Small Uranium Equities Tempt Major Players: Rob
Source: George S. Mack of
The Energy Report
Investors may still be holding their breath, but larger mining
companies aren't waiting around for the price of uranium to go
up. No, indeed, they are buying smaller companies on the cheap.
In this exclusive interview with
The Energy Report,
Equity Research Analyst Rob Chang of Versant Partners makes his
case for deep value and discusses his favorite plays. With or
without Germany and Japan, life goes on for uranium
The Energy Report:
Fourteen months after the fact, the biggest story in uranium is
still the tsunami that struck Japan and destroyed four nuclear
reactors at the Fukushima Daiichi nuclear power station. Japan is
attempting to eradicate its dependency on nuclear energy. Are any
plants still operating? Will all reactors be shut down in the
My numbers indicate that there are 50 reactors in Japan in total
with only one still operating, and that last one is scheduled for
a regular maintenance shutdown in early May. Since the Fukushima
disaster occurred, every reactor that has been turned off for
routine maintenance has not been permitted to restart. By
mid-May, Japan will no longer run on nuclear power at all.
There is a huge rise in carbon emissions in Japan, where fuel oil
consumption for power production has doubled. Are drastically
increased emissions likely to affect policy decisions in Japan,
Germany or elsewhere?
The carbon emissions are certainly growing. For Japan and
Germany, an incredible rise is expected. There was an estimate
that over the next few years, the increase in CO2 for Germany
alone will be between 170-400 million tons (Mt) of additional
CO2, which completely contradicts the country's previous goals.
The populations and governments of these two countries are
currently putting carbon emission concerns behind their fears of
nuclear power. Germany is aggressively following its anti-nuclear
power path while moving toward renewables and using other sources
of power, such as natural gas, which unfortunately does generate
a lot of CO2. Whether the country decides to go back to its
original commitment of reducing CO2 emissions or to stay the path
of avoiding nuclear at all costs will certainly be an issue,
considering that alternative energy sources can't yet meet their
It sounds like there could be some very interesting alternative
plays emerging from Germany and Japan's planned energy shifts, as
both countries have large economic bases.
That's the goal for both countries, to move toward alternative
energy, which includes solar, wind power, hydro and geothermal.
The problem with that is none of these can really provide a
consistent form of baseload power. With solar, if you get a
sustained period of darkness, you're going to have problems. You
could also have a lack of wind, or a lack of suitable locations
to build dams to generate hydro-electric power. As for
geothermal, Japan has some capacity, but studies show that it's
not enough to fully replace nuclear.
What are the predominant, global sources of baseload energy?
Baseload sources of power, those that are available at all times,
include natural gas, coal and nuclear. Of the three, only one is
zero-carbon emitting after being built, and that would be nuclear
power. That's the big argument in favor of nuclear power. It is
pretty much the only source of baseload power that solves all of
the problems in terms of carbon emissions, low-cost power
production and being relatively safe outside of the potential of
nuclear meltdowns. Even when we look at Fukushima, it's really
more about fear than reality. Nuclear power is still quite
Rob, you said nuclear is low-cost compared to other forms of
energy. Tell me more.
The costs of operating a nuclear power plant after it's already
been built are probably the lowest among all energy sources. If
you look at it in terms of alternative energy, which are heavily
government-subsidized forms of power, it's actually very
expensive to run those projects. On top of that, you still have
the additional not-in-my-backyard problems for wind farms, which
many people dislike. Although alternative forms of energy sound
like a great option, nuclear power makes a lot more sense.
Looking at a chart, uranium seems to have some support at about
$50/pound (lb), and it seems to be in a trading range now with
resistance at around $55/lb. That looks like a consolidation
pattern to me.
I'm more of a fundamentals analyst than a technical analyst, but
I do observe the same patterns that you're seeing. It seems like
it's trading in that range primarily because of near-term supply
and demand fundamentals. Two, three or five years from now, if
mine production schedules go the way they're supposed to, we
should be in balance, with maybe even a slight surplus.
Where is new supply coming from?
The three primary mines that are coming online that are expected
to meet upcoming demand are Cigar Lake in the Athabasca, run by
Cameco Corp. (CCO:TSX; CCJ:NYSE)
, the expansion of Olympic Dam by
BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK)
in Australia and the Imouraren mine that's run by
in Niger. Together, these make up the bulk of the upcoming supply
that's theoretically supposed to balance the increase in demand.
That's assuming the World Nuclear Association's best-case
scenario, as presented last year, unfolds. Demand may be lower or
higher, but it does take into account the shutdowns in Japan and
Does this consolidation pattern have anything to do with the
acquisitions we've been seeing in the industry?
