The Nuclear Revival: Mark Lackey
Source: Brian Sylvester of
Emerging from the shadow of Fukushima, the nuclear sector is
on the cusp of a comeback, according to Mark Lackey, chief
investment strategist with Toronto-based Pope & Company.
Nuclear plants have been reopened, and as many as 200 new plants
worldwide are scheduled to come online. At the same time, uranium
supply shortages loom on the horizon, making for bullish
fundamentals for uranium miners. Lackey's faith in the coal
sectors also burns brightly. He reveals his favorites in both
sectors in this exclusive
The Energy Report:
The Fukushima disaster, protests in Australia over lifting a ban
on uranium exploration, and a fire aboard a Russian nuclear
submarine in December indicate negative sentiment toward nuclear
power. Why would investors risk exposure to a commodity that is
so price sensitive to events like these?
The fundamentals of the uranium sector still look good.
Worldwide, 1.3 billion (
) people lack electricity. In China, load growth for electricity
is 10% annually; in India, 8%. That growth is unlikely to
diminish any time soon. Nuclear power has to be considered as an
option to meet demand.
I would remind you the nuclear industry did not end after the
accident in Fukushima, Japan. Yes, there was a reaction; plants
were shutdown in Japan and Germany. Subsequently, some startup of
those same plants is planned. Furthermore, construction on 65
plants around the world did not stop.
There have been more inspections in China, India and France
and that reassures people that everything has been built to
As many as 200 new nuclear plants are being planned in Asia,
Brazil and even Saudi Arabia. The week of Feb. 13, China
announced its long-term goal to increase installed nuclear
capability by an additional 30%. Their original goal was 65
) kilowatts (
) by 2020; now it is 80M KW. Clearly, the country does not plan
to stop or change direction.
What impact did the U.S. Nuclear Regulatory Commission's approval
of construction of two nuclear reactors in the state of Georgia
have on the uranium sector?
It did not move the spot price, but the industry views this as a
positive. Recent growth has been largely in Asia and South
America. We will have to wait and see if this leads to more
positive announcements in the U.S.
Do you expect more licenses to be granted in the U.S.?
Even though U.S. load growth will grow only in the 1% range, the
country will need additional capacity in the next 10 to 15 years.
It is very hard to build coal plants in the U.S. and the
hydroelectric sites are pretty well maxed out. The other option
is to burn natural gas. All of this puts nuclear power back in
Among commodities, is uranium the most sensitive to world events
or would you put gold in that category as well?
I would put uranium up there. But it is not the only commodity
that is event driven. Gold really reacts to events. You can see
that in its volatility related to events in Europe. Silver is
also event-driven because it tends to follow the gold market.
Base metals are not all that event-driven, although oil has been
In 2010, the nuclear industry used 152 million pounds (Mlb) of
uranium. Yet uranium suppliers only produced a total of about 118
Mlb. The shortfall was covered by reprocessing nuclear weapons.
When will those finite sources run out?
Russia will stop exporting the highly enriched uranium it has
been processing from its nuclear warheads by 2013. Unless a new
source is found, a potential shortfall could happen over the next
two or three years.
It is now almost a year since Fukushima. The spot price for
uranium is now $52 a pound. Has that spot price resumed an upward
No, our 2011 forecast would have been correct if the earthquake
and tsunami had not happened. The price fell from $72 to the $40s
and has remained at $52 the for last six months.
The decision to shut down some plants in Germany and Japan
took away short-term demand. During the recent cold weather,
Germany restarted a few of those plants, and the Japanese are
looking at proposals to restart some as well. As that trend
continues and new plants are commissioned, demand should
Just about a year ago, the spot price and the long-term price for
uranium crossed paths on the charts. Ever since, they have
diverged. When do you think those two lines will meet up
Interestingly enough, most uranium sells in the long-term market.
The equities all follow the short-term price, partly because that
is what the market follows. In the next couple of years, I expect
spot prices and long-term prices to rise. We anticipate they will
be trading in the same relative price range by 2014.
What range do you expect the spot price to trade in this
By the end of 2012, we anticipate $65, moving into the mid-$70s
in 2013. That upward pressure is due to the fact that the
Russians will no longer export highly enriched uranium starting
What are some different ways to gain exposure to the uranium
Investors could go a couple of different ways. They could buy
mutual funds that specialize in the uranium market. Investors
also could buy into companies involved in building nuclear plants
or other related industries. We tend to focus more on uranium
mining companies themselves.
What are some companies you follow?
Fission Energy Corp. (FIS:TSX.V; FSSIF:OTCQX)
, a play in the Athabasca Basin. A number of people caught on to
Fission after Hathor Exploration Ltd. was taken out because
Fission has the adjacent property. The numbers on its Waterbury
Project are impressive. Fission also has interesting projects in
Saskatchewan and Québec. From our perspective, this would appear
to be a takeover candidate, depending on its success drilling the
Waterbury Lake property.
