By The Energy Report, on April 4th, 2011
 The peripatetic Mercenary Geologist Mickey Fulp explains that even if all under-construction and planned nuclear facilities are suspended, not enough uranium is being mined currently to supply ongoing demand. In this exclusive interview with The Energy Report, Mickey reveals a number of companies poised to benefit from this long-term fundamental upside.
The Energy Report: What impact will the damage to the Fukushima nuclear facility in Japan have on the spot price and/or market valuations for uranium companies?
Mickey Fulp: Currently, it is unknown what the fallout (pun intended) from this nuclear incident will be both economically and geopolitically. At the very minimum, Japan has lost a significant portion of the energy output from one facility. Eleven nuclear reactors out of the country’s 55 are shut down currently and at least two will never produce electricity again. That energy capacity will need to be replaced by other electrical sources.
Globally, this is the third nuclear plant incident in more than 30 years. The first was Three Mile Island. While nothing of real consequence happened, it did change the perception of nuclear safety. The second incident was Chernobyl where the reactor melted down, resulting in serious environmental and health impacts. That reactor was an obsolete and inadequate design with no containment vessel and was never used in the West. Although Japan’s Fukushima plant was using some older technology and we still don’t know what the full damage will be, it will not be anything near the Chernobyl disaster.
Anti-nuclear organizations will be emboldened by this situation while pro-nuclear concerns likely will remain so. Looking forward, who knows what the impact will be? Will we see some older reactors come offline? Probably, however, most countries can’t afford to shut them down because electrical demand will not decrease. Will we see some reactors in the process of construction stop construction? Perhaps. Will we see nuclear facilities that are planned but not yet started be delayed or waylaid? That seems likely.
TER: If reactors under construction or planned are postponed or abandoned, how much will that impact the demand for uranium? Could we see a uranium price crash?
MF: It wouldn’t surprise me if we saw a drop in the spot uranium price and stocks. I don’t think it will diminish much uranium demand in the short or midterm, because the fundamentals haven’t really changed. There is still a shortage of uranium. We haven’t mined enough uranium for 25 years and our current mine supply deficit is 30% of total yearly demand. We’ve been operating on depleting private and sovereign stockpiles and the conversion of Russian warheads to nuclear fuel rods. The Russian program ends in 2013 and stockpiles are getting depleted to low levels. So, even if all the reactors under construction, planned and proposed, are scuttled, we’d still need more uranium for the reactors that are online currently than we are presently mining.
TER: Do you see any scenario in which the Japan incident will impact uranium prices significantly?
MF: We saw spot prices crater to a low of $49/lb. on March 16 before recovering to $60/lb. on March 21. There will be a price impact but, as for significant damage to the nuclear energy industry, it is way too early to tell. Frankly, I do not know. I do know that current reactors need to replenish stockpiles of uranium periodically and that we don’t mine enough at this time. Demand, most likely, will still be there over the short, mid and long term.
TER: Will other energy commodities increase due to this nuclear scare? Specifically, I was thinking about natural gas, which is in abundance and really cheap.
MF: We have a mixed bag of energy prices now and lots of volatility. As the uranium stocks sold off, solar, wind and natural gas stocks took off briefly before reality set in. Solar cannot provide baseload electricity because of night and wind cannot because it does not blow constantly at the same velocity 24 hours a day, 7 days a week for 365 days a year. We don’t have the natural gas transportation, storage and filling infrastructure to convert electrical plants or vehicles quickly.
Coal has been the real winner in 2011 with supply disruptions causing rapid rises in price, but it is our dirtiest form of energy and a major pollutant worldwide. Oil prices are high at over $100 a barrel and major volatility is likely to continue due to Middle East turmoil. We also have the ecofascists who preach “clean and green,” but then launch lawsuits to stop solar plants in the Mojave Desert and offshore wind farms on the East Coast. What do the NIMBYs (not in my backyard) want, all of us to just freeze in the dark?
In my opinion, we desperately need a viable domestic uranium industry as we strive to reach energy independence in the U.S. I trust that the American people and its politicians and policymakers will continue to ensure that all forms of energy, including nuclear power, play a part in this mix.
TER: You have written that your two favorite uranium companies are Strathmore Minerals Corp. (TSX:STM; OTCQX:STHJF) and Mawson Resources Ltd. (TSX:MAW; OTCPK:MWSNF; Fkft:MRY). Let’s talk about them. In your December Musing, “The Mercenary Geologist’s Uranium Review Q410,” you felt that Strathmore Minerals was the most-undervalued uranium developer listed on the North American exchange. You wrote, “Rest assured, given the current time and price that I am not selling.” The stock chart shows it’s been jumping around a bit since December. Can you give us an update?
MF: Strathmore is continuing to work toward a feasibility study at Roca Honda in New Mexico and a mine permit application in Gas Hills, Wyoming. The company likely will monetize some of its other seven non-core development assets in the next 12 months. I still expect the consolidation of uranium developers in New Mexico within the next year or two. A private European investment fund divested of its Strathmore holdings in early 2011, and that depressed the stock price. It took a while for the company to chew through this, and then it went as low as $0.63 in the four-day selling frenzy after the Fukushima incident. STM has recovered nicely in recent trading sessions and is now trading at about $0.75.
TER: You mentioned that your other favorite company in the uranium sector is Mawson Resources. You alerted readers about Mawson on November 17 and those who acted on your alert got more than a double in four days from $1 to over $2. What’s in store for Mawson in 2011?
MF: Mawson had a phenomenally quick double based on project news, my BNN appearance, a Mercenary Musing alert and the San Francisco Hard Assets show that allowed the company to show off its wares. After the initial run-up to $2.68 and profit taking that took it back to about $2, it ranged between $1.75 and $2.25 before dropping to $1.16 in the aftermath of the Japan disaster. Mawson recently announced final 2010 surface sample results from the Rompas project in northern Finland. The results are impressive, with bonanza-grade gold and uranium values. The stock moved when the company received permits for shallow drilling and is once again in the $2.10 range. Rompas could be a major new discovery or perhaps just a curious surface anomaly; more likely, it will be something in between. Now, we will wait for results from the drilling and what the old truth tool will tell.
TER: Do you have any new ideas in uranium space?
MF: Of course, I am always looking for beaten-up stocks that have strong fundamentals and solid underlying value. My recent favorite is Uranium Energy Corp (NYSE.A:UEC), a new in-situ recovery (ISR) uranium producer in South Texas. Although still early on, its first quarter of production came in with cash costs of $18/lb. Given uranium’s current spot price of $60, it looks like a potential winner to me. It is the one stock I am accumulating on sector weakness for long-term investment and anticipate a plan to grow this junior producer into something bigger in the near future.
TER: In your last Mercenary Musing, which is available to your free email subscribers, you wrote, “Putting in stink bids and patiently accumulating as the market rises and falls is always a legitimate strategy.” In general, what constitutes a “stink” bid—20% from the recent price, 25% off the price?
MF: To me, a stink bid is a bid lower than the stock’s normal or recent range that implies a lack of interest, a market correction, some sort of selloff, a dormant period with no news or, perhaps, breaking below the 50- or 200-day moving average. Rest assured, I am now closely watching the uranium space for contrarian opportunities.
Michael S. “Mickey” Fulp is the author of The Mercenary Geologist. He is a certified professional geologist with a B.Sc. in earth sciences with honors from the University of Tulsa and M.Sc. in geology from the University of New Mexico. Mickey has more than 30 years experience as an exploration geologist searching for economic deposits of base and precious metals, industrial minerals, coal, uranium, oil and gas and water in North and South America, Europe and Asia. Mickey has worked for junior explorers, major mining companies, private companies and investors as a consulting economic geologist for the past 23 years, specializing in geological mapping, property evaluation and business development.
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By The Energy Report, on March 28th, 2011
 If the clouds of crisis enveloping Japan, the Middle East and North Africa hold any silver linings, they may be in the form of opportunity for resource investors, particularly in the uranium, oil, natural gas and alternative energy sectors—at least that’s how Rick Rule sees it. The widely known and well-respected founder of Global Resource Investments returned to cyberspace this week for a webcast wherein he explored some of the investment implications of these recent crises. In this Energy Report exclusive, Rick shares his insights and investment ideas.
Rick Rule, world-renowned expert in resource investing, anticipates ongoing repercussions on the nuclear energy front as one consequence of the reactor crisis that has kept Japan in daily headlines for weeks. As you may recall from The Energy Report interview with Alka Singh last week, citizens and politicians around the world, fearful that catastrophes like that at Japan’s Fukushima complex could occur in their own backyards, want governments to rethink nuclear power programs.
Riding the wave of growing fear, investors have been pulling out of uranium stocks, as some in the markets are calling for an end of the nuclear renaissance and the demise of the uranium bull market. With Japan’s tragedy marring perceptions of nuclear power as a safe and clean alternative to fossil fuels, the uranium spot price fell right along with valuations of companies in the uranium sector.
Reaction to the crisis is not over, Rick says, noting that this adds volatility to an already volatile market. He expects nuclear-power opponents to seize on the crisis to whip up as much political and social hysteria as they can, raising—and perhaps exaggerating—questions about the state of readiness for potential disasters, not just in Japan but also around the world.
“We’re going to have the opportunity to take advantage of fear and terror in the uranium industry in a way that we haven’t had,” says Rick. He calls attention to the fact that two uranium companies subject to current takeover bids are already trading at 25%–30% discounts to the value of the bids. This is “indicative of the wonderful opportunities that we’ll see over the next year,” he adds.
