By: The Mining Report
Source: Kevin Michael Grace of The Mining Report
Nuclear power is enjoying a renaissance, and the world will soon need more uranium. Up to 50% more within a decade, says Joe Reagor of ROTH Capital. In this interview with The Mining Report, he explains that the share prices of uranium juniors remain low because the uranium spot price has not yet risen to reflect the increased demand just around the corner. This provides a great opportunity for canny, long-term investors, and Reagor explains why companies may have means to profit from the inevitable need of their product.
The Mining Report: The 27th annual ROTH conference was held in California last month. What's the purpose of this conference?
Joe Reagor: We provide management access to our client base and provide exposure for the smaller-cap companies that are somewhat under-covered by the Street.
TMR: How would you sum up the sentiments of the participants?
JR: In the mining sector, I heard a bit of cautious optimism. Conditions seem to be improving, but the strength of the U.S. dollar is not helping most commodity prices. However, if you operate outside of the U.S., margins are improving.
TMR: With all the concern about a possible stock-market bubble, was there perhaps a feeling that miners may be due for a revaluation because they produce things of tangible worth?
JR: There has been more generalist interest in mining recently because of the fear that the broader market is getting a bit frothy in certain sectors. This lends support for diversification and investment in mining companies because, as you said, they do produce hard assets and can benefit should the overall market underperform.
TMR: Since we last spoke, the spot price of uranium topped $40/pound ($40/lb), and is now just above $39/lb. What are the fundamentals that have undergirded this rise?
JR: There was a significant supply overhang after the Fukushima disaster of 2011. Then there were two large sales that occurred after that, probably inventory liquidation, perhaps from Japan. We reached the bottom last summer.
The supply overhang peaked again due to increased production from Kazakhstan. But that is no longer a problem. Kazakh production is no longer growing, and some of the larger uranium projects globally have been put on hold. That has allowed the inventory level to return to normal levels and has enabled a more sustainable pricing point.
TMR: Where do you see uranium going for the duration of 2015?
JR: There will be additional demand as nuclear reactors come back on-line in Japan, and as China completes new ones. So, I think the price will continue to trend upward, perhaps to $50/lb by year-end, although we might continue to see small pullbacks.
TMR: China's demand for new reactors is dependent on burgeoning economic growth. Will China continue to expand as it has in the recent past?
JR: I'm not a macro expert on that subject, but my opinion is that China will continue to grow at a rate that will inspire envy in Europe and the U.S., but it will not be the double-digit growth we became accustomed to. China needs to produce more power for a growing and more affluent population, so it will need reactors. For that reason, I think China's uranium needs may grow faster than its economy overall.
TMR: Given the recent success of uranium exploration in Saskatchewan, will there be a rush to develop these projects should the uranium price top $55/lb?
JR: Not necessarily. The uranium industry is now well aware of its supply-and-demand dynamics. A price above $55/lb will encourage additional development, but not of any projects that would result in significant oversupply. Most of the world's active uranium mines are very profitable at $55/lb.
TMR: How finely can uranium demand be calibrated?
JR: Current uranium demand is 155 Mlb, plus or minus 5%, assuming no additional reactors. Reactor lead time is up to five years, and that is more than enough time to source new supply.
TMR: Can you explain how the price of uranium is determined by long-term contracts signed by utilities and what the current state of this process is?
JR: Contract-price uranium has enjoyed a premium over spot price. This has trended down to only a couple of dollars a pound, but historically it has been closer to $10/lb. Utilities generally seek to sign contracts to buy uranium two years into the future. But they will sometimes take delivery 6 to 12 months early and have it sent to their concentrators. The ultimate purpose of these contracts for utilities is to provide price stability for energy consumers. And to the miners, these contracts guarantee financing.
The great majority of uranium is sourced via contracts, with only 5–15% provided by the spot market.
TMR: It has been suggested that the price of uranium is likely to increase soon because several large 7 to 10 year contracts are coming to an end. Do you agree?
JR: Some larger producers have contracts with utilities coming up for renewal. There is a essentially a quoted contract price out there that's well known and then an assumed inflationary rate beyond that. I think the utilities are likely to simply renew these contacts with their existing producers. The bigger concern is that the Japanese utilities have not renewed contracts and don't have offtake agreements, so they might be forced into the spot market.
TMR: We often hear the uranium market compared to a game of chicken between suppliers and utilities. Is this a useful metaphor?
JR: It's a bit overstated. Suppliers use this comparison in order to suggest that the price of uranium is going to increase, but when we compare in importance the overall cost of running a nuclear power plant versus the cost of 500,000 lb (500 Klb) to 1 Mlb of uranium, the latter is not all that crucial.
Utilities are not that incentivized to haggle over a few dollars a pound, as the suppliers would have you believe. Utilities can now make up any supply shortfalls from their contracts in the open market, and that could lead to a tighter spot market.
TMR: What's the best strategy for investors seeking to benefit from the expected growth of nuclear power?
JR: There are two strategies I like. The first is targeting companies that are not getting full credit for assets that are expected to go into production in the next few years. The second is targeting companies whose portfolios are diversified enough such that they can wait out flat uranium prices.
TMR: So you see uranium miners as a long-term investment?
JR: Yes. The lead time of new uranium mines is long. So the ability to change the stories of these companies does not usually happen overnight, unless there is an acquisition.
As I said earlier, we expect higher uranium prices, but we haven't seen these companies move because most lack financial flexibility. Should the price of uranium reach the $60–70/lb range, these companies will show the cash flow level needed to justify higher valuation, in our opinion.
TMR: Joe, thank you for your time and your insights.
Joe Reagor is a research analyst with ROTH Capital Partners, providing equity research coverage of the natural resources sector. Prior to ROTH, he worked in equity research at Global Hunter Securities and at Very Independent Research, covering a wide array of resources companies including metals (steel and aluminum), mining (gold, silver and base metals) and forest products (containerboard, OCC, UFS and pulp). Reagor earned a Bachelor of Arts in economics and mathematics from Monmouth University.
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-- Posted Tuesday, April 14 2015 | Digg This Article |
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