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No Substitute for Nuclear Power

Source: JT Long of The Energy Report (5/19/11)
May 20th, 2011

Emotional selloffs of uranium stocks in the wake of the Japanese nuclear disaster created a buying opportunity, says Alka Singh, a mining analyst at Jennings Capital. In this exclusive interview with The Energy Report, Alka runs down the supply/demand problem that could drive prices to $75/lb.

Companies Mentioned: BP Plc. Cameco Corp. Denison Mines Corp. Laramide Resources Ltd. Paladin Energy Ltd. Ur-Energy Inc. Uranium Energy Corp Uranium One Inc. Uranium Resources Inc.

The Energy Report: We talked a couple months ago, right after the 9.0 earthquake and subsequent tsunami damaged Japan's nuclear reactor, about the impact the disaster would have on the uranium market. Tell me, were you surprised by the short-term reaction, particularly after the operator raised the emergency level to a seven—the highest on the scale and equal to what happened in Chernobyl.

Alka Singh: I was somewhat surprised by the news reports. The Chernobyl accident was a much more destructive accident than that of Japan. The difference in the scale of the two events was enormous. A meltdown is certainly not a good thing, but the ultimate measure of a disaster is how much radioactivity is released into the environment. The Japanese meltdown can be compared to Three Mile Island, where very little radiation leaked out of the facility. What happened in Japan was a natural disaster caused by a tsunami and an earthquake rather than an operational failure. The media likes to make a bigger deal out of it.

TER: And, what about the reaction of the stock market short term?

AS: The stock market reacted immediately. Uranium producers, uranium companies and utility companies with nuclear power plants were down between 60% and 80% from pre-earthquake levels. The market is emotional. You have to understand that. It is similar to what happened during the oil spill when BP Plc. (NYSE:BP; LSE:BP) stock price went down 70% in a matter of weeks. Other oil companies suffered as well. Oil stocks eventually bounced back. We are hoping in the near future people will realize the supply/demand fundamentals of the uranium market and this strong selloff will stop.

TER: When we talk about short-term impacts, on what does the length of the negative reaction depend? Does it depend on how long it takes to get the reactor fully contained? Does it depend on other reactors coming back online or being built? What is it going to take for the markets to shift to more of a long-term supply/demand fundamental mindset rather than a short-term reaction to the headlines mindset?

AS: In addition to the speed of the Japanese reaction, the market is also watching other countries that made noise about being cautious in the permitting and construction of new reactors. Slowly the world will realize that we need nuclear power. You cannot substitute nuclear power with wind, solar or geothermal power. Once the market realizes that the supply and demand fundamentals for uranium are strong, that's when there will be a reversal in the prices. It will be a fast reversal. I would compare it to what happened in the entire financial market in 2008. It took three to five months for everything to rebound back to the same level. That is why this is a good buying opportunity for people who can take some volatility and some risk and stay there for the long run.

TER: How many countries have canceled or scaled back plans for nuclear plants? What is the status of nuclear plants in the planning and operational state?

AS: Germany took seven reactors off line. In Japan, out of 56 operating reactors 11 in the earthquake and tsunami zone have been shutdown. Not a single country has scaled back any of the 62 nuclear power plants being built. That means that of the 443 operating reactors in the world about 4% of them were impacted by what happened in Japan.

TER: Two suppliers are going offline this year. What does that mean for the supply and demand balance of uranium?

AS: The 443 operating reactors need about 180 million pounds (Mlb.) of uranium. We are just talking about the ones in operation right now. Today, the world produces 130 Mlb./year. The 50 Mlb. gap is filled by the Russian Highly Enriched Uranium (HEU) agreement and some fuel reprocessing. If the HEU agreement expires, as the Russian government says it will in 2013, where are we going to get that 25 Mlb.? Not a single mine in the world produces over 20 Mlb. uranium a year.

TER: Are any new sources coming on line?

AS: The problem is that from exploration to production, uranium mines take about 10 years to develop compared to a gold mine, which could be in production in about five years. That is because of the tough regulatory environment. A few are in the final stages of that process. Uranium Energy Corp (NYSE.A:UEC) just started production last year. Ur-Energy Inc. (NYSE.A:URG; TSX:URE) and Uranium Resources Inc. (NASDAQ:URRE) will both be in production in the next 24 months. But, they'll be producing very little. When they ramp up, each company will be producing about 2 Mlb. uranium per year—just 6 Mlb. uranium when the U.S. utilities alone use 57 Mlb. In 2010, the U.S. produced 4 Mlb. This is the kind of market that we are talking about right now.

TER: When we talked two months ago, you pegged the long-term target price at $75/ lb. Is the psychological nuclear fear factor figured into that estimate? And, is that still your long-term estimate?