Absolute Non-Starter
In no way does Rick consider the current crisis the end of the line for nuclear energy for Japan or even the U.S., which seems to “erroneously believe it can afford to ignore physical challenges in the face of emotional challenges.” Why? The U.S. derives 19% of its electricity from uranium, according to Rick, who adds, “the idea of shutting down 19% of U.S. generating capacity and throwing the country into the dark is an absolute non-starter.”
He fully expects Japan to return to its reliance on nuclear energy, as well. “Despite the challenges Japan faces,” says Rick, “nuclear power is the inescapable cornerstone of its electrical supply going forward, for the simple reason that nuclear power is so dense.” He explains that Japan can buy and store enough uranium to sustain its power grid for five or six years, adding that in no way could Japan—or Korea, Singapore or Taiwan—store enough oil, liquefied natural gas (LNG) or coal to guard against geopolitical supply constraints that will affect other energy sources. Around the globe, Rick states, nuclear power is an inescapable part of the energy mix going forward—not just because it’s a major component today but also because energy demand will grow so much in the future. According to some estimates, demand could be up to 35% higher than 2005 levels by the year 2030.
To Be Rich Is Glorious
Much of that growth will come from developing nations, as what Rick calls “emerging-markets liberalization” takes hold in fits and starts. China is probably the best, and certainly the most-prominent, example. The country started down the capitalist road in 1979, and the post-Mao mantra introduced by Deng Xiaoping, the paramount leader of the People’s Republic of China then and throughout the 1980s, set off what he describes as “the greatest boom I’ve seen in my lifetime.”
Rick believes Deng wasn’t seeking to diminish his power when he said, “To be rich is glorious”—words that sent a signal to the senior bureaucracy that the Chinese people should be a little more free and a little more self reliant. Since the shift in sentiment, China’s economy has grown to 10 times the size it was then—300% just in the last decade—and per-capita incomes are rising every year. It may be “just a little more free,” Rick says, but as China, India and Brazil have shown, “when societies become a little more free, they become a lot more rich; a little less constraint and a little more self reliance generate absolutely incredible economic growth.”
This phenomenon is a boon to the resource sector, in particular, he says and he explains why.
Energy-Intense Lifestyles
In the Western world, wealthy people tend to spend their money on services, according to Rick, adding, “prosperity at the bottom of the economic pyramid is enormously beneficial for energy prices.” The ability of these billions of people to enjoy a better lifestyle is increasing rapidly, he says, noting the lifestyle to which they aspire is energy intensive. India and China are building national highway grids, selling large numbers of vehicles and building electrical infrastructure similar to what the U.S. did in the ’30s, ’40s and ’50s. We don’t hear as much about Indonesia as we do China and India, he adds, but its 230 million people also will make that country a formidable energy consumer.
At this time, Rick says, the average Chinese citizen consumes just a fraction (3%) of the petroleum energy on which the average American relies. Considering the size of its population, if Chinese per-capita consumption rose to the level rivaling that of even South Korea (17% of U.S. consumption), China’s economy “would consume every drop of oil produced in the world,” Rick says.
As per-capita consumption increases in China and other developing economies, he continues, the impact on global petroleum prices will be dramatic. The fact is, billions of people not only want the standard of living that the Western world enjoys but also, increasingly, have the means to compete for it. Thus, inexorably, the price of commodities will increase. This includes prices for all energy sources—at a time, Rick notes, when energy supply has plateaued.
In terms of oil, while acknowledging that new technology will facilitate recovery of additional reserves from existing sources and help locate new deposits, he doesn’t believe these endeavors will prolong the life of oil at prices in the neighborhood of $100–$150 per barrel. “We’re running out of $100 oil,” he explains, citing a variety of reasons. To an alarming degree, he says, the national oil companies that are responsible for the lion’s share of production have diverted cash flow from reinvestment in energy security to domestically popular spending programs, including―ironically―subsidizing the price of energy or “increasing demand while reducing supply.”
Further, he expects national oil companies that represent about 30% of the world’s export crude (from countries like Mexico, Venezuela, Peru, Ecuador, Indonesia and Iran) to cease being oil exporters within five years. “Taking 30% of the world’s export supply out of the equation when export demand is increasing at 2% per annum,” he says, “is a recipe for incredible oil price rises.”
Middle East Turmoil
And, of course, there is the increasing volume and intensity of social unrest in the Middle East and North Africa. International crude prices reached a 30-month high of $120 per barrel in February following earlier turmoil in Egypt and Tunisia. Overlaying systemic shortages with agitation for regime changes—not unlike the situations that also have erupted in Yemen and Libya—suggests the enormous potential for disruption in supply as a consequence of political turmoil, revolution and even higher prices. “And the balance between supply and demand is too tight to take the supply shocks that could come with regime changes,” Rick points out.
For a glimpse into the potential of such supply shocks, consider the recent reductions in Libya’s oil production. Libya pumped approximately 1.6 million barrels per day (Mbpd) of crude before heavy fighting between Muammar Gaddafi’s forces and rebel troops, followed by U.N.-approved air strikes, slashed production to less than 400,000 bpd. This cut off exports and possibly damaged Libya’s oil infrastructure. While the country’s exports likely account for less than 1% of the world oil supply, Rick explains, the loss of 500,000–1 Mbpd of Libyan oil drove the price of oil up 10%–15% worldwide.
Black Swan on Steroids
“And what would happen,” Rick muses, if serious agitation for social change were to occur in the United Arab Emirates, Kuwait or Saudi Arabia? “That’s a black swan on steroids.”
Though attracting far less media attention than its reactor crisis, the devastating earthquake and tsunami that hit Japan has purportedly wiped out 29% of its domestic refining capacity. As the world’s second-largest net importer of oil, Japan relied on imports to meet 45% of its energy needs as recently as 2009. “The nuclear capacity was threatened,” Rick says. “In northeastern Japan, the oil- and petrochemical-refining capacity was not threatened―it was obliterated. But this isn’t what you read about in emotion-driven headlines.”
While the oil market might be the most noteworthy bellwether because oil is the most-ubiquitous and most-useful form of energy, tensions in the Middle East and the crisis in Japan are focusing more attention on alternatives.
LNG: Fuel of the Future
Since 2008, Japan has been the world’s third-largest nuclear power user, with 55 reactors providing more than one-third of the nation’s electricity. Rick believes that additional nuclear capacity will replace what has been lost at Fukushima, eventually; but in the interim, he expects one consequence of Japan’s need for power to create more reliance on hydrocarbons and that’s likely to be LNG. He considers LNG the “fuel of the future at any rate, as it can be stored well, is energy dense and can be used for peaking production, which is cheaper to establish although more expensive to operate than baseload production.”
Indeed, speculation that the damaged Japanese reactors will divert LNG resources there has already driven up the prices of natural gas futures and promises to incrementally tighten LNG supplies. Even before the March 11 tragedy, Japan ranked first among the world’s LNG importers. With or without Japanese demand, Rick believes that upward momentum in oil prices will lead North American, and probably European, markets to investigate and initiate use of LNG or compressed natural gas as transportation fuel, at least to supplement diesel and gasoline for over-the-road trucking. He foresees a dramatic effect on natural gas prices and the creation of a global market that connects what currently are distinctly local markets.
Carbon Conundrum
Despite concerns about loading carbons into earth’s atmosphere, Rick expects parts of the world—particularly countries that don’t think they can afford clean air—to keep coal as an important component in the world energy mix. “Despite being vilified,” he says, “coal will continue to be an important part of the energy matrix. The demand for energy will supersede the demand for clean air, especially in countries that are marching from 10%–15% electrification toward 100% electrification.” And like it or not, he adds, this isn’t hard—metallurgical coal for steelmaking isn’t hard, except for “the dirty, old, thermal, steam coal that China, India, Pakistan and others will burn.”
On the other side of the coin, he expects countries that believe they can afford to use more energy—Australia, New Zealand, the U.S., Canada and Western Europe—and fortified by fears about nuclear power, to intensify focus on alternative energies that are more politically correct. In fact, he anticipates “the unaffordable subsidies doled out to solar, wind and run-of-river power generation to increase whether we can afford them or not.”
Rick personally considers only geothermal and hydro as the viable alternative power sources that work. While he submits that both of these sectors “are deeply out of favor,” that makes them all the more appealing to Rick, who reveals that we can expect to see him increase his already-considerable stake in those sectors substantially.
Not that current headlines offer any rationale for panic, in terms of hydro and geothermal energy—at least not in the sense that uranium is suffering from the flared-up fear factor—but throughout his illustrious career, Rick has encouraged investors to summon the courage to buy whatever the masses of investors are snubbing. “It’s the panic markets that offer the best opportunities to buy good assets and solvent companies at extraordinary discounts,” he professes, adding, “More often than not, the huge gains come with having the courage to buy when others won’t.”
Rick Rule, founder and CEO of Global Resource Investments (GRI), began his career in the securities business in 1974 and has been principally involved in natural resource security investments ever since. He is a leading American retail broker specializing in mining, energy, water utilities, forest products and agriculture. Rick’s company has built a national reputation for its specialist expertise in taking advantage of global opportunities in the oil and gas, mining, alternative energy, agriculture, forestry and water industries. Last month, Rick closed a landmark deal with Eric Sprott, another famous powerhouse in the natural resources arena. With GRI now a wholly owned subsidiary, Sprott, Inc. manages a portfolio of small-cap resource investments worth more than $8 billion and boasts a workforce of more than 130 professionals in Canada and the U.S. This article is based on Rick’s Global Resource Investments webcast, Monday, March 21.
