Rob Chang: Best Uranium Stocks to Rebound in
Source: George Mack of
The Energy Report
While uranium prices fell after the Japanese earthquake and
tsunami, Versant Partners Analyst Rob Chang says in the long
term, prices must rise due to a supply shortfall and the economic
necessity of using nuclear power. In this exclusive interview
The Energy Report,
Chang suggests ways to take advantage of the eventual
rebound and highlights some companies that will be the first to
see rising stock prices.
: CAMECO CORP.
ENERGY FUELS INC.
FISSION ENERGY CORP.
KIVALLIQ ENERGY CORP. U3O8 CORP. URANIUM ONE INC.
The Energy Report:
How did investors initially react to the earthquake and tsunami
in Japan, and how have attitudes changed since?
Many hit the sell button on uranium after the disaster. The
uranium spot price prior to Fukushima was around $66.50/lb. In
the three days following, it declined 30%, to as low as $47/lb.
However, it didn't stay that low as it bounced back by the end of
the week, finishing only about 9% lower, at $60/lb., which was a
good sign. It later drifted to a low of about $55.25/lb. in early
May and is now trading at $55.00/lb.-showing some strength.
Switching to the long-term price, which better indicates how
utilities see things, it was around $73/lb. prior to the
disaster. After the first post-Fukushima price update, it only
declined $1/lb., a fantastic sign that the utilities and the
producers didn't see much of a long-term impact. It has declined
a little since then-and is currently down 7%, to
Uranium equities, on the other hand, declined about 30%
following Fukushima and, despite attempts at rallying, their
prices have drifted lower. It appears that investors have shifted
their focus away from the fundamentals, which drove the market
for the previous nine months, and now employ more of a "wait and
see" approach while countries around the world reevaluate their
nuclear programs. It is interesting to note, however, that
despite the 30% drop from the peak before the tsunami, uranium
equities are still trading higher than at this time last year.
Things are still positive from that perspective.
Very interesting point. Germany has announced a plan to
scrap its nuclear power programs by the year 2022; Chancellor
Merkel says this is just the beginning of a fundamental shift in
policy. What is your take?
I am skeptical. A 10-year time frame to phase out 25% of
Germany's power generation seems aggressive, and Merkel's plans
lack clarity. They say the power will be replaced by gas and coal
plants in the short term, and then by renewable sources. But
there are a lot of question marks. For example, renewable sources
currently make up 17% of Germany's power generation; they are
expecting that to double to 35% by 2022. That's pretty
Economically, the cost would be ridiculous; just to phase out
25% of the world's fourth-largest economy's power generation and
replace it with gas and coal, and then buy renewables, would
require a vast amount of money in the form of taxes and/or
tariffs. That is hard while we are still in a global recession or
downturn. At the same time, even if they were able to find the
money, where are they going to build new power plants? No one
will want them in their backyards. An additional layer of
regulation and political hand-holding would be needed; to attempt
to do all this in 10 years is optimistic at best.
But won't this be an overall negative for nuclear
It could be if they succeed. However, Germany only accounts
for about 4% of global nuclear power generation. So, over the
long term, it might not make that much of an impact.
If Germany has taken this attitude toward nuclear power,
does it open the door for other countries to think that
It does, because Germany is a large economy and one of the
more powerful industrial nations. However, outside of Switzerland
and Italy, it doesn't seem like many other countries are moving
in the same direction. The driver behind the change in Germany is
the fact that Merkel's political party is losing power. They know
they need some radical changes to hold onto it, so, instead of a
gradual phase out, they've adopted a more drastic one, hoping to
Let's move back to Japan. We know from unfortunate past
experience that Japan has been willing to make dramatic foreign
policy changes because of catastrophes, for instance at the end
of World War II. Could they be rethinking their policy on nuclear
They could be-every country is rethinking their
policies-but the economics don't work well for phasing out
nuclear power in Japan. Currently, 30% of Japanese power comes
from nuclear generation. Studies indicate that it would cost
$60-$150B to replace that with coal or liquefied natural gas (
), and another $17-$27B in import costs for coal and LNG. That
would be an extremely expensive endeavor in an environment where
they need to rebuild parts of their country-and again, the global
economy isn't strong.
In order for renewables like solar power to replace nuclear,
the country would have to increase capacity about 190 times from
where it is right now, costing just short of $700B in capital
expenditures. In terms of wind power, some estimate they would
need a hundredfold increase, costing $330B. Some might suggest
geothermal, but that's not possible; it would take 65 GW
(gigawatts) of geothermal power at a cost of more than $200B to
replace the nuclear poweHigr being generated, although the
country is currently only capable of producing 23.5 GW.
So, you are still bullish overall on nuclear power, and
therefore uranium mining.
What are the growth drivers for the uranium industry?
