Uranium Spot Prices Poised For Comeback After Dropping From $74 lb To $51 lb

Published on Wednesday September 14 2011 (AEST)

BMO Capital Markets in London updates us on the sector s status and offers advice on the best companies to support in the coming months and years.

Companies Mentioned: Bannerman Resources Ltd. BHP Billiton Ltd. Cameco Corp. Extract Resources Ltd. First Uranium Corporation Hathor Exploration Ltd. Kalahari Minerals plc Paladin Energy Ltd. Rio Tinto Uranium One Inc.

The Energy Report: Edward let s quickly sum up 2011 for uranium. Spot prices for yellowcake have fallen from a high of around $74 a pound (lb.) in January to around $51 lb. now. Most of the decline can be attributed to the tsunami in Japan that caused radiation leaks at several reactors there. After the Japanese problems chatter started about substituting thorium for uranium in nuclear reactors. Then negative long term policy decisions started trickling in from Japan Germany Italy and Switzerland. Your long term uranium price of $60 lb. makes you sound less than bullish on the sector. What if anything is going to pick up the uranium sector dust if off and send it upward again?

Edward Sterck: The biggest driver is likely to be the uranium price. I haven t actually changed my uranium price forecast post Fukushima because I had a conservative price estimate previously with a long term price of around $60 lb. in real terms. But in terms of potential positive catalysts the main thing needs to be reinforcement of positive sentiment from China once it announces that its safety review will allow it to continue to license new reactors. I would also like to see some buying picking up in the spot markets from organizations such as China Guangdong Nuclear Power Group and China National Nuclear Corporation. Those are the things that the market needs to see before belief in the uranium space returns to investors minds.

TER: August is typically a slow month for uranium sales but what about September and October?

We usually see volumes pick up in September and October. I think we ll see the same this year as well although a couple of things are overhanging the market at the moment making utility fuel procurement officers a little more cautious on the spot market.

The first is that some Department of Energy material still has to be liquidated into the market. It s not a significant quantity but fuel procurement officers may be waiting to see how that plays out before committing to purchases. There are also fears in the market that Germany or Japan may liquidate inventories. Obviously that would be to fuel procurement officers benefit. That s one of the reasons they could be holding off as well. It s a small market and prone to sentiment. If anything I think Germany and Japan would probably look for bigger buyers rather than just selling piecemeal into the open market potentially through block sales to countries such as China.

TER: You talked about whether China will license new reactors and move forward with its nuclear program. The country wants to boost power output by 45 gigawatts by 2015. Is there any path to that other than nuclear?

ES: China s main electricity generation focus is still fossil fuels coal fired powered generation but it has a big focus on clean energy as well. Nuclear is likely to be a core part of that strategy as well as renewables simply given the amount of airborne pollutants that the coal fired power generation is pumping out into the atmosphere over China. China s general population in certain areas suffers significant respiratory illnesses related to the pollution problem hence the drive for clean energy.

Nuclear power is likely to remain a core part of China s power strategy going forward. You also get advantages with nuclear power in terms of base load power generation in that unlike in coal you can stockpile uranium to the extent that you can actually cover your fuel demands for several years. It gives an element of energy security that other forms of power generation cannot.

TER: China s Sichuan Hanlong Group Co. Ltd. recently made an all cash offer of just a little over $0.51 share for Bannerman Resources Ltd. (BAN:TSX BMN:ASX) which is developing the promising Etango uranium project in Namibia. Earlier this year Kalahari Minerals plc (KAH:LSE KAH:NSX) the major shareholder of Extract Resources Ltd. (EXT:TSX EXT:ASX) which also has a uranium project in Namibia had acquisition discussions with China Guangdong Nuclear Power Group. The Chinese obviously want to secure uranium projects and they want to do it on the cheap. Do you expect that trend to continue?

ES: A number of Chinese power state organizations like Hanlong Group are securing strategic resources for China s future. It is certainly possible that we may see further moves in the uranium space.

In terms of investor friendly strategies we could be looking at things that are a little more marginal like Bannerman for example. The Etango Project has scale but it s low grade and doesn t necessarily make economic sense at current uranium prices. However if you are a Chinese power state organization with effectively a 0% cost of capital then the economics of these projects could look considerably different and you ve obviously got a very different investment timeline to your average investor as well. They re looking at this over a 10 20 30 year time span whereas your average investor is looking for a return in a much shorter time period.