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By The Energy Report, on March 18th, 2011
 Even in the face of problems at Japan’s Fukushima Dai-Ichi nuclear reactor following a massive earthquake and tsunami, Jennings Capital Mining Analyst Alka Singh takes a positive long-term view on uranium prices. In this exclusive interview with The Energy Report, Alka explains why uranium demand will increase globally in the next two years and offers a few companies poised to capitalize on that need.
The Energy Report: In the wake of the 9.0 magnitude earthquake and tsunami in Japan, how will both the reality of the problems at the Fukushima Dai-Ichi nuclear reactor and the media reports surrounding the events impact demand for uranium and uranium stock prices?
Alka Singh: Well, I don’t see a lot of changes to my model because I’m still using a long-term uranium price of $75 per pound. But, there is so much market uncertainty that I put off initiating coverage on uranium names because of negative sentiments people have surrounding this sector. I think that all of this is more emotionally than fundamentally driven. Actually, this is a great buying opportunity to pick some of the better uranium companies with the solid assets and management teams. But, I’m just waiting for the market volatility to slow down.
TER: Are some companies going to do better than others based on their size, their stage of development or their geography?
AS: That’s an excellent question. The companies that are already in production with all their permits and most of their long-term contracts in place are the best companies to own right now. The long-term contracts have already been signed, so the utilities are actually paying the set price for the next five to eight years. Typically, companies that are already in production tend to sell about 70% to 80% of their production on these long-term contracts. Only 10% to 15% of their production is sold on spot prices. So, companies already in production with low cash costs and long-term sales contracts in place are the types of companies that you would want to own.
TER: What are some specific companies you’ve been following that you think are going to do well?
AS: Some of the producers who will be doing well would be companies like Cameco Corp. (TSX:CCO; NYSE:CCJ) and Paladin Energy Ltd. (TSX:PDN; ASX:PDN) because they have long-term sales contracts and are in production. As they are already in production, they don’t have the permitting risk in the equation. You may see regulators in some countries, including the U.S., take the news negatively. They will probably tighten the criteria that they look at before approving licenses for new nuclear reactors, which will impact demand for uranium.
The uranium equities are responding negatively as the market expects lower uranium demand in the coming years. It’s just that markets will get scared, as they did when the oil spill happened last year. People will call for a moratorium and there will be a lot of uncertainty in the near future, which will be negative for the uranium companies. But, don’t forget, when the oil spill happened BP Plc. (NYSE:BP; LSE:BP) share price dropped approximately 60%, and then recovered in six months.
TER: Why has the reaction in Germany, which is shutting down reactors, varied so much from countries like China and India, which are still moving forward with nuclear plans?
AS: Germany is taking preventive action. The country’s suspending life extensions of 17 nuclear reactors that were supposed to shut down in 2021 originally but were extended by an average of 12 years based on the nuclear crisis in Japan.
In China, the China Environmental Minister came out and said that while the country had learned lessons from Japan, it would not change its plans for a nuclear renaissance. India also has talked about caution—not dramatic change—and is in the process of trying to acquire uranium from Australia. Together, China, India and Russia have 42 reactors currently under construction, another 82 planned and 210 proposed.
TER: Does the design make a big difference in the viability of the project?
AS: The three hydrogen pressure explosions that happened at the nuclear plants in Japan were in the exterior of the nuclear reactors. This disaster is actually much different from the Chernobyl disaster that happened in the Ukraine where no containment vessel was in place. The Japanese government has done a very good job of managing the situation. It could end up as a positive, proving that designs of nuclear reactors being built today are much better than the ones that failed during the Chernobyl crisis.
It’s not as if the Japanese reactor exploded because of an operational failure. We are talking about a huge earthquake, followed directly by a tsunami. Even a nearby oil refinery burst into flames and collapsed. More countries may do stress tests and expanded permitting, which is time consuming and more costly. But, as of right now, I don’t think you can say this event is an end to the nuclear renaissance.
TER: So, are you saying the impacts are going to be different in the short term versus the long term?
AS: That is true. The short-term reaction is obviously one of panic. Over time, people will realize that nuclear power is the only viable way to fulfill the world’s energy requirement. Either you burn more fossil fuel and pollute your environment or you go for very expensive wind power and solar power. Hydropower is built out, basically. Nuclear power is still the cheapest. You can actually produce power at US$0.02 per kilowatt hour compared to coal at US$0.03, natural gas at about US$0.05 and oil at US$0.12 per kilowatt hour. So, what do you do? Do you pollute the environment or do you look for ways to build containment vessels that can handle this level of natural disaster? I still see the supply/demand fundamentals as very positive for uranium.
TER: In your last interview with The Energy Report, you were really positive about the prospects for uranium prices. At the time, they were in the $60–$70/lb. range. Obviously, that price has fallen in the last four days. Is this a short-term price impact or will we see long-term adjustments?
AS: Term markets are responsible for 80% of the total uranium sold annually, while spot markets purchase from 8%–12% every year. That’s it—that’s how small the spot market is. However, equities tend to react more to the spot market than the long-term market. The long-term prices have not changed; they are still at $73/lb. It is the short-term price that has fallen to $60.
The producers or companies actually signing long-term contracts right now will not be impacted by the spot price. Only hedge funds and traders—the guys who are afraid of what’s going on in Japan and trying to make a short-term trading call—are shorting uranium equities on the assumption of a nuclear meltdown as 11 of the nuclear reactors (11 of the 54 operating nuclear reactors) in Japan are in the earthquake/tsunami impact zone. Long term, I think that these guys will start closing the short positions in the near future. It’ll be similar to the oil spill situation with BP.
TER: If this is a short-term selloff of uranium shares, where do you see opportunities?
AS: This is a great opportunity to buy good uranium stocks for the long term. Short term, hedge funds could still short all of these uranium names without knowing which one is better just because they have the word “uranium” in the name. There could be still some tears in the market in the short term. However, if you find good companies that you like with good assets and management teams, this could be a great opportunity. I am talking about companies with good assets, low-cost production and maybe in-situ recovery (ISR) production, including Uranium Energy Corp (NYSE.A:UEC) and Uranium Resources Inc. (NASDAQ:URRE) in the U.S. Their cash costs would be under $25/lb. compared to conventional operations.
At Denison Mines Corp. (TSX:DML; NYSE.A:DNN), where the cost of production is about $45, you don’t want to be long. Cameco would be my other go-to company. As one of the largest uranium producers, the company could gain a lot when the Highly Enriched Uranium (HEU) Agreement between the U.S. and the Russian Federation expires in 2013, leading to higher uranium prices.
In the U.S., 104 operating nuclear reactors need about 60 million pounds (60 Mlb.) of uranium per year. But the country produces only 4 Mlb., which leaves a gap of 56 Mlb. to be met by secondary sources, including the HEU Agreement. So, this is a good time to be long uranium producers/developers. Uranium prices had been recovering in the latter part of 2010 and early 2011 before the crisis happened in Japan. This gives investors the best opportunity to buy since the 2008 financial meltdown. I can understand why people are concerned; but for a risk taker, this is good high-reward opportunity.
TER: Thank you so much for taking the time to talk with us.
AS: No problem. Thank you.
Prior to taking a position as mining analyst at Jennings Capital, Alka Singh was the managing director and senior metals and mining analyst at Rodman & Renshaw in New York City for two years. Previously, Ms. Singh was a vice president covering the metals and mining sector in Canada at Merrill Lynch, and prior to that she was an associate analyst covering the gold and base metal companies at Orion Securities Inc. Ms. Singh holds an MBA from Schulich School of Business, York University in Toronto, Canada and a Bachelor of Science in geology from the University of Delhi in India.
By The Energy Report, on March 11th, 2011
 As an investment option, uranium glows brightly for Siddharth Rajeev, vice president and head of research at Fundamental Research Corp. He also favors coal and explains why size matters when it comes to potash in this exclusive interview with The Energy Report.
The Energy Report: When you last talked with The Energy Report, you were more bullish on the uranium price than any other commodity. Since then, the price of yellowcake has gone from about $50/lb. to just under $70/lb. Is there much upward momentum left in uranium?
Siddharth Rajeev: Yes, we continue to believe in the uranium story. You’re right, uranium prices have gone up significantly in the last six to eight months. But we still think there’s upside potential, mainly because the fundamentals remain very strong.
There are four reasons we believe in the uranium story: 1) Nuclear energy is a dependable and clean power source; 2) There is no direct substitute for uranium in nuclear power plants; 3) On the supply side, the primary production of uranium must increase significantly from current levels to keep up with long-term demand because the current supply deficit is met by stockpiles; and 4) Most of the new projects that we see out there are of much lower grade than the majority mines operating currently. Lower grades imply higher operating costs.
Our research indicates that the operating cost of new projects in development stages could be about $55–$60/lb. This implies that uranium prices must be significantly higher than those levels in order for the new projects to be feasible.
TER: Do you think we could see another 2007 when prices reached the $130/lb. area?
SR: We believe the market overreacted in 2007. We don’t expect prices to go that high, but we definitely see significant upside from the current price.
TER: Can you put that into more specific terms?
SR: We use a long-term price of US$80/lb. in our valuation models.
TER: What is the investment thesis for uranium juniors in light of that price environment?
SR: When uranium prices hit record highs a few years ago, most junior exploration companies raised a significant amount of capital. A lot of them cut down their spending to preserve cash when uranium prices collapsed. So, when uranium prices recovered, we started seeing many juniors with quality assets in a strong cash position. Those are the kind of companies we like.
