Rob Chang, metals and mining analyst at Cantor Fitzgerald Canada Metals and Mining, spoke with Uranium Investing News about the fundamentals at play in the uranium market and how they will lead to an inevitable increase in price.
At current levels, uranium spot prices are not high enough to support profitable production for most uranium producers. But all that is about to change — the only question is when.
Rob Chang, metals and mining analyst at Cantor Fitzgerald Canada Metals and Mining, spoke with Uranium Investing News (UIN) about the fundamentals at play in the uranium market and how they will lead to an inevitable increase in price.
UIN: Uranium spot prices have fallen below $40, leading some market watchers to believe we have hit bottom. What do you think? Does uranium have much lower to go? Or are enough fundamentals in place to keep it from going any lower?
RC: I think the fundamentals show that the minimum uranium spot price should be $40 per pound because that is the marginal cost of production. In fact, from what my sources tell me, half of the world’s producers (in production) are actually not profitable at the current price of around $35 per pound U3O8. So, fundamentally speaking, the price should not even be as low as it currently is right now. Unfortunately, it is what it is. But, we are skeptical in thinking that it’s going to go much lower; if anything, we believe that it will move higher, most likely dramatically when it does so.
UIN: While there is no specific date that investors can expect the uranium spot price to climb, are there any indicators you’re looking for that will imply prices are starting to recover?
RC: Yes. We believe prices will pretty much stay flat or maybe trend slightly higher for the remainder of the year, perhaps even to the early part of next year. Primarily because the utilities — who are primary consumers and purchasers of uranium — are still pretty well stocked in terms of their inventory. They generally hold about three years of inventory in their storage. That being said, this is a figure we have been seeing for quite a while; a year has passed, so at the very least, one year of [stockpiled supply] has been used. On top of that, there has been a lot of excess supply out there, and Japan hasn’t been using as much as it was originally earmarked for — for obvious reasons.
In terms of looking for a date, there really isn’t a specific date. I do agree with you. I do believe that when the nuclear regulatory agency in Japan officially announces some [reactor restarts] being approved, that will be a catalyst for more speculative buying. For more fundamental purchasing, I believe utilities will start looking to step into the market later this year, probably early next year.
From what my sources tell me, utilities are again well stocked; however, some will be in the market for materials for say the end of 2014 and 2015. They may start stepping into the market this year or early next year to do that.
UIN: Does new nuclear plant construction have an impact on uranium prices?
RC: New nuclear reactor builds will have a positive impact on pricing. And what I can tell you as of right now, based on the planned number of reactors that are currently under construction and the others that we have a reasonable belief that they will be built, we believe no matter what scenario we look at, there is going to be a major supply deficit in 2020. And it’s getting very close to bouncing in and out of supply deficits between now and that point. But definitely becoming very severe by 2020 because that is when a lot of reactors will turn on. And if for some odd reason the uranium spot stays here, we are going to see major gaps of 20 million pounds plus in the future.
The good thing is that reactor demand is somewhat easily forecastable because countries don’t surprisingly throw up a new reactor. When they do this, they go through a big process of budgeting, checking with the public and there are a lot of regulations and hoops to jump through. So once a reactor is approved to commence construction, the demand is pretty set. And governments have less incentive to back off of these plans since they are large capital commitments.
UIN: So in regards to supply and demand, can you give us a really broad understanding of the current demand and supply situation for uranium in the world?
RC: We’re estimating 2014 demand to be about 184 million pounds of U3O8. And the global supply should be about 179 million pounds. That’s if several new builds (mines) progress as intended.
That’s if everything goes perfectly to plan. And by that, I mean if Cigar Lake ramps up the way that we forecast it and the way Cameco (TSX:CCO,NYSE:CCJ) forecasts it, as well as other operations ramping up, such as Ur-Energy’s (TSX:URE,NYSEMKT:URG) operations in Wyoming and Cameco’s production start up at North Butte in the US.
Those all have to be hitting exactly for these numbers to match, otherwise the supply numbers will be worse. And this is with our conservative estimate of reactor restarts in Japan as well.
But for those who follow mining, it’s almost expected that mines generally do not ramp up the way they are originally planned.
UIN: Indeed. How about the supply and demand situation in the US?
RC: Right. The US will probably stay pretty static. We forecast they will be around 49 million pounds. There have been some shutdowns planned, but conversely there are also some new builds happening. It’s pretty safe to say that demand in the US will be somewhere in the area of 50 million pounds.
A key thing to note, though, since you are bringing the US up, is that the US only produces about 5 million pounds of U3O8, so about a tenth of the demand that they need is being satisfied with current domestic production; the remainder needs to be imported from other sources.
UIN: It sounds like you’re saying uranium production in the US is not enough to meet the country’s demand. Now that the highly enriched uranium program is over in the US, what is the US going to do to meet its supply needs?
