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Undiscovered Energy Gems Sparkle

By: The Energy Report and Siddharth Rajeev

-- Posted Thursday, March 10 2011 | Digg This ArticleDigg It! |

As an investment option, uranium glows brightly for Siddharth Rajeev, vice president and head of research at Fundamental Research Corp. He also favors coal and explains why size matters when it comes to potash in this exclusive interview with The Energy Report.

The Energy Report: When you last talked with The Energy Report, you were more bullish on the uranium price than any other commodity. Since then, the price of yellowcake has gone from about $50/lb. to just under $70/lb. Is there much upward momentum left in uranium?

Siddharth Rajeev: Yes, we continue to believe in the uranium story. You're right, uranium prices have gone up significantly in the last six to eight months. But we still think there's upside potential, mainly because the fundamentals remain very strong.

There are four reasons we believe in the uranium story: 1) Nuclear energy is a dependable and clean power source; 2) There is no direct substitute for uranium in nuclear power plants; 3) On the supply side, the primary production of uranium must increase significantly from current levels to keep up with long-term demand because the current supply deficit is met by stockpiles; and 4) Most of the new projects that we see out there are of much lower grade than the majority mines operating currently. Lower grades imply higher operating costs.

Our research indicates that the operating cost of new projects in development stages could be about $55–$60/lb. This implies that uranium prices must be significantly higher than those levels in order for the new projects to be feasible.

TER: Do you think we could see another 2007 when prices reached the $130/lb. area?

SR: We believe the market overreacted in 2007. We don't expect prices to go that high, but we definitely see significant upside from the current price.

TER: Can you put that into more specific terms?

SR: We use a long-term price of US$80/lb. in our valuation models.

TER: What is the investment thesis for uranium juniors in light of that price environment?

SR: When uranium prices hit record highs a few years ago, most junior exploration companies raised a significant amount of capital. A lot of them cut down their spending to preserve cash when uranium prices collapsed. So, when uranium prices recovered, we started seeing many juniors with quality assets in a strong cash position. Those are the kind of companies we like.

TER: Coal is another commodity that interests you. Despite growing concerns about pollution, prices continue to climb, mostly due to increasing demand from steel plants in places like China and Korea. We've even seen some recent takeovers. What should our readers expect from the coal market through the rest of 2011?

SR: We've always been bullish on coal because it remains the cheapest and most-abundant fossil fuel out there, accounting for 40% of global electricity supply. Despite the move toward cleaner energy, we believe it is tough to replace coal; consequently, we do not think coal will lose its significance in the energy sector at least for the next decade or so.

TER: What's your coal price range per ton?

SR: We use $140/ton for long-term metallurgical coal—well below the current price of $175–$180/ton.

TER: Another major commodity in Saskatchewan is potash, which is mostly used in fertilizer and prices show no signs of retreating any time soon. Why is potash so hot right now?

SR: Obviously, with high demand for food comes high demand for fertilizers. In addition to demand, the supply side of potash is very important to look at when forecasting potash prices. Most potash deposits are highly capital intensive and need billions of dollars to be put into production. As a result, new potash supply is hard to come by. Increasing demand and the bottleneck on the supply side are the primary reasons why we like potash.

TER: Do you have some parting thoughts on the energy markets or on the markets for energy-related commodities?

SR: We continue to have a positive outlook on uranium. We believe there are lots of opportunities in the sector—companies with quality assets and a good cash position. We are also bullish on potash. However, investors should be extra cautious when it comes to investing in very early stage potash juniors as companies have to delineate large resource estimates to cover the huge capital cost and make their projects economically feasible. Companies with advanced-stage projects and known economics have significantly lower risk.

TER: Does that wisdom stand for uranium and coal projects alike?

SR: It is more relevant for potash projects. Uranium projects are capital intensive but not nearly as much as potash projects. Coal projects are less capital intensive compared to both uranium and potash.

TER: That's good to know, Sid. Thank you for your time.

Siddharth Rajeev joined Fundamental Research Corp. in April 2006. At FRC, he oversees the research department and also covers a broad array of companies, primarily in the energy, mining and technology sectors. Prior to FRC, Siddarth had a mix of engineering and finance experience, including corporate finance experience, at a leading investment bank in Kuwait. Sid has ranked as a four-star analyst in the energy and mining sectors by Deutsche Asset Management, a division of Deutsche Bank. Sid holds a bachelor of technology degree in electronics engineering from Cochin University of Science & Technology and an MBA in finance from The University of British Columbia. He is a CFA Charterholder and has completed studies in exploration and prospecting at the British Columbia Institute of Technology. Sid is sought by the media for commentary on the valuation of small-cap stocks and industries he covers and is a speaker at various investment conferences.

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-- Posted Thursday, March 10 2011 | Digg This ArticleDigg It! |

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