TER: Can you give us a handful of uranium juniors with upside that you’re currently covering?
SR: Our top three favorites in the uranium sector are Strathmore Minerals Corp. (TSX:STM; OTCQX:STHJF), Mawson Resources Ltd. (TSX:MAW; OTCPK:MWSNF; Fkft:MRY) and Fission Energy Corp. (TSX.V:FIS).
Let’s start with Strathmore. The company’s advanced-stage Roca Honda project in New Mexico has a measured and indicated (M&I) and inferred resource of 33–34 million pounds (Mlb.) of uranium. And STM has a strong partner—Roca Honda is held 60% by Strathmore and 40% by Sumitomo Corp. (TKY:8053; OTCPK:SSUMF) of Japan. Management expects to put the project into production in the next two to three years. The company recently completed an internal Phase 1 feasibility study on Roca Honda. This project is considered one of the largest planned underground mines in the U.S. in 30 years. We definitely think Strathmore has a lot of upside potential from this project.
The company also has several other projects with NI 43-101-compliant and historic resource estimates. It’s in a strong cash position, with more than $20 million in working capital and has a solid management team. We have a BUY rating on STM with a fair value estimate of $2.26/share.
TER: You mentioned an internal feasibility study. Does that mean we won’t be able to see it?
SR: We might not get to see it. Feasibility is typically done by a third party. Companies generally start with an internal study and depending on those results, hire a third-party consultant to do a formal feasibility study that can be disclosed to the public.
TER: Strathmore also has the Gas Hills project in Wyoming. What is its status?
SR: STM commenced a development-drilling program at its Gas Hills project in central Wyoming with the objective to complete an NI 43-101-compliant resource, confirm and expand known areas of mineralization and advance its permit application, which is expected to be submitted in Q211.
TER: Do you think Strathmore may thin out some of those other projects?
SR: Yes, that’s highly likely. Last year, the company sold its Pine Tree-Reno Creek properties in Wyoming to Bayswater Uranium (TSX.V:BYU) for US$17.5 million (cash) and US$2.5 million (shares). In November 2010, Strathmore announced plans to sell its Juniper Ridge property in Wyoming to Crosshair Exploration & Mining Corp. (TSX:CXX). And STM has definite plans to spin out its non-core projects. We think that’s the best strategy because it gives the company more time to focus on and monetize its core projects.
TER: What do you think of the combination of STM CEO David Miller and President Steven Khan, in terms of uranium juniors?
SR: We’ve been following the STM team for several years and the management team has a great track record.
TER: You also mentioned Fission Energy, which has projects in Saskatchewan, Quebec and Peru. What’s the next step for Fission?
SR: So far, results from the Waterbury Lake project in Saskatchewan have been extremely impressive. The stock has tripled since last May, and Fission recently completed a $7.5M financing.
TER: Some of the drill results at Waterbury have hit 5%–6% uranium, which is really quite high.
SR: They are exceptionally impressive. Drilling on the J-Zone uranium discovery has continued to turn up significant intersections of high-grade uranium. The main thing we see in this project is that high-grade uranium mineralization continues to be intersected at the unconformity. That’s encouraging because mineralization at many of the major deposits in the Athabasca Basin, like Cigar Lake and McArthur River, occurs at the unconformity.
TER: The last of your top-three was Mawson Resources, which has projects in Finland, Peru and Sweden.
SR: Mawson’s main project is the Rompas Gold-Uranium project in Finland. The preliminary exploration program completed by Mawson returned extremely positive results on the grab and channel samples. Just to give you an idea, channel samples collected on the property during last year’s field exploration program gave grades of 1,424 g/t gold and 1.3% uranium over 0.95 meters, and 191 g/t gold and 0.44% of uranium over 2.05 meters. These are tremendously high numbers. From initial results, we believe Rompas has some of the highest upside potential of any early stage project under our coverage.
TER: Mawson is trading at about $1.75 right now, a bit off some price spikes as a result of those bonanza-grade samples. What’s the next step for the company? Will it be drilling soon?
SR: Mawson recently applied for a winter ground-access permit for a shallow grid-diamond drilling program.
TER: Coal is another commodity that interests you. Despite growing concerns about pollution, prices continue to climb, mostly due to increasing demand from steel plants in places like China and Korea. We’ve even seen some recent takeovers, including Walter Energy, Inc.’s (NYSE:WLT) proposed acquisition of Western Coal Corp. (TSX:WTN). What should our readers expect from the coal market through the rest of 2011?
SR: We’ve always been bullish on coal because it remains the cheapest and most-abundant fossil fuel out there, accounting for 40% of global electricity supply. Despite the move toward cleaner energy, we believe it is tough to replace coal; consequently, we do not think coal will lose its significance in the energy sector at least for the next decade or so.
TER: What’s your coal price range per ton?
SR: We use $140/ton for long-term metallurgical coal—well below the current price of $175–$180/ton.
TER: What are some small-cap, under-the-radar names in coal?
SR: One of our favorite stories is Compliance Energy Corporation (TSX.V:CEC), which is developing the Raven Coal Deposit 80 km. northwest of Nanaimo, BC. It has more than 130 million tons (Mt.) of M&I and inferred semisoft met coal. Its focus is on metallurgical coal, which has a higher value than thermal coal.
The company has very strong partners in LG and ITOCHU, which indicates that it has solid access to capital. Compliance issued a very positive prefeasibility study (PFS) in October 2010. Our valuation on the stock is $2/share; the current price is $0.35. The main reason we like this stock as an investment is because cash and marketable securities alone account for $0.25–$0.30/share. This indicates that the market value of the company’s project is just $0.05–$0.10/share, which is extremely low for an advanced-stage project like Raven.
TER: Do you mean $0.05 per ton?
SR: No. The current share price is $0.35. Cash and marketable securities alone account for $0.25–$0.30/share, which means the remaining share price of $0.05–$0.10 is the value that the market assigns to the project.
TER: Could some of that low valuation be due to development risk?
SR: Generally, projects in BC have high permitting risk. Despite the risks associated with the project, we believe a market value of $0.05–$0.10/share is extremely low for a project with positive PFS results and an expected mine life of at least 16 years.
TER: What about some other coal names?
SR: The next one I want to talk about is 49 North Resources Inc. (TSX.V:FNR). It’s Saskatchewan’s first publicly traded resource investment company, with close to $65 million in assets under management. FNR invests in early stage resource projects, including minerals, oil and gas, and its portfolio also has coal projects.
One of its top-five holdings is a coal company called Westcore Energy Ltd. (TSX.V:WTR), which is a junior explorer focused on coal in Saskatchewan and Manitoba, where it has interest in over 95,000 hectares of land. Westcore’s Black Diamond property has had four discoveries recently. FNR owns 30% of WTR’s outstanding shares. The winter drilling program that commenced in January has thus far shown encouraging results.
TER: Another major commodity in Saskatchewan is potash, which is mostly used in fertilizer and prices show no signs of retreating any time soon. Why is potash so hot right now?
SR: Obviously, with high demand for food comes high demand for fertilizers. In addition to demand, the supply side of potash is very important to look at when forecasting potash prices. Most potash deposits are highly capital intensive and need billions of dollars to be put into production. As a result, new potash supply is hard to come by. Increasing demand and the bottleneck on the supply side are the primary reasons why we like potash.
TER: Last year, BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF) made a bid for PotashCorp (TSX:POT; NYSE:POT) in an effort to get a stable potash supply in an increasing price environment. Potash One Inc. (TSX:KCL) was acquired by the German company, K+S Aktiengesellschaft (Fkft:SDFG.F). In the last year, some potash juniors shot up as a result of this renewed interest. What are some names you cover?
SR: Our favorite potash story is a company called Western Potash Corp. (TSX.V:WPX), based here in Vancouver. Its main project is the Milestone Project in Saskatchewan, 30 km. from Regina. The company’s exploring the potential of hosting a solution potash mine. Solution mines are significantly cheaper to develop and have lower operating costs than underground potash mines. Western Potash has a pretty advanced-stage project that turned up a positive scoping study in the second half of 2010 that suggested WPX can produce potash for at least 40 years at a rate of 2.5 Mt./year. That’s a good source of supply for any major company or country looking for a stable source of potash.
As potash projects are capital intensive, the exit strategy of most potash juniors is either to joint venture (JV) or get acquired by a major (with access to capital). The acquisitions you mentioned, made in the last year, were mainly companies with producing or advanced-stage projects. Potash juniors typically tend to be acquired when they reach the point that the economics of their projects are known. We think Western Potash is an ideal acquisition target, particularly because it is Canada’s most advanced-stage junior that has yet to be acquired.
TER: Do you have some parting thoughts on the energy markets or on the markets for energy-related commodities?
SR: We continue to have a positive outlook on uranium. We believe there are lots of opportunities in the sector—companies with quality assets and a good cash position. We are also bullish on potash. However, investors should be extra cautious when it comes to investing in very early stage potash juniors as companies have to delineate large resource estimates to cover the huge capital cost and make their projects economically feasible. Companies with advanced-stage projects and known economics have significantly lower risk.
TER: Does that wisdom stand for uranium and coal projects alike?
SR: It is more relevant for potash projects. Uranium projects are capital intensive but not nearly as much as potash projects. Coal projects are less capital intensive compared to both uranium and potash.
TER: That’s good to know, Sid. Thank you for your time.
