Rob Chang: Nuclear Power Growth Is Inevitable
Source: George Mack of
The Energy Report
Long-term demand growth for uranium is a global story, with
China expected to far exceed any other single nation in new
nuclear plant construction over the next decade. Versant Partners
Analyst Rob Chang looks for equity ideas that investors can play
to leverage these growing requirements for uranium fuel. In this
exclusive interview with
The Energy Report,
Rob highlights some interesting companies.
The Energy Report:
What is your uranium forecast for the intermediate term and for
the long term?
For 2011, currently we have the spot price at $75/lb. Then the
following two years we expect it to go up to $80/lb. and then
take a slight step down in 2014 to $75/lb. For 2015 we have it at
$72.50/lb. And then long term, we're currently expecting
Why does the price forecast go down?
Just to be conservative. Over the long term, as any economist
would tell you, prices should revert to a point where the
marginal costs equal marginal revenue. Basically the company that
incrementally produces enough to satisfy market demand should be
pretty much breaking even. Despite the fact we have a short-term
increase, over the long term we do expect that market forces will
I don't know if round numbers have any technical significance,
but between the end of October and now, uranium has broken
through the $50/lb., $60/lb. and $70/lb. levels. Does the fact
that it didn't test those levels for long imply demand?
Absolutely. I was personally of the belief that the prices were
way too low for where they should be. The only reason why it
stayed at such depressed levels was that investors were just
afraid to get into the market during the economic weakness. Then
when things started to turn around people paid attention,
realized and then committed their capital into uranium, and once
it started moving up it quickly adjusted to more reasonable
levels. So, technical analysis doesn't always work and I think
this is a situation where you can clearly see that these round
numbers didn't really mean anything as the price advanced to
where it should be.
Where is the demand going to come from?
Like everything else in the world, the strongest demand is coming
from China. Currently there are around 443 nuclear reactors in
the world, and China has only 13, which accounts for 3%. China is
now the second largest economy in the world, recently surpassing
Japan, and given how strong the Chinese economy is and is
expected to be, just 3% of the global nuclear power production is
a little ridiculous considering its energy needs and the fact
that nuclear provides the best base load power supply. And you
can see this easily in the number of planned and proposed nuclear
reactors for construction.
According to the World Nuclear Association (WNA), of the 540
nuclear plants that are currently in the construction, planned or
proposed phase around the world, China accounts for 35% of them.
About 187 of the 540 are in China in some stage of development.
China's doing three times the number of Russia, and I think
that's pretty significant.
Can demand fluctuate?
Of all commodities, uranium is one of the best in terms of
forecasting demand because you can't miraculously create another
nuclear power plant. There are a lot of years, planning,
permitting and capital required. It's fairly certain that once
one is being built, it's going to go to completion and that
demand will be there.
Tell me about your initial screen, the enterprise value per pound
(EV/lb.) of uranium in the ground. Describe that for me
Sure. The EV/lb. metric that I use essentially common-sizes the
universe of uranium companies by applying the EV/lb. metric for
every company. I prefer enterprise value over market cap because
it includes the debt and the cash numbers, which I believe are
fairly significant in the decision of investing in any company.
It also allows for easier comparison. You're going to have
different companies with different resource sizes, and you can
see whether one may be overvalued or undervalued on a per-pound
I understand that valuations can vary from exploration company
all the way up the value chain to producer, but under what EV/lb.
level would you consider looking at a company as a long
I wouldn't say there's an exact hard rule in terms of what number
I would look at, given that EV/lb. is basically a screening tool
or even just a sorting tool in terms of showing where companies
fit in the grand scheme of things. The key thing to note is that
some companies do deserve to be where they sit. A good example is
Hathor Exploration Ltd. (TSX.V:HAT)
, which has one of the highest EV/lb. valuations. It should not
be trading below the average given the location and grade of the
project. So, it would be rather unfair to cut it off at an
arbitrary number just because it seems to be above that
Where do you go next?
I then get in contact with management and try and meet with them.
I want to understand management and find out where they came from
and ask them what they're doing with their project now as well as
understand what their plans are.
