By: The Gold Report and George Topping
George Topping, a research analyst specializing in the mining sector at Blackmont Capital, pays closer attention to uranium and copper than he does gold and silver, but in this exclusive interview with The Gold Report, he shares what he foresees: gold flat at $950 per ounce (in real terms) through 2011, copper at $1.80 per pound in two years, and uranium nudging up $100 per pound within five years.
The Gold Report: Let’s begin with some of your thoughts about uranium. Almost two years ago, spot prices hit a record $137 per pound. A year ago—well before the bottom fell out of virtually all the markets—the spot price dropped by nearly half, to the neighborhood of $70. You focus a lot of your attention on uranium. How do you see its future shaping up?
George Topping: The situation right now is you’ve got the spot price down at about $43 a pound and the term price up at $69. Historically, the spot and the term price have traded very close together, within a couple of dollars. The hedge funds being forced to sell material in the spot market, which is typically a fairly small market for uranium, have depressed the spot price. But I expect that’s starting to dry up and over the next several months we should see the spot price come up to meet the term price round about the $60 to $65 per pound level.
From there I would expect it to increase further over the next several years, the main new source of demand being sovereign stockpiling. In the last five months,
TGR: What sort of balance is there between nuclear weapons and power plants? It seems it would be somewhat small for weapons.
GT: It depends upon how much test work is undertaken and how large a stockpile of nuclear weapons one requires. For example, over the last 10 years about 30% of the world nuclear power demand has been met by dismantling nuclear weapons and from
TGR: You used the term “sovereign stockpiling” of uranium. So
GT: No. And it isn’t only uranium. The Chinese, for example, have said that they’re obviously stockpiling oil right now. They’re actually just commissioning one of the world’s largest storage facilities for oil. In the same announcement, though, the Chinese said that they’d be stockpiling oil as well as other forms of energy. They have coal already and natural gas is not easy to store, but uranium is one of the easier ones to go out and buy and stick away in a strategic stockpile. Given that
TGR: What about the
So I don’t see the
GT: I believe that, as with oil, they’re not pausing at all due to their own slower growth. They’re carrying on with plans to stockpile metals, particularly metals they produce, actually, to support domestic industry, keep their own mines operating and lower the number of miners who are flung out of work domestically. They don’t want riots and people protesting. A lot of
For example, within
TGR: So they are mining all these industrial metals that you just mentioned in
GT: The imports are increasing as the Chinese are paying a premium to the LME prices. You’re seeing imports come into the country. With copper, for example, an arbitrage situation closed in the last week or two, but you could have been buying copper in London, putting it on a ship, and sending it over to China for an arbitrage profit.
TGR: That swings both ways. You have to be on the right side of the trade. Quadra Mining just had to write a big refund check because by the time the copper reached its destination, the price had dropped dramatically.
GT: Yes, you have to be on the right side of the trade or else mitigate the risk by buying puts or entering into fixed-price contracts. If you don’t mitigate the risk, you may get caught.
TGR: But back to uranium, currently we’re seeing this spread between spot and the term price that a utility would pay. Spot is low because of the hedge fund selling, but you think that’s drying up. So where do you see the spot price and term price ending this year? What direction? What magnitude? And what are you looking at for 2010?
GT: For this year I expect the term price to drift down to $65 per pound or thereabouts, but the spot price to move upwards and end the year very close to the term price. So right about $65 by the end of the year. And then going into 2010, I’m looking at $70, then $80 the year after that.
I think prices will move back up to $100 per pound over the next five years. Come 2013, the agreement to dismantle nuclear weapons expires.
TGR: That’s between
GT: Correct. It’s called the HEU Agreement, the Highly Enriched Uranium Agreement, and when that expires, it will leave a 30-million-pound gap in supply. A nuclear power generator that’s just spent several billion dollars adding another couple of reactors will want to be sure of a uranium supply, so it’s in their interest to foster new supply before 2013.
TGR: A couple of weeks ago, a Japanese consortium and a uranium company announced an agreement to joint venture on a project in
TGR: So might we see sovereign governments themselves, particularly the ones we’ve talked about, buying uranium? Would you expect an increase in countries actually buying in this sector of the market?