Siddharth Rajeev joined Fundamental Research Corp. in April 2006. At FRC, he oversees the research department and also covers a broad array of companies, primarily in the energy, mining and technology sectors. Prior to FRC, Siddarth had a mix of engineering and finance experience, including corporate finance experience, at a leading investment bank in Kuwait. Sid has ranked as a four-star analyst in the energy and mining sectors by Deutsche Asset Management, a division of Deutsche Bank. Sid holds a bachelor of technology degree in electronics engineering from Cochin University of Science & Technology and an MBA in finance from The University of British Columbia. He is a CFA Charterholder and has completed studies in exploration and prospecting at the British Columbia Institute of Technology. Sid is sought by the media for commentary on the valuation of small-cap stocks and industries he covers and is a speaker at various investment conferences.
By The Energy Report, on February 18th, 2011
 BMO Capital Markets Mining Analyst Ed Sterck projects a very moderate $60/lb. uranium price in 2011, but that shouldn’t stop you from investing in the uranium space. “This is a sector that is very prone to sentiment and, at the moment, the sentiment is building toward the possibility of a price spike,” he says. He also expects to see more M&A activity in the sector, particularly among uranium juniors with reasonably priced projects. Read on to find out which companies Ed likes in this exclusive interview with The Energy Report.
The Energy Report: London, where your office is, is the financial capital of the world and uranium equities remain a large portion of your coverage universe. Could you tell us about the institutional investor appetite for uranium equities now and over the last four to six months?
Ed Sterck: Well, it’s certainly picked up. When you look back 12 months, the uranium market was pretty uninteresting for the average institutional investor. Prices had remained fairly flat until about six months ago. Since then, obviously, the spot price of uranium has picked up markedly and with that, we have seen a return of investor appetites for uranium plays. I think that’s slightly precipitated by people’s recollection of the price spike of 2006–2007, and the response that company share prices demonstrated with the price spike. I think it would be fair to say a number of the investors looking at uranium again are hoping something similar will unfold.
TER: Are you seeing an increase to the $130/lb. range as was the case in 2007?
ES: My analysis is a little more subdued than that. I actually think that uranium supplies will be adequate for the next several years, and then enter into a deficit at the end of the current decade. If you were to look at the supply and demand picture as I see it, then I would expect the price to be determined by the marginal cost of production. On that basis, I am looking for a price of $60/lb. in real terms for the next couple of years, and then a little peak at $70/lb. in 2013 and 2014 before coming back to a long-term price of $60/lb. That said, the uranium market is small and very sentiment driven. So, there’s certainly the potential for a price spike, perhaps regardless of the underlying fundamentals.
TER: You talked a little about institutional investors’ growing appetite. Is there anything different about the types of investors entering the market this time around? Have you noticed anything unusual?
ES: No. I think it’s a similar collection of people, though the generalist funds are looking at the uranium space at the moment. But I think there is a difference in the way investors are looking at each of the individual stock opportunities, certainly in terms of those companies that were exploration and development plays back in 2006–2007. Many of those companies are now in production, and I think there is more of a focus on companies producing meaningful amounts of cash flow. So, rather than just buying those stocks on the basis that the uranium price might go up, I think investors are being selective about which stocks they choose, expecting some stocks to actually have a great return for shareholders on a peak-cash flow basis.
TER: So the last run-up in uranium prices funded a number of projects, and the investors that got out of those stocks when uranium fell to below $40/lb. are coming back. But many of those projects are in production or coming into production and generating cash flow. So, those projects are far less speculative.
ES: They are probably far less speculative than they were in the past. What I was trying to angle at is that I think people were a bit less discerning about which stock they invested in back then—like anything with “uranium” in its name was worthy of investment given the price run-up. Now, investors are saying, “Okay, I expect this stock to outperform that stock on the basis that it’s going to generate meaningful cash flow, whereas the other is going to struggle to give a decent return to shareholders.”
TER: Do you think that’s directly as a result of what happened in 2008?
ES: I think you’ve raised a good point there, and I think that it probably is. Some investors did get their fingers burned last time and perhaps now they are being a little more cautious. You know, once bitten, twice shy.
TER: What are some companies that you expect to generate solid cash flow that discerning investors are taking a closer look at?
ES: Well, one of the problems is there’s a limited selection of pure-play listed producers out there—there aren’t many options. Look at the biggest companies, like Cameco Corp. (TSX:CCO; NYSE:CCJ), the share price of which has performed extremely well over the last six months or so. Cameco sells its uranium production into a contract book, so it has less exposure to the uranium price than some of the other producers. Consequently, it might make less for an investor than some of the mid-cap producers. On the other hand, given Cameco’s size and liquidity, it might be the only option for the generalist funds coming into the space. We look a bit further down the food chain, toward the mid caps that will demonstrate a great amount of growth in cash generation.
TER: What are some of those mid-cap names?
ES: One example would be Paladin Energy Ltd. (TSX:PDN; ASX:PDN). It was an exploration-development play back in 2006–2007, and it now has two mines in production. It’s running into a few difficulties but, over the next couple of years, it should have a stronger production growth profile than Cameco. So, one would suspect—coming from a small base, of course—that the relative improvement in cash flow will actually be greater than Cameco’s.
TER: You said in a recent research report that Paladin looks fully priced and is receiving a market premium for management and mergers and acquisitions (M&A) appeal. Do you see consolidation on the horizon in the uranium sector, or is that a little farther off?
ES: No, I think that will be one of the big themes this year, though I anticipate it will be the large- and mid-cap guys consuming some of the smaller companies with good projects. One recent example would be Paladin buying Aurora Energy Resources, Inc. from Fronteer Gold Inc. (TSX:FRG; NYSE.A:FRG). There are some political risks associated with that particular project, but that’s the kind of transaction I expect to occur.
In terms of the bigger companies, there might be acquisitions or a merger of equals but I think both events are unlikely. For example, I think Cameco buying Paladin is unlikely—I don’t think Cameco could afford Paladin right now. Acquisitions of mid-cap companies are more likely to come from higher up the food chain, perhaps by the power utilities, principally out of Asia, looking to secure production. We’re talking about companies like China National Nuclear Corp. (CNNC) or China Guangdong Nuclear Power Co. (CGNPC) looking at a company like Paladin and thinking, “China’s got a very ambitious nuclear growth program, which will require uranium to fuel it. Rather than buying a project and developing it ourselves, perhaps we should just go and buy current production.” I think that’s really why Paladin has M&A appeal because it’s the only one of the senior or mid caps that actually doesn’t have a significant minority shareholder or a shareholder with a potentially blocking stake.
TER: It probably wouldn’t be all that strategic for Cameco to purchase Paladin’s assets over some right in its backyard in the Athabasca Basin that belong to Denison Mines Corp. (TSX:DML; NYSE.A:DNN) or smaller companies like Hathor Exploration Ltd. (TSX.V:HAT). If Cameco wants to see tangible appreciation in its share price, could it be looking at M&A activity in the basin?
ES: My feeling is that Cameco already has a big land resource in the Athabasca. But the market gets so excited about companies like Denison and its Wheeler River project, which is starting to look really interesting. However, the market has given such a big premium to Denison for Wheeler River’s exploration potential that Cameo might balk at paying the premiums currently demanded to acquire those assets.
Conversely, although it’s not in Cameco’s “backyard,” buying assets in Africa might not increase its geopolitical risk, strangely. For example, Namibia, where Paladin’s project is located, is probably one of the most mining-friendly regimes around at the moment.
TER: You mentioned Denison is receiving a market premium for the Wheeler River project. But in a recent research report you said the premium on Denison also involves its M&A appeal. So, if it’s not Cameco, who would be looking at Denison?
ES: The other possible candidates out there include other mid-cap producers or even some of those power station organizations I mentioned. Of course, for a non-Canadian company to buy Denison, it would have to do so in conjunction with a Canadian company that would take a majority stake in the project because that is required under Canadian law.
TER: Denison recently said it would produce 1.2 million pounds (Mlb.) of uranium oxide this year. In your research, you said Denison’s particularly sensitive to uranium price rises. Is that guidance in line with what you thought it would be?
ES: I think the guidance the company gave was a little better than I had anticipated, but it’s such a small amount of production that it isn’t a really big driver of the stock. The stock value is driven by its exploration portfolio and the market’s expectation for Wheeler River rather than earnings from uranium sales.
TER: Why is Wheeler River so important to the company?
ES: Given that Denison’s current production is a relatively small component of its valuation, its exploration projects are the main value driver. If we take a step back, projects in the Athabasca Basin tend to be very small, very high-grade deposits. As a consequence of their small size, they can be very difficult to find through geological exploration. So, an awful lot of money must be spent to make those discoveries, and for most companies that work will amount to nothing.
One of the reasons that Wheeler River is interesting is because Denison has encountered high-grade uranium in a large alteration halo, but it’s also finding that the high-grade mineralization continues as the company drills farther away from the initial discovery. On top of that—and I think this is as interesting as the resource Denison has defined to date—the geological situation of the ore body is very analogous to Cameco’s McArthur River deposit, which is one of the world’s largest uranium mines. If Denison has something similar to that, it could be very appealing for the company indeed. However, the timeline to production even for a really interesting project like McArthur River is between 10 and 20 years. Even if Denison has found something really exciting, we’re still a long way from seeing any uranium production even if it determines it’s an economically viable deposit.
TER: Let’s talk more about M&A activity. Do you expect that to be geographical in nature? Or should we look for more diversification in terms of exposure to uranium in a given locale versus another?
