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Coal and Uranium Generate Heat

By: The Energy Report and Geordie Mark

-- Posted Wednesday, November 16 2011 | Digg This ArticleDigg It! |

From fossil fuels to fission, growing global demand for power generation offers investment opportunities. Thermal coal is heating up and the uranium junior mining sector is set for development and a wave of consolidation. Geordie Mark, mining analyst with Haywood Securities in Vancouver, shares his thoughts in this exclusive Energy Report interview.

The Energy Report: There have been recent takeovers in the coal sector. What should investors take away from that?

Geordie Mark: Investors need to be aware that metallurgical coal is intimately related to the steel market. Our expectations for growth in the steel market drive our expectations for growth in metallurgical coal. It is a positive sign that the market sees the value of such a strategic commodity. We've seen a lot of activity this year in the space.

TER: Chinese imports of metallurgical coal have grown along with China's steel sector. Do you see this trend slowing in the near term?

GM: With steel demand increasing, we expect China to have an ever-increasing footprint in terms of metallurgical coal consumption. Long-term, there is still big potential for metallurgical coal, although we may see a plateau in pricing in the near term. China is also the largest producer of metallurgical coal, producing more than 500 million tons (Mt) in 2010, but we are expecting continued importation of the commodity in China, as well as Japan, India and South Korea.

TER: There is a lot of negative news about the pollution that coal-burning power plants produce. Are you saying that, despite the headlines, the thermal coal market isn't going away any time soon?

GM: That is definitely what the projections tell us. The International Energy Agency predicts increases in thermal energy consumption over the next 20–25 years. I don't see thermal coal—the largest form of base-load power across most economies—going away anytime soon as most of tomorrow's growth is expected to emanate from the Advancing Economies.

TER: The last 12 months have not been kind to uranium companies, especially juniors. How do you pitch uranium equities to retail and institutional investors at this point?

GM: The equities have taken a very big hit over the last year, despite the uranium spot price being around where it was a year ago. This equity market artifact is more related to sentiment, I think.

We still see uranium very much as a strategic commodity, even following the nuclear accident in Fukushima. This view is supported by the acquisition and offer activity in the sector in 2011. The sector's growth outlook looks solid, driven by expected demand increases in China, Russia, South Korea and petroleum-producing nations such as the United Arab Emirates and Saudi Arabia.

TER: The Australian Bureau of Agriculture and Resource Economy estimates that roughly 107 thousand tons (Kt) uranium will be needed to meet demand in 2016. That is about 20 Kt more than the 86 Kt yellowcake expected to be consumed this year. Is an extra 20 Kt a year enough to drive up the share prices of uranium juniors?

GM: I think we need some other catalysts. We need to remove the negativity sentiment toward this sector. For example, we need to see new reactors being built. We need to see a timeframe for non-operating reactors, say those in Japan, to be put back online. Investors need to see more usage of existing reactors and new growth coming into play.

We're starting to see new demand. A couple of new reactor proposals got the go-ahead in China recently, with construction for the reactors expected to start next year. Progress is starting to be made, albeit on an incremental basis.

TER: Until the last few years, few uranium projects have been developed into producing mines outside of Kazakhstan. Other than the price of uranium, why is that?

GM: The lack of new project development is a combination of the long lead times typically required to mature projects through permitting and construction, as well as fluctuating commodity prices and access to project financing. Lack of project development appears to be also an artifact of sector focus. In the last 10 years, a lot of money was spent on brownfields projects that were marginal in earlier periods of exploration, and less focus was placed on greenfields projects. Greenfields discoveries have the potential to add low cost output to the future production project, but discovery and resource definition can take time. I think that it is interesting to observe that despite market sentiment, acquisitions are still on the table in the sector, and these are focused on the few new discoveries made over the last several years.

TER: Geordie, thank you for your time and your insights.

Dr. Geordie Mark, a research analyst with Haywood Securities, focuses principally on iron ore, coal and uranium companies involved in exploration, development and production. He joined Haywood Securities from the junior exploration sector, where he served in an executive role concentrating on exploration across Canada. Immediately prior to joining the exploration industry full-time, Dr. Mark lectured in economic geology in Australia and served as an industry consultant. He completed his doctorate 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 Wednesday, November 16 2011 | Digg This ArticleDigg It! |

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