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Uranium Is a Deep-Value Sector

By: The Energy Report and Alka Singh

-- Posted Thursday, May 24 2012 | Digg This ArticleDigg It! |

Having just founded her own research company, Mine2Capital, Alka Singh has her sights set on the uranium sector, where she sees deep values in a beaten-down industry. With two major catalysts likely to boost spot prices, M&A activity afoot, new mines coming into production and new companies coming to market, well-positioned investors stand to benefit from what just may be a coming boom. In this exclusive interview with The Energy Report, Singh shares what she sees on the horizon.


The Energy Report: Alka, your own sector expertise is uranium mining. What is your current theme?


Alka Singh: Well, the uranium sector had just started to show some life in late 2010 and early 2011 when the unprecedented tsunami and earthquake hit Japan and brought the sector back to low levels in March 2011. Many countries started reducing their nuclear power generation. Japan has since shut down all of its 54 nuclear power plants, some only for maintenance. And Germany has announced a phaseout of all nine of its nuclear plants by 2022. This has had a negative impact on the uranium price, and of course on uranium equities. Ultimately, given its long-term safety record, low-carbon emission profile and its ability to produce low-cost baseload power, we continue to believe that nuclear power generation will play a key role in the electricity supply chain.


TER: If Japanese reactors begin to come back online, what would it mean for uranium consumption and demand?


AS: We anticipate that Japan will begin to restart its nuclear power plants by year-end. The return of these reactors to the global fleet would increase uranium demand by approximately 12%. Another thing that will push prices higher is the end of the U.S.-Russian Highly Enriched Uranium (HEU) Purchase Agreement in 2013. Right now, Russia supplies the world with an equivalent of 24 million pounds (Mlb) of uranium on an annual basis through the down-blending of its nuclear warheads. Globally, there are 435 nuclear reactors that consume about 180–190 Mlb/year of uranium, and world production is currently only 150 Mlb. Through the HEU agreement, Russia currently supplies 13% of global uranium consumption and 45% of U.S. uranium needs.


So the end of the HEU agreement will force us to seek other sources of material at the end of 2013, and that's why we are very positive on the uranium sector, even now. Russia, China and South Korea continue to propose and plan new reactors. Those new nuclear power plants that are supposed to come online in the next 20 years are not being canceled—at least not yet.


Nuclear power remains the only carbon-free baseload source of electricity, and it is producing far more clean power than even wind or solar. In light of this, we are very positive on uranium prices and equities.


TER: So, you are saying the major catalysts for the uranium mining industry would be Japan restarting some of its reactors and the end of the HEU pact in 2013.


AS: That is correct, George. Those are the two biggest catalysts. Equities are always valuing events 12 months in advance. So, if the HEU agreement expires in late 2013, we should see an increase in uranium prices later this year. We also expect uranium equities to react positively in response to that increase in uranium prices.


TER: From what you have just said, I would surmise that you believe the uranium mining equities market is at value levels currently.


AS: It is. You are absolutely right. The uranium sector right now is definitely a value sector.


TER: Alka, I am looking at some of these sub-$200 million ($200M) market cap juniors, and some of them have mid-double-digit negative returns over the last three months. It seems that investors should be discounting these important catalysts now. What is the issue here? Is it fear?


AS: Investors tend to hate stocks when they are going down and love them when they are going up, and uranium equities react in the same way as other sectors. But logic should tell you otherwise. When everybody is against the uranium sector and staying away, that is the time to actually get into the sector—not when everybody is buying it.


The whole junior mining space is under scrutiny right now, and a lot of the portfolio managers are in cash-preservation mode and are trying to understand what direction the market is going before forking over their money in any commodity equities, whether it's junior gold equities, junior base metals equities or junior uranium equities. Investors are going toward more liquid names, and uranium juniors have all been getting killed in this kind of a market.


TER: We are seeing consolidation in the market right now. Does this normally signal a bottom in the markets?


AS: Sometimes it does. When you see a period of consolidation, it's either the bottom and stocks take off, or it's just consolidating before taking another leg down. But I think in the uranium equities market this consolidation will see the next leg up rather than down. Uranium prices have been beaten down a lot, and if you look at some of the conventional uranium producers, the cash costs are above $70/lb if you include capex and exploration costs. So uranium prices cannot stay where they are right now. It's only the in-situ recovery (ISR) production projects, which are cheaper than conventional mining projects, that can actually survive this kind of a market.


TER: Thank you Alka, I enjoyed speaking with you.


AS: I enjoyed it too. Thank you.


Alka Singh started her career as a mining research associate with Wellington West Capital Markets in Toronto. Since then she has worked for Orion Securities and Merrill Lynch in Canada. She then moved to New York City to build the mining franchise for Rodman and Renshaw, where she covered 24 precious metals, base metals and uranium names. Singh has since started her own independent research firm, Mine2Capital, to provide unbiased research for clients. She holds a Bachelor of Science in geology and a Master of Business Administration in finance. She is a CFA charter holder.

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-- Posted Thursday, May 24 2012 | Digg This ArticleDigg It! |

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