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Nuclear Power Growth Is Inevitable

By: The Energy Report and Rob Chang

-- Posted Wednesday, March 2 2011 | Digg This ArticleDigg It! |

Long-term demand growth for uranium is a global story, with China expected to far exceed any other single nation in new nuclear plant construction over the next decade. In this exclusive interview with The Energy Report, Versant Partners Analyst Rob Chang tells us about looking for ideas that investors can play to leverage these growing requirements for uranium fuel.

The Energy Report: What is your uranium forecast for the intermediate term and for the long term?

Rob Chang: For 2011, currently we have the spot price at $75/lb. Then the following two years we expect it to go up to $80/lb. and then take a slight step down in 2014 to $75/lb. For 2015 we have it at $72.50/lb. And then long term, we're currently expecting $70/lb.

TER: Why does the price forecast go down?

RC: Just to be conservative. Over the long term, as any economist would tell you, prices should revert to a point where the marginal costs equal marginal revenue. Basically the company that incrementally produces enough to satisfy market demand should be pretty much breaking even. Despite the fact we have a short-term increase, over the long term we do expect that market forces will work.

TER: I don't know if round numbers have any technical significance, but between the end of October and now, uranium has broken through the $50/lb., $60/lb. and $70/lb. levels. Does the fact that it didn't test those levels for long imply demand?

RC: Absolutely. I was personally of the belief that the prices were way too low for where they should be. The only reason why it stayed at such depressed levels was that investors were just afraid to get into the market during the economic weakness. Then when things started to turn around people paid attention, realized and then committed their capital into uranium, and once it started moving up it quickly adjusted to more reasonable levels. So, technical analysis doesn't always work and I think this is a situation where you can clearly see that these round numbers didn't really mean anything as the price advanced to where it should be.

TER: Where is the demand going to come from?

RC: Like everything else in the world, the strongest demand is coming from China. Currently there are around 443 nuclear reactors in the world, and China has only 13, which accounts for 3%. China is now the second largest economy in the world, recently surpassing Japan, and given how strong the Chinese economy is and is expected to be, just 3% of the global nuclear power production is a little ridiculous considering its energy needs and the fact that nuclear provides the best base load power supply. And you can see this easily in the number of planned and proposed nuclear reactors for construction.

According to the World Nuclear Association (WNA), of the 540 nuclear plants that are currently in the construction, planned or proposed phase around the world, China accounts for 35% of them. About 187 of the 540 are in China in some stage of development. China's doing three times the number of Russia, and I think that's pretty significant.

TER: Can demand fluctuate?

RC: Of all commodities, uranium is one of the best in terms of forecasting demand because you can't miraculously create another nuclear power plant. There are a lot of years, planning, permitting and capital required. It's fairly certain that once one is being built, it's going to go to completion and that demand will be there.

TER: Tell me about your initial screen, the enterprise value per pound (EV/lb.) of uranium in the ground. Describe that for me briefly.

RC: Sure. The EV/lb. metric that I use essentially common-sizes the universe of uranium companies by applying the EV/lb. metric for every company. I prefer enterprise value over market cap because it includes the debt and the cash numbers, which I believe are fairly significant in the decision of investing in any company. It also allows for easier comparison. You're going to have different companies with different resource sizes, and you can see whether one may be overvalued or undervalued on a per-pound basis.

TER: I understand that valuations can vary from exploration company all the way up the value chain to producer, but under what EV/lb. level would you consider looking at a company as a long position?

RC: I wouldn't say there's an exact hard rule in terms of what number I would look at, given that EV/lb. is basically a screening tool or even just a sorting tool in terms of showing where companies fit in the grand scheme of things. The key thing to note is that some companies do deserve to be where they sit.

TER: Where do you go next?

RC: I then get in contact with management and try and meet with them. I want to understand management and find out where they came from and ask them what they're doing with their project now as well as understand what their plans are.

How they see their project is important to me, because I want to weed out the promoters versus the actual developers or exploration people. It's key to find companies that have good projects and the personnel to advance the project. I've run into some situations where companies may have a decent project, but they don't seem to have the management team to actually push them forward. That's the key thing, because any good project can be ruined by bad management.

So, that would be the first cut. After that it would be to understand the political environment and effectively performing good fundamental analysis such as understanding the grade of the deposits. Metallurgy is also extremely important.

TER: Tell me about that process of evaluating management.

RC: Pedigrees do matter. It is not essential, but knowing that someone came from a well-run firm helps.

TER: Does having excellent leadership at the C-level translate to great engineers and people on the ground?

RC: I find it generally does. You attract better talent when you have a leader that has a history of success and strong management skills.

TER: Thank you and best wishes, Rob.

RC: Thank you.

Versant Partners Analyst Rob Chang has extensive financial markets experience dating back to 1995. He was a member of a five-person team running a multi-strategy hedge fund, a base metals research associate at BMO Capital Markets, a manager of resource funds at a boutique investment management company and an equity analyst covering the global mining sector at an independent investment bank. Rob has a Master of Business Administration degree from the Rotman School of Management at the University of Toronto and holds a Canadian Investment Manager designation.

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-- Posted Wednesday, March 2 2011 | Digg This ArticleDigg It! |

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