By: The Energy Report and David Talbot
Source: Zig Lambo of The Energy Report
David Talbot of Dundee Securities sees the tides rising in uranium markets, but not every stock price will recover in-step. Talbot's strategy is to focus on a good story, and he has identified uranium exploration, development and production companies with compelling growth profiles. In this exclusive interview with The Energy Report, Talbot explains why investors should build positions while the spot price is still sluggish.
The Energy Report: In your last interview, "The Uranium Industry Is Alive and Well," Germany and Japan looked determined to shift away from nuclear power. Now, it looks like Germany is having second thoughts on its plans to shut down all nuclear plants by 2022, and Japan has restarted one reactor, with more to come. What's your general industry view at this time?
David Talbot: We are still bullish on the uranium sector because the nuclear power industry is moving forward and demand is behaving somewhat predictably. Supply will make all the difference in the world. The U.S./Russia Megatons to Megawatts program will go off-line in 2013, which will remove 24 million pounds (Mlb) of secondary supply from the equation. Meanwhile, there are five more reactors in the planning or construction phases globally than there were before the disaster at Fukushima occurred. There are 430 reactors currently in operation worldwide, and 160 reactors are being planned now. The trend is clear: There is still growth in nuclear power.
On the supply side, the world uses 176.7 Mlb of uranium each year, according to the World Nuclear Association. The reactors under construction alone will account for a 13% increase in demand, approaching 200 Mlb of uranium required annually. This does not factor in any reactors in the planning stages. Mining companies are not matching that in the short to mid-term—they need higher uranium prices to make larger-scale and typically low-grade projects economic, and miners are optimistic that will happen. Uranium exploration expenses rose to about $2 billion worldwide last year.
As for Germany, its demand accounts for only 9 Mlb a year, or about 3% of world demand by 2020. I believe its government did overreact, and it is apparently having second thoughts, based on economic realities. We don't think Germany's opinion on nuclear power has changed much. But the country is struggling with rising electricity prices and facing pressure from industry. Finally, China matters. Its 15 reactors now produce just 2% of its electricity, and there are 26 reactors under construction and 51 more planned. Last year, China produced only 10% of the electricity that the U.S. reactors produce. It already uses 17 Mlb per year, and that figure is climbing quickly and should be in line with U.S. figures in the next seven years. Chinese demand is a major force driving the industry. While we believe that renewables should be a growing part of the energy mix, they are intermittent generation sources and can't necessarily handle a large proportion of baseload demand. Many alternative energy sources are still in their infancy and expensive.
TER: So, despite the negative thoughts about nuclear power, it really is the only viable alternative to coal at this point, other than natural gas.
DT: I think so. We are seeing a lot more natural gas use these days, primarily in Japan, which is spending about $100 million (M) a day on energy imports. If Japan wants to maintain its way of life, it really must turn the reactors back on or risk losing jobs. A couple of reactors have started up and two more restarts are under discussion. I think this is going to help boost sentiment in the sector and ultimately increase uranium demand, which should improve spot prices from the current U.S. $49.50/lb level.
TER: What are your expectations for short-term uranium prices?
DT: The supply/demand balance in the mid-to-near-term may impact pricing. The current supply deficit should put upward pressure on prices, eventually making projects more feasible. We'll be lucky if annual uranium production reaches 180 Mlb by 2020. And that would require sustained spot prices of $70-80/lb. Our current forecasts for next year and 2014 are $70/lb and $67/lb, with a long-term forecast is $65/lb.
TER: How have the uranium stocks performed this year?
DT: Equities in general have really dropped off since the beginning of the year. As a group, uranium stocks are down about 30% year-to-date and much of the downward action occurring within the last 3-months. These companies have been under the same pressure as the broader market, with low liquidity and European debt worries. In the long term, I think the producers will outperform developers. But over the past few weeks we've seen some movement in the smaller stocks, with no clear winner between producers, developers or explorers. But however harsh the market is, you have to pick good stories, and right now we have a couple of suggestions for each of those categories.
TER: What kind of timing are we looking at before we see some real activity in uranium?
DT: We believe uranium prices may be at the bottom right now, around $49/lb.
We expect firming, especially as the Japanese reactors come back online. We may see some price appreciation later this year and into 2013 as the Megatons to Megawatts agreement expires. We are calling for higher uranium prices down the road, ultimately to our $65/lb long-term price. Investors have to pick good and improving companies before we see these stocks run. There's already a lot of volatility in the uranium sector but stocks tend to take off before you know it, so you can't necessarily choose cash flow over near-term production or potential blue-sky upside, as you can in a bull market. I really think this sector will be one that's going to outperform in the coming years.
TER: Very good. We appreciate your insights today David. Thanks for talking with us.
DT: Certainly. Thank you.
Dundee Securities Senior Mining Analyst David Talbot worked for nine years as a geologist in the gold exploration industry in Northern Ontario. Talbot joined Dundee's research department in May 2003 and in the summer of 2007, he took over the role of analyzing the fast-growing uranium sector. He is a member of the PDAC, the Society of Economic Geologists and graduated with distinction from the Univ. of Western Ontario, with an Honors Bachelor of Science degree in geology.
Dundee Securities Ltd. and its affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by, companies under coverage: Energy Fuels Inc.
Dundee Securities Ltd. and/or its affiliates, in the aggregate, own and/or exercise control and direction over greater than 10% of a class of equity securities issued by, companies under coverage: U3O8 Corp.
Dundee Securities Ltd. has provided investment banking services to the following companies under coverage in the past 12 months: Energy Fuels Inc., U3O8 Corp., Kivalliq Energy Corp., UEX Corp., Ur-Energy Inc. and Fission Energy Corp.
All disclosures and disclaimers are available on the Internet at www.dundeecapitalmarkets.com. Please refer to formal published research reports for all disclosures and disclaimers pertaining to companies under coverage and Dundee Securities Ltd. The policy of Dundee Securities Ltd. with respect to Research reports is available on the Internet at www.dundeecapitalmarkets.com.
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-- Posted Tuesday, August 14 2012 | Digg This Article |
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