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Thomas Drolet Warns Of A Coming Grand Canyon Of Uranium Supply Deficit And Shares Three Ways To Profit By It

|Includes: Cameco Corporation (CCJ)

A Grand Canyon of supply deficit is opening up in the uranium markets, with 66 nuclear reactors under construction globally and more restarting in Japan. As Russia and China shore up their supply chains in Kazakhstan and elsewhere, the rest of the world could be scrambling for new sources to keep the lights on. In this interview with The Energy Report, Thomas Drolet, head of Drolet & Associates Energy Services, illuminates junior companies in the Athabasca Basin that could be strategic sources for countries shoring up domestic supply and for majors that need replacement resources.

The Energy Report: We have heard for years that Japan could be restarting its reactors any time. Is it really happening now?

Thomas Drolet: It is happening; one has just restarted. The intelligence I have gathered from my visits and telephone conferences with Japanese utility people since the Fukushima-Daiichi accident indicates that the restart will be measured, formal and slow. Only 25 of the original 54 reactors will eventually be restarted, in my opinion. The reasons are varied, but include local opposition, proximity to fault lines, regulatory barriers and excessive capital reinvestment needs.

TER: Once they are restarted, how long will it take to work through Japan's uranium supply backlog?

TD: Utilities-and Japanese utilities are no different than North American, European or Canadian utilities-prefer to buy in the long-term markets. They usually buy somewhere between two and five years' forward supply. That has left the nine Japanese utilities that have nuclear reactors on their systems stockpiling inventory to fulfill long-term contracts. A few of those utilities paid a penalty to get out of the contracts. But the majority stuck with them, so they do have a lot of inventory on hand.

An average utility that restarts four reactors would burn through excess uranium inventory in about five to seven years. Some reactors will start sooner than the average of the 25, and work through supplies faster, but some will take longer.

TER: In the meantime, how much of an impact can Chinese and Indian nuclear construction have on demand in the uranium market?

TD: Several hundred reactors are being planned or are under construction in China, India, Russia, Saudi Arabia, Argentina and the United Arab Emirates. That doesn't include the smaller reactor business in places like Turkey, Jordan, Bulgaria, Bangladesh and Vietnam. That means a Grand Canyon of a deficit in supply from known sources-approximately 30-35 million pounds per year (30-35 Mlbs/year) in what is currently a 155 + Mlbs/year market-will open up by 2020-2022. The way in which the deficit gets filled is going to be a complex process.

TER: If it takes decades to develop a uranium resource, that puts the focus on the junior space, where we have seen a flurry of mergers and acquisitions (M&As) lately. Is that a good sign for uranium mining equity prices for the rest of this year?

TD: First, we have to get through this doldrums period of oversupply over the next few years. We have the big existing suppliers right now in Kazakhstan, in Canada- Cameco Corp. (NYSE:CCJ)-and in Australia. Some smaller in situ recovery [ISR] suppliers work the U.S. and Australia, but that is not going to be enough to fill the approaching canyon. All of this current supply is going to be gobbled up by U.S., European, Chinese, Canadian and Indian users. We're going to have to look for new supplies from Canada, South America, Europe, the U.S. and Africa.

We are indeed headed for a deficit situation, and it is going to be a real problem for baseload electricity supply in the world. As much as 16% of the world's electricity today is generated by nuclear reactors, and over the next decade or two, that will ramp up toward 20+%. The supply of last resort would have to be to gain access to some national strategic stockpiles which, in and of itself, would have major geopolitical implications.

TER: Will that mean more M&A, as majors look to replenish resources? Or perhaps exploration for fresh sources?

TD: I think both. M&A is the way of the world in the oil, gas and mineral exploration and production (E&P) game. The juniors find the uranium, prove its existence and its economic extraction potential, and then, because the juniors don't have the capital, the bigger companies step in to put their finds into operation. This process will continue in the future world of uranium as well.

TER: Let's discuss the Athabasca Basin. What should investors be watching in the Athabasca?

TD: I think we should be watching for investor interest to come from outside of the normal sources used to date-not from the current players. The Chinese and Indian governments and their agencies and other business enterprises are looking for long-term sustainable supplies. I think Russia will concentrate on a closer relationship with Kazakhstan to supply its turnkey projects in Turkey, Pakistan, Bangladesh and Vietnam. This shift could limit what Kazakhstan sells on the general market in the future.

TER: Are there companies that our readers should be watching?

TD: Ualta Energy Ltd. (private) of Canada is managed by a couple of geologists-Michael Fox of Calgary and Paul Pitman of the Toronto area-who have decades of experience in mineral exploration, including the extraction of uranium. They have discovered two potentially very large bodies of uranium mineralization hosted in porous remains at fairly shallow depths in the plains region of southern Alberta, a mining-friendly jurisdiction ranked highly by the Fraser Institute. The two zones of uranium mineralization each measure more than 15 miles in length and 2 to 8 miles in width, and have been defined by down-hole gamma ray logging in 55 drill holes drilled by oil and gas companies in southern Alberta, southeast of Calgary. The two mineralized zones show low concentrations of uranium, but the mineralization is fairly evenly distributed in the sandstone over a very extensive area. Ualta's management proposes to extract the uranium using an innovative, low-cost combination of horizontal drilling and proven ISR techniques. The size of the zones has led to estimates of U3O8 in the 500+ Mlb range, which management considers could be extracted at costs in the near-$20+/lb range. The surface ISR plans would be simple and of very low capital cost. Ualta Energy is a start-up company looking for capital. This is a new, promising company to keep our eyes on.

TER: Do you envision it going public at any time soon?

TD: Not until it gets private capital financing to prove out in the ground what it's seen from the oil and gas drilling core data. But soon after that, I think it's a distinct possibility it will list on the TSX.V.

TER: What words of wisdom do you have for investors who've been waiting for uranium prices to turn around?

TD: I'm starting to notice that some of the big suppliers, faced with low spot and long-term prices, are entering into shorter-term user contracts because they do not want to be locked into longer-term contracts at the current very low price. This is a sign that producers expect uranium prices to rise. I believe the whole supply system will soon recognize the looming demand pressure from the 66 reactors under construction worldwide. Price increases usually show up first on the spot market, and then the long-term market follows fairly quickly. That market may start to move up by the end of 2016. We will have to wait and see.

TER: Thank you for your time.

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

Thomas Drolet is the principal of Drolet & Associates Energy Services Inc. He has had a 44-year career in many phases of energy-nuclear, coal, natural gas, geothermal and distributed generation, with expertise in nuclear commercial aspects, nuclear research and development, engineering, operations and consulting. He earned a bachelor's degree in chemical engineering from Royal Military College of Canada, a master's degree in nuclear technology/chemical engineering and a DIC from Imperial College, University of London, England. He spent 26 years with North America's largest nuclear utility, Ontario Hydro, in various nuclear engineering, research, international commercial and operations functions.

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