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  • Rob Chang: Uranium Stocks Powering Up

    Rob Chang: Uranium Stocks Powering Up

    Source: Zig Lambo of The Energy Report  (11/1/11)

    http://www.theenergyreport.com/pub/na/11471

    While Germany and Switzerland have made headlines with sudden phase-out plans, world leaders from North America to Africa to Asia have reaffirmed their commitment to nuclear power as a low-carbon, low-cost energy solution. Development plans continue for the industry, and the long-term growth picture shows continued uranium demand. In this exclusive interview with The Energy ReportRob Chang discusses prospects for both junior and major uranium developers and producers, and which companies could be the next belle of the bidding war ball.

    COMPANIES MENTIONED: AREVA - CAMECO CORP. - ENERGY FUELS INC. - EXTRACT RESOURCES LTD. -FISSION ENERGY CORP. - HATHOR EXPLORATION LTD. - KALAHARI MINERALS PLC - KIVALLIQ ENERGY CORP. - RIO TINTO - URANERZ ENERGY CORP. - URANIUM ENERGY CORP - URANIUM ONE INC.

    [Editor's note: This interview took place on October 24, 2011. Mr. Chang's comments were made prior to Versant Partners' engagement on Fission Energy's financing.]

    The Energy Report: Thank you for joining us again. What major changes have unfolded in the uranium sector since you last spoke with The Energy Report in June?

    Rob Chang: Let's look at uranium pricing first. The spot price went through the summer doldrums, as it usually does. It dipped slightly but stayed relatively flat since June. It's down about 3% and is currently in the low $50s. The long-term price declined by about 6%. It was around $68 when we last spoke. It's now $64. But there has been some good news. Looking at it from a global standpoint, the number of nuclear reactors under construction, planned or proposed has significantly increased. There are currently 565 in various stages as opposed to 553 back in June. We've also seen some M&A activity heat up the market. Cameco Corp.'s (CCO:TSX; CCJ:NYSE) and Rio Tinto's (RIO:NYSE; RIO:ASX)bids for Hathor Exploration Ltd. (HAT:TSX.V) were huge news items. More recently, the China Guangdong Nuclear Power Corp has resumed talks with Kalahari Minerals plc (KAH:LSE; KAH:NSX)and Extract Resources Ltd. (EXT:TSX; EXT:ASX) to acquire them as well. It's been a pretty interesting time for the uranium space since we last spoke.

    TER: It sounds like some stability has returned to the sector and long-term prospects remain positive.

    RC: I would definitely agree. The prospects haven't changed in terms of supply and demand. There was a lot of initial negative sentiment toward what happened with Fukushima. Since then, what we've actually seen is something that, in my opinion, is beneficial in the long term for the industry in that countries around the world reassessed their nuclear programs. As a result, the overwhelming majority came out saying that they're fine or that they're putting in place improvements that will make them better. Outside of the more publicized Germany, Italy and Switzerland news regarding anti-nuclear decisions and phasing out in Germany and Italy-those are the exceptions rather than the rule. For example, Japan's own Prime Minister said he thinks it's impossible for Japan to maintain its economy without nuclear power. China has completed safety assessments a month ahead of schedule. Spain has deemed nuclear power to be irreplaceable. And the Czech Republic came out with an energy plan wherein nuclear will contribute 60-80% of the nation's power by 2050. Overall, the worldwide perception of nuclear energy has been pretty positive.

    TER: Looking at the price chart, we've had a bottom around $49. Have we seen a permanent turnaround in the price of uranium, or do you foresee it fluctuating in a similar range? 

    RC: The $49 figure is unnaturally low based on supply and demand fundamentals. In our opinion, long-term spot prices should be closer to $70 in order for supply to match demand. This would also make new mines economic, especially low-grade mines in Africa, for example. What we've seen more recently concerns utility buying, which usually occurs in the last quarter of the year. Because utilities weren't really buying, we saw a lot more volatility than we normally do. Instead, producers became the major buyers, soaking up excess supply rather than selling the uranium they're producing-it's actually more cost-effective for them to simply buy off the market and sell it at a higher price, fulfilling their contracts that way. There will always be short-term volatility, especially since uranium is viewed as a high-beta commodity. 

    No matter how we look at it, we're going to see uranium and uranium equities higher than they are presently. The key question now is, when will they rebound? Right now the uranium market is negatively affected by the global economic crisis and investors are not willing to take on risk. Once things settle down, the supply/demand fundamentals behind the nuclear industry should take hold.

    TER: Can you bring us up to date on the developments that have taken place with uranium companies you've been covering?

