to take off before you know it, so you can't necessarily choose cash flow over near-term production or potential blue-sky upside, as you can in a bull market. All the stocks will likely lift, but at different rates. Among producers, maybe look at Paladin and Energy Fuels; for developers, UEX, U308 Corp and Ur-Energy, and explorers, Kivalliq Energy and Fission Energy. We suggest that investors buy a basket of these stories. I really think this sector will be one that's going to outperform in the coming years.

    TER: Very good. We appreciate your insights today David. Thanks for talking with us.

    DT: Certainly. Thank you.

    Dundee Securities Senior Mining Analyst David Talbot worked for nine years as a geologist in the gold exploration industry in Northern Ontario. Talbot joined Dundee's research department in May 2003 and in the summer of 2007, he took over the role of analyzing the fast-growing uranium sector. He is a member of the PDAC, the Society of Economic Geologists and graduated with distinction from the Univ. of Western Ontario, with an Honors Bachelor of Science degree in geology.

    Want to read more exclusive 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 Exclusive Interviews page.

    DISCLOSURE:
    1) Zig Lambo of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of The Energy Report: Energy Fuels Inc., U308 Corp., Ur-Energy Inc. and Fission Energy Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
    3) David Talbot beneficially owns, has a financial interest in, or exercises investment discretion or control over, companies under coverage: Energy Fuels Inc., U3O8 Corp. and Kivalliq Energy Corp. David Talbot was not paid by Streetwise Reports for participating in this interview.

    Dundee Securities Ltd. and its affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by, companies under coverage: Energy Fuels Inc.

    Dundee Securities Ltd. and/or its affiliates, in the aggregate, own and/or exercise control and direction over greater than 10% of a class of equity securities issued by, companies under coverage: U3O8 Corp.

    Dundee Securities Ltd. has provided investment banking services to the following companies under coverage in the past 12 months: Energy Fuels Inc., U3O8 Corp., Kivalliq Energy Corp., UEX Corp., Ur-Energy Inc. and Fission Energy Corp.

    All disclosures and disclaimers are available on the Internet at www.dundeecapitalmarkets.com. Please refer to formal published research reports for all disclosures and disclaimers pertaining to companies under coverage and Dundee Securities Ltd. The policy of Dundee Securities Ltd. with respect to Research reports is available on the Internet at www.dundeecapitalmarkets.com.

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