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The Uranium Industry Is Alive and Well

By: The Energy Report and David Talbot

-- Posted Tuesday, December 13 2011 | Digg This ArticleDigg It! |

The Fukushima disaster cast a shadow on the uranium mining industry, but Dundee Capital Markets Vice President and Senior Mining Analyst David A. Talbot sees very strong fundamentals, especially in the absence of substitutes for nuclear generation. Such a premise suggests that uranium use will rise with growing populations and needs. In this exclusive interview with The Energy Report, Talbot lays out the demand picture in detail.

The Energy Report: Dave, what is your post-Fukushima uranium thesis?

David Talbot: Post Fukushima, there are broader market issues that are also impacting the uranium equities. However, there is a little bit of danger that if we don't get a lot of this new build, uranium prices would increase.

TER: Lack of development would give rise to the classic market conditions that would ultimately force uranium prices up.

DT: Exactly.

TER: How does consolidation come into play?

DT: I don't think there is necessarily consolidation for its own sake. I think that there are some companies that are just so undervalued that larger companies that want to get into certain areas may jump at these opportunities.

TER: Will we see the double-digit returns again in the uranium industry?

DT: I think we will come back to double-digit returns. But Fukushima put long-term viability of the sector in doubt for some time due to significant negative press, which kept coming, and often it was just wrong. Uranium and uranium equity markets now seem to be hypersensitive to negative news, and the spot price was declining due to supply concerns earlier this year, and the stocks were trading hand-in-hand with uranium prices. We think that Fukushima ultimately is responsible for only about 3035% of the value lost in the uranium equities while many of the stocks are down by about half.

TER: I'm hearing you say there's value in the equities because of this 35% haircut that Fukushima gave the industry, but I'm wondering about revenue lines and bottom lines.

DT: For the producers, revenue is certainly tied to uranium prices and the rate of production. I think many of the uranium producers are also ramping up production. I think some companies need higher uranium prices than the $52/pound (lb) where we're trading at right now. We forecast uranium prices of between $65 and $75/lb over the next couple of years, especially once the HEU (highly enriched uranium) Agreement goes offline.

TER: What are some growth drivers in the industry?

DT: I think the main growth drivers are the expectations for higher prices given the strong fundamentals of the uranium space. We believe that demand will really outpace supply beyond 2013. Uranium demand continues to be strong. Nuclear build continues to increase despite Fukushima and despite that the reactors that are now offline in Japan and Germany. Today there are 12 more reactors in operation, under construction, planned or proposed than there were before the Fukushima incident. So that's about 997 reactors on the drawing board right now in one way, shape or form. We have seen uranium production increase about 28% over the past four years with almost all of that growth coming from Kazakhstan and Namibia. In fact, Canada and Australia are actually in decline over the same period. So despite this big runup in uranium prices from about $20 six years ago, we really haven't seen the mine construction that we had expected. Projects have been delayed, deferred or canceled for many reasons. We are estimating maybe just under 200 Mlb of production by 2020 if everything goes forward as planned.

Another important driver is the reduction in secondary supply resulting from the HEU Agreement, the downblending of the Russian nuclear weapons program and then selling that uranium for nuclear fuel. The HEU Agreement is expected to go offline by the end of year 2013, and the Russians continue to confirm this. The end of the HEU program would remove 24 Mlb from supply annually. That number is huge. It's about 18% of all uranium mining. So what do you think the market will do when it realizes this HEU Agreement is going offline? I think that's definitely positive for the fundamentals.

TER: Is China going to be the major global driver?

DT: Yes. I would say China is definitely the dominant growth driver. Along with India and Russia, China is going to account for about half of the new build in the world. While China has temporarily suspended approvals pending stress tests and further review in light of Fukushima, and rightly so, the country maintains strong support for nuclear power. The country is up to 15 reactors in operation from 11 just one year ago, and it has another 26 under construction, 51 planned and 120 proposed. So China is definitely leading the way.

TER: And utilities are in the game now.

DT: I think the Asian utilities are going to go out of their way to either purchase uranium in the markets through long-term contracts, but probably and most importantly, buy some of those large uranium mines around the world. This, potentially, leaves less uranium for the next country.

TER: I have enjoyed speaking with you, Dave. Thank you.

DT: Thank you very much.

Dundee Securities Vice President and Senior Mining Analyst David A. Talbot worked for nine years as a geologist in the gold exploration industry in Northern Ontario. His field experience included three years with Placer Dome and six years managing projects for Franco-Nevada Corp. and its successor, Newmont Capital. Talbot joined Dundee's research department in May 2003; in the summer of 2007 he took over the role of analyzing the fast-growing uranium sector, and has since launched the lithium sector. He is a member of the Prospectors and Developers Association of Canada, the Society of Economic Geologists and graduated with distinction from the University of Western Ontario with an Honors Bachelor of Science degree in geology.

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-- Posted Tuesday, December 13 2011 | Digg This ArticleDigg It! |

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