    RC: Sure. Starting off with Fission Energy Corp. (FIS:TSX.V; FSSIF:OTCQX), other than the bids for Hathor coming in from Cameco and Rio Tinto, the company has had some interesting exploration results. Its Patterson Lake South Project has some exploration results showing boulder trains of high-grade uranium. It's looking very prospective and the company just announced that it's doing additional trenching. 

    The numbers there look very exciting, with potential for something pretty significant. It will certainly add another layer of interest to what has already been a very exciting story, given that Waterbury is right beside Hathor's Roughrider Project. On top of that, the company also has its Dieter Lake property and the Macusani as well. We're monitoring Fission's progress there with a great interest. Just from looking at it, it seems just the boulders themselves are high-grade enough to potentially have a resource. 

    TER: Can you clarify for people who aren't acquainted with the geology of uranium-where do the boulders come from and what is their significance?

    RC: That's the interesting thing. The company is currently doing some exploration to find out exactly where the boulders originated. The potential source is northeast of where the boulders were found on the property and hopefully the whole resource is all still on the property. But, these boulders are just basically rocks on the surface. Fission has been finding pretty high-grade mineralization there.

    Another company we're covering and very excited about is Kivalliq Energy Corp. (KIV:TSX.V). It has identified the western and eastern extensions to their Lac Cinquante Deposit, which has 14.15 million pounds (Mlb) of 0.79% uranium-the highest-grade uranium deposit in the world outside of the Athabasca Basin. It's located in Nunavut. The western extension has shown a high-grade intercept of 2.25% over 2.3 meters (m). That's just one hole, but we've seen interesting results from both sides. It may potentially be a much larger resource. The Lac Cinquante Deposit itself is a very small part of the overall area that Kivalliq can explore. Looking at some of their target maps, it seems like there are many targets the company can potentially test that will last them quite a long time. It's quite exciting for them as well. 

    TER: Nunavut-that's pretty remote. 

    RC: Yes, but there are other projects being developed right now in the area. AREVA (CEI:PAR), to the northeast of Kivalliq, is currently working on their Kiggavik uranium project. It is reassuring for investors to see a large uranium miner currently moving forward on an asset in the area. But you are correct; there is less infrastructure and the deposit will definitely have to be high grade and relatively large for it to be economic. However, it is the highest-grade uranium deposit outside of the Athabasca Basin, so it's got the potential.

    TER: What other companies do you like?

    RC: Energy Fuels Inc. (EFR:TSX) recently announced that it's purchased the Skidmore Lease in southeast Utah's Sage Plain District from a private company. This lease contains 921,000 pounds of historic resources that need to be proven up. More importantly, that lease is located near EFR's current Calliham, Crain, Sage and other nearby leases, which enables them to continue their strategy of consolidating the area. It can now start the permitting process for their third potential mine behind its Whirlwind and Energy Queen Mines, which are already waiting to go. 

    TER: What's the general outlook for uranium mining in the U.S. versus Canada?

    RC: Mining in the U.S. tends to be a little bit more difficult, given the anti-uranium sentiment in some areas. In Canada's Athabasca, there has been consistent and well-accepted uranium production for many years. In the U.S. it's a little bit more difficult. You can see that in Virginia, for example, where there's been a lot of pushback toward uranium. Even with Energy Fuels right now, a Colorado federal judge issued a stay against the Department of Energy's activities in granting licenses for uranium exploration, or any type of uranium-focused activity. The regulatory regime is a little more difficult and more protective in the U.S. compared to the Athabasca region. 

    TER: Would you say the safest jurisdictions are in Canada or overseas at this point?

    RC: Yes, but I think the U.S. has some very good resources, strong companies and good projects being advanced. Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.A) is progressing with its deposits in Wyoming and Uranium Energy Corp (UEC:NYSE.A) is now producing in Texas. There are, however, a few more hoops to jump through in the U.S. compared to other countries such as Kazakhstan or African countries, where the regimes are more favorable toward mining development. I had a good chat with the management at Uranerz recently, and, it seems that the development of its assets has been progressing very well. We're quite anxious to see when it starts producing and we're very positive on the company.

    TER: Let's shift gears again to M&A activity. There were at least two competing offers for Hathor from Rio Tinto and Cameco. Rio Tinto upped Cameco's bid by about $0.40 a share. Is this going to be a bidding war that attracts more players, or are these two going to fight it out to the end?

    RC: Rio Tinto came into the game pretty late already. If I were to guess, I would expect it would be just between these two. We're more than likely going to see a second offer from Cameco. The common view, as well as mine, is that both bids are a little low relative to what Hathor should be worth. Cameco is in the best position to provide synergies and pay the highest amount for Hathor. It is the dominant player in the area, with two mills and extensive experience developing Athabasca-based mines. On the other hand, Rio Tinto is one of the largest miners in the world and if it wants something, it can get it. It'll be interesting to see how things shake out.