ES: Well there are a limited number of countries in the world that have economic uranium deposits at the current uranium price. Probably what we’ll see is more people looking to acquire projects in areas that, in the past, faced political opposition to uranium mining but now are allowing mining. An example would be Western Australia where there are numerous juniors with small- to medium-sized deposits that might be available for a reasonable price. That’s one of the things we could see happening.
There’s also some interesting exploration happening in places like Mali and Botswana. We could see people looking to pick up some exploration portfolios hoping to find a new uranium-producing district. On the other hand, I’m not sure the senior companies are prepared to pay any price for assets. Historically, M&A across all commodities tends to be fairly price sensitive. If the market speculation that’s building with the current increase in the uranium price translates into large market valuations for some of these projects, then they might not be that appealing to the seniors and mid-cap producers.
TER: But you’re predicting $60–$65 uranium four years out, so it seems like the price will be fairly static.
ES: Yes, but by using my assumptions for production and sales, I can roughly calculate the implied uranium price the market is paying for uranium stocks. In most cases, it’s significantly higher than the current uranium price. We’re talking +$100/lb. for current producers and $60/lb. for exploration stocks, because the market’s expectation is that uranium prices will continue to rise. Exploration stocks imply slightly lower uranium prices because the market is discounting development risk. However, if prices stay at $60–$65/lb. in real terms for the next four years, the market tends to get bored with things staying static, and I think we would probably see a reduction in those premiums. If I was a mid-cap producer with my price outlook—and I don’t think any of them share it—I would probably choose to sit on my hands and wait to pick up assets at a cheaper price.
TER: Has there been a noteworthy increase in uranium juniors seeking financing for uranium plays, or do you think there will be?
ES: We haven’t seen a significant amount yet, but given the uranium price rise and increasing investor interest in the space, we’ll likely see a pick up in the number of juniors looking to capitalize on their higher share prices in order to raise capital.
TER: One junior, Australian-based Bannerman Resources Ltd. (TSX:BAN; ASX:BMN; NYSE:BMN), recently completed a $15 million private placement at AUD$0.50/share. That placement was oversubscribed. Is that telling us more about the demand for uranium equities or Bannerman’s prospects for further growth?
ES: I think it’s telling us more about expectations for future uranium prices than anything else. Bannerman is a company with a good management team; however, though its Etango Project is fairly analogous to Rio Tinto’s (NYSE:RIO; ASX:RIO) Rössing mine, it suffers from a lower grade. In my mind, the oversubscription is an option on high uranium prices. Investors are expecting uranium prices to continue rising; and for Bannerman, based on my estimate, there will be a threshold price at which Etango makes sense. At that point, Bannerman’s share price could reflect the improved project economics.
TER: In a recent research report, you said Bannerman basically needs $70/lb. uranium to show “appealing economic returns.” However, you also said management could accelerate development if things change. You have a Market Perform rating on Bannerman right now. What do you expect from that junior in the short to medium term?
ES: Bannerman is in the process of finishing its feasibility study. Eventually, it will announce the study’s findings to the market and how it proposes to go about developing the Etango Project. It wouldn’t surprise me, though, if Bannerman accelerates the rate at which it’s doing that work. We could get the results of that feasibility study sooner rather than later, probably around midyear.
TER: Have you visited Etango?
ES: I have, yes.
TER: What were you thoughts after your visit?
ES: From a technical perspective, it’s fundamentally low risk because the style of mineralization is similar to the Rössing mine, which has been in production since the 1970s. It’s really just the grade that’s the issue. If uranium prices continue rising to the point that grade is no longer the controlling factor, then the project could look pretty appealing.
TER: What sort of grade are we looking at?
ES: The current grade is around 220 parts per million (ppm).
TER: What would be considered high, or even average, grade?
ES: If we look at what they’re mining in the Athabasca Basin, you’ve got average grades there in the 18%–20% range. Now, compare that to Extract Resources Ltd.’s (TSX:EXT; ASX:EXT) Rössing South deposit, which it’s renamed “Husab.” That’s considered to be a highish-grade deposit for an open-pit target in Africa, and the average grade there is around 470 ppm—that’s 0.047% versus 18%–20% in the Athabasca. Although Athabasca Basin deposits are typically much higher grade than those in Southern Africa, the economic viability of the deposits can be fairly similar because you have fewer technical challenges in Southern Africa than you might have in the Athabasca Basin.
TER: The deposits in the Basin tend to be smaller, too.
ES: In terms of total contained pounds, some of Cameco’s are fairly similar but with the high grade, the deposits occupy a much smaller volume of rock. The problem is, they’re usually more than several hundred meters underground and saturated with high-pressure water. So, in order to mine them, you have to freeze the ore body by pumping a high-saline solution through the ore body at -35ºC. That adds to your costs versus an open-pit operation in Southern Africa.
TER: Could you tell us about some other uranium names that are poised to benefit from the current price environment?
ES: One of the other stocks would be Extract, which I already mentioned and which is one of my preferred stocks. Its Husab Uranium Project in Namibia is fairly analogous to Rössing South, so it should be fairly low risk. It does suffer from a relatively large amount of overburden, which has to be stripped off the deposit before it can be mined. But then it has the benefit of being a significantly higher-grade than Rössing.
TER: Do you think Rio Tinto would take a run at Extract given the Rössing deposit’s proximity to Husab?
ES: Rio Tinto already has an effective 21% stake in the company, including an indirect stake through Kalahari Minerals plc (LSE:KAH; NSX:KAH), which has roughly a 45% interest in Extract. I think if Rio Tinto were to take out Extract, it would also have to buy Kalahari. That would be quite a difficult transaction for Rio to undertake. The company tends to be very conservative in the commodity prices it uses for internal evaluation of projects and investment opportunities. If we look at the way uranium prices have behaved in the last five years, Rio Tinto may be using a moving average, which would put the uranium price down to the low- to mid-$40s. For Extract, the implied uranium price is on the order of $60/lb., which might look too expensive for Rio Tinto currently.
TER: Are there any other companies you like?
ES: The only other significant producer is Energy Resources of Australia Ltd. (ASX:ERA), which is already 65% owned by Rio Tinto. I don’t see that as being a significant takeout target. ERA’s share price has underperformed the peer group significantly over the past 12 months due to a number of production issues that necessitated the company make spot uranium purchases to cover its contracted delivery commitments. Australia is suffering from an extremely wet season, which has resulted in ERA halting production for three months—something that’s driven the stock price even lower. Although ERA is not having the easiest of times, its share price is now so low it might show some appeal on a relative-valuation basis versus the peer group. Potential positive catalysts include the wet season ending without the open pit being flooded and positive decisions on a move to underground operations.
TER: Please leave our readers with some of your thoughts on the uranium sector in 2011.
ES: As you know, I’m pretty cautious on the uranium price outlook. As I mentioned, this sector is very prone to sentiment and, at the moment, sentiment is building toward the possibility of a price spike. I’m telling my clients this is not a sector that I anticipate pulling back significantly—unless the uranium price gets too far ahead of the underlying fundamentals. It might not be a bad place to park any spare cash investors may have because they’re unlikely to lose a significant amount of money by investing in the space, given the current sentiment.
TER: Thanks for talking with us today, Ed.
Edward Sterck covers uranium, diamond and platinum group metal mining companies for BMO Capital Markets. He joined BMO in 2007, prior to which he was a mining analyst at Hargreave Hale. Before working in mining research, he spent more than four years trading government bond futures on a proprietary basis. Edward holds a bachelor of science in geology with honors from the Royal School of Mines, Imperial College London.
By The Energy Report, on February 11th, 2011
 Kevin Bambrough founded Sprott Resource Corp. in 2007 to take advantage of a future in which he believes trust in paper currencies will diminish. The idea is to invest in natural resources, including precious metals, energy and agriculture, which represent tangible value from which investors will benefit as necessities become more precious. Unlike closed- or open-end mutual funds, the business is a corporation that can buy private equity to ultimately sell, spin out or even take an active investor approach through majority ownership in publicly traded companies. The company also looks for distressed deals. In this exclusive interview with The Energy Report, Kevin and Sprott COO Paul Dimitriadis share their investment philosophy and ideas on how to protect wealth.
The Energy Report: Kevin or Paul, Sprott Resource Corp. (TSX:SCP) bought $74 million of physical gold in 2008 and 2009, which is held in vaults at Scotiabank. How much is that holding worth today?
Paul Dimitriadis: It’s worth roughly $105 million, I believe.
TER: It sounds like you’re still bullish on gold. Do you think of it as a hedge, a store of value, insurance against catastrophe or all of the above? What is your investment theory here?
Kevin Bambrough: I believe that it’s all of the above; but, more so, it’s that I place no value in paper money. Fiat currency is worth exactly zero. Right now, we’re in a unique time in history in which the populace, as a whole, perceives currency to have value; so, therefore, it does. But I believe that faith is going to continue to dwindle. Ultimately, investments like gold are a much better store of value.
TER: Do you believe that Sprott’s stock price will typically underperform its internal rate of return (IRR) until there is some catalyst that causes dramatic inflation or something similar?
KB: In terms of market volatility, I think the market will overvalue our assets at times. Other times, it will have a very negative view and undervalue our assets. The greatest example is to look at the history of Sprott Resource Corp. When we first started the company, we had basically $1.50 per share in cash—that was it. But sometimes the market traded us above $3/share, so we were trading at 2x cash—having done absolutely nothing.