Extract s Husab project has probably got a little more appeal due to its larger scale and higher grade versus Bannerman s Etango project. However despite the fact that CGNP s approach for Kalahari failed it is more digestible than Extract and it is possible that Kalahari may be the way to play the M A side of Husab rather than investing in Extract directly.

TER: Kalahari is the majority shareholder at Extract. Is that a potential takeover target?

ES: I think it is. Its Husab Uranium Project is world class in scale. The share structure does make it rather difficult though with Kalahari in there for 43%. Rio Tinto (NYSE:RIO ASX:RIO) has a pretty significant minority stake in Extract as well and there s also a Korean group in there. That does make it more of a challenge for any potential acquirer to take out. If anything I think Kalahari is possibly the cleaner target and would probably be the first port of call for any company looking to take out Extract or gain a significant stake in the Husab project.

TER: Bannerman was granted environmental clearance for infrastructure required to service its Etango Uranium Project. Does that make it more of a takeover target?

ES: Any piece of licensing or environmental approval that s secured makes the project more appealing for a potential acquirer.

TER: Do you expect larger uranium companies like Cameco Corp. (CCO:TSX CCJ:NYSE) or BHP Billiton Ltd. (BHP:NYSE BHPLF:OTCPK) to acquire smaller uranium explorers or producers while share prices remain in the doldrums?

Cameco has a lot of organic growth internally so it doesn t necessarily need to go out and make acquisitions. That said it did recently launch a hostile bid for Hathor Exploration Ltd. (TSX.V:HAT) that did come as a bit of a surprise. Hathor s primary asset is the Roughrider deposit which is located in the vicinity of Cameco s existing assets in the Athabasca basin and that could demonstrate synergies.

BHP s uranium commitment is focused on the Olympic Dam expansion. The company s criteria for project development is truly world class in scale.

At the moment there is not really anything of significance out there in the uranium space that seems to be available. There are several world class projects but they are largely tied up. Rio Tinto is possibly a bit more likely to be inquisitive in the space but it s going to be very price dependent. Like BHP it is looking for projects with significant scale and there aren t many at the moment. TER: What leads you to those conclusions?

ES: Rio Tinto s been more actively picking up shareholdings in the uranium space than the other two. Cameco s got a lot of organic growth anyway and until now hasn t been that active in the way of picking up listed uranium companies even with its first mover advantage at the beginning of the 2006 2007 uranium boom. In terms of BHP I m really just looking at the approach the company has embodied in other commodities.

TER: In a recent report you suggested that Cameco is greatly undervalued. You have an Outperform rating on Cameco based largely on its hedging strategy and greater uranium sales in the latter half of 2010. But for a long time Cameco has created some doubts among investors due to the instability of its large uranium projects like Cigar Lake. Has Cameco managed to get things under control in the Athabasca Basin?

ES: As far as we can see the situation at Cigar Lake is under control. I m actually going to visit the project in September so I ll have a better idea exactly where Cameco stands after that site visit. But the company appears to be progressing with the project in line with the schedule that it laid out to investors. I m sure it is doing everything in its power to make sure it doesn t run into the same problems again.

With respect to my Outperform recommendation relative to Cameco s own history it does appear somewhat undervalued at the moment. One of the risks to my recommendation is that we could see some erosion of valuation multiples in the market as a result of economic uncertainty combined with a reappraisal of multiples post Fukushima. Of course this would potentially apply to all of the uranium stocks that I cover.

TER: You also said it was based on an increase in forecast prices for the fuel services division. What does that mean?

ES: Long term the cost of fuel conversion services has generally gone up worldwide over the last couple years. That wasn t fully reflected in my forecast so I ve adjusted my forecast to take into account that Cameco cannot effectively charge a higher fee for its fuel conversion services.

TER: You also have an Outperform rating on Uranium One Inc. (UUU:TSX) which recently reported a five fold increase in second quarter profits on higher production and better uranium prices. For 2012 Uranium One has provided production guidance of 12.5 Mlb. 2 Mlb. more than the company is slated to produce this year. Is that a realistic target?