    TER: What are the implications here for Fission? Is the company going to end up getting taken over too, or is it a little premature?

    RC: I think Fission will definitely eventually be taken out by whomever wins the Hathor battle. Fission's property, even though the exploration is probably two or three years behind Hathor's, is very prospective. Based on the drilling results that we've seen already, Fission's J East zone is the likely western extension to Hathor's Roughrider zone. Then, 30m just to the west of J East is the J Zone. That's a pretty large tabular ore body that's near to surface relative to Roughrider's deposit. 

    Further to the west of J Zone there are several other perspective targets that Fission's currently exploring. There could potentially be more pearls in that string of mineralization. The mineralization is shallower on the west side with these pearls of mineralization going deeper toward the east. Potentially there is more further to the west of what Fission has in its J Zone. Since its property package is larger than Hathor's, it could potentially have more mineralization than Hathor. But that remains to be seen.

    TER: When do you think someone will take a shot at Fission?

    RC: I would assume that whomever wins the Cameco/Rio Tinto battle will want to consolidate the whole area. More than likely this battle will continue into 2012. Bids for Fission will probably happen a few months after that. Meanwhile, Fission will obviously be trying to prove up as many resources as possible to increase its value. Within a year, Fission will likely no longer be a standalone company. 

    TER: What's happened with the stock prices on Fission, Kivalliq and Energy Fuels since last June, and what are you expecting in the near future?

    RC: All three have moved up. Hathor will probably go up with the potential bids. I think the key one to look at really is Fission. Given that Fission does not have a resource, many investors don't know what type of valuation to assign to it. It's trading in the $0.80 range as we speak. My expectation of a resource is somewhere between 15-20 Mlb, now just shy of 18 Mlb. We believe that Fission is probably worth double its current share price. Will Hathor be worth more? Probably, but a double from its current level is unlikely. I do know some investors who believe that Hathor should be worth $10.00 a share. Looking at it from that perspective, I'm very excited about the prospects for Fission. 

    TER: How about Kivalliq and Energy Fuels?

    RC: I like both those companies very much as well. Unfortunately they don't have a take-out scenario happening right next door but, valuation-wise, are very strong. We believe Energy Fuels is still a buy with a $1.30 price target. On Kivalliq, we also have a Speculative Buy rating with a $1.00 price target. 

    TER: So there's still some potential upside on all of these plays. Are you looking at any other companies you'd like to mention at this point?

    RC: As far as our favorite producer names, even though we don't cover it, we are positive on Uranium One Inc. (UUU:TSX). It is the one producer that is 100% exposed to the spot price, meaning it does not have any hedge to sales. In our opinion, it is in the best position to get good leverage and torque from when the spot price inevitably goes into the $70s. Other producers will be stuck at lower price points with their contracts.

    TER: What do you think our readers should be looking at now at if they're interested in the uranium market in North America? 

    RC: Fission is an exciting opportunity, because you have that immediate take-out story happening next door. An NI 43-101 resource coming at the end of this year that will be somewhere between 15-20 Mlb makes for an exciting story that has tremendous upside. For those who want to position themselves for a good turnaround in the uranium spot price, Uranium One probably would be a very strong candidate. Looking a little longer-term, we're very positive on Energy Fuels and Kivalliq Energy, with our target prices being significantly higher than where they're trading now.

    TER: Plenty of food for thought and interesting prospects. We appreciate your time today and we'll look forward to talking with you again. 

    RC: Great. Thank you. 

    Versant Partners Analyst Rob Chang has extensive financial markets experience dating back to 1995. He was a member of a five-person team running a multi-strategy hedge fund, a base metals research associate at BMO Capital Markets, a manager of resource funds at a boutique investment management company and an equity analyst covering the global mining sector at an independent investment bank. Rob has an MBA from the Rotman School of Management at the University of Toronto and holds a Chartered Investment Manager designation.

    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: Fission Energy, Energy Fuels Inc., Uranerz Energy Corp. and Uranium Energy Corp.
    3) Rob Chang: I personally and/or my family own shares of the following companies mentioned in this interview: Uranium One. I personally and/or my family am paid by the following companies mentioned in this interview: None.

