Source: Peter Byrne of The Energy Report (8/15/13)
Home to some of the richest, highest-grade uranium deposits on the planet, the Athabasca Basin has long been a mining investment hot spot. Even with uranium prices at relatively depressed levels, projects like Roughrider or Patterson Lake South have captured the market's ear-and created significant gains for the companies behind these discoveries. In this interview with The Energy Report, Zimtu Capital Director Ryan Fletcher profiles miners that may well be sitting on the next show-stopping resource as the Athabasca Basin story continues to unfold.
The Energy Report: Ryan, what is the current supply and demand situation for uranium?
Ryan Fletcher: Uranium is currently a contrarian investor's dream commodity. Post-Fukushima, the space has been beaten down to the point where it is attractive to investors again. My view on the space is based on filtering out a lot of the noise and focusing on a couple of simple things. First, uranium, or more specifically nuclear energy, is an important part of the global energy supply mix, contributing about 11% of the world's electricity. There are many advantages to having nuclear as part of the energy mix. Second, global demand for electricity is growing: Projections estimate an approximate demand increase of 75% by 2035. Bottom line, we will need more uranium supply to feed global energy needs.
Already there is a gap between global uranium demand and mine supply. This is currently being filled by secondary supplies and recycling. But this gap is set to widen. Over the previous seven years, we added about 46 million pounds (46 Mlb) of uranium to the supply side, 90% of it from Kazakhstan. By 2020, we will need to add almost double that-an extra 90 Mlb, give or take. There is no Kazakhstan-type production growth to bail us out this time. That is a gargantuan challenge for the industry.
TER: What makes uranium an attractive investment?
RF: For investors, the uranium space is attractive now because the spot price is so low-it's been bouncing around $35 per pound ($35/lb), which is close to an eight-year low, and almost a quarter of its $135/lb peak in 2007. Long-term contracts, where most uranium is bought and sold, currently price uranium at around $50/lb. How did we get to this low? The biggest factor was Fukushima. After the events of Fukushima, the Japanese government immediately put the brakes on its nuclear industry, the third largest in the world, shutting down its entire fleet, which included about 50 reactors. This has had a two-fold effect on the market. Not only did it immediately take a significant amount of demand offline, this decision added a new source of supply because Japan's utilities had excess inventories to destock.
The Japanese economy, however, is already starting to feel the effects of the mothballed fleet. Since the Japanese fleet has been taken offline, the cost to substitute fossil fuels like liquefied natural gas (NYSEMKT:LNG), oil and coal, etc. has been estimated at more than $300 million ($300M) per day-that's over $100 billion per year. In some industries, electricity bills have risen fivefold. Meanwhile, utilities are in need of bailouts and Japan is blowing its climate targets. Although still politically sensitive, the likelihood of Japanese reactor restarts appears to be growing, albeit timing is still uncertain. This, along with other factors, should help to reverse the process that brought uranium prices to their current lows.
A side consequence of the low current prices is that they do not incentivize new mining projects or expansions. Companies have shelved or delayed projects. We are getting into a situation where if uranium prices don't start to move, we'll be turning off the lights. This is a bullish scenario for investors.
TER: The Athabasca Basin is the hot spot for uranium plays today, and several juniors are exploring there. What is driving the interest?
RF: The Athabasca Basin has always been a hot spot for uranium investors as it hosts the highest-grade and richest uranium deposits in the world. In mining, grade is always king, especially when prices are low. The Athabasca Basin also has well established mining infrastructure, a stable investment environment and the presence of the majors, including Cameco Corp. (CCO:TSX; CCJ:NYSE), Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) and AREVA SA (AREVA:EPA).
While most of the exploration and mining activity in the Athabasca Basin has been centered on the eastern side, recently Fission Uranium Corp. (FCU:TSX.V) and its 50% partner Alpha Minerals Inc. (AMW:TSX.V) have made a significant discovery, Patterson Lake South (PLS), on the western end. This is driving a significant amount of interest back into the region.
The PLS discovery is one of the most intriguing finds in the basin in some time, and already it's shaping up to be one of the most attractive uranium projects in the hands of juniors since Hathor Exploration's Roughrider project, which was eventually acquired by Rio Tinto for $654M in 2012.
