Geordie Mark: Coal and Uranium Generate Heat
Source: Brian Sylvester of
The Energy Report
From fossil fuels to fission, growing global demand for power
generation offers investment opportunities. Thermal coal is
heating up and the uranium junior mining sector is set for
development and a wave of consolidation. Geordie Mark, mining
analyst with Haywood Securities in Vancouver, shares his thoughts
in this exclusive
BANNERMAN RESOURCES LTD.
- CAMECO CORP. -
COALSPUR MINES LTD.
- CORSA COAL CORP. - DENISON MINES CORP. -
ENERGY FUELS INC.
- EXTRACT RESOURCES LTD. - HATHOR EXPLORATION LTD. -
KALAHARI MINERALS PLC - PALADIN ENERGY LTD. - RIO TINTO -
STRATECO RESOURCES INC.
- TITAN URANIUM INC. - UR-ENERGY INC. -
URANERZ ENERGY CORP.
URANIUM ENERGY CORP
- URANIUM ONE INC. - XINERGY LTD.
The Energy Report:
There have been recent takeovers in the coal sector, including
the $1 billion (
) takeover of Grande Cache Coal by a Chinese and Japanese
business combination. What should investors take away from that
Investors need to be aware that metallurgical coal is
intimately related to the steel market. Our expectations for
growth in the steel market drive our expectations for growth in
metallurgical coal. It is a positive sign that the market sees
the value of such a strategic commodity. We've seen a lot of
activity this year in the space, highlighted by the $4B takeover
of Riversdale by
Rio Tinto (RIO:NYSE; RIO, ASX)
primarily for Riversdale's metallurgical coal asset base in
Chinese imports of metallurgical coal have grown along with
China's steel sector. Do you see this trend slowing in the near
With steel demand increasing, we expect China to have an
ever-increasing footprint in terms of metallurgical coal
consumption. Long-term, there is still big potential for
metallurgical coal, although we may see a plateau in pricing in
the near term. China is also the largest producer of
metallurgical coal, producing more than 500 million tons (Mt) in
2010, but we are expecting continued importation of the commodity
in China, as well as Japan, India and South Korea.
Which juniors with advanced coal projects are likely to see
some interest from potential suitors on the heels of the Grande
The first that comes to mind is
Xinergy Ltd. (XRG:TSX)
, a company that produces thermal coal, but which recently
acquired two metallurgical coal projects. One already produces
high-voltage metallurgical coal and Xinergy aims to bring the
other into production next year.
Another name is
Corsa Coal Corp. (CSO:TSX)
, which is in production at its own metallurgical coal projects,
both surface and underground, in the U.S.
Coalspur Mines Ltd. (CPT:TSX; CPL:ASX)
To put Coalspur in context, it helps to talk about thermal
coal. The company's Vista Coal Project is a strategic asset as
there is still underlying, increasing demand for seaborne thermal
coal, especially in Asia.
This is coal that is used primarily in power plants, is
Yes, its predominant use is to provide base-load for
electricity generation. Coal remains the largest form of
base-load power in the U.S. Almost 80% of power in China comes
from thermal coal; Japan and India are also very big thermal coal
consumers, and importers.
We see Coalspur being able to introduce itself into the
thermal coal space through its Vista Project in Alberta, Canada.
Coalspur just tied up a contract through the Ridley Terminals in
Prince Rupert for up to 8.5 million tons per annum in export
volume starting in 2015. Furthermore, the company also signed a
memorandum of understanding with CN Rail to co-ordinate coal
transport to Prince Rupert starting 2015. The project is right
next to the railroad, so it is ideally positioned to add
high-quality thermal coal into the seaborne market over the next
few years. The large scale of this project, with such
high-quality product, and advanced stage of negotiation for
infrastructure support, is unparalleled in Canada. We expect
Coalspur to make big inroads over the next few years. We have a
12-month target of $2.80 on Coalspur, and it is trading around
There is a lot of negative news about the pollution that
coal-burning power plants produce. Are you saying that, despite
the headlines, the thermal coal market isn't going away any time
That is definitely what the projections tell us. The
International Energy Agency predicts increases in thermal energy
consumption over the next 20-25 years. I don't see thermal
coal-the largest form of base-load power across most
economies-going away anytime soon as most of tomorrow's growth is
expected to emanate from the Advancing Economies.
Do you have confidence in Coalspur's management?
Absolutely. The management team has built and run mines in
the coal space in various jurisdictions. I am very comfortable
with what they will be able to achieve.