How they see their project is important to me, because I want
to weed out the promoters versus the actual developers or
exploration people. It's key to find companies that have good
projects and the personnel to advance the project. I've run into
some situations where companies may have a decent project, but
they don't seem to have the management team to actually push them
forward. That's the key thing, because any good project can be
ruined by bad management.
So, that would be the first cut. After that it would be to
understand the political environment and effectively performing
good fundamental analysis such as understanding the grade of the
deposits. Metallurgy is also extremely important.
Tell me about that process of evaluating management.
Pedigrees do matter. It is not essential, but knowing that
someone came from a well-run firm helps. For example, someone who
has come from a
Cameco Corp. (TSX:CCO; NYSE:CCJ)
, where they know the process and how to do things in a high
quality way rather than a "let's just cover this pot with this
Does having excellent leadership at the C-level translate to
great engineers and people on the ground?
I find it generally does. You attract better talent when you have
a leader that has a history of success and strong management
Do you have a stock that you have initiated coverage on or had
coverage transferred that you like?
Sure, I just had the coverage of
Energy Fuels, Inc. (
transferred over to me. I really like the story. It's a near-term
producer that's currently in development mode as it has recently
received a permit from the Colorado Department of Public Health
and Environment. It's probably the most difficult to acquire
permit, and it will allow them to process 500 tons per day (tpd)
of uranium ore.
The great and interesting point about the story is that the
company currently has two turnkey mines already in its portfolio,
those being the Energy Queen and the Whirlwind mines, which can
both be brought up to speed and producing within a year, if not
less, of the decision to do so-probably less actually. So, EFR
can be producing soon and can capitalize on the high uranium spot
prices right off the bat and join the producer category in very
short order. That's something that a lot of other uranium
companies cannot do given the extensive permitting, development
and funding process required. So, it is well up the curve and
extremely close to production relative to almost any other
non-producer. It looks great.
So much of the news about its near-term production has been
discounted into the price over the past six months during which
time the price has nearly quadrupled. You still have a target
price of $2 for an implied 40%-plus total return from here. Could
you give me a little background on that valuation?
I think the quadrupling was more a matter of the stock price
being previously depressed for Energy Fuels. Speaking as a former
portfolio manager, I would have adopted a "prove you can get a
permit" perspective because there was some doubt that EFR was
going to be able to get that permit.
Once that permit was granted, that overhang was removed and
the stock quickly moved up to more reasonable levels. So, I
believe that's the primary reason of the meteoric rise that you
were noting. I still believe there's upside from here. Given
expected production, I fully expect the mill to be expanded from
500 tpd to 1,000 tpd in short order. It is already designed with
that in mind. So, once that gets put into place with additional
consolidation, I think that the target price of $2 and possibly
even higher is quite achievable.
Rob, your target price on Energy Fuels is equivalent to the net
asset value of the company. That sounds very conservative to
This stock valuation is more from my buy side perspective, and I
tend to be a lot more conservative. I don't like to be one of
those guys who starts applying multiples without having the
company prove that it is capable. Although the company looks
strong and I have no reason to doubt management's abilities, they
still have to prove that they can develop on time and on budget.
So, even though it does have its permits in place, I'd rather be
more conservative on our target price, which is still a
substantial increase from its current trading value.
One more question on Energy Fuels, I wanted to ask about the
significance of the mill. The company calls it the first
conventional uranium mill to be built in the U.S. in three
decades. How does it add value to this play?
It legitimizes the play. Any conventional uranium explorer with
designs on becoming a uranium producer needs to have a mill to
process its ore.
Denison Mines Corp. (TSX:DML; NYSE.A:DNN)
has one in the area, and now Energy Fuels will have one. So, in
terms of being a strategic asset it's a very important
piece-being able to consolidate the area, to become a producer
and to eventually become a major player. Without the mill you
need to have someone else's mill to process your ore. It's a
major piece that's required to become a producer.
What other companies can you talk about?