ES: I think it is. Uranium One s assets in Kazakhstan are performing extremely well. The structure there is that the mines are operated by subsidiary companies. At most of those operations the staff has a very good understanding of how to undertake in situ leach mining. Uranium One is the only company in the mid cap peer group that has been consistently hitting (a) its guidance and (b) analysts estimates in terms of both production and earnings. I don t see any reason for that to change in the near term.

TER: Uranium One is 51% owned by Russian interests. Is there any danger there?

ES: It does concern some shareholders. Personally I m quite comfortable with it. Any significant transaction between Uranium One and its 51% shareholder Russian state run ARMZ is subject to minority shareholder approval. So there are controls in place.

In terms of risks associated with Uranium One its operations are largely in Kazakhstan. The Russian interest in Uranium One very much reduces the political risks in Kazakhstan. Obviously Kazakhstan is an independent country. It treads its own path. But it was part of the Soviet Union previously. So I think having Russian governance involved with Uranium One probably alleviates some concerns regarding political risks in Kazakhstan.

TER: Paladin Energy Ltd. (PDN:TSX PDN:ASX) recently cut its 2012 output guidance to between 7.4 Mlb. and 7.9 Mlb. down from the previous forecast of 8.2 Mlb. Most of that is due to the delays at its stage three expansion at the Langer Heinrich Mine in Namibia Africa. Why do you have a market performance rating on that company given its projected shortcomings?

ES: I think Paladin will actually hit the design capacity production targets at both the Langer Heinrich operation and also at its Kayelekera operation in Malawi. The main problem with the company has been that it has overpromised results to the market and under delivered. It does have the technical ability to follow through on its targets but it is simply likely to take longer to get there than it is telling the market. So at present I don t really see any fundamental problems with the company that would suggest tagging it as an Underperform.

TER: Your target for Paladin was $3.50 in June. It s $3 now.

ES: I revised on the fact that the company is taking longer to get there than expected. And then obviously the outlook for nuclear power or the market s perception of nuclear power and uranium has been somewhat reduced post Fukushima. And I think that the market is applying smaller valuation multiples to the uranium companies than it did previously.

TER: Are there some other uranium names that you follow that you would like to discuss?

ES: I d like to mention First Uranium Corporation (FIU:TSX FUM:JSE) which is now primarily a gold stock despite its name. It has had a pretty troubled history and it definitely represents a higher risk and potentially a higher return investment. The problems that it has encountered have been in relation to its underground operation which has been fairly technically challenged. The company is struggling to get it up to the production rate that will alleviate problems with grade control. If it achieves that production rate it should bring costs down to reasonable levels. It s also had a couple of issues at its Mine Waste Solutions tailings retreatment facility which has encountered some regulatory issues that the company has now overcome.

Looking ahead I expect it to eventually get to the production rates that the company is guiding toward. It s just going to be a fairly long and potentially painful process. However being primarily a gold company I think we can ultimately see gold production on the order of 400 000 ounces a year five or six years out which makes it comparable to some of the mid cap gold companies.

TER: First Uranium s earnings share are about negative $0.19 a share in 2011 but you project that to go up to positive $0.05 per share in 2012. Is gold strictly to account for that?

ES: It s a combination. The gold price has obviously been very strong but production has improved as well. Mine Waste Solutions is actually cash flow and earnings positive. It s really just the Ezulwini Mine that s dragging earnings at the moment. Come the third and fourth quarter of the coming fiscal year I expect things to be looking better at that operation. As always however First Uranium remains a higher risk investment and there are certainly some refinancing risks associated with some debt that is due in June of 2012.

TER: Do you have any other thoughts on the uranium sector before we let you go?

ES: I m actually feeling slightly more positive than I was pre Fukushima. The rationale is that the main drivers of growth in nuclear power haven t really changed. The countries that were planning to expand their installed nuclear capacity were countries like China and Russia and India. They re not changing their plans materially as a result of the accident that happened in Japan.

On the other hand if you look at the supply side pre Fukushima everyone was trying to put a uranium mine into production given the great excitement about the outlook for nuclear power. My analysis at the time suggested that we were going to have a significant oversupply of uranium. Now that there s greater uncertainty in the outlook for nuclear power in investors minds and we ve obviously got general economic woes in the world that have pushed markets lower and negatively impacted investor sentiment I think that the financing of new production is likely to be more challenging than it was pre Fukushima.

