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Uranium and Mining Stocks Recovering

By: The Energy Report and Geordie Mark

-- Posted Thursday, October 28 2010 | Digg This ArticleDigg It! | Discuss This Article - Comments:

Uranium has been radioactive for investors who have stayed away in droves since the metal crashed into a prolonged slide beginning in early 2007. Now that the sector is in a cautious recovery mode from multiyear lows, Haywood Securities Senior Analyst Geordie Mark discusses uranium demand and his outlook for the sector in this exclusive interview with The Energy Report.

The Energy Report: Between the first quarter of 2009 and the first half of 2010, uranium tested $40 on the downside about three times. Has it found solid support? Also, what minimum level does it need to maintain for companies to be profitable?

Geordie Mark: That's a very good question. Certainly it has had a lot of technical support at $40 with a lot of buying strength coming in at that level. I'd say there's been even more buying strength recently. So that's a lot of strength. For the ultimate strength of investment health of this sector, I think we're looking at numbers north of $65. In fact, it would probably have to be higher than that to warrant risking venture capital for exploration. Also, you need to see higher prices for investment in large-scale, leveraged development-stage projects. Spot is now around $52, and we see positive movement there in terms of pricing with the long-term price at $60.

TER: You see positive movement, but it sounds like mining uranium is risky now. Is that right?

GM: Yes, mining does have technical risk. That's correct. As part of an offset to that, the projects we see going into production, certainly over the next year or so, are the lower-cost projects involving lower capital expenditure for development. Those are called in-situ recovery operations and they have a low-cost basis. So you're looking at cash costs of $30 per pound or less. They are the ones that can accommodate the current commodity price, but not the larger-scale projects requiring significant injection of capital. That's why we've seen delays in that development pipeline; $40 spot prices make it difficult to justify large, higher-cost projects. However, in our view, we do need those larger projects to sustain increasing demand.

TER: On a percentage basis, why has uranium lagged other metals? What market pressures have put downward pressure on the metal?

GM: Well, this year and late last year we actually saw a significant increase in production—probably larger than anticipated—out of Kazakhstan, which had a massive run from about 19 million pounds (Mlb.) in 2008 to about 36 Mlb. of production in 2009. With that continuing, we expect +40 Mlb. this year.

That really put a blanket on the uranium price for the first seven months of 2010 and moved it down to lows close to $40. But over the last few months, we have seen a 20% increase in the spot price.

From the low $40s to today, where it's about $52, we've seen an increase and a recovery in the price that has been a response to production shortfalls from some of the larger mines. We're seeing that balance swing a little bit more to the demand side in 2010.

TER: Geordie, you explained how Kazakhstan production put a blanket on the price of uranium and dropped it down to about $40, and that it has now rebounded to $52 due to expected production shortfalls in Australia and elsewhere. Going forward, would you expect to see big price swings when one mine increases production and another decreases it?

GM: Broadly speaking, we see nearer-term market equilibrium with buying strength coming out of China as it builds strategic working inventory for future nuclear requirements. So that buying strength provides underlying support if larger projects were to produce more than expected. Alternatively, pricing pressure could be experienced more so if there were appreciable production shortfalls.

TER: So if one major mine increases production, it could more than satisfy the demand here?

GM: Well the point, in terms of Kazakhstan, is that it has multiple smaller-scale mines rather than one big mine. The large-scale mines that could have a significant or material impact just by themselves, such as Cameco's Cigar Lake, could furnish significant amounts of material on the market. But while Cameco is thinking that Cigar Lake will come into play, ramp-up and begin production in 2013, it's not really going to make a material impact until about 2017. So we think there's certainly some pricing pressure coming around 2012–2013.

TER: What's going to drive capital into this market?

GM: Ultimately, I think prices are expected to increase right along with demand. However, in terms of one of the components of the uranium sector, the nuclear sector will drive the material and incremental change in demand through the number of reactors that have gone into construction over the last 24 months.

In the last two years, the number of reactors that have entered into construction has increased 61%. Also over that time period, there's been a 54% increase in the number of reactors planned and a 45% increase in the number of reactors proposed. These are largely in non-OECD (Organization for Economic Cooperation and Development) countries, so we're looking outside North America.

We're also getting something of a sea change in views on existing reactor fleets, certainly from Europe, where we're seeing policy changes to extend reactor fleet lives. So we're seeing new demand, but we're also seeing extension of demand from existing reactor fleets in countries in Europe, including Germany, Sweden and Belgium. Also, the UK is looking at additional reactors. So significant changes in demand are taking place, but it does take a long time to get a project through the development curve. Therefore, we think there are opportunities for the development projects that can reach production in the next two, three or four years.

TER: Do weak currencies in Australia and other uranium-producing countries portend risk for investors?

GM: Yes, currency exposure is obviously a risk on margin. But it can also be an opportunity, in terms of having lower-cost production due to operations being based in a country with a weaker currency. So it definitely depends on whether you're able to hedge some of your costs in that currency. But yes, I think we've seen that over the last month or so given the changes in the relative strength of currencies against the U.S. dollar. You do get a gain or atrophy in margins. That works for any commodity.

TER: Geordie, who are your buy-side clients? Are they small-, mid- or large-cap mutual funds? Who are they mainly?

GM: Our clients represent a whole range—small cap all the way up to very large. Their requirements relate to different investment objectives, of course, and to different sized companies within the uranium sector.

TER: Thank you.

Dr. Geordie Mark, a research analyst with Haywood Securities, focuses principally on uranium companies involved in exploration, development and production. He joined Haywood Securities from the junior exploration sector, where he was vice president of exploration for Cash Minerals, which concentrated on uranium and iron oxide-copper-gold targets across Canada. Immediately prior to joining the exploration industry full-time, Dr. Mark lectured in economic geology at Monash University, Australia and served as an industry consultant. He completed his PhD in geology in 1998 at James Cook University's Economic Geology Research Unit in Australia, specializing in aqueous geochemistry and igneous petrology applied to ore-forming systems.

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-- Posted Thursday, October 28 2010 | Digg This ArticleDigg It! | Discuss This Article - Comments:

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