By: The Energy Report
Source: Peter Byrne of The Energy Report (4/9/15)
Smart energy investors pay attention when Dundee Capital Markets' David A. Talbot speaks. With decades of experience as a geologist and financial analyst, Talbot knows his game. He puts his muddy boots on the ground, always visiting a mine before recommending a buy. In a wide-ranging interview with The Energy Report, Talbot opens Dundee's basket of well-positioned uranium mining firms—all well-managed companies that will pump out riches as the uranium price stabilizes.
The Energy Report: Due to the low-priced uranium regime, Dundee recommends that investors play defense and stick to high-grade producers. Why?
David Talbot: Uranium prices are fluctuating around US$40 per pound (US$40/lb). Price instability is tied to the question of when the Japanese reactors will restart, how many will restart, and, on a global scale, how fast reactors now on the drawing board can be built.
In this atmosphere of perennial uncertainty, the uranium producers are outperforming the developers and the explorers, so we advise investors to watch for names that are leveraged to rising prices. If uranium prices head toward US$65/lb, as they should, these names will benefit tremendously. The short story on defense is that investors should buy well-managed miners with strong balance sheets, good access to capital and the highest quality assets.
Wise uranium investors are looking at U.S.-based ISR [in situ recovery] companies and high-grade explorers in the Athabasca Basin. The newest world-class discoveries are not necessarily dependent on short-term price fluctuations.
TER: Do you have a time frame for the uranium price point to hit US$65/lb?
DT: The price could reach US$65/lb within two years. Some mines will be very profitable at US$65/lb, but the capital markets need more immediate incentive. Right now, uranium investors are happy staying in the Athabasca Basin or in the western and southwestern U.S. Developing the large deposits in Africa will require higher uranium prices.
TER: What are the possible catalysts for a resurgence in uranium? What are the risks?
DT: I think a number of catalysts may either positively or negatively affect uranium prices.
On the negative side, the risks are that we actually have ample spot supply, and that there is short-term utility malaise.
Underfeeding is also important—as long as there is excess enrichment capacity, and the centrifuges continue to spin, we might see unplanned uranium hitting the markets, anywhere from 10–25 million pounds (10–25 Mlb) annually.
Low oil prices aren't likely to make much of an impact on uranium—perhaps a little on cost of production, although open-pit mining isn't really much of a uranium source.
Low natural gas prices may delay some U.S. incentive for nuclear build, but most people are looking at growth in emerging markets anyway.
On the positive side, we have several catalysts. First is the Olympic Dam mill shutdown and the fire at the Rössing uranium mine. A mill shutdown due to electrical failure at the largest of three operating mills at Olympic Dam threatens 3–4 Mlb of global uranium supply in 2015 (~10% of spot demand). Details are still emerging from a fire at Rössing's product recovery plant, but mining/production appears unharmed (5.2 Mlb per annum).
Second is Russia/Ukraine fallout. With ongoing strife in the region, concerns about European Union/U.S. sanctions against Russia continue. This could impact both primary and secondary supply, enrichment capabilities and potentially banks that deal in the sector.
Russia, in general, is very aggressive. The country is working hard to become the one-stop shop for nuclear power: finance and build the reactors, supply and enrich the uranium, recover it at the end of the day. The Russians have a contract book of more than $100 billion, and have recently signed deals with Jordan and India, etc.
The third catalyst is Japanese restarts. We remain cautiously optimistic on restarts of the two Sendai reactors receiving Nuclear Regulation Authority and community approvals. It is possible the restarts are being pushed back to August—that would be 13 months after they received approvals. Two Takahama reactors have also received approvals, with restarts expected later this year, But if those restarts take as long as Sendai, then we might see them pushed into next year. Japan is a psychological driver—not a really demand catalyst at this stage.