Waterbury Lake is owned by a consortium, which is headed by the
Korean Electric Power Corp. or KEPCO. Do you view that as a
positive or negative?
I view it as a positive. I do not buy the idea that the presence
of KEPCO means Fission is less likely to get a takeover offer. I
think KEPCO's presence tends to derisk the project and reduces
Fission's financial requirements in the future.
Does it make sense to develop Hathor's Roughrider Project without
having what is believed to be its extension, which Fission owns,
in the J Zone?
Ultimately, the more work that is done at Hathor-especially if
the numbers remain as good as they are and the trend continues to
move toward Fission-the greater the likelihood that somebody
would want to acquire Fission.
Rio Tinto (RIO:NYSE; RIO:ASX)
is an obvious candidate, given that it won the Hathor stake and
clearly wants to extend its presence in North America.
Cameco Corp. (CCO:TSX; CCJ:NYSE)
, another significant player in the basin, would not sit idly by
if a company like Fission was put into play.
Fission also has the Dieter Lake Project in Québec. Is the market
crediting Fission for the value of that property or is the
valuation based solely on Waterbury Lake?
I would say that few people give the Québec project a whole lot
of credit; not enough people have looked at it. The market is not
paying attention to the real promise of the Québec property. That
is partly because people believe that the Athabasca situation is
what will make Fission. In the short run, that is where the
company is concentrating as well. Another factor is that there
just are not many uranium players in Québec.
What other companies are you following?
Strathmore Minerals Corp. (STM:TSX;
, a company with significant land positions in New Mexico and
Wyoming, the two states that have had the most production in U.S.
history and have by far the biggest reserves of uranium. We
believe the company could have production as soon as early 2015.
The company has low capital costs and Strathmore has significant
) expertise on staff. The market has not completely recognized
its Church Rock project as a much larger and cheaper source of
uranium. The focus has been on Roca Honda and its Gas Hills play
How sensitive are uranium juniors to the spot price?
In general, the correlation on uranium stocks is fairly high. The
junior stocks tend to move after the big market has shown
For example, if we see continued movement in Cameco,
Denison Mines Corp. (DML:TSX; DNN:NYSE.A)
Paladin Energy Ltd. (PDN:TSX; PDN:ASX)
, I think the juniors will start to follow. If the uranium price
gets to where we believe it will be by the end of 2012, the
juniors that are in production or relatively close will move with
When you get a company like Strathmore, as you get closer to
2014 and if we are right about uranium prices, there should be
considerable gains in Strathmore's share price. It will be a
significant uranium producer as we get to the latter part of this
What is the next near-term catalyst for Strathmore?
It is probably getting all of its permitting done so the company
can get into production by 2015. Given that its projects are in
mining- and uranium-friendly jurisdictions, I would not
anticipate any major impediments to this process.
KEPCO recently acquired 14.5M shares of Strathmore at
$0.55/share. What did you make of that move?
I think it is positive for Strathmore, because it reaffirms the
KEPCO commitment to the company and it now owns about 14% of the
This has become a trend in the base metals, whether it is
China, Korea or India. In cases where there is an offtake
agreement, countries secure some of the uranium themselves.
Korea, Japan, India and China want to make sure that uranium
opportunities are out there, that the physical supply will be
Can you give us one off-the-radar name our readers may not know
They may not be aware of
Tigris Uranium Corp. (TU:TSX.V)
, run by Bill Sheriff. Bill built Energy Metals Corporation,
which Uranium One took over four or five years ago. He brought in
Dennis Stover, who was COO of Energy Metals. Dennis knows ISR
better than most people.
Given your expertise in coal, we have to talk a little bit about
that. Prices for thermal coal and metallurgical (met) coal remain
healthy despite reports about the contribution of greenhouse
gases generated by coal-burning power plants and steel mills to
global warming. What are your outlooks for thermal and met
The met coal market looks pretty good. We expect steel production
to grow in the 6% range over the coming four to five years.
European steel production shows some weakness right now, but
there is no significant slowdown in India, Korea or China. Even
in the U.S., it looks like steel production will be OK, given the
expected decent year for auto sales. We expect met coal to trade
in the $200-225/ton (t) range, which will be very positive for
met coal producers.
Thermal coal is a little more diverse. It can be as low as
$15/t and as high as $120/t, depending on the British thermal
units (BTUs), sulfur and ash content. At the upper end, the
markets for thermal coal look very good. The lower end is always
more problematic. Environmentalists have the most problems with
this coal, particularly in developing countries. And, it is a
little more difficult to develop plants.
