Japan's nuclear catastrophe sent shock waves through the uranium market, but in this exclusive interview with The Energy Report, Haywood Securities Analyst Geordie Mark explains why the disaster in Japan isn't the end for uranium miners.
The Energy Report: Geordie, take us through what it was like on March 11 once you learned that Japan's nuclear reactors had suffered severe damage in an earthquake and subsequent tsunami.
Geordie Mark: We were all taken aback by the scale of the natural disaster, of which the significance of the event only really translated over the weekend as more data started to become available. The shock of the event hit the markets the next week with uranium stocks taking a significant beating.
TER: Was it more significant than the downturn in late 2008?
GM: Definitely. The results over the entire week were far sharper and more emotion driven than based on tangible knowledge of the events, which are still slowly coming to light. We still don't know everything that has happened at the reactors. We probably won't for quite a while. Those tangible effects are still going to come out. The market reacted emotionally and moved out of the sector in a big way. In terms of magnitude and timeframe, we believe that it was greater than what we saw in 2008.
TER: Did you have to revise a number of your research reports on uranium companies you cover immediately?
GM: We were waiting to find out more information before we reached a more-definitive conclusion about how the events would affect the sector on a short- and long-term basis. We certainly needed more information. Since then, we have revised some of our expectations and our supply/demand scenarios.
TER: Will the impact of Japan's nuclear problems continue to lower uranium prices? Or will the upward price trend that started in the second half of 2010 continue once the market suffers some memory loss?
GM: That's a good question. I think this sector will continue to go forward still. There are a number of reactors under construction today-62 or more. That represents appreciable growth, about 15%.
We've lost some demand, particularly from Japan and certainly from the reactors in Germany that were shut down in response to the accident in Japan. That loss in near-term demand is somewhat offset of by the loss of production out of the Rio Tinto's (NYSE:RIO; ASX:RIO) Ranger Mine (69% Rio Tinto) in Australia and some shortfalls from of the company's Rössing Mine in Namibia. That leads us to believe that there's pricing protection based on supply/demand fundamentals.
TER: So far this year, the long-term price for uranium is up about 11%. When you talked to The Energy Report in October 2010, you said you expected some price pressure in uranium in 2012 and 2013. Has that outlook changed?
GM: No, that's an area that is still very much in play. Those are very large drivers. We expect to see a number of reactors remain offline in Japan, but the pricing pressure is still there. The supply/demand scenario is largely the same. We've lost some demand on the short end of the curve, but we also lost some production. We probably will lose a little expected future supply from the advanced exploration-stage companies that we thought might go into production after 2013. I think there may be project development delays now due to greater regulatory oversight in response to the events in Japan. However, it's still very much the same equation that we saw 10 months ago.
TER: Does that mean that you're going to increase the discount rate on some of those juniors?
GM: I think we'll leave them as they are. The discount rate in the juniors still builds in a certain amount of risk depending on the development and permitting stage of the individual projects. Modification of expected production timelines and dilution expectations in our valuation account for more protracted periods of stakeholder interaction, project scrutiny and regulatory oversight.
TER: The Ranger Mine is being shut down due to fear that severe rainfall could push radioactive water over the edge of a tailings dam and into a World Heritage site in Australia's Northern Territory. Do you see this as a first step that could lead to a push for nationwide ban on uranium mining in Australia?
GM: Activist groups have already called for bans on uranium mining. It is too early to say what the response will be.
TER: Do you have an update on what is happening at the Ranger Mine now?
GM: It extended its shutdown period to the end of July.
TER: Do you have any Buy ratings on juniors with projects in Australia?
GM: Sure we do. We cover Mega Uranium Ltd. (TSX:MGA), which has a project in Lake Maitland. It's in the advanced permitting-application phase. It's attempting to win a mine permit for production around 2013 or so. This would be a small-scale mine at about 1.65 million pounds (Mlb.) per year. Mega has an $0.80 price target.
TER: What would the company's costs be per pound?