Fukushima hasn't really changed those. Current demand for
uranium is around 180 Mlb. from the 440 operating reactors around
the world. Meanwhile, the supply from mines is around 135 Mlb.
That leaves a 45 Mlb. shortfall, currently mitigated by the
Highly Enriched Uranium (HEU) agreement, which downgrades
Russia's nuclear warheads and redistributes the material. The
agreement is set to expire in 2013, and from the reports we're
getting the Russians aren't planning to downblend any more after
that. If that is true, they will not be reprocessing their
warheads after that date for themselves either, so that supply is
Meanwhile, 61 reactors are under construction, already
financed and moving forward. Another 25 Mlb. of uranium will be
required to power these new reactors, which use approximately
400,000 lb. each. On top of that, 158 more nuclear reactors are
planned, and 326 proposed. Even if only half are built, that's
another significant demand for uranium when we already have a 45
Mlb. shortfall. The growth drivers for uranium are
What does this shortage bode for the price of uranium?
It has nowhere to go but up. For the marginal cost of
production, you're looking at a minimum of $45-$50/lb. If you
were to add on the capital expenditures required to build out
these lower grade, probably deeper deposits that generally cost
more to build, you are looking at a minimum of $70/lb. just to
support the build-ups. And since you have such a supply shortage
relative to demand, these new mines need to be built in order to
power the world. For that reason, the uranium spot price must
increase to $70/lb. or higher going forward.
On a long-term basis-let's say 10 years-will the events at
Fukushima have slowed the growth of the uranium industry?
Overall, I don't think Fukushima has made a significant
Cameco Corp. (TSX:CCO; NYSE:CCJ)
analysis predicts only a 4% reduction over the next 10years
in uranium demand because of Fukushima. That is not very
significant, especially when we have massive shortfall of supply
relative to demand right now.
There will be some impact over the decade, but I think the
actual impact on the markets will be short lived. It's tough to
say how long it will take; it depends on the actual impact of
Fukushima, which is not yet fully known. There are still ongoing
efforts to fix everything there.
A parallel could be made to last year's BP oil spill. Around
that time, there was a lot of negative sentiment toward oil, but
now, any oil-related investment is significantly higher than it
was before. Similarly, uranium could be off and running by next
year. That could be optimistic, but it looks and feels like it
could end up in the same situation.
In a basket of individual uranium stocks, the one-year
total returns are still phenomenal, anywhere from 30% up to 150%
up over the past 52 weeks. But over the past three months, some
of these stocks have been cut in half. Is there a bright side?
Are we looking at deep value currently in stocks?
There is definite value. The uranium stocks were all on an
upward trend, as you noted. The uranium price itself needs to go
higher, and these stocks will go with it. So yes, there is
significant value in these stocks; we just need a catalyst, more
interest or at least recent events to blow over for these stocks
How can investors take advantage of these lower share
Investors looking to take advantage of the initial
snap-back once the uranium price starts to aggressively pull back
up would want to be in the producers, such as Cameco or
Uranium One Inc. (
. Cameco is the bellwether in the uranium space, and any investor
looking there will generally look at Cameco first. Many large
institutions use it as their key uranium holding, so it would be
one of the first to turn around when the market starts heating
I also like Uranium One, because it is the most exposed to the
spot price, and once that starts climbing, UUU will see most of
the benefit. Other companies that will experience gains would be
near-term producers, such as
Energy Fuels Inc. (
. We have a "buy" rating and a $1.30 target price on it. We like
this company because it's building a 500 ton/day mill located
within 180 miles of 23 permitted uranium mines with at least 7
Mlb. of uranium in the area around the Colorado Plateau. The
company also owns two turnkey mines with at least 4.5 Mlb. of
uranium; both can be turned on within a year, probably in nine
months or less. So we really like Energy Fuels.
Looking at some more exploration and growth-oriented
companies, we also like
Kivalliq Energy Corp. (TSX.V:KIV)
, which we also cover as a speculative buy with a target price of
$1.00. Kivalliq Energy owns the Lac Cinquante deposit in Nunavut,
which is the highest grade uranium deposit outside the Athabasca
Basin. The average grade is currently 0.79% U3O8. When you
compare that with the global ex-Athabasca median of 0.08%, it's a
phenomenally high grade. When you're in mining, grade is
Currently, it has an NI 43-101 compliant inferred resource of
14.2 Mlb., but it has lots of room to grow. The NI 43-101
resource estimate only covers a tiny portion of the total land
package that Kivalliq owns and there are several highly
prospective areas. On top of that, they also have a strong
relationship with the local Inuit group, so we're very positive
Another company that we would like to talk about is
Fission Energy Corp. (TSX.V:FIS; OTCQX:FSSIF)
. We have a speculative buy on that one, with no target price.