What do you like to see in a coal play?
All things being equal, my preference is to be in the met coal
market or the upper-end thermal market. We tend to be in North
America, where we are familiar with the permitting processes and
I also look for good infrastructure. Without rail or water or
power, having a big coal deposit is not very useful. You also
want companies in places where there are lots of people who
understand the geology in that jurisdiction.
What names are you following in the coal space?
Fortune Minerals Ltd. (FT:TSX)
. The company has its Mount Klappan project, a met coal deposit
in British Columbia. It has access to infrastructure and ports.
Being in the western part of Canada, its market is Asia. This is
one of the world's premiere met coal development projects. There
is obviously a lot of expertise in the area, given all the met
coal that has been developed around British Columbia and
Fortune is trading at about half its 52-week high, after taking a
bit of a beating in 2011. Is this a good entry point?
If you look at when this stock peaked and you look at what took
place in the Venture Exchange, which is down about 35% to 40%
from its peak last April, Fortune has really followed that trend.
Many people moved out at tax-loss selling time. Production will
not start for a few years, and some people want to be in coal
plays that are in or near production. But if you take a
longer-term view and look at the size of the reserves, you
recognize the significant potential three or four years from
The Canadian subsidiary of the Korean steel-maker, POSCO, owns
25% of the Mount Klappan project. Why are Korean companies so
consumed with North American energy plays?
I think they recognized that areas of the world you can go to are
limited. The Koreans like the stability of Canada, that we do not
change legislation a lot. You can find a lot of strong, competent
people to run companies. China and Korea probably have the most
joint deals in the North American energy sector; China probably
more than Korea in the last year.
What other coal plays can you tell us about?
Corsa Coal Corp. (CSO:TSX)
, a met coal play with an operation in Pennsylvania. Management
has a successful track record in the state. Don Charter, who was
one of the senior guys at Dundee for years, runs it. It is in
production and the potential is there to get higher levels over
the next few years. This is a company that is not on a lot of
people's radar screens.
The company produced about 250,000t coal last year, with an
average realized price of $167/t. What do you think the average
realized price will be in 2012?
The met market has not been as high as in China, but then you
have to ship it to China. You need to realize that, if we quote a
price of $225, you need to deduct the shipping costs. The price
Corsa is getting is in line with what you get in the U.S.
If we had a decent year in the U.S., the price could go
slightly higher. It will not skyrocket. A lot of met coal
producers would be happy if they saw $150/t or $140/t. I would
suggest prices will stay at the $170/t level, or slightly
Corsa expects to produce 695,000- 765,000 raw tons of met coal in
2012 at a cash cost of roughly $50/t. Are those reasonable
The cost numbers look good and the production numbers look
reasonable. Of course, there is always execution risk, which
management has helped lower.
Do you have any other coal names?
NovaDx Ventures Corp. (NDX:TSX.V)
is a met coal play in Alabama and Tennessee. It picked up a lot
of top management from coal companies in both states. The company
expects good production increases down the road. We think that
these significant production increases will likely result in a
much higher share price in the next few years.
Do you have any parting thoughts to share?
We put world growth in 2012 at around 3.5%, down from almost 4.5%
last year and almost 5% in 2010. That is better than forecasters
who peg world growth as low as 1.5% to 2%. Clearly, if you
believe the latter outlook, it will not be a great year for the
But if you believe our 3.5% forecast, we expect to see good
opportunities in both uranium and coal. And, we expect
appreciation of these equities as we go through the year.
Mark, thank you for your time and insights.
, currently the investment strategist at Pope & Company
Limited, has 30 years of experience in energy (oil and gas;
hydro), mining, central and corporate banking and investment
research and strategy. He worked at the Bank of Canada where he
was responsible for the production of U.S. economic
forecasting, briefing Governor Gerald Bouey on U.S. economic
developments on a weekly basis. Mr. Lackey was a senior manager
of commodities at the Bank of Montreal where he helped to
determine whether or not the bank would loan money to companies
in the commodity space. He spent 10 years in the oil industry
with Gulf Canada, Chevron Canada and Petro Canada where his
main responsibility was developing corporate plans. He is a
regular guest on BNN, having made more than 200 appearances in
the last 10 years (more than 40 of which were in 2010). On his
most recent appearance, Lackey discussed his new role at Pope
& Company and branded Pope as an up-and-coming
institutional resource boutique dealer.
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1) Brian Sylvester of
The Energy Report
conducted this interview. He personally and/or his family own
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2) The following companies mentioned in the interview are
The Energy Report:
Fission Energy Corp. and Strathmore Minerals Corp. Streetwise
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3) Mark Lackey: 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. I was not paid by Streetwise
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