I can't really say it is definitely a consolidation pattern. But
when you are seeing consolidation in the industry, you generally
see it in the low parts of the market when larger firms can see
value in other firms and believe that their prices are going to
go up and markets are going to be better. They might as well buy
now when it's cheap and get bigger. We are certainly seeing that
now, and we have been seeing that for the last two years. In my
opinion, we're going to see more of it going forward.
We've seen some pretty nice ones-the Chinese buying
Extract Resources Ltd. (EXT:TSX; EXT:ASX)
Fission Energy Corp. (FIS:TSX.V; FSSIF:OTCQX)
Pitchstone Exploration Ltd. (PXP:TSX.V)
Energy Fuels Inc. (EFR:TSX)
acquiring the U.S. assets of
Denison Mines Corp. (DML:TSX; DNN:NYSE.A)
. These represent a lot of very positive signs for the industry
because usually when you see consolidation, it signals the bottom
in most industries. It looks as though we may be seeing that as
What about uranium price? Will it remain weak, as it is now at
It could, unless we have a catalyst. Right now, it seems like a
very comfortable range for uranium. The main catalysts that many
are waiting for is Japan's possible decision to restart its
nuclear reactors. Once that happens, I would bet that we would
see a run-up in the spot price. How far up it goes will be tough
to say. It will entirely depend on how aggressive the nuclear
roll-out or re-ignition occurs in Japan. For most of us, we
believe that it's not a matter of if, but when the reactors are
restarted. The government has already decided that it needs to.
It's more a matter of getting the locals and the mayors in the
areas to sign off on it. But once that happens, we should see the
price go up.
What is your price forecast?
I believe uranium prices will rise a little bit, from here at
least. For 2012, we're expecting an average price of $55/lb.
If it rose above $55/lb, would that create a secular bull trend
in uranium equities?
I believe so. The uranium equities have been moving higher over
the last six to eight months, primarily based on the fundamentals
despite the fact that the uranium price hasn't moved. I fully
recognize that they've come off highs from January and February,
but overall they're still up relative to the Fukushima event. I
believe that as the uranium spot price moves higher, there will
certainly be more interest in the uranium equities.
What names are you recommending to investors?
The three names that we cover are Energy Fuels, Fission Energy
Kivalliq Energy Corp. (KIV:TSX.V)
. We still are very bullish on all three.
Ok, let's take Energy Fuels first.
As you know, Energy Fuels acquired the U.S. assets of Denison
Mines, but Denison has been getting most of the publicity because
it is basically cleaning itself up to be acquired by
Rio Tinto (RIO:NYSE; RIO:ASX)
for its Athabasca assets. However, people should be recognizing
Energy Fuels as a big winner given that it has established itself
as the premier producer in the U.S. That's pretty significant,
because the U.S. is the largest consumer of uranium. The U.S.
consumes over 50 million pounds (50 Mlb), but it only produces 4
Mlb/year. So there's a massive shortfall between U.S. demand and
supply. Security of supply is always going to be important for
Another thing is that Energy Fuels acquired the White Mesa
mill from Denison, which allows it to put its Energy Queen and
Whirlwind mines into production. Those are two turn-key mines
that could be turned on within a year of the production decision.
Those two mines are basically on pause while Energy Fuels clears
all of the permitting and rebuilding hurdles for the Piñon Ridge
mill, but now that it has acquired the White Mesa mill, it no
longer needs to wait for Piñon Ridge. It can just go and process
everything through there. So, unlocking those two mines will
allow it to produce over 1 Mlb/year in the U.S. and provide
immediate upside. There aren't that many producers out there, and
Energy Fuels is a new producer on the block. I can see the
company commanding a premium once the dust settles.
Your target price on Energy Fuels is $1.10, which is an implied
300% return from here. Do you believe that startup of these two
turn-key mines is going to be the catalyst for that kind of
It's one of many catalysts. It's a near-term producer now, so
that is also factoring the net asset value (
) of the production coming from those mines. It factors in all
revenue streams coming into the company. The reason why, in my
opinion, Energy Fuels has been trading this low is that uranium
has been out of favor and Energy Fuels has been viewed previously
as a developer that was not producing and still needed a permit.
These hurdles have been addressed, improved upon or eliminated. I
think once people give Energy Fuels a good hard look, they will
realize it's significantly undervalued.
The overall market has been pretty negative, so investors are
pretty reluctant to deploy capital. And they generally prefer
producing companies that are large and subsequently safer. Energy
Fuels has historically been a developer, but will be a producer
after the deal closes. For this combination of reasons, it is not
moving up as much as it should be. I believe that this is
temporary and when sanity returns to the market, Energy Fuels
What about Kivalliq?