I can make a few comments regarding
Continental Precious Minerals Inc. (TSX:CZQ)
and Hathor. CZQ has uranium plus moly (molybdenum ) and other
metals in Alum Shale in Sweden at the Viken Project. The company
has a billion pounds of uranium there. It's very low grade, and
it's in a very tricky environment. Alum Shale hasn't really had
much history of being processed. It was processed before by the
Swedish Government but at very low recoveries and at pretty high
costs. It's possibly one of the largest uranium deposits in the
world-from what I could tell it's probably one of the top two or
three. But the key question mark is whether it can be extracted
economically. I know CEO Ed Godin is currently working the
metallurgy, and I think that's really the key point-whether it
can be economically produced at a commercial scale from the
low-grade Alum Shale at a low enough cost in order for it to
work. But overall it looks interesting.
You mentioned Hathor.
Hathor is a very strong story. From an EV/lb. perspective, it's
trading at around $13/lb., which has it at the top valuation
among exploration companies. This is one of the situations where
it definitely deserves to be on the higher side of the EV/lb.
average. Hathor is in the prolific Athabasca Basin, and it has
some of the highest grades of any uranium property in the world.
It already has around 25 million pounds (Mlb.) of attributable NI
43-101-compliant resources, and it has the potential for it to be
even higher. So, Hathor does look very interesting.
It deserves to be that high relative to everyone else?
That's the key question. I do believe that at least a portion of
the $13/lb. valuation is attributed to an expected resource
increase. So, it really just depends on what number you want to
hang on the increase to see if it trades closer to what its peers
are. As a comparison, the average exploration company trades at a
$3.17 EV/lb. So, Hathor definitely is a premium company, and it
could be potentially much higher. It's very high grade. On a
blended basis it has a U3O8 grade of 5.4%, which is extremely
high given that the global median for uranium grades is 0.076%
from my database. So, it's a fantastic grade.
Not nearly as speculative as CZQ?
Comparing the two, it's not even remotely close because Hathor is
in a prolific area. The metallurgy is somewhat known given that
there are many uranium mines in the area.
Any others you might mention?
There are some that are actually quite interesting. Hathor's
Fission Energy Corp. (TSX.V:FIS)
is interesting in that it also has encountered very high grades
from its drill intercepts. It doesn't have a resource as of yet,
but it is a stone's throw away from the Roughrider deposit. There
are some pictures of their property where you can see Hathor's
drills and Fission's drills right beside each other. You really
could throw a stone from one and hit the other, and there seems
like there is a reasonable chance that the mineralization could
cross the boundary line.
Ok, I'd love to hear another one.
Kivalliq Energy Corp. (TSX.V:KIV)
looks quite good. I tend to gravitate towards higher grade
stories, and this one is interesting in that its NI 43-101
resource is at 0.79% U3O8, which is a pretty high grade deposit,
one of the highest ones around actually. It's Angilak Project is
located in Nunavut, Canada. The company appears to have strong
relationships with the Nunavut people there. It currently has a
resource of 14.2 Mlb. at one of the highest grades in the world,
and it looks like it could be easily expandable. So, that's
another one I'm keeping my eye on as well.
Tournigan Energy Ltd. (TSX.V:TVC, FSE:TGP)
is a Slovakia uranium play. It's in the prefeasibility category
right now, and it currently has 58 Mlb. in total resources. It's
primary project is Kuriskova, and the key thing I like about it
is that it's a high grade deposit at 0.413% U3O8. On a blended
grade basis for all of its nearby properties, the company has a
portfolio grade of 0.297% U3O8, which is quite good.
Did you have another you wanted to mention?
We can also talk about
U3O8 Corp. (TSX.V:UWE)
. It has a few properties that it received from a transaction
Mega Uranium Ltd. (
, which effectively placed the latter's South American assets
into U308 Corp. U308 is interesting in that it has three
properties, one in Colombia, one in Guyana, which I have visited,
and a third in Argentina. The Colombian property is interesting.
It has pretty good grades, the potential for valuable byproducts
such as phosphate and vanadium and has a lot of blue sky
potential, and the Argentinean one looks like it could be a
simple low-cost project that would require little capex to
Thank you and best wishes, Rob.
Analyst Rob Chang 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 a Master of Business Administration
degree 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 on Feb. 14th, 2011. 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
The Energy Report:
Mega Uranium, Fission Energy, Energy Fuels.
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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