AS: Yes, that is my long-term estimate. The psychological nuclear fear factor was figured into it a little bit. But, it will not last for long. Eventually the market will realize that while the Fukushima melt down was a bad thing, we have to get our energy from somewhere. India needs more energy. So does China. So does South Korea. So does Brazil. So does Russia. Where is all that energy going to come from? Either you burn coal or natural gas or run hydroelectric power or nuclear. But most of the hydroelectric options have been tapped. Using coal will pollute the environment. So, what do you do? Is nuclear that ugly? Well, not really comparatively speaking. It's like the BP oil spill, within six months British Petroleum recovered 60% to 65% of the value that they lost due to the oil spill. I'm hoping for the same rebound for uranium.

TER: You mentioned earlier that you saw this as a buying opportunity. Based on size, location and development stage, where are some of the best opportunities right now?

AS: That's a great question. All the uranium stocks right now are for sale. But some stocks are better than others. For now I would stay with uranium producers with low production costs such as Uranium Energy Corp., Cameco Corp. (TSX:CCO; NYSE:CCJ) and Paladin Energy Ltd. (TSX:PDN; ASX:PDN).

Other companies that are close to production are Uranium Energy and Uranium Resources. The reason I like them is they use the in-situ leach recovery (ISR) process for extracting uranium and their cost would be under $20/ lb. compared to say a Denison Mines Corp. (TSX:DML; NYSE.A:DNN) with operating costs of $45/ lb. to $47/ lb. These two companies are also in the U.S.—a safe jurisdiction.

TER: You recently wrote about Uranium Energy Corp.'s acquisition of the Hobson processing plant from Uranium One Inc. (TSX:UUU). How much output do you see them being able to achieve?

AS: Uranium Energy Corp actually got a good deal when they bought Hobson plant and the Palangana Project from Uranium One. The company started production late last year. UEC will be producing 1 Mlb., slowly ramping up to 2 Mlb. ISR facilities are never large enough to produce 6 Mlb. to 10 Mlb. So, they would be limited to about 2 Mlb. to 2.5 Mlb. even after ramp up. They might have to make a $1M investment to get some vacuums that would help them go up from about 1 Mlb. to 2 Mlb., but that is the limit.

TER: What about Uranium Resources? You mentioned that they're in New Mexico and Texas. It looks like they have two NRC licenses but they still have some work to do to be profitable. What made you decide to initiate coverage on them?

AS: The reason I initiated coverage on Uranium Resources is because the company has 101 Mlb. uranium—the 8th largest in the world. About 45 Mlb. is amiable to ISR. Uranium Resources already has its NRC licenses, which are in the process of getting reinstated. So, they don't have a regulatory risk factor. The company could probably supply a lot of their uranium to U.S. That is why I like them.

TER: What about partnerships? Are they looking at joint ventures and, how can that help them?

AS: Oh yeah. The 45 Mlb. out of the 101 Mlb. is ISR-amiable; the other 56 Mlb. has to go to conventional milling. Building a mill could cost north of $250M—a steep price for a company with a market cap under $200M. A joint venture with Laramide Resources Ltd. (TSX: LAM), two companies in the area, could provide synergies for joint milling. But we have to wait and see. Right now, I'm not giving any value to the conventional milling at all. I'm deriving my target price of $5 based on the ISR project.

TER: What are the prospects for Ur-Energy's Lost Creek Project in Wyoming?

AS: The company is waiting for its final NRC permit. We expect the company to get approval by mid-year and start ISR production early next year. ISR is an easier process with low operating and capital costs. All three companies could realize cash-costs lower than $25/oz.

TER: Any other companies we should be watching?

AS: I would stay away from high-cost producers and companies that have resources, but are in the early exploration stage, trying to ride the uranium bull market of mid-2010 into early 2011.

TER: Good advice. Any other uranium issues you can see on the horizon that might impact some of these companies?

AS: Every uranium investor should watch oil prices. Generally oil has a good correlation to uranium prices. In 2007, we saw uranium prices go up to $139 at the same time oil hit its annual high. Now we're seeing oil reach an all-time high again. It has backed up a little bit, but I think oil over $90/barrel is always very positive for uranium.

Prior to taking a position as mining analyst at Jennings Capital, Alka Singh was the managing director and senior metals and mining analyst at Rodman & Renshaw in New York City for two years. Previously, Ms. Singh was a vice president covering the metals and mining sector in Canada at Merrill Lynch, and prior to that she was an associate analyst covering the gold and base metal companies at Orion Securities Inc. Ms. Singh holds an MBA from Schulich School of Business, York University in Toronto, Canada and a Bachelor of Science in geology from the University of Delhi in India.

Source: JT Long of The Energy Report (5/19/11)
May 20th, 2011

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1) JT Long of The Energy Report conducted this interview. She personally and/or her family owns shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Uranium Energy Corp and Ur-Energy.
3) Alka Singh: 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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