Kivalliq has the highest grades of any uranium company outside of
the Athabasca Basin, 0.69% U3O8. The global median for U3O8
grades is 0.07%. So at 0.69%, Kivalliq is actually one decimal
spot to the left of the global median. Kivalliq is located in
Nunavut, which does present some challenges given there is little
infrastructure in the area. However, the company already has 27
Mlb of this high-grade uranium near the surface. It has the
potential of getting a lot more. There is the possibility that it
could grow this to a +100 Mlb resource with the proper time and
drilling. This makes Kivalliq a very interesting company. Another
reason to like this company is that to the northeast of it, AREVA
is developing the Kiggavik uranium deposit, which is a +100 Mlb
uranium deposit. AREVA is way ahead of Kivalliq in terms of
exploration/development, and there may be some synergies involved
there in terms of Kivalliq being able to use AREVA's
infrastructure builds. So I'm very positive on Kivalliq.
Kivalliq has been weak for the past month. Does that make it even
more interesting to you? Do you see it as a deep value
Absolutely. I have $1.10 target price for Kivalliq as well.
That's about 150% of upside from here. So I believe there is lots
Your third pick was Fission.
I really like Fission Energy. This is in the Athabasca Basin,
located right next door to Hathor Exploration, which is now Rio
Tinto's Roughrider deposit. In fact, the western extension of the
Roughrider deposit actually goes over the border into Fission's
territory. If Rio Tinto was to ever develop this, it would make a
lot of sense to develop that little nub that goes over the
border. There's no reason for Rio Tinto to stop right at the
property line. A few meters to the west of that is Fission
Energy's J Zone deposit, which has an initial NI 43-101-compliant
resource of 9 Mlb that it announced earlier this year. It would
make a lot of sense for anyone, like Rio Tinto, wanting to
consolidate the region, to buy Fission Energy next door as well
as Denison's and AREVA's assets. Within a 5 kilometer (km) area,
there is already more than 110 Mlb of uranium. So it would make a
lot of sense for one company just to consolidate the whole
An acquisition certainly does not look to be baked into Fission's
It was previously. Fission traded over $1 at one point in
November, when Hathor was being acquired. It's the classic
situation where investors buy on the potential and when it
doesn't happen immediately, they give up and sell. It is further
exacerbated by the fact that we have a negative market in
Even though you've seen Fission drift lower, the story hasn't
fundamentally changed. If anything, it is closer to actually
happening now than it was right after Rio Tinto bought Hathor. I
haven't seen many scenarios where an acquiring company buys
Company A and immediately turns around and buys Company B. They
generally take some time in between to digest the acquisition or
do more work. So, if anything, now would probably be a better
time to buy Fission.
Another reason Fission has drifted down is that many expect
Rio Tinto to acquire Denison first given that it's larger, and
then turn its attention to Fission last, or after AREVA. So maybe
it's more of a timing issue and people would get back into
Fission when they see more activity in the basin and because they
could see a bid for Denison.
What are some other names you like?
Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.A)
is a near-term producer. It is scheduled to produce by the end of
this year, which would make it the next uranium producer in the
world. It is located in the Powder River Basin in Wyoming. It has
pretty high grades as far as
) mining goes. It's an ISR miner, which means it uses injection
wells and pumps the solution out of the ground. It is a low-cost
operation similar to that of
Uranium One Inc. (UUU:TSX)
in Kazakhstan and some of the assets that Cameco has in the U.S.
Uranerz is also run by one of the best management teams that I've
come across in the uranium space. Given that it's a near-term
producer, I am very positive on Uranerz for the same reason I
feel that Energy Fuels is a bigger deal than what the market is
giving it credit for.
Another name that I've very positive on is
U3O8 Corp. (UWE:TSX.V)
. It is basically a South American consolidator of uranium
assets, with assets in Colombia, Argentina and Guyana. I had the
opportunity to visit all three. The flagship property is in
Colombia, where it has decent grades. It looks like it there will
be a suite of metals that the company can extract. In fact, it
believes it can economically extract other metals such as
molybdenum, vanadium, some rare earths and phosphate. Its asset
in Guyana could be another Athabasca Basin.
Many thanks to you, Rob.
I've enjoyed it. Thank you for having me back.
Versant Partners Analyst
has extensive financial markets experience dating back to 1995.
He helped run a multistrategy hedge fund, worked in base metals
research at BMO Capital Markets, managed resource funds at a
boutique investment management firm and was a global mining
equity analyst at an independent investment bank.
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1) George S. Mack of
The Energy Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Energy Report:
Fission Energy Corp., Uranerz Energy Corp. and Energy Fuels Inc..
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3) Rob Chang: I personally and/or my family own shares of the
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