The last 12 months have not been kind to uranium companies,
especially juniors. Year-over-year, the share price for
Denison Mines Corp. (DML:TSX; DNN:NYSE.A)
, a mid-tier uranium producer, fell 36.5%;
Uranium One Inc. (UUU:TSX)
dropped 46.2%, and
Paladin Energy Ltd. (PDN:TSX; PDN:ASX)
, a uranium project developer, lost 63.7%. Over the same time
period, the TSX Composite Index slipped a mere 4.4%. How do you
pitch uranium equities to retail and institutional investors at
The equities have taken a very big hit over the last year,
despite the uranium spot price being around where it was a year
ago. This equity market artifact is more related to sentiment, I
We still see uranium very much as a strategic commodity, even
following the nuclear accident in Fukushima. This view is
supported by the acquisition and offer activity in the sector in
2011. The sector's growth outlook looks solid, driven by expected
demand increases in China, Russia, South Korea and
petroleum-producing nations such as the United Arab Emirates and
The Australian Bureau of Agriculture and Resource Economy
estimates that roughly 107 thousand tons (Kt) uranium will be
needed to meet demand in 2016. That is about 20 Kt more than the
86 Kt yellowcake expected to be consumed this year. Is an extra
20 Kt a year enough to drive up the share prices of uranium
I think we need some other catalysts. We need to remove the
negativity sentiment toward this sector. For example, we need to
see new reactors being built. We need to see a timeframe for
non-operating reactors, say those in Japan, to be put back
online. Investors need to see more usage of existing reactors and
new growth coming into play.
We're starting to see new demand. A couple of new reactor
proposals got the go-ahead in China recently, with construction
for the reactors expected to start next year. Progress is
starting to be made, albeit on an incremental basis.
The strategic nature of uranium is highlighted by recent
interest shown by
Cameco Corp. (CCO:TSX; CCJ:NYSE)
, the world's largest uranium-only producer, and Rio Tinto
Hathor Exploration Ltd.'s (HAT:TSX.V)
Roughrider asset. Rio Tinto's involvement in the space is
very interesting because that company deals with a range of
commodities, and it allocates capital across geography and across
sectors. By taking an interest in North American assets, Rio
Tinto is increasing its stance in uranium.
As I understand it, Cameco came in with what Hathor
considered a low-ball bid. Then Rio countered. Has Cameco
Cameco has upped the ante and offered an increased bid of
$4.50 per share. Cameco has more operational synergy in the
region than Rio Tinto, given Cameco's infrastructure and
expertise in the Athabasca Basin. Ultimately, Cameco could
provide a greater offer for Hathor than Rio and still maintain
similar future margins on the operation.
Does the bidding war for Hathor tell us that the major
uranium producers place a premium on jurisdiction?
Yes, but we also have to be cognizant of the inherent
quality of the asset. For Rio and Cameco, it's about where they
see the equity markets valuing assets today versus the long-term
outlook. It's a combination of being comfortable in the
jurisdiction and in the sector's value.
Do you expect takeover offers for more juniors with
significant high-grade resources in safe jurisdictions, like
Canada and the U.S., in the year ahead?
The other situation that has investors' attention is the
potential bid for
Kalahari Minerals plc (KAH:LSE; KAH:NSX)
Extract Resources Ltd.'s (EXT:TSX; EXT:ASX)
Husab uranium resource in Namibia. Extract Resources is the
world's third-largest uranium company, based effectively on the
valuation of the Husab uranium project, which has more than 500
million pounds (Mlb) uranium.
Right now, Kalahari Minerals, the largest shareholder in
Extract, is in negotiations with state-owned China Guangdong
Nuclear Power Corp. where a potential all-cash offer of £2.4355
per share is potentially on the table for Kalahari.
Another significant project in Namibia is
Bannerman Resources Ltd.'s (BAN:TSX; BMN:ASX)
Etango uranium project. China's Sichuan Hanlong Group made highly
conditional proposal to acquire Bannerman, but Bannerman recently
announced it must do further due diligence before committing to
the financing. Is this an indication that Bannerman needs to
continue to derisk Etango or that Hanlong simply wants Etango at
a steep discount?
Hanlong's proposal was at quite a low enterprise value per
pound rating, much less than $1/lb. That was already a fairly
substantial discount to other acquisition metrics in the space.
For instance, Hathor and Mantra Resources Ltd. (MRU:TSX) were
north of $9/lb. Bannerman's management and board were talking to
many parties subsequent to Hanlong's proposal. Bannerman's board
considered it to be a low offer for the company. Time will
Do you think Bannerman will find another bidder?
There is a lot of interest out there in the sector for
advanced projects, but I think that there needs to be a
resolution with the potential take out of Kalahari, and by
extension Extract Resources, before focus may move to
Moving back to North America, are there projects here that
you expect to generate takeover interest in 2012?