RC: The US needs to import it. The utilities knew well in advance that this would be coming, so they’ve probably taken appropriate steps to account for that. They are just going to import more from major sources such as Cameco in Canada, and other sources potentially. Also, the US Department of Energy sells its excess stockpile into the market, so that is a potential source for US utilities. But by and large, I think they are turning primarily to importing from the known producers, particularly Cameco, as well as domestic producers as they are expanding. Ur-Energy, for instance. Ur-Energy has just started production, and another ISR developer based in Wyoming is set to start production relatively soon. You have Cameco expanding production in the US, Energy Fuels (TSX:EFR) as the second-largest uranium producer in the US, as well as other companies that are starting production pretty soon as well. Those will be supplying into the market as well going forward.
UIN: We talked about the construction of new plants. But looking globally, are there any other upcoming demand drivers that we can point to that could have an impact on the demand out there for uranium?
RC: We are still seeing the consistent building of nuclear reactors in China. Russia is also a very big player. We recently rebuilt our demand model, and note that there are several reactors being built in both of those countries as well as other countries. One thing to note is that the UAE, the United Arab Emirates, is also embarking on a nuclear program. And when we take a step back and think about it, the UAE is an oil-rich country and they’re looking to do nuclear. So that is a very good sign in terms of the demand for nuclear — if a country as oil rich as the UAE is doing it, then it certainly is very positive for the space. Plans are still relatively early for the UAE, and we have not factored its potential demand into our models yet. But once that steps forward into reality, that will be another positive, especially given the signal it gives to the market, that a country of that nature would still look to get alternative sources of energy.
UIN: There is a limited supply of global expertise when it comes to uranium exploration. Which companies that you follow, or don’t, have notable exploration teams?
RC: Just looking at those who have recently made some discoveries, the one that comes to mind is the one you see in the news recently, which is the Fission Uranium (TSX:FCU) team. That team, led by Ross McElroy, has now discovered two high-quality projects. The first one being the J-zone at Waterbury Lake, which is directly adjacent, and likely attached to, the former Hathor Exploration Roughrider project, which was acquired by Rio Tinto (NYSE:RIO,ASX:RIO,LSE:RIO).
That team found that deposit, which was around 11 million pounds when it was sold. This past November they have been working on a new discovery called the Patterson Lake South project. That’s in the Western Athabasca basin and has many markings of a world-class project that could be over 100 million pounds. It is also shallow, so it is especially interesting. One of the reasons I bring it up is because they used a relatively newer technology in finding the deposit.
They have been able to identify projects based on that [technology], which is similar to what we used in the past. But there are some refinements that led to those discoveries. So it’s pretty interesting and it looks like they are working to patent it. And maybe, potentially, it will be used around the world. That would be very interesting and certainly a very strong endorsement of this exploration team.
Another exploration team that we are particularly fond of is Denison Mines (TSX:DML). The team is working on the Phoenix deposit at its Wheeler River project, which is probably the highest-grade uranium asset in the world — at least based on the numbers they have shown so far. It also has the makings of a world-class project. We are very impressed with that.
The Kivalliq Energy (TSXV:KIV) folks up in Nunavut have been very cost effective in terms of using a minimal amount of cash and translating it into resource pounds. The team has demonstrated the ability to consistently increase the resource size of their Angilak project up in Nunavut, and they seem to be progressing pretty well. We are excited to see the progression of that project. Those are the three off the top of my head that are quite strong.
But you also have very good teams, of course, in Cameco, because it is Cameco. And some good teams also in the US with projects such as at Ur-Energy, Uranerz (TSX:URZ,NYSEMKT:URZ), Uranium Energy (NYSEMKT:UEC) and of course Energy Fuels. So those guys all have solid teams in place as well.
UIN: Excellent. Just to jump over to Canada for a moment, the Athabasca Basin is the most well-known region for uranium. However, Canada has other regions where uranium exploration mining is going on. Can you tell us a bit more about these other areas? How does the Thelon Basin compare?
RC: The Thelon Basin is similar to the Athabasca Basin, but has had relatively less exposure primarily because we have not yet found the massive deposits that you see in the Athabasca. Of course, people tend to look for resources in the shadow of a head frame, so most of the focus for uranium exploration in Canada has been on the Athabasca Basin, and it’s significantly more developed. The Thelon Basin is a similar basin to the Athabasca, and has the potential to produce a good-quality asset as well. At some point, there probably will be a sizable project that is of note in Canada from the Thelon.
UIN: Are there any other regions that interest you in Canada?
RC: Absolutely. As previously mentioned, Kivalliq up in Nunavut is in the Angikuni Basin, which is also very similar. It is being explored by a team led by Jeff Ward. The Angilak project that Kivalliq is working on is one of the highest-grade projects outside of the Athabasca Basin. And as many of us know, grade is king.
The Angilak project has shown potential to have some very high grades. It’s really now a matter of what size can it get to. Based on the conductors and targets that Kivalliq has identified, we believe it has the potential to be quite sizable. Potentially it could be 80 to 100 million pounds plus. Of course, exploration has yet to identify that.
UIN: Great, thank you. There have been some interesting developments with Fission and Alpha Minerals (TSXV:AMW) and a potential takeover. Could you comment on this recent news and what it means for the industry moving forward?