GM: We expect that cash costs would be somewhere in the mid-$20/lb. range.
TER: What sort of uranium price would Mega need to have a profitable operation?
GM: If long-term prices hold where they are-just north of $70/lb.-it would make an attractive proposition.
TER: Hathor Exploration Ltd. (TSX.V:HAT), which is a junior operating in Saskatchewan's Athabasca Basin, has launched a bid to acquire Terra Ventures Inc. (TSX.V:TAS). If the deal goes through, Hathor would realize full ownership of the Roughrider deposit. Is Hathor's bid to acquire Terra a sign that more consolidation is on the way?
GM: It's a strategic move. Given market sentiment about the sector and the lows we have seen, we could see more opportunities to consolidate further for companies that have good assets or strategic asset portfolios.
TER: Ok. What are some companies you believe could be targets in a consolidation phase?
GM: In the U.S., in-situ recovery (ISR) companies, such as Uranium Energy Corp (NYSE.A:UEC), Uranerz Energy Corp. (TSX:URZ; NYSE.A:URZ), and Ur-Energy Inc. (NYSE.A:URG; TSX:URE) are all either in production or in advanced stages of permitting. They could be attractive takeout targets for broader-scale consolidation within the ISR space.
Strateco Resources Inc. (TSX:RSC) potentially could be a good acquisition for a high-grade uranium resource over 20 Mlb. Extract Resources Ltd. (TSX:EXT; ASX:EXT) and Bannerman Resources Ltd. (TSX:BAN; ASX:BMN) also represent potential targets for consolidation of strategic asset ownership-this point is particularly poignant for Extract Resources given the recent dialogue between Kalahari Minerals plc (LSE:KAH; NSX:KAH)-Extract's largest shareholder and China's state-owned China Guangdong Nuclear Power Holding Corporation (CGNPC).
TER: Let's look at some of those companies a bit more closely. In a recent research report on Uranium Energy, you said you expect operating cash flow per share to jump from $0.03 in 2011 to $0.35 in 2012 and $0.70 in 2013. What's going to propel that growth?
GM: The company started production late last year and has a great growth portfolio. It is the newest uranium producer and probably will hold that mantel for another year or more. The growth really relates to Texas operations. The Palangana ISR project is growing. The Goliad satellite ISR facility is expected to come on stream late this year or early next year. That really gives the company a good growth portfolio.
TER: It's in a pretty safe jurisdiction as well.
GM: Yes, It's in Texas, which is an Agreement State that streamlines licensing. The company already has a fully permitted plant. Its first project, Palangana, is fully permitted and in production. Goliad has a draft permit and is awaiting the final permit perhaps as soon as July. Political risk seems to be lower there.
TER: What are your estimated operating expenses?
GM: We say that the company's future expected cash costs are about $26/lb. We play it conservative and will review once we see sustained output growth. Our target price is $6.30.
TER: Let's talk about Uranerz, which is developing a project in Wyoming.
GM: Uranerz could win Nuclear Regulatory Commission (NRC) licensing approval for the Nichols Ranch ISR Uranium Project by early next quarter. The company is well cashed up; it has around $49 million in the bank. If it can start development by midyear, it could be in production within about 12 months. Cash costs are expected to settle somewhere in the mid- to low-$30/lb. range. We see Uranerz as the world's next uranium producer. Our target price on Uranerz is $6.10.
TER: Ur-Energy is developing the Lost Creek project in Wyoming. How robust could it be?
GM: Ur-Energy's projects in Great Divide Basin, Lost Creek and Lost Soldier are a little bit behind in the permitting progress compared to Uranerz. The company potentially could receive Wyoming Department of Environmental Quality permits and NRC license as early as the second half of this year and, as such, it could come into production in late 2012. Ur-Energy has a very strong technical team and an advanced development-stage asset. We have a price target of $2.
TER: Are there any other operating mines in Wyoming right now?
TER: This is an established district, probably the most-established uranium district in the U.S. right now, isn't it?