Fission and Alpha are currently in the midst of an 11,000 meter (11km) $6.95M drill program. So far the results have been spectacular. Three main zones of mineralization have already been identified within a strike length of about 800 meters (800m). The first few holes from this program have been some of the best to date, and the potential resource appears to be expanding quickly with additional drilling.
The main PLS conductor corridor runs for about 2km, giving the project a lot of immediate potential upside. This is significant, as uranium deposits in the Athabasca are usually confined to small areas. The Roughrider deposit, for instance, was largely contained within a 350m area. The discovery is both high grade and near surface, and has resource upside. This is music to the market's ears, as well as to majors and other potential acquirers.
TER: What other companies in the Athabasca Basin are you following? Any new plays?
RF: NexGen Energy Ltd. (NXE:TSX.V) is a newly listed company that we are invested in and following. The company has great ground, a top-tier management team, money in the bank and drills turning. The company is run by Leigh Curyer, who was previously CFO and head of corporate development at Southern Cross Resources Inc. before it merged with Aflease Gold and Uranium Resources Ltd. to formUranium One Inc. (UUU:TSX).
NexGen's flagship projects, Radio and Rook I, are both located in great neighborhoods. The Rook I project borders PLS. NexGen acquired this project just before Fission and Alpha announced their discovery-it was fortuitous timing. The company plans to drill a minimum of 3,000m at Rook I beginning mid-August. This should be an exciting time for investors. The Radio project, on the other hand, is located on the same east-west corridor that is interpreted as hosting the Roughrider project. NexGen currently has a market capitalization around $34M, which would be dirt cheap if the company shows success on its drill programs.
Another company we are involved with in the Athabasca Basin is Lakeland Resources Inc. (LK:TSX.V). Over the last several months, the company has meticulously acquired a portfolio of properties in the basin, primarily in areas where the depth to targets are shallow and where there is a history of exploration, thereby increasing the potential chance of success. The company is backed by a seasoned technical team and advisory board, including Richard Kusmirski, past exploration manager for Cameco, and Thomas Drolet, a uranium and nuclear energy specialist with over 40 years in the energy sector. Lakeland's key property is Riou Lake, which is located in the north end of the basin. Lakeland is a new entrant into the Athabasca Basin and has a micro-cap of ~$2M. This company is a relatively inexpensive way for investors to gain exposure to the Athabasca Basin.
TER: Outside of the uranium space, where else can investors find opportunity in the current market?
RF: There are some companies you can pick up now that are at or below cash value. As of their latest financials, for instance, Ethos Gold Corp. (ECC:TSX.V; ETHOF:OTCQX) has approximately CA$9M in cash and a CA$6M market cap. Ethos is run by Gary Freeman, a dynamic, Vancouver-based financier and entrepreneur who recently sold his previous venture, Pediment Gold Corp., to gold producer Argonaut Gold Inc. (AR:TSX) for CA$137M. Ethos is on the hunt for assets and opportunities. This is a stock you can be patient with and accumulate for the long term-you sleep easy with this management team working for you.
Ryan Fletcher is a director of Zimtu Capital Corporation, a Vancouver-headquartered public investment company that creates, invests in and grows resource companies. Fletcher has been responsible for identifying and sourcing projects, structuring companies and investments, marketing group companies and business development. He is a graduate of the University of British Columbia Okanagan with a Bachelor of Arts in economics. Before joining Zimtu in 2009, Fletcher worked as a consultant for publicly listed mineral exploration and development companies and a boutique private investment firm focused on the mineral exploration sector.
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1) Peter Byrne conducted this interview for The Energy Report and provides services to The Energy Report as an independent contractor. He 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 Uranium Corp. and Zimtu Capital Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Ryan Fletcher: I personally and/or my family own shares of the following companies mentioned in this interview: Fission Uranium Corp., NexGen Energy Ltd., Lakeland Resources Inc. and Ethos Gold Corp. I personally am and/or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with and/or share position in the following companies mentioned in this interview: NexGen Energy Ltd. and Lakeland Resources Ltd. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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