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    Tags: Uranium, Nuclear
    Nov 15 2:42 AM | Link | Comment!
  • Vikas Ranjan: Companies Meeting Emerging Market Demand

    Vikas Ranjan: Companies Meeting Emerging Market Demand

    Source: Brian Sylvester of The Energy Report  (10/27/11)

    http://www.theenergyreport.com/pub/na/11433

    Headlines scream gloom and doom, but Vikas Ranjan of Ubika Research sees brilliance on the horizon. As emerging markets develop, opportunities for profit abound: it's only a matter of identifying the most in-demand commodities. Meanwhile, cleantech companies are creating commercial solutions to keep the lights on and the water flowing. In this exclusive interview with The Energy ReportVikas discusses the new Ubika Mining 30 Index and some companies ready to feed the need.

    COMPANIES MENTIONED: ALLANA POTASH CORP. - CHAMPION MINERALS INC. - CLEARFORD INDUSTRIES INC. - GLEN EAGLE RESOURCES INC. - H2O INNOVATION INC. - RODINIA LITHIUM INC. - WESTPORT INNOVATIONS INC.

    The Energy Report: Vikas, Ubika Research launched its Mining 30 Index on October 1, during a time of less-than-robust projections for the global economy. Why commodities, and why now?

    Vikas Ranjan: It is true that in the short term, the global economy does look sluggish. However, we are very optimistic about the longer-term health of the global economy, especially the emerging markets. Countries like China, India, Brazil, South Africa, Russia, Indonesia and Vietnam will continue to grow at a robust pace. Commodities are a big part of that growth story. At this stage, a slight economic downturn creates an opportunity to spot undervalued assets. 

    TER: How did you choose which commodities to focus on? 

    VR: Because our investment thesis concerns broad-based growth in emerging markets, we looked for commodities that are used in a range of industries. We asked ourselves what particular emerging markets will need the most in the next five to 10 years and which commodities will meet those requirements. Base metals like copper, nickel and zinc address the need to expand infrastructure, and agricultural commodities like potash and phosphate are key to feeding an increasing population. 

    TER: About 19% of the index is coal companies. Why did you allocate such a large percentage of the index to an energy source that governments are increasingly trying to phase out? 

    VR: Coal is going to be in use for a long, long time. More than two-thirds of the world's energy still comes from coal. China sources 80% of its energy from coal, as does India. In fact, the largest market cap company in India is Coal India Ltd. (COALINDIA:NSE), which went public about a year ago. In the next five to 10 years I don't see any energy source coming close to coal. Beyond electricity generation, coal is also used to produce steel. Coal may be phased out in the future, but that future is far, far away.

    TER: Could the Ubika Mining 30 Index serve as an indicator of global economic health, similar to copper, the so-called barometer of global markets? 

    VR: Copper will still play its role as an early indicator, a bellwether, for the direction of the global economy. There really is no substitute. However, a broader index, like the Ubika Mining 30, may provide a more decisive indication of the health of the economy, though it may take time for its performance to reflect what is happening in the global economy.

    TER: Since its launch, the Ubika Mining 30 is up roughly 12%. Which companies on the index do you believe will continue to outperform the broader market? 

    VR: All 30 companies are highly prospective, with solid fundamentals and strong management. We're pretty optimistic about most of them. Of course, we will keep a close eye on their performance and make changes as needed. 

    Having said that, we have more in-depth research on a few of them: Allana Potash Corp. (AAA:TSX; ALLRF:OTCQX)Rodinia Lithium Inc. (RM:TSX.V; RDNAF:OTCQX)Glen Eagle Resources Inc. (GER:TSX.V) and Champion Minerals Inc. (CHM:TSX)

    TER: As of June 20, you had a model price of US$2.56 on Allana Potash. At that time, the company had about US$60 million (M) in cash. How much does the company have now, and will it be enough to carry it through the bankable feasibility study?

    VR: Allana is our top pick in the junior potash exploration field. It has a strong prospect for a potash mine in Ethiopia. 

    Its price has come down quite a bit; it's now trading at US$1.02. This is what happens when expectations run ahead and when markets in general tumble, causing more high-profile stocks like Allana's to get impacted negatively. But we will stay by our model price. The resource estimate far exceeded our expectations. It has more than 1 billion tons (Bt) of potash resource at its projects, most of it in the measured and indicated (M&I) category. We think that Allana has close to US$50M in the bank, and it's fully funded to move forward with a bankable feasibility study. If anything, Allana is less risky than it was 18 months ago.

    TER: In your research report, you note the possibility of a takeover. Do you expect that to happen before the bankable feasibility study or after?

    VR: At current levels, I suspect Allana would probably not consider a takeover offer because the price does not reflect its true value. I think it will continue to build value in its assets and its share price will reflect that.

    After the bankable feasibility study, once the value of those deposits are proven, bigger players will start to show serious interest in Allana's exploitable potash. 