I think people will wait and see how the dust settles for
Hathor Exploration, but consolidation is probably the name of the
game in the space for the time being. We've seen that in the in
situ recovery space in North America. There is synergy
Uranium Energy Corp (UEC:NYSE.A)
Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.A)
Ur-Energy Inc. (NYSE.A:URG; TSX:URE)
. Uranium Energy Corp is in production now. Uranerz Energy is in
the construction phases, and Ur-Energy awaits a final permit
prior to commencement of construction. Then there is the
potential merger of
Energy Fuels Inc. (EFR:TSX)
Titan Uranium Inc. (TUE:TSX)
, announced at the end of October.
What did you make of that deal?
I felt it was a positive move for Energy Fuels, in that it
gives the company access to a broader resource base, particularly
in the uranium mining state of Wyoming. Energy Fuels has
potential access to future production through its planned Piñon
Ridge uranium-vanadium mill. The Sheep Mountain uranium project
in Wyoming is a moderate-sized, defined resource of more than 30
Mlb uranium, and Titan's management team has a clear objective of
progressing the project through permitting and development over
the next several years.
What more can you tell us about Uranerz? Do you think it is
Uranerz is fully permitted for construction for Nichols
Ranch and its Hank satellite facility. Both are on time and on
budget. The company has a rich history of developing similar
projects-six times in the U.S. There is a lot of confidence that
Uranerz can do this. Production is expected to commence in Q312.
That timing would make Uranerz the world's next uranium
The company is being derisked through the construction phase;
moving into next-producer status will be very positive for the
Uranium Energy Corp is up and running in Texas, where it is
working on a second in situ operation there. Given that the
company is recovering significant amounts of uranium, is there a
likelihood Uranium Energy could see a bid?
You typically see bids coming in after significant
milestones and de-risking have occurred. If a bid were to come
in, I think it would be after UEC has permitted, built and
started production on its second main project, Goliad. There will
be a wait-and-see period in terms of external acquisitions.
Why is Uranium Energy Corp a good buy?
First off, UEC is in production. Second, it has a very
clear plan for developing its portfolio of assets to increase its
corporate production rate. Goliad is at the mature state of
permitting and is expected to enter the construction in H112. The
company also has the Salvo Project, which could be Uranium Energy
Corp's third project to come into production in a couple of
years. The company has a clear strategy to increase production
from an existing plant that is already built, permitted and
Until the last few years, few uranium projects have been
developed into producing mines outside of Kazakhstan. Other than
the price of uranium, why is that?
The lack of new project development is a combination of the
long lead times typically required to mature projects through
permitting and construction, as well as fluctuating commodity
prices and access to project financing. Lack of project
development appears to be also an artifact of sector focus. In
the last 10 years, a lot of money was spent on
projects that were marginal in earlier periods of
exploration, and less focus was placed on
projects. Greenfields discoveries have the potential to add
low cost output to the future production project, but discovery
and resource definition can take time. I think that it is
interesting to observe that despite market sentiment,
acquisitions are still on the table in the sector, and these are
focused on the few new discoveries (e.g., Mkuju River Project,
Husab Uranium Project and Roughrider Project) made over the last
One new discovery is
Strateco Resources Inc.'s (RSC:TSX)
Matoush Deposit in Central Québec. Do you think that will
ever become a mine?
Matoush certainly has potential with just over 20 Mlb U3O8,
at grades and close to 0.6% uranium. Because it is in Canada, the
permitting process is known, although it takes time to go through
and meet all the requirements. The company is in the permitting
Geordie, thank you for your time and your insights.
Dr. Geordie Mark
, a research analyst with Haywood Securities, focuses
principally on iron ore, coal and uranium companies involved in
exploration, development and production. He joined Haywood
Securities from the junior exploration sector, where he served
in an executive role concentrating on exploration across
Canada. Immediately prior to joining the exploration industry
full-time, Dr. Mark lectured in economic geology in Australia
and served as an industry consultant. He completed his
doctorate in geology in 1998 at James Cook University's
Economic Geology Research Unit in Australia, specializing in
aqueous geochemistry and igneous petrology applied to
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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
2) The following companies mentioned in the interview are
The Energy Report:
Coalspur Mines Ltd., Paladin Energy Ltd., Bannerman
Resources Ltd., Uranium Energy Corp, Uranerz Energy Corp, Energy
Fuels Inc. and Strateco Resources Inc.
3) Geordie Mark: I personally and/or my family own shares of the
following companies mentioned in this interview: Paladin Energy
Ltd. I personally and/or my family am paid by the following
companies mentioned in this interview: none.
4) Haywood Securities Inc. or an Affiliate has managed or
co-managed or participated as selling group in a public offering
of securities for Strateco Resources Inc., Coalspur Mines Ltd.,
Denison Mines Corp., Extract Resources Ltd., Uranium Energy Corp
and Uranerz Energy Corporation in the past 12 months and may have
received compensation for investment banking services from these
companies in the past 12 months.
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