A fifth catalyst is Chinese resurgence. Three reactors were completed in 2014, but no new reactors broke ground until recently. Resurgence is now expected, with five reactors expected to start construction. Expect aggressive U3O8 procurement to continue. China comprises about 40% of the reactors under construction globally right now. In total, 26 reactors are being built, and by 2020, China could have about 14% of world nuclear generation capacity, up from about 6% now. And with that, we would expect its demand to increase to about, let's say, 32 Mlb from about 21 Mlb currently—and that has a chance to double again, to about 64 Mlb by 2030. China is a huge driver here.
India is also, potentially, a large driver. There are 21 reactors in use and six under construction, but the planned reactors are in third as far as growth, only behind China and Russia. It looks like the industry is setting up accident insurance policies in an effort to cope with the nuclear liabilities laws that are in place. This should help kick-start a resurgence of build in India.
TER: Is there a danger of discovering too much uranium in the current price environment?
DT: The danger is not in finding too much uranium—there is plenty around already. Whether the discovered metal makes it to market is the big question. We had a strong run in the uranium space from 2005 through Fukushima. But even with rising uranium prices, the only projects that came online during that period were the two big Paladin mines, a few smaller ISR operations scattered in the western U.S., and Cigar Lake. Interestingly, Kazakhstan has enjoyed 90% of all new production during the past decade.
TER: How does the term price affect spot for uranium concentrates?
DT: The term price for uranium has held at US$49/lb for a while, despite a fluctuating spot price. Investors typically focus on spot fluctuations as a gauge for market sentiment. But most utility requirements are in the term market.
Term prices should therefore be considered the better gauge of utility demand. Rising term prices mean increased contracting, which should be bullish for the equities. We typically see a US$10/lb spread between term and spot prices. Any tightening of that spread could be a leading indicator for higher term prices. With 80 Mlb of term volume traded over the last two years, we assess that term contracting will accelerate to offset the nearly 360 Mlb of uranium used in nuclear reactors over the same period.
TER: You also analyze graphite for Dundee.
DT: We are seeing renewed interest in the graphite sector. The rumor that Apple will be building batteries for a driverless car has excited the market. Tesla remains a key topic of conversation. Graphite demand could grow at near double-digit rates, about 9% per year into the next decade.
Future demand will be powered primarily by the manufacture of electric vehicle batteries. We also see stable growth coming from historical industrial applications, such as refractories and crucibles. Graphite supply is 80% concentrated in China. Current demand is 1.2M tons per year, but supply exceeds demand by 200,000 tons. That picture is set to change. It will require two to three sizeable mines to maintain a stable supply balance going forward.
The Lac Knife project in Québec, located within an established iron ore camp, near roads, rail, a port and a labor force. Lac Knife is a large, well-advanced, high-purity project with nice size distribution and quality management. It has demonstrated that coated spherical graphite from its project shows superior electrochemical performance when compared with commercial grades of synthetic graphite for lithium-ion batteries.
Madagascar remains relatively unknown to investors and poses a challenge to those seeking equity capital. But the product stands up well in testing, meeting all the requirements for a variety of uses. A recent feasibility study provided good improvement over the two-year drill program.
TER: Do you visit these mines?
DT: Yes, I have visited several graphite, lithium and iron ore projects, plus about 85 uranium projects worldwide. I am a geologist with almost 10 years' experience in the gold exploration industry. With this background, we believe that we are able to quickly sight early-stage opportunities in these sectors—it's one of Dundee's sweet spots. We understand the geological environments, technologies, underlying risks and opportunities.
TER: David, thanks for your time.
Dundee Capital Markets Vice President and Senior Mining Analyst David A. Talbot worked for nine years as a geologist in the gold exploration industry in northern Ontario with Placer Dome, Franco-Nevada and Newmont Capital. 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, and currently covers uranium, lithium, graphite and iron ore. Talbot is a member of the Prospectors and Developers Association of Canada (PDAC), the Society of Economic Geologists (SEG) and graduated with distinction from the University of Western Ontario with an Honours B.Sc. degree in geology.
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