GM: The state has more than 50 years of continuous uranium-production history and, by virtue of this, is placed as an established uranium-producing region.
TER: Strateco is developing the Matoush uranium project in Québec, which is a somewhat high-grade project. Why might that be a takeover target?
GM: Strateco has a handsome resource of just more than 20 Mlb. U308. The grade is just under 0.6% uranium and it's in Québec. It has good neighbors in Cameco and AREVA (PAR:CEI). The resource has demonstrable upside potential along a long strike length and at depth. It has all the marks for growth potential. It also is a long way through permitting for its bulk-sampling underground development. We think the company could be close to winning a permit to go forward. The Matoush project is probably one of the most advanced development-stage projects held outside Cameco, Denison Mines Corp. (TSX:DML; NYSE.A:DNN) and Areva in Canada. We have a price target of $1.45.
TER: What's the earliest it could be in production?
GM: Probably 2014 or 2015.
TER: What is the regulatory regime like in Québec? That tends to be a pretty favorable jurisdiction for mining gold and base metals. Does the same hold true for uranium mining?
GM: That remains to be tested fully. Québec has a very rich mining history, and international mining surveys place the province high in the rankings.
TER: Are there any other companies that have a takeover target on them?
GM: Extract Resources is an obvious entity out there with the China Guangdong Nuclear Power Group (CGNPC) in dialogue with the largest shareholder in Extract Resources, which is Kalahari Minerals. It's the only asset in the uranium space that I deem to be world class and in the hands of the development-/exploration-stage company.
TER: Bannerman Resources is right in that neighborhood, too, albeit with a bit lower grade, isn't it?
GM: That's very true. Bannerman's Etango project is very sensitive to the uranium price, and the company's share price has certainly reacted that way in relation to changes in the underlying spot price. The heap-leaching potential looks very good; the tests are very reasonable. Bannerman's Etango project is anticipated to deliver uranium at higher cash costs of around $40. However, given that this development-stage project has the potential for significant production of between 5 Mlb. and 7 Mlb., I don't think the company can be ignored.
TER: What is your forecast for prices through the end of 2011 and into early 2012?
GM: There is room for pricing strength going forward. We forecast the price to be $67.50 for uranium spot and about $75 for uranium long term. We still see most of the action coming around 2013 to 2014. There is good fundamental support for the commodity price.
TER: Should investors get into this play now and ride it out until 2013 or 2014?
GM: Value plays do exist for those who have mid-term investment time horizons, as well as short-term time horizons as company valuations are driven around catalysts relating to production growth, permitting progress, resource expansion and discovery. We expect that a number of companies in the uranium sector will enjoy the aforementioned catalysts over the next year or so.
TER: We really appreciate you taking the time for this.
Dr. Geordie Mark, a research analyst with Haywood Securities, focuses on uranium companies involved in exploration, development and production. He joined Haywood from the junior exploration sector, where he was vice president of exploration for Cash Minerals, which concentrated on uranium and iron oxide-copper-gold targets across Canada. Prior to joining the exploration industry, Mark lectured in economic geology at Monash University, Australia and served as an industry consultant. He completed his Ph.D. in geology in 1998 at James Cook University's Economic Geology Research Unit in Australia, specializing in aqueous geochemistry and igneous petrology applied to ore-forming systems.
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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: Mega Uranium, Uranium Energy Corp., Uranerz, Ur-Energy, Strateco and Bannerman.
3) Geordie Mark: I personally own shares of the following companies mentioned in this interview: None. I personally am paid by the following companies mentioned in this interview: None.
4) As of the end of the month, immediately preceding this publication, either Haywood Securities, Inc., its officers or directors beneficially owned 1% or more of Uranerz and Strateco.
5) Haywood Securities Inc. or an affiliate has managed or comanaged or participated as selling group in a public offering of securities for Strateco and Denison Mines in the past 12 months.
6) Haywood Securities, Inc. or an affiliate has received compensation for investment banking services from Uranium Energy Corp. in the past 12 months.
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