Then, after making significant gains and during the pessimism of late 2008 and early 2009, the stock traded down to about half cash. We had $3.55 in cash and gold per share and we traded down to the $1.80 range, which made no sense. Our goal is not really to trade in line with our asset value at any given point, but rather to be given some value for management’s ability to source transactions, create companies and take them public, which we have already done repeatedly. SCP should get a premium value for our ability to involve the right people, including investors and directors, and marry business plans with high-quality assets so our companies outperform their peer group.
KB: Paul, did you want to add to that?
PD: In the oil and gas (O&G) sector, people have no trouble trading companies above their net asset value (NAV) due to their strong management teams. Investors are willing to pay a premium for that. Our hope is that, over time, they’ll also be willing to pay a premium for our stock.
KB: With that in mind, we want to make sure we maintain at least a reasonable valuation relative to our assets. Management has committed and demonstrated that we will buy back our stock when it trades at what we believe is an unreasonable discount to the market. So, that really helps to mitigate the risk. We’re very aware of the fact that closed-end type vehicles typically trade at a discount because what they do could be replicated fairly easily. You can look at the contents of a mutual fund or a closed-end fund and say, “Well, I could go buy those stocks.” But the difference here is that we create businesses in unique sectors with unique opportunities well ahead of when they’re properly valued.
TER: Give me an example of that.
KB: We’ve gotten some significant gains that have come from what initially appear to be very minor investments or very little capital being committed. For example, Stonegate Agricom Ltd. (TSX:ST). In that case, we started with an option agreement totaling $53,000 that turned into a mark-to-market gain of nearly $100 million over a couple of years. And we have made much larger investments, buying things like PBS Coals Limited (LSE:SVST) or Orion Oil & Gas Corporation (TSX:OIP) that were very cheap relative to the public market comparables.
TER: You wanted to get into the fertilizer business with Stonegate because it’s a play on agriculture (Ag), a sector on which you’re bullish. But doesn’t a mining operation add risk to what you already believe is a relatively safe way of playing agriculture?
KB: Let me first say I agree that resource exploration has got to be one of the riskiest sectors in which to be involved. Typically, the odds are insurmountable but Stonegate is not a grassroots exploration. Both of Stonegate’s properties had proven historical merit; and our agreement was structured in very low-risk terms, which would minimize any material damage to our assets or the NAV of our company. We approached the transaction, got involved and advanced the asset to the point of going public.
We started with a small investment of $53,000, which was an option agreement that we rolled into a private company, and we ended up with 80% of that company. We were in a very, very comfortable position as far as the money that we had to put in. Stonegate went public with a $50 million offering and, post-IPO, we retained about 54% of the company. We put $12 million into that IPO, which basically gave us a claim on 54% of $50M through our shareholdings. So, there was very little risk.
TER: You’ve said you’re bullish on uranium. Could you tell me your investment thesis there?
KB: The investment thesis on uranium really stems first from the fact that I’m a believer in peak oil. The major oil discoveries were made in the 1960s and 1970s, and the world’s major oil fields on most continents have already peaked in terms of production. Now, the discoveries are getting smaller and those that get headlines from time to time are really irrelevant compared to the scale of global consumption. We still get something like 50% of our energy from oil. That statistic—and the fact that the U.S. is a massive importer of oil and runs a substantial trade deficit—has led me to the view that energy prices in the U.S. will go up dramatically. Also, in looking at the cost of coal production, we don’t properly account for the environmental costs. I don’t think we’ve begun to come close to accounting for greenhouse gases or general pollution.
So, I think nuclear fuel and nuclear power will grow out of necessity. There’s really no other choice than to see significantly higher uranium prices to spur production to meet what I believe is going to be burgeoning demand. In the U.S. in particular, where 90% of uranium is imported, I believe that it’ll become an issue of national security that the government will get behind; it’ll advocate increasing production in order to protect our energy security.
TER: How are you playing uranium?
KB: We own approximately 20% of the Coles Hill uranium project in Virginia mostly through a private company, of which Virginia Energy Resources Inc. (TSX.V:VAE) owns roughly 30%.
TER: The stock is up more than 300% over the past six months. Back in mid-October, the company announced an NI 43-101 preliminary assessment that stated the net present value (NPV) of the Coles Hill uranium project was more than $400M. Do you see more upside to this stock?
KB: Well, if you look back on that study, you’ll see that with higher-priced uranium, the NPV rises dramatically. That’s what we’ve seen recently, as the price of uranium has moved up. And I think you need to see uranium in the $75/lb. area on a sustained basis to encourage supply. Then I think the NPV will be in the $600 million area. But I don’t think that study really optimizes uranium’s value because, if you were to increase production rates, you would potentially get a higher NPV; and I think that ultimately is what should happen. The reason it’s still trading at such a discount to that NPV is purely due to the lack of a uranium mining law in the state of Virginia. We’re hopeful that, eventually, it will be resolved in a positive way so the project can go forward.
TER: Sticking with your peak-oil view, you mentioned Orion Oil & Gas a moment ago. Tell me about that.
PD: We completed the transaction in September of 2009. It was a private company that had been distressed. The banks were closing in on some of its lines. The company was looking for recapitalization. We co-invested with Gary Guidry, who, as CEO of Tanganyika Oil Company Ltd., sold his company to Chinese refiner Sinopec Shanghai Petrochemical Company Ltd. (NYSE:SHI) for CAD$2.2 billion. We purchased 80% interest in Orion for $107 million with a mixture of cash and stock; the total purchase price of the deal was $130 million. We just announced that Orion had released updated reserve numbers demonstrating an NPV of $440M on a 10% pre-tax basis—an increase of $106M over the prior year and a 34% increase in reserves from the prior year. Those results stem principally from the large capital program that was put in place this year. The assets are 50% oil and natural gas liquids (NGLs) and 50% natural gas.
TER: You invested $107M. How much have you made on this?
KB: Mark-to-market, it’s more than double today.
TER: Orion is 50% gas weighted. Kevin, you’ve said cheap gas is a myth.
KB: Gas is cheap today, obviously; I think it’s very cheap. But I think it’s too cheap compared to the level at which it should be trading. I believe the average gas company is engaging in production despite the fact that it can’t make money at current prices; and, ultimately, we may find that reserves are overstated and companies can’t produce at these prices.
TER: Then why produce gas?
PD: They’re doing it for a variety of reasons. First, they have commitments on leases that they must maintain, so they are forced into drilling those properties even though it may not be economic. Secondly, we’ve seen some alternative forms of financing emerge in the form of joint ventures (JVs) and other creative-financing techniques that are enabling these companies to continue their drilling programs. But I think, slowly, you’ll start to see the switch to more liquids-rich deposits by some of these producers. In order to sustain the production needed to meet demand, we’re going to need higher prices than those currently in the market.
TER: What are you doing in private equity?
KB: We have two entities that are the hardest to value but potentially the most exciting assets. Right now, very little value is being given to them in the Resource Corp. share price but, eventually, their value could be very large. These are the One Earth companies—One Earth Oil & Gas Inc. and One Earth Farms Corp., both of which are private. One Earth Farms is something we started working on in 2007. It’s taken a few years to get there, but we’re very pleased that it’ll be the largest farm in Canada and one of the largest farms in North America in 2011. It’s also positioned to be one of the largest farms in the world in the coming years.
One Earth Farms has synergistic cattle and grain operations. Its real goal is to change the typical farming model, wherein the average farmer buys retail and sells wholesale. By that, I mean he buys his equipment, fertilizer, etc., from a local dealer or store, and then sells his crop as a commodity at harvest time based on wholesale prices. With the size and scale we’ve already attained, we’ve established that we can buy wholesale. And now we’re working on the model that can allow us to capture some of the retail margin by partnering with food processors or retail outlets. It’s almost impossible to find good investments in the Ag sector, and there are very few corporate farms in which to invest around the world. We’re building one that, hopefully, will provide inflation protection, as well as food security for potential investors and partners.
By the way, One Earth Farms is, in our minds, the only way you can invest in Canadian farming in a large way. That’s because it is in partnership with the First Nations groups of Canada, which are federally regulated and permitted to allow public companies and foreigners to lease land. Typically, non-First Nations lands in Manitoba and Saskatchewan are restricted under provincial law from public company ownership or leasing or foreign participation.
TER: How will you exit this company in the end?
KB: I think that One Earth Farms is a company that ultimately will be highly valued and coveted by three different types of investors. First, large pension funds might find it very desirable for the inflation protection it could provide pension fund holders. Also, I think that the sovereign wealth funds and the Ag ministries of the world that are trying to get food security for their nations would find this to be very strategic. Lastly, we feel it would be valued by ordinary institutional and retail investors if it were publicly listed.
KB: Paul, would you touch on One Earth Oil & Gas?
PD: The One Earth Oil & Gas concept is related to that of One Earth Farms in that it’s in partnership with First Nations of Canada. On One Earth Farms’ management team, we have former Grand Chief of Saskatchewan Blaine Favel. He was instrumental in creating One Earth Farms. Through his relationships and knowledge of the First Nations sector, we’ve been able to sign agreements with a number of First Nations with the hope of developing some of the O&G prospects on their lands that have thus far remained undeveloped for a variety of reasons. We’ve managed to tie up a significant amount of acreage to date, both in Canada and in Montana. This year, we’re in the process of drilling some of those prospects and further defining some of their resources, and then we’ll bring on production through various plays.
KB: Just to clarify, when Paul says a “significant land package,” we’re talking about more than 300,000 acres and growing. We’re optimistic that we’re going to increase our optioned acreage. This is a very, very significant land package, which, in my mind, gives us an eventual opportunity to have real upside to oil and gas prices as we prove up the plays.