    TER: Let's move on to Rodinia Lithium. Its flagship project is the Salar de Diablillos Project in Argentina. Rodinia recently had positive brine processing reports, yet the stock, which is trading at US$0.21, didn't move at all. Why is that?

    VR: Lithium is a little out of favor right now. Although it has other uses, lithium's major role is in electric vehicle batteries. Demand is generally down now, and this is reflected in lithium exploration stocks. General economic conditions have also impacted stock valuations. 

    Rodinia is moving ahead. It has been getting very good exploration results and has had some good results on the processing side. We believe in Rodinia's prospects; it has good projects and a good management team. The company is focused on its Argentinean project right now, but it also has land in the U.S. The stock will likely bounce back once the general sector regains strength. 

    Another advantage for the company is the strategic investment from Shanshan, China's largest lithium-ion battery materials provider. It shows that the company is attracting right type of interest. Rodinia has a good technical team with previous experience in lithium projects and process development. So we remain optimistic about Rodinia's prospects.

    TER: There are quite a few salars in that region of Argentina, and other companies are working on brine projects there. Do you foresee consolidation?

    VR: I would assume so. That is typically what happens when junior companies like Rodinia develop these assets. It's much less likely that it will produce the deposits. If a company has built a good deposit base, has moved the project along and advanced it, it will have better chances of attracting outside interest. Rodinia is in the right place, in one of the most prolific belts for lithium deposits.

    TER: Glen Eagle Resources has several projects based in Québec, Canada; a very safe jurisdiction.

    VR: We're very excited about Glen Eagle. The company is focused on phosphate. It also has a reserve on a lithium project next to Canada Lithium Corp. (CLQ:TSX; CLQMF:OTCQX).

    Glen Eagle recently announced an option agreement to acquire 100% of the Moose Lake phosphate property. It's immediately adjacent to a phosphate property called Mirepoix, which is controlled by Arianne Resources Inc. (DAN:TSX.V; DRRSF:OTCBB; JE9N:Fkft). A grab sampling and initial work were very promising. Glen Eagle is currently developing its Lac Lisette phosphate project. It is presently drilling on it. The Lac Lisette property is 40 km away from Arianne Resources' Lac à Paul property, and shares the same main road.

    Phosphate, like potash, has tremendous use in agriculture and is in high demand. Glen Eagle is very undervalued because not many people know about that resource. Its market cap is about US$18-20M. Right next door, Arianne Resources is roughly a US$140-150M market cap company. We see Glen Eagle closing that valuation gap once it starts to prove up the deposit. We have a model price of US$0.96 on that stock. It trades at about US$0.43. We started covering Glen Eagle when it was about US$0.30.

    TER: The last company you mentioned is Champion Minerals. That's trading at about US$1.25. What's your model price for that one?

    VR: We don't have a model price, because Champion Minerals isn't part of our in-depth research. We had it as a stock-watch list pick. 

    This is an iron-ore exploration company with some very good properties in the Labrador/Québec area. It has been getting some really good results and management is good. They're in a very prospective area for iron ore exploration, near other majors and prospective companies. For example, Consolidated Thompson Iron Mines Ltd. (CLM:TSX) acquired Quinto Mining Corp., which had properties next to Champion Minerals' property. We feel this project could be a prospective inclusion candidate.

    TER: You also operate the Ubika Cleantech 30 Index. As of December 31, 2010, the combined market cap of the companies on that index was US$7.8B. By October 14, 2011, the value had fallen to US$5.8B. Why is this sector underperforming?

    VR: It has been a rough year for cleantech. Our index has fallen along with other benchmark indexes, in similar proportions or even more, for various reasons. Most of the companies in our index are very early-stage companies. Most have no revenue because they are at a pre-commercial stage, and they fluctuate more widely. It's a classic case of market euphoria and high expectations taking hold and running ahead of fundamentals. 

    Cleantech is a very broad sector, so not everything is performing badly. The energy side of it, such as solar and wind, has not proven to be as commercially viable as anticipated. Investors are getting disillusioned, wondering if these companies will become commercial. It's a classic research-and-development (R&D) situation. Some of these companies come out well, but many will fall by the wayside. It hasn't helped that there have been some high-profile failures.

    TER: Has Solyndra's bankruptcy hurt the credibility of the renewable energy/cleantech sector as a whole? 

    VR: It has tarnished the industry. It was certainly not good for the cleantech sector. It also shows you that it is risky for the government to get too involved, for example, in selecting prospective winners or losers in a sector that is still at such an early stage. The better approach is to provide a conducive environment, one that spurs more innovation and R&D, but that ultimately lets the market decide. 

    TER: What's your outlook for the sector?

