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Rob Chang, Canada metals and mining analyst at Cantor Fitzgerald, told Uranium Investing News what may propel the uranium market out of the current slump and gave his top uranium equity picks.
Uranium Investing News (UIN) asked Rob Chang, Canada metals and mining analyst at Cantor Fitzgerald, what potential catalysts we may see this year that could propel the uranium market out of the slump. “I think there is a potential catalyst for prices following Japan’s new nuclear safety regulations, which come out in July,” said Chang. According to Cameco (TSX:CCO,NYSE:CCJ), three Japanese utilities plan to submit restart applications in mid-July, meaning there may be somewhere between five to eight reactors turned on this year, he said. “There is also word that at least two other utilities may also submit applications quickly following the July introduction of regulations, bringing the total to five utilities,” added Chang, who said that for now the market is in a wait-and-see mode.
While for now most utilities have enough supply to meet their requirements in the short to intermediate term, Chang explained, “looking out over the longer term there is still a fundamental supply/demand gap.” That gap is soon to be made worse by the current price environment, “which will certainly not support new projects — it’s not even incentivizing producers.”
He pointed to Energy Fuels (TSX:EFR) as a producer smartly holding back production in a low pricing environment. “They can potentially produce more, but have announced they are only producing about one million pounds this year. There are likely others who are affected like this as well. Of course, the more expensive projects, like those in Africa, won’t even get off the ground at this current pricing,” said Chang.
The cutbacks in production will ultimately push prices higher as the supply/demand gap widens in the long-term. “It takes about seven to ten years for a project to progress from Greenfields all the way to production so we are already behind the eight ball so to speak because the gap will occur prior to seven to 10 years,” he noted.
Top company picks
UIN: Can you give our investor audience Cantor Fitzgerald’s top pick for a producer in the uranium space?
Rob Chang: From a producing standpoint, Cameco has always been our top pick. It’s going to be the first one to march back once uranium comes back into favor for a variety of reasons. One being it’s the dominant player in the Athabasca Basin, which is the best address in the world for uranium because of the region’s high grades, great infrastructure, and long-time mining history. Cameco is also one of the more dominant producers in the world, with a significant amount of pounds of U3O8. In terms of size, after Uranium One privatizes, Cameco will be the only uranium company that is trading over a billion-dollar market cap. So when you think about large institutional portfolios looking to deploy money into the uranium space there are a very limited number of names that they can buy. Cameco’s the most obvious one that is a uranium-focused play. When money does come back into this sector, Cameco’s going to see a large majority of it.
UIN: Can you please comment on headlines citing Cameco’s 93 percent lower earnings for Q1 from same period last year?
RC: For one thing, anyone who follows a uranium company would know that the first couple of quarters are usually weaker and it’s the last quarter that really matters. Part of it was lower prices and lower deliveries, but the more important part was its Bruce Power division had to shut down three out of four reactors, so they weren’t making money on those and it was a big loss this time around. So that contributed. It wasn’t just because uranium sales were weak, but of course pricing was weak. For deliveries, to be clear, they are still maintaining their guidance.
UIN: Who’s your top pick in the uranium developer category?
RC: On the developer side, Uranerz Energy (AMEX:URZ,TSX:URZ) is our favorite. Uranerz will start production at its ISR mine in Wyoming sometime this year, or perhaps early next year depending on when they acquire the small amount of funding they need to build the deep disposal wells. That’s the last thing they need to finish, so they are right at the cusp. It appears that the State of Wyoming will give them some debt financing that will get them over the hump. Once funded, it will take them about two months or so to complete the wells and move into production. We say it will be producing about 200,000 pound to start off, but it will average out to about 1 million pounds U3O8 per year.
Uranerz is run by one of the better operational teams that we’ve seen. It’s processing material through Cameco’s facilities, which we think is important because if Cameco is looking to buy someone, then Uranerz would be an excellent fit as it would mean less work for Cameco to integrate Uranerz’s assets into its current operations.
UIN: Finally, who’s your favorite in the explorer space?
RC: We like Fission Uranium (TSXV:FCU), which is in the southwest corner of the Athabasca Basin. We’ve talked about Fission Energy a lot, but this is the subco that came out after Fission sold most of itself to Denison Mines (TSX:DML,AMEX:DNN). Fission Uranium owns 50 percent of the Patterson Lake South project, along with its joint venture partner Alpha Minerals (TSXV:AMW). The property appears to be a potentially emerging world-class project with excellent high-grade and long-intercept drill holes. In addition, it’s uniquely all rather shallow at about 60 meters below surface as opposed to many Athabasca Basin deposits that are between 200 meters and 400 meters in depth. So from the exploration side we’re really excited about Fission.
Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.
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