PD: Again, we’ve invested only about $10 million to date in this business. It’s another example of us starting a business for a very small amount of capital that could potentially be worth significant sums of money. The risk/reward, in my opinion, is exceptional.
TER: Kevin, you don’t have much faith in paper currencies. Do you foresee a time when people will be holding gold, silver or other metals in bank vaults and writing checks based on their value, or using a debit card based on the value of the resources they are holding?
KB: I think that we’re going to come up with different monetary instruments that are reflective of precious metal or other holdings. Sooner or later, I envision we’ll have a currency that may be reflective of a basket of commodities that we may trade in units tied to something tangible. Ultimately I think we could have an energy-based currency.
TER: I enjoyed meeting you both. Thank you.
KB: Thank you.
Kevin Bambrough founded Sprott Resource Corp. in September 2007. He is a seasoned financial executive with more than a decade of investment industry experience and is a recognized leader in the commodity investing space. Since 2009, he also has served as president of Sprott Inc., one of Canada’s leading asset managers, which has more than $8 billion in assets under management. Between 2003 and 2009, he held a number of positions with Sprott Asset Management, including market strategist, a role in which he devoted a significant portion of his time to examining global economic activity, geopolitics and commodity markets in order to identify new trends and investment opportunities for Sprott Asset Management’s team of portfolio managers.
Paul Dimitriadis is chief operating officer, general counsel and corporate secretary for Sprott Resource Corp., a position he has held since 2008. He evaluates and structures transactions; coordinates and conducts due diligence; and is involved in the oversight of the operating subsidiaries. He serves on the board of directors of Orion Oil & Gas Corporation, Waseca Energy Inc. and Stonegate Agricom Ltd. Prior to joining Sprott, he practiced law at Blake, Cassels & Graydon LLP. Mr. Dimitriadis holds an LLB from the University of British Columbia and a BA from Concordia University. He is a member of the Law Society of Upper Canada.
By The Energy Report, on February 11th, 2011
Philip Williams, Pinetree Capital’s VP of business development, says the spot price for uranium will likely explode above $100/lb. in 2011, much as it did in 2007 when it topped at $137. The good news, Philip says, is that even when uranium comes off its high, it will likely only fall to around $80. It’s around $73 now. If Philip’s right, we’re on the cusp of another round of uranium market madness. And you will want to read this Energy Report exclusive for some of Pinetree’s favorite uranium and lithium plays.
The Energy Report: In January, Macquarie Research said it expects the uranium spot price to reach $75/lb. in the first half of 2011 with the main driver being China’s growing energy demands. Where does Pinetree Capital Ltd. (TSX:PNP) see uranium trading at in 2011 relative to Macquarie’s forecast?
Philip Williams: We continue to be very bullish on the price of uranium. It’s had a very good run of late and we see that continuing for many of the same reasons that Macquarie does. I think for the early part of the year $75 is a good number, but it could surpass that substantially by year-end. By then, we think that the price will be at the $100 level and maybe even higher. We’ve got China doing quite a lot of stockpiling, especially on the spot market. We see the producers as being overcommitted right now. We also think that financial-speculator activity will come back to the market. All those events will culminate in a much higher price.
TER: The last time we saw a similar price spike in uranium was in 2007, when prices for yellowcake rose above $130 per pound. After that, prices dropped off dramatically. If these financial speculators are just looking for short-term money and getting out again, could we see a similar price drop?
PW: I think there are two things to think about. In 2006–2007, the uranium price was driven up mostly by financial speculators and I think they’re coming back into the market. When the run-up in the price was on, in some cases, a very small amount of uranium actually changed hands. With China’s recent uranium stockpiling, we’ve seen quite a lot of material go through the market at these prices. I think we’ll probably get a spike similar to the last one and it could be even higher, and then it will pull back. But I think we’re going to have a much higher base price this time than we did last time. After 2007, the price came back to about $40. I think it’s going to be substantially higher; it could be a price that falls back into the $80–$100 range.
TER: You mentioned China is stockpiling uranium, and China National Nuclear Corp. just received governmental approval to work on four new reactors. The European Commission just published a 10-year strategy plan that encourages development of nuclear energy as a means of clean energy. Japan’s Kyushu Electric Power Co., Inc. (TKY:9508.T) has submitted plans to build a third reactor at the country’s Sendai Plant, and India just brought a new reactor online. Where is North America in this global nuclear buildout?
PW: In a word North America is lagging. When it comes to nuclear, the U.S. is the largest generator of nuclear power with 30% of worldwide nuclear generation; but a reactor hasn’t been built in the U.S. in decades. While there are quite a few on the drawing board, only a handful is expected to come online by 2018. The real growth here is in the developing countries that you mentioned, China, India, etc.
TER: What’s largely responsible for the U.S.’ lagging nuclear growth?
PW: I think government policy is improving toward new nuclear energy but cost is still a big issue. Some of the numbers Macquarie recently published listed the cost of a new reactor built in China at about $2 billion versus $7 billion in the U.S.—that’s a huge factor. And natural gas-powered plants compete against new nuclear reactors. I think there’s still a lot of public opinion against new reactors being built. There are 104 reactors in the U.S. right now, so adding four is a very small growth rate compared to what’s happening in China and India. The U.S. was very successful on its first nuclear energy buildout but has since lost a lot of that technical knowhow, especially when it comes to building new reactors. Now, the U.S. is climbing back up that curve.
TER: Late last summer and into the fall, we watched big uranium producers like Cameco Corp. (TSX:CCO; NYSE:CCJ) and BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF) dip into the uranium market to meet their supply contracts because it was cheaper to buy uranium on the open market than bring on more production. What minimum price level is necessary for new uranium producers to be profitable?
PW: I expect the spot price will get to around $85 soon, and I think everything that’s in—or very close to—production will be profitable at that level. Lots of groups out there have done cost-curve analysis for future production that suggests we need a much higher number. It’s hard to give just one specific number but I think it’s at least $80/lb. It could even be higher depending on cost inflation. The next generation of uranium projects are lower-grade, more technically challenging and farther from infrastructure and major markets than most of the current mines. So, these new projects require a significantly higher uranium price to make them profitable. You need a higher incentive just to get them into production.
TER: But just a few months ago, we had $40 uranium. What’s going to sustain the uranium price at $80?
PW: You need to distinguish between the spot price and the term price. The spot price tends to be a lot more volatile. That price was $40 but the term price was above that at the time. Now, the term price is below the spot price. But it’s that long-term price that applies to new projects because a lot of these projects will forward sell their production into that price.
Fundamental supply and demand issues are ultimately going to sustain the price. Going back to that Macquarie report you quoted, we’re seeing a lot of strategic buyers like utilities from Asia and other places buying projects outright. At some point, it’s going to be very difficult to get production at any price because it will be all tied up. The end users will be integrated in such a way that they’re already contracted for any material produced. When you get into that type of environment, the price can be as high as it needs to be.
TER: But JP Morgan was far less bullish on the short-term price for uranium. It predicted uranium prices in the neighborhood of $60–$65 in 2011. Why is one big bank so much more bullish than the other?
PW: I think the difference, which Macquarie discusses in its report, is that they missed the China stockpiling. Again, you’re talking about what’s happening today between buyers and sellers that need material today—not what people are looking for in the future. When China comes in and buys close to 3,000 tons of uranium oxide in December alone, that really impacts the spot market. Because the spot market represents just a fraction of the total uranium required in any given year, it is subject to much more swings in price than the term price.
TER: How large is that fraction?
PW: I think it’s 20%–30%. Last year and the year before were particularly active years on the spot market. That’s what gives us the confidence that this move on the spot market is real and can be sustained because of the volumes that are trading on the spot market. The spot price is much more transparent; the term price is far less so. It’s a referenced price that’s provided by the pricing groups, but it’s not as transparent as the spot price in terms of where it might actually be on any given day. It could be higher; but until an actual contract transacts that meets those specific criteria, it doesn’t actually change.
TER: What’s the term price right now?
PW: About $73.
TER: As of Sept. 30, 2010, Pinetree Capital had 55 different investments in uranium. That accounted for 18% of your holdings. I dare say that that’s even greater now based on stock-price appreciation since then. Either way, that’s a sizeable bet on uranium. Could you tell us about your investment thesis and why you own so many positions in so many different plays?
PW: That September number also includes coal. We have one very significant coal position that represented a large portion of that amount and that’s Cline Mining Corp. (TSX:CMK). Cline has done great since the end of September and we think there’s a lot of potential there. As you pointed out, there have been some tremendous performances by the uranium stocks since September. We’ve always been big fans of this space.
We saw the long-term picture early on, or our Chairman and CEO Sheldon Inwentash did. This is a very simple macro argument—the world needs more electricity, especially clean power, and nuclear is in the best position to provide that. With that in mind, we wanted to have a big exposure to the uranium space, especially after the price pullback from $138 to $40. There were junior explorers and developers whose stock prices went so low that their value was basically being discounted to almost nothing. At that point, we decided to take a very proactive position in the space and rebuild the portfolio. We sold quite a few of our uranium names at the peak in 2007. We made a strategic decision to return early to the space and identified a number of juniors that were well positioned. I think our thesis has proven correct to this point.
TER: What are some of your more promising uranium holdings?
PW: We have a number of names. We focus mostly on the junior and the development-stage companies. We like names that have great assets but have been mispriced in the market and good management teams that can see those assets forward. Some of companies we are most bullish on would be names like Mega Uranium Ltd. (TSX:MGA), a long-held holding. It’s an Australia-focused uranium developer