In summary the supply demand outlook is one in which we re less likely to see an oversupply scenario. We could see tighter markets perhaps. I also think we still need a production expansion going forward to meet expected demand. On that basis to a certain extent this scenario actually plays into the hands of the established producers that are all pretty well capitalized. They are unlikely to need to come back to the market for additional financing and they could benefit from higher uranium prices next year or the year after.

TER: Thank you for your insights.

Courtesy: The Energy Report

Uranium Energy Corp CEO Makes The Case For Nuclear

Published on Wednesday August 24 2011 (AEST)

The global Uranium mining sector has been plunged into some disarray by the Japanese nuclear disaster at Fukushima resulting from the uranium reactors being hit by the massive earthquake and subsequent tsunami and where the repercussions are likely to continue for many years to come. However, the CEO of the USA's newest uranium producer, Uranium Energy Corp (UEC) reckons the world has already gone too far along the nuclear energy path for uranium demand not to seriously exceed supply, possibly as soon as in the second half of the current decade.

Amir Adnani, CEO of Corpus Christi, Texas-based UEC still sees a big bull market in uranium ahead "Politicians are coming to value nuclear power as an increasingly critical tool in our efforts to minimize carbon and greenhouse gas emissions worldwide," said Mr. Adnani. "Of course, more reliance on nuclear power means more need for new uranium supply"

Although the tragedy in Japan temporarily affected uranium share prices, it drew attention to the array of safety features incorporated in western-designed reactors.  "In the US alone, nuclear power plants have shown tremendous improvements in their safety records and operating capacity factors," adds Mr. Adnani.  "Safe, green and made in America:  US nuclear plants have undergone exhaustive studies and have been declared safe in any number of contingencies.  Now the US will learn from Japan to make its plants even more safe."

Even the Fukushima reactors, which were very much old nuclear technology, effectively survived an enormously powerful  force 9 earthquake with the major meltdown problems being primarily caused by the associated tsunami knocking out the power supply and thus cutting off the plant's cooling systems.  This is a hopefully unique occurrence, and one certainly nuclear regulators around the world will be extremely aware of and  will enforce standards to prevent this combination of safety failures occurring anywhere else.

Adnani sees an incredible business opportunity in revitalizing sites across America that formerly produced uranium.  "There was a thriving uranium market in the US during the 1950s through the mid-1980s," he says.  "Then came the uranium bust, and as a result, there is a significant shortage of uranium for the 104 nuclear power plants safely operating in the US.   American power plants consume about 55 million pounds of the metal every year to generate 20% of America's electricity, yet the US produces only 3.5 million pounds, and US production has been falling.  We rely on imports for about 70% of our oil but foreign countries supply 95% of our uranium.  And some of those suppliers are no more stable than certain OPEC members."

Adnani believes that the uranium sector is facing a severe supply crunch. "Today, primary uranium production only supplies  about two-thirds of reactor requirements.  The balance is made up for by secondary supplies like the US-Russian HEU Agreement which supplies 13% of worlds or 45% of U.S. annual uranium needs. This agreement expires in 2013, while current forecasts call for greater than 100% increase in uranium demand by 2030," he said.
 

There is, though, still some major growth in potential new uranium production ahead, and some in countries like Canada and Australia, and perhaps Namibia and Kazakhstan which don't really fall into Adnani's categorisation of unstable suppliers.  Fukushima did knock uranium prices back and will most certainly have led to more difficulty in getting some new projects to fruition.  

Some of the world's anticipated new nuclear power plants will be delayed or cancelled altogether as a direct result of the Japanese disaster, but one suspects over time the overt worries will gradually dissipate as they did after Three Mile Island and Chernobyl in the past, but it will take quite a long time and some nuclear capacity will probably have been lost forever - but that doesn't necessarily detract from Adnani's premise which is, in part, a call for the U.S. to become more self-sufficient in uranium output - even just to meet existing demand.

Currently the uranium price is sitting at around the $50 a pound mark and probably no sharp move up or down is very likely until the reactor supplies from the nuclear warhead decommissioning agreement come to an end in 2013.  From then, assuming supplies from this source cease completely, prices could definitely come under pressure.  If the majority of the nuclear power plant building programmes around the world continue, and new mining projects are delayed or cancelled altogether because of the weaker prices currently prevailing, we could be in for a very major supply squeeze - but that is still a few years ahead and the short term outlook probably remains clouded for the uranium mining sector.