GT: Yes, and I think it’s a wise thing for them to do. If they can’t rely on their own corporations to ensure supply, they’ll probably step in.
Most countries, though, leave it up to the private corporations to ensure supply. For example, the
TGR: Is enough mining underway currently to fill that 30 million pound supply gap? Or will there be a shortfall of supply for a certain number of years?
GT: Right now it looks like there’ll be quite a shortfall.
TGR: Would any another potential property be able to come into production before 2013 to yield the Cigar Lake amount of uranium?
GT: Not really. The forecast production rate for Cigar Lake is18 million pounds of uranium per annum, so that would have taken away a little more than half the gap. The last frontier for a major jump in supply is Australia. We really need Australian governments at the state level to open up their mining permits to allow more uranium mines.
TGR: Wasn’t that voted in last year?
GT: The federal government has voted it in, but some of the states are taking their time. So the federal government wants it, but they basically said we’re in favor, but it’s really up to the states.
TGR: Isn’t a vote in Queensland scheduled soon?
GT: Yes, there is. I spoke with a uranium company in Australia recently and they expect both the Liberal Party and Labor Party are in favor of it. It’s a question of time. Even with permission to go ahead and develop uranium deposits, though, it’s still very tight to get something in by 2011.
TGR: Given this picture you’re painting of this massive shortfall in supply, it’s somewhat surprising to hear that you aren’t projecting the price to go up more rapidly as we move toward 2013. Energy is strategic to most countries and many of them, such as France, China and India use a lot of nuclear power.
GT: It’s quite a jump. I’ve got it going up to $100 per pound. It could go a lot further if there’s no visibility of filling that hole in supply. But right now I think $100 a pound is fine.
TGR: Switching to copper, you recently suggested that it might be a bullish signal for copper if speculators rush in to cover their shorts. Where do you see copper going as the year goes on?
GT: I cover mainly copper companies. We’ve had a nice run up in the copper price lately, due I think to three factors. Principally, a lot of it has to do with Chinese buying. As I mentioned, you’ve got the arbitrage the situation, you’ve Chinese buying for stockpiles, and less scrap material on the market. There are two reasons why the amount of scrap available has really contracted. One is, of course, that lower copper prices make it less economic to strip wire out of cable and out of buildings. In addition, though, a lot of the scrap dealers have to deal with banks; they need loans to pay for the scrap they collect and accumulate and then send over to China. When they get paid, they pay the banks back. What we’re hearing is that there’s a lack of trade finance. The fact that banks aren’t lending to these scrap merchants as they had in the past is really disrupting the scrap trade. That will take a bit of time to sort itself out. When it does, I think by the middle of the year we should see copper prices back down to about the $1.50 level and that’s my forecast for the year—$1.50.
TGR: And today, it’s what —$1.80 or so?
GT: Yes, about that.
TGR: So you believe the when the scrap market adjusts, copper prices will fall again.
GT: Yes, you’ll get the scrap market supply increasing. Also I don’t believe the Chinese want to chase the price up. I think they’re much happier letting the price come to them. And the arbitrage gap has shrunk significantly between China and London. It’s only a few percent now.
TGR: What would you see in another two years in China for copper?
GT: In two years, I have copper at $1.80. But there’s nothing wrong with $1.50 to $1.80 copper price. It’s a nice price and a lot of companies make good money at that level.
A research analyst specializing in the mining sector at Blackmont Capital, George Topping has more than 20 years of experience in the mining industry as an analyst in brokerage firms and in management positions for South African mining companies. Early in his career, George gained valuable production experience with the Gencor Group, a major South African mining company with assets in North America, South America and Turkey, as well as Ghana and South Africa. He moved on to develop financial analysis skills in Gold Fields’ Mineral Economics Department, where he conducted due diligence on potential acquisition targets. George switched to the sell-side of the investment industry in 1995 as an analyst for Irish & Menell Rosenberg in South Africa. He migrated to Canada two years later, where he has continued to pursue his career as a sell-side analyst in the base metals and minerals sector, most notably at Sprott Securities from 1999 to 2005. His coverage at Blackmont includes a mix of emerging and mid-cap companies in the base metals sector, each with varying degrees of exposure to copper, zinc, uranium and molybdenum.
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