Fission Energy has an enviable mix of location, high-grade
resource potential and opportunity. It is located in the prolific
Athabasca Basin, which has a 35-year history of uranium
production and excellent infrastructure. Fission's Waterbury Lake
property is located adjacent to Hathor Exploration's Roughrider
deposit and AREVA/Denison Mines' Midwest project-a uranium camp
that already hosts over 110 Mlbs. of U3O8. Being adjacent to
Hathor is part of this company's selling point. While it does not
have an NI 43-101 compliant resource at the Waterbury Lake
project, drilling results there have produced some fantastic
assays of over 1% uranium and some as high as 6%.
Waterbury Lake itself has five targets, all apparently highly
prospective, along the Discovery Bay Corridor, which is an
east-west string of pearls of mineralization that includes all
five of Fission's prospects, as well as the adjacent Roughrider
and Roughrider East on Hathor's property. It looks like investors
in Fission also get a free option on some other Fission
properties that are highly prospective as well.
Fission also has Dieter Lake in Quebec, with an NI 43-101
compliant resource of 24.4 Mlb., and a very prospective piece of
property in Macusani, Peru, a uranium district that is heating up
You have no target price assigned to Fission yet, but a
speculative buy would imply multiples at the current market
price. Have you avoided assigning a target price because there's
no NI 43-101 on it?
Yes, that's the primary reason. We made an estimate, and in
our research report, we note a valuation halfway that would give
it around $0.90 if we used a base case assumption. Assuming they
have 17 Mlb. of uranium, if we use some relative valuation
metrics and add the other pieces of the company together, it
comes to around $0.90. However, that estimate would be unfair
because we don't know if 17 Mlb. is accurate. On top of that,
that resource estimate would only be for J-Zone, one of the five
targets within Waterbury Lake. Four other prospective areas could
have mineralization that would add further value. In addition, an
estimate wouldn't assign value to any of the other projects
outside of Dieter Lake, which we did add to the number because it
has an NI 43-101 resource estimate. There are multiple moving
parts-too many assumptions-for us to settle on a number we think
would be fair.
So your growth hypothesis is based on the string of pearls
extending from the Hathor mines projects?
The five Fission properties look almost exactly in line
with Hathor's Roughrider and Roughrider East; they are dots along
that line. All five could potentially be something. The fifth,
J-Zone East, is likely to be an extension of Roughrider, as it
shares the border. The other four appear to be highly prospective
and, like J-Zone, each could potentially be 17 Mlb. or more.
However, it's too early to say. But looking at the mineralization
of J-Zone, J-Zone East, Roughrider and Roughrider East, the
latter for which Hathor recently came out with some really
impressive numbers, it seems there is an entire string of pearls
formation of perhaps 20-30 Mlb. pods within hundreds of meters of
Going back to Energy Fuels: you dropped your target price
to $1.30, but it still implies a significant 200% return from
current levels. When could investors expect that kind of
The short answer is when the uranium market comes back into
favor. Energy Fuels is an excellent value, but if money is not
going into the sector, Energy Fuels rides with it; thus it
depends on when the overall sector gets better. I would point
investors toward Energy Fuels because they have short-term
production, and with their mill, they will have a strong position
within the region.
Going to Kivalliq: you noted that it was trading at roughly
half of its current peer group enterprise value/lb. level. Why is
it trading at such a discount in an already discounted
It's not as well known as other companies. Kivalliq just
released its NI 43-101 on Lac Cinquante last year; others may
have had their resource estimates longer, so they are better
known. When some other analysts talk about the highest-grade
uranium deposits outside of the Athabasca Basin, I tell them
about Kivalliq. Some don't even know the name yet. The company
has some fantastic grades for a deposit located outside of the
Athabasca Basin; it's a story that just needs to be told.
Any other stories you wanted to mention?
U3O8 Corp. (TSX.V:UWE)
continues to impress. U308 has projects in Colombia, Guyana
and Argentina. The Colombian project is its best, with a suite of
metals-uranium, phosphate and others-and that looks impressive.
We look forward to seeing more results, but it looks nice
A few weeks ago, we visited the Argentinean site, a low-grade
uranium project we initially thought might not be very
prospective. However, given the size of the rocks in the
material, it appears the grade could be significantly improved by
a simple screening process similar to what is done at Langer
Heinrich in Namibia. Therefore it raises the likelihood that it
is a viable, economically sound project. It really depends on how
many pounds they find in the ground there.
Rob, the four stocks you've talked about today have a
market cap of $40-$57 million, and it does not take a lot of
investment capital to move microcap stocks. That makes these very
interesting stories. Thank you.
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 Canadian Investment Manager
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1) George Mack of
The Energy Report
conducted this interview. He personally and/or his family
own the following companies mentioned in this interview: None.
2) The following companies mentioned are sponsors of
The Energy Report:
Energy Fuels and Fission Energy.
3) Rob Chang: I personally and/or my family 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.
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