China’s Nuclear Power Plans Unfazed By Fukushima Disaster

Published on Wednesday August 10 2011 (AEST)

In the wake of the Fukushima meltdowns, some nations are looking to move away from nuclear power. But not China, which is proceeding with plans to build 36 reactors over the next decade. Now some experts are questioning whether China can safely operate a host of nuclear plants.

by david biello

Giant rings of prefabricated concrete and steel lower into place at the Sanmen Nuclear Power Station in Zhejiang, China. Inside the rising containment building, a 340-ton chunk of forged steel forms the nuclear reactor’s vessel, which arrived from South Korea late last month. Inside that vessel, if all goes well, uranium fuel rods clad in zirconium alloy will by 2013 begin to fission, heating water to create the steam that will spin a turbine and produce electricity without the heavy greenhouse gas emissions of burning coal.

Workers swarm over the scaffolding of the buildings surrounding this core at the world’s newest nuclear power plant — the first to use a new type of nuclear reactor, the so-called AP 1000 from Westinghouse, though a similar reactor at Haiyang in Shandong Province is not far behind. And those two reactors represent only a fraction of the 20 nuclear power plants — and 36 nuclear reactors — China plans to build in the next decade. Already, Sanmen’s second AP 1000 reactor is under construction and scheduled to be completed in 2014.

In the wake of the meltdowns at the Fukushima Daiichi nuclear power plant in Japan, many nuclear nations have reassessed their fission future.

Japan has cast aside plans to build more nuclear power plants, Germany plans to abandon nuclear power by 2022, and Italy will no longer restart a long moribund nuclear industry. Even nuclear stalwarts such as France — which gets 80 percent of its electricity from nuclear reactors — have begun to analyze what eliminating nuclear might mean as part of a broader energy strategy for 2050, although the French government remains supportive of fission’s role in the energy mix.

But for the world to have any hope of constraining greenhouse gas emissions, nuclear power may have to play a role. The Japanese Environment Ministry notes that shuttering the 18 nuclear power plants in the country would boost CO2 emissions by as much as 210 million metric tons — a rise of nearly 17 percent from current levels. The International Energy Agency suggests that 30 new nuclear reactors must be built each year between now and 2050 to cut CO2 emissions in half.

As a result of such climate change concerns, as well as the need for more power in developing nations, more than 60 reactors are under construction around the world today in countries like India, Russia. and South Korea. Even the U.S. is currently building one new reactor — the second unit at Watts Bar in Tennessee.

But no other country comes close to China, with 26 reactors now under construction — nearly half of all the nuclear reactors being built worldwide, according to the World Nuclear Association. That percentage only looks set to increase as other nations call off nuclear plans. China has also become the world’s living laboratory for new nuclear reactor designs. The country has or is building “evolutionary” pressurized water reactors from France, heavy water reactors from Canada, pebble-bed reactors tested in South Africa, and even experimental reactors that use molten salt for cooling and, potentially, thorium for fuel.

Lynas Corps Rare Earths Mine Opens In WA

Published on Thursday August 04 2011 (AEST)

A mine that will tap into the richest known deposit of rare earths in the world has been officially opened in Western Australia's Goldfields region by Premier Colin Barnett.

The Mt Weld mine, about 35km south of Laverton, is a $100 million Lynas Corporation project developed over the past 10 years.

The ore will be concentrated at Mount Weld before export to Lynas' advanced materials processing plant in Kuantan, Malaysia, and then sold globally.

Mr Barnett opened the mine on Thursday, saying it was the first significant rare earth mine opened outside of China for many years and added important new capacity to WA's already diverse resources sector.

"As well as directly employing up to 90 people at its full capacity, the mine is expected to contribute at least $17 million in annual royalty payments to the state," he said in a statement.

Rare earths is the term used for 15 metallic elements found within a "cocktail" of elements that need to be separated for commercial use.

They are used in advanced materials, batteries and electronic devices such as computers, high definition televisions, mobile phones and audio devices.

They are also used in advanced electricity generation and control technologies, including hybrid car technologies.

The Mt Weld mine is expected to be in production for 20 years.

China currently supplies about 95 per cent of the global rare earths market, but limits its supply to the rest of the world.

Based on estimates, Lynas could be supplying about eight per cent of the world market in 2012 and about 14 per cent in 2013.