    VR: Winners will emerge. Investors are looking for companies that can solve a particular problem countries face, especially emerging countries. Examples are companies that have solutions for water pollution, for helping countries improve the livelihood of their population. 

    TER: Which companies fit this description?

    VR: Westport Innovations Inc. (WPT:TSX) is developing fuel technology to reduce emissions by reconfiguring diesel engines to use compressed natural gas (CNG) or liquefied natural gas. That is an example of a company with clean technology that is both retrofitting and allowing new commercial vehicles to use CNG-based engines. Natural gas is still a fossil fuel, but it's a lot cleaner than, say, diesel. In the last year or so, Westport's stock has gone up 40%-45%. It's a good example of a commercial company with rapidly rising revenue that will continue to do well. 

    Clearford Industries Inc. (CLI:TSX.V) is another example. The company developed a patent for a small-bore sewer system. Centralized sewage systems push everything to a single location for treatment. These centralized systems place heavy demand on water, and they are inefficient and costly for emerging countries like India, China and Peru. 

    Clearford developed a solution that treats sewage in a localized environment, suitable for a small community or a collection of small communities. It has anchored its technology in India, where it won a major contract with a large real estate developer that will use the technology for a development of something like 6,000-plus houses or apartments. Once Clearford gets that commercial proof, it should do very well. Getting the first contract under the belt is the biggest challenge. On August 11, 2011, Clearford announced that it has signed a memorandum of intention with Engineers India Ltd., a major engineering consulting firm owned by the Indian government, to jointly pursue projects using Clearford technology in India. This clears the path for the company's growth among municipalities and cities.

    TER: Any others?

    VR: I still like H2O Innovation Inc. (HEO:TSX.V), a major player in Canada's water treatment industry. It designs and produces environmentally friendly water treatment systems, especially for wastewater and industrial processed water. It has been performing relatively well even in the downturn. This is one of the fastest-growing companies in Canada. Its revenue has grown through acquisition, and it has a client base of over 500 installations worldwide. This is a good example of a commercial company solving a real problem. 

    TER: Do you have any parting thoughts for us?

    VR: I would conclude by saying that we don't believe the global economy is dipping into a double-dip recession, which was a major concern in the summer and early fall. We believe the markets made their lows for the year in August, and we see better times ahead. Yes, there is a slowdown, and developed countries are struggling, but the growth story in emerging markets is intact. 

    TER: Excellent. Thank you. 

    Vikas Ranjan, a principal of Ubika Research, has over 15 years' experience in investment management, finance, customer analytics and research. His experience includes management positions with TAL Global Asset Management and Bank of Montreal. He holds a Bachelor of Arts in economics, a Master of management studies from University of Mumbai, and a Master of Business Administration in finance from McGill University. Vikas co-founded P2P Systems Inc., which was acquired by Microforum Inc.

    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) Brian Sylvester 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: Allana Potash Corp. and Rodinia Lithium Inc.
    3) Vikas Ranjan: I personally and/or my family own shares of the following companies mentioned in this interview: Allana Potash Corp. and Rodinia Lithium Inc. I personally and/or my family am paid by the following companies mentioned in this interview: None. Ubika Research has received fees and/or options from the following companies mentioned in this interview to provide research and/or exposure coverage: Allana Potash Corp., Rodinia Lithium, Glen Eagle Resources, Champion Minerals and Clearford Industries.

    Streetwise - The Energy Report is Copyright © 2011 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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    Nov 15 2:29 AM | Link | Comment!
  • Jonathan Lee: Companies Positioned to Grow with Exploding Lithium Demand

    Jonathan Lee: Companies Positioned to Grow with Exploding Lithium Demand

    Source: Zig Lambo of The Energy Report  (10/25/11)

    http://www.theenergyreport.com/pub/na/11396

    Lithium continues to be in high demand as battery application growth outpaces the economy. In this exclusive interview with The Energy Report, Jonathan Lee of Byron Capital calls on his engineering and manufacturing background to explain the factors shaping the evolution of this growing market. He also brings us up to date on several promising companies blazing trails in the lithium industry.

    COMPANIES MENTIONED: FMC LITHIUM CORPORATION - GS YUASA CORP. - LITHIUM AMERICAS CORP. -LITHIUM ONE INC. - OROCOBRE LIMITED - ROCKWOOD HOLDINGS, INC. - RODINIA LITHIUM INC. - SOCIEDAD QUÍMICA Y MINERA DE CHILE S.A. - TALISON LITHIUM LTD. - TOYOTA TSUSHO GROUP - WESTERN LITHIUM USA CORP.

