-- Posted Friday, January 14 2011 | Digg This Article |

Mark Lackey, with Toronto-based financial services company Pope & Co., admits he's in the minority. He believes the Street is too optimistic about production in Saskatchewan and Kazakhstan heading off a uranium shortage. In this exclusive interview with The Energy Report, Mark explains why he believes Cigar Lake won't save the day and why uranium could hit $100 a pound.

The Energy Report: Last summer, two big uranium players bought uranium off the spot market because it was cheaper than boosting production. It's estimated that those two companies bought as much as a quarter of the supply that was out there to meet their supply contracts. Are we seeing ripple effects in the uranium market now?

Mark Lackey: When those two big players were buying in the spot market, it signaled that the price was too low because they would have boosted production if that had been cheaper. But then those purchases started to move the price and China and South Korean started coming into the market to do some deals. Then, of course, there were other issues with another big company trying to ensure that it could get deals. Everyone was looking for uranium at the same time; consequently, the price moved $22/lb. in about three months. Earlier this week it was at $62.50.

TER: Roughly 15% of the world's electricity comes from nuclear power; 60 more nuclear power plants are being built and another 152 are on the drawing board. On the supply side, the Australians—at least those in the Northern Territories—have rejected a proposed uranium mine there, and some African jurisdictions are becoming quite dangerous. These factors seem to be signaling an impending, dramatic rise in the uranium price. Should we expect an even greater increase than what we've seen in the last couple of months?

ML: We're forecasting $65–$70 this year and probably $75 next year. A big difference could come in 2013 due to some of the issues you pointed out. There are some real potential supply constraints. Russia has said it's not going to export any more of the high-quality uranium from its weapons in 2013 when that agreement runs out. The consensus forecast for 2013 on the Street is still $75.

A lot of people think, "Well, Kazakhstan will continue to rapidly increase production." We don't tend to agree with that. Some people believe we'll saved by Cigar Lake—the high-grade uranium mine in Northern Saskatchewan majority owned by Cameco (50%)—but we don't know if that's going to be up and running in 2013 for sure. Our view, and admittedly it's a minority view, is that the price could easily spike above $100 in 2013 and go somewhat higher in the next few years until supply can catch up. That could take until 2015 or 2016 at least, and it may be longer due to the growth in demand. But the real argument is on the supply side, and some people are just too optimistic about where that new supply is going to come from.

TER: Cigar Lake has had all kinds of underground water issues, which delayed production time after time. As you mentioned, it's scheduled to come online in 2013. Why don't you think that's a realistic deadline?

ML: Those problems have been extremely difficult to handle. It wouldn't surprise a lot of people, including us, if that date was pushed back a year or two. If that's the case, the uranium price has a good chance of spiking because there will be a shortfall in the market.

Only 2% of the costs of running a nuclear plant are the feedstock. I'm not saying utilities will pay any price but, clearly, they don't get as concerned about price as they do about supply. Obviously, you can't run your plant if you don't have the supply.

TER: What makes you sit up and take note when you start looking into a uranium explorer and its particular projects?

ML: The very first thing I look for is a stable political jurisdiction wherein a company can get mining permits to go forward. I don't want to go to places where they're going to pull permits, there could be protests or the government is not very stable. Those problems do exist in many of the uranium mining jurisdictions. A jurisdiction needs a pro-uranium view. Even within the U.S., some states are much more pro-uranium than are others.

The project, land position, management, proximity to major players—those all come into play. A lot of what we like is in the Athabasca Basin, Wyoming and New Mexico because those have been the best-producing areas for uranium and have major players in all three of those jurisdictions. Less work has been done in places like Nunavut, Canada; however, some work was done there in the past and I think that's one of the reasons we like that area so well.

TER: Let's talk about another one of your specialties—coal. You're bullish on metallurgical coal and believe it could reach $300 a ton next year. That forecast is helped by the flooding in Australia. Can you give us an overview of what we can expect from the coal market in 2011?

ML: Flooding has been an issue, but that's going to be a short-term phenomena. The flooding will end and they'll get the mines back and operating. However, Australia's port facilities are at full capacity, so getting new production out of the country is extremely difficult. It would take at least a couple of years to build some new port facilities. Some are under construction, but Australian coal is pretty much maxed out. With demand rising as quickly as it is, coal is going to have to come from some other areas.

The steel industry is doing very well in South Korea, Japan, China and India; and we do see some improvement in Europe and North America, as well. There are even port-facility issues in the U.S., so there are some limitations these days with such bottlenecks that will add to a higher price. Not only will that impact metallurgical coal but also thermal prices are being quoted nearly as high as $130 a ton now.

TER: Some parting comments on mineable energy commodities?

ML: One of the reasons we're so positive on both uranium and coal is where the world markets are going for both of these commodities. They both have some different issues. Obviously, it's hard to get permits for uranium and there are countries, like Australia, where there's a significant anti-nuclear view. There are a lot of problems with some of the uranium-producing countries in Africa. So, we're kind of sticking to North America; and I think there's going to be some significant opportunities, given the uranium supply/demand balance.

Coal is being driven by significant demand growth coming out of Asia for both metallurgical and thermal, as well as limited global opportunities to find all of this coal and actually ship it. Both uranium and coal have very good outlooks during the next five years.

TER: Thanks, Mark.

Mark Lackey, currently the investment strategist a Pope & Company Limited, has 30 years of experience in energy (oil and gas; hydro), mining, central and corporate banking and investment research and strategy. He worked at the Bank of Canada where he was responsible for the production of U.S. economic forecasting, briefing Governor Gerald Bouey on U.S. economic developments on a weekly basis. Mr. Lackey was a senior manager of commodities at the Bank of Montreal where he helped to determine whether or not the bank would loan money to companies in the commodity space. He spent 10 years in the oil industry with Gulf Canada, Chevron Canada and Petro Canada where his main responsibility was developing corporate plans. This involved forecasting oil and natural gas prices, oil and natural gas demand, oil and natural gas supply, downstream products and their competitive position versus other oil companies. During his tenure at Trans Canada Pipelines and Ontario Hydro, Mr. Lackey helped develop corporate plans while also working closely with each company's pension funds.

In the investment community, Mr. Lackey was director of research at Brawley Cathers and the investment strategist at both Blackmont Capital and Hampton Securities. He is a regular guest on BNN, having made more than 200 appearances in the last 10 years (more than 40 of which were in 2010). On his most recent appearance, Mark discussed his new role at Pope & Company and branded Pope as an up-and-coming institutional resource boutique dealer.

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-- Posted Friday, January 14 2011 | Digg This Article |