RC: As a quick background, the two companies own 50/50 and have a joint venture over the Patterson Lake South project, which is likely the most exciting project in the uranium space now, given the incredible grades and the shallow depth of the mineralization that we’ve seen so far from the drilling campaigns. Mineralization was hit in November and both stock charts have rocketed higher, almost on a drill hole-by-drill hole basis.
The attempted acquisition of Alpha Minerals by Fission makes sense in that there needs to be one company overall. The reason I argue this is because a major will eventually step in and buy the company. Now, a major taking a look at two companies that equally share one project is less inclined to do any moves, primarily because if you buy one, you are automatically increasing the price of the other, and it’s tricky to deal with something like that.
Now, it can be argued that this may be a little early because the current structure is essentially a poison pill. And you could argue that it’s a little early to try to combine and remove the poison pill aspect from the project, primarily because there’s a lot of exploration to be done. We’re not even a year into the discovery of this project and already they’ve identified four zones. Based on the reported drill hole assays, we estimate that there are almost 40 million pounds of resources at Patterson Lake South. Definitely not official, but based on what we can calculate. So that’s pretty sizable. And based on the reported intercepts and what can still be targeted, there is significantly more upside there. So, is it a little early? Perhaps; however, the argument then is, at what point do they combine?
And when would it make the most sense? With the current uranium price environment the way it is right now, more than likely majors or larger players will be more inclined to buy now rather than later, which makes a lot of sense. If there is interest now, why not combine the two now and have the companies start realizing the full valuation that they both deserve. There is an argument that because they are split up separately, both companies, Fission and Alpha, are trading at a discount to fair value.
The other issue that is of interest is that on April 1, the companies have an operator switch-over agreement. That is, the operatorship of the projects switches over every two years. So that’s planned to be switching over from Fission back to Alpha on April 1, 2014. While we do like both companies, we have a little more faith in the Fission team, primarily because the Fission team has two discoveries under their belt. Essentially, all of the positive developments that have happened at the Patterson Lake South project have happened under the Fission team’s guidance. I’d rather just leave it in the hands of the one that is running it right now because it is going well so far. And I’d rather not fix what’s not broken.
UIN: Thank you for that information.
RC: That’s a long answer to what you just asked for.
UIN: Well, it’s an exciting area. Now, my last question, are there any other companies that you’re watching closely with regards to a major coming in or take over?
RC: There are quite few that we are interested in. Denison Mines is probably a prime takeover target and the next likely major acquisition, in our opinion. Primarily because there are two companies that would be interested in acquiring it. Let me backtrack and explain why.
Denison probably has the best package of exploration assets in the Athabasca Basin. They own, as I previously mentioned, the Wheeler River project, which is the highest grade in the world. They also owns key land positions around the Roughrider project that Rio Tinto now owns, including the acquisition they made from Fission Energy (the predecessor of Fission Uranium) for the J-zone. That being said, Denison owns effectively a piece, if not all, of the notable projects surrounding the Roughrider project.
If Rio Tinto decides to go all in and make a go of it in the Athabasca Basin, it’s almost necessary for it to acquire Denison and the surrounding projects rather than having separate projects operated by separate companies.
On top of that, Denison also owns a mill, and for mining, owning a part or having control of a mill is especially important. And Denison does have this access and ownership. And for a company such as Rio Tinto, which wants to process the material that it pulls out of Roughrider and the adjacent properties potentially, it would need mill access to do so. Denison would certainly provide them with that.
The flip side of this perspective, though, is that Cameco, which is the dominant player in the Athabasca Basin, would also be interested in acquiring Denison for a variety of reasons. One being just to increase its land package with the notable exploration property that Denison owns, and the second being as a strategic move to disrupt Rio Tinto’s position in the basin. Acquiring Denison would effectively lock Rio Tinto into just the Roughrider project. This, as I mentioned, might not be economic for Rio Tinto on its own. And if Rio Tinto can’t get the sufficient size that it needs and were to exit, Cameco could buy everything else.
Other potential targets, if Cameco so chooses, may be in the US as the giant could potentially acquire other ISR producers in the Powder River Basin given that Cameco has a very large footprint there. It could be an acquirer of Ur-Energy, for example. That potentially could make sense — or any other ISR producers in that region.
Outside of that, I don’t see any obvious opportunities for acquisitions. I do know that Paladin Energy (TSX:PDN,ASX:PDN) has been looking to sell a piece of Langer Heinrich, but that process seems to have derailed recently. But that’s on a project basis rather than on a company-wide basis.
One other potential to note, which hasn’t been talked about much, is the potential of someone putting in an offer for Uranium Participation (TSX:U), which is a portfolio of physical uranium in the form of U3O8 and UF6. Currently it’s trading at a slight premium, but being able to get your hands on that much material could be of value for a utility. At the right price, this may make sense as it has historically traded at major discounts at times. So if we Uranium Participation trading at a major discount, I could see someone putting in a bid just to steal it and get a notable amount of material for cheap.
UIN: Well, thank you for that insight. That was helpful. Thank you Rob, I appreciate the time.
RC: Great. Thank you.
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