    The Energy Report: Thank you for joining us this afternoon, Jonathan. You have a technical background in engineering and manufacturing in addition to your experience as an analyst. This gives you a unique perspective in evaluating investment opportunities. What do you look for specifically in a lithium company?

    Jonathan Lee: Numerous factors. Our strategy is to find low-cost producers within a sector. Then from a capital cost side, it's always more beneficial to have a lower capital cost to get a better return on equity and make the project more feasible. We like to have low capital expenditures and operating expenditures. Beyond that, it really comes down to valuing the company and trying to make sure that the equity is purchased at the right price. The two major factors that contribute to a better return on equity are good assets and low costs.

    TER: Are you looking across the broad spectrum of levels of development, from prospectors to companies that are already producers? Or do you narrow it down to more advanced companies?

    JL: We look at everything from exploration to producing companies. When we look at producing companies, a lot of times there is less technological risk or execution risk involved. At the earlier stage, there's a lot more risk entailed in proving out the deposit, proving up a resource and gathering more metallurgical information, etc. Earlier-stage companies usually are valued less and have the potential of higher returns but also entail more risk. 

    TER: Lithium has been a hot topic in the past several years. For those readers who are not all that familiar with it, can you give us a little background on the metal, its uses and what people should be looking at when considering lithium investments? 

    JL: Lithium is a metal that's used in a slew of different products. Batteries are a big percentage of it, roughly 25%-30% of production. Glass and ceramics are also a big usage because it lowers the heating temperature, which saves energy. It's also used in lubricants and castings. A variety of products utilize the element, but these end users make up the majority. 

    TER: Is battery usage growing faster than other applications? 

    JL: Yes. Although penetration into automobiles is not great as of yet, there is significant growth in consumer applications for lithium-ion batteries, and you're seeing that growth year over year. We think that's going to continue to grow as things get switched over from, say, nickel-metal hydride rechargeable batteries to lithium-ion batteries in consumer electronics. 

    TER: With all the market turmoil that we've had here since you last spoke with us back in April, can you bring us up to date on what's been happening in the battery materials industry in the past six months? Have there been any major changes? 

    JL: There are only four major lithium producers. Chemetall and FMC Lithium Corporation (FMC:NYSE) publicly stated in July that they were raising their prices, partly because of increased demand. That definitely helped out along with rising raw materials prices. Soda ash (sodium carbonate) has increased dramatically, thereby increasing the cost to produce lithium carbonate. Because demand is still strong, they've been able to raise prices and pass on those extra costs to customers. If you look at companies like Talison Lithium Ltd. (TLH:TSX), which we currently cover and have a Buy recommendation on-it is also selling at capacity. You're likely to see FMC increase its capacity by 30% next year. So the overall strength of the market is definitely there in the short term. We believe producing companies, such as Talison, will be able to take advantage of that market demand.

    TER: Has anything happened recently on the technical front to affect the lithium market in either a positive or negative way?

    JL: As kind of a leading indicator of where the market is going, you can look at the amount of money that a company is going to spend on new lithium-ion plants. GS Yuasa Corp. (TYO:6674) is increasing the capacity of its plant. It's spending roughly $300M on that plant. When it's up and running in 2014, that will be a significant buyer of lithium for batteries. Panasonic, although it's scrapping its plant in Japan, is also expanding in China. More and more battery producers are increasing capacity, and that's a clear signal of where we think the market is going.

    TER: A number of companies are mining lithium deposits, mainly in South America, but also in Canada. Do you foresee a supply glut in the market? 

    JL: Most of the mining companies could come into production within the next year. Demand should increase in step with supply. Talison is increasing its production as is FMC. The markets have a pretty good way of clearing out producers that aren't able to compete. That is why locating potential low-cost producers is part of our investment strategy. Just like any other market or mining sector, not all exploration juniors make it to production. We try to find those companies that will be in the lower quartile of relative production costs.

    TER: You mentioned that a couple of the major producers raised prices. Is lithium mainly a negotiated or supplier price-based market rather than one driven by investment demand?

    JL: Yes, it's mainly supplier-price based. It's sold over the counter, and we doubt there is going to be any type of LME (London Metal Exchange). It's not going to be an exchange-traded material because customers have specific criteria for batteries on the chemical side as well as the physical side. A lot of the juniors that we cover are working with trading or industrial companies or even an end user like the Argonne National Laboratory, which has an agreement with Western Lithium USA Corp. (WLC:TSX; WLCDF:OTCQX). Determining the physical and chemical characteristics of lithium products will be based on customers' needs. Because each customer has different needs, we think that it will remain a negotiated market, and people will pay different prices for different chemical and physical characteristics.

    TER: Back in April, you told us about the four major companies that dominate the market, which areSociedad Química y Minera de Chile S.A. (SQM:NYSE; SQM-B:SSX; SQM-A) a Chilean company; FMC Lithium Corp.; Chemetall, a unit of Rockwood Holdings, Inc. (ROC:NYSE); and Talison. What are the prospects for smaller companies now entering the market?

    JL: Recently, demand has been strong and the majors are expanding. But we believe there will be space for companies to enter the market because the four majors will, at some point, max out on capacity. We think there is space for some of the juniors. In the short or medium term, you may see companies that have strategic investors who may pay up for the security of having that supply in an offtake agreement. If one of those strategic investors makes a more substantial equity investment in the near future, we think that shows that the customers are more worried about the security of supply rather than price. And that could bode well for some of these juniors. 

    TER: You've done some research reports recently on Talison Lithium, Lithium One Inc. (LI:TSX.V)and also Western Lithium. Of course, Talison is one of the majors. What can you tell us about Lithium One and Western Lithium, which are not in that category?

    JL: Lithium One is a junior brine exploration company in Argentina. It just released its preliminary economic assessment (PEA), which showed positive economics. It showed it could be a low-cost producer of lithium as well as potash. Its estimated production includes a substantial amount of potash, which, on the byproduct credit basis, significantly reduces the cost of lithium production. It's similar to the model that SQM uses in Chile, where it has potassium and lithium co-products that make for positive economics. We think it's definitely tangible given that its salar looks very much like FMC's salar. 

    On Western Lithium's front, it signed up with the Argonne National Laboratory to collaborate and work on creating better lithium products. Because lithium is a non-commodity with respect to its chemical and physical characteristics, having that knowledge of what its customers want is a significant turn of events. This is a big win for the company.

    TER: How close are these companies to production?

    JL: Most of them are at least a few years away from production. I guess the closest one out of the brine projects would potentially be Orocobre Ltd. (ORL:TSX; ORE:ASX). It's in negotiations with Toyota Tsusho Group (TYHOF:OTCPK) to finalize its offtake and strategic investment. Even after that is done, you still have to construct the mine, pump brine into the ponds and evaporate it for at least a year. So you are looking at a timeframe of at least two to three years to production. I think it would be one of the earliest companies to come to production. Most of them are fairly far off.

    TER: What kind of capital costs are associated with putting these operations into production?

    JL: It really depends on the size, but a lot of their economic assessments have come in roughly between $200-$360M, ranging in size from 15,000-25,000 tons. And those estimates seem fairly reasonable. Financing is going to be one of the risks for companies getting projects up and running. Mining is a capital-intensive business. 

    TER: Are there any other lithium development names that you think are worth considering at this point?

    JL: The other two names that we cover are Lithium Americas Corp. (LAC:TSX; LHMAF:OTCQX) andRodinia Lithium Inc. (RM:TSX.V; RDNAF:OTCQX). Lithium Americas has a strong management team with a property adjacent to Orocobre with very similar brine chemistry, and it already has strategic partners in Magna International Inc. and the Mitsubishi Corporation. Rodinia has a brine project in Argentina, which is highly prospective. It should have its PEA released within this quarter. That should bode well for it and prove up its economics as well. 

    TER: How would you summarize your reading on the lithium business at this point?

    JL: I think the lithium business is strong. I'm seeing strong growth in the near term. With the consumption of lithium in consumer batteries, you'll see substantial growth, especially with the implementation of transportation vehicles. Companies are committing hundreds of millions of dollars in capital to build these plants. We think that's a leading indicator of where demand is heading.

    TER: As far as you are aware, is anyone developing any competing technology?

    JL: No. When you look at where lithium is on the periodic table, it's on the top left, so it's the cathode of choice because of its energy density.

    TER: It looks like lithium is here to stay for the foreseeable future.

    JL: We believe so as well. 

    TER: Very good. We appreciate the update and your current thoughts. Thanks for talking with us today.

    JL: Thank you.

    Jonathan Lee is a battery materials and technologies analyst with Byron Capital Markets in Toronto. As a member of Byron's research department, Lee's primary focus is on the battery materials sectors, which includes lithium, vanadium and cobalt.

    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: Talison Lithium, Rodinia Lithium Inc., Western Lithium USA Corp and Lithium One Inc.
    3) Jonathan Lee: I personally and/or my family may own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.

    Streetwise - The Energy Report is Copyright © 2011 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
    Petaluma, CA 94952

    Tel.: (707) 981-8204
    Fax: (707) 981-8998 
    Email: jluther@streetwisereports.com

    Nov 15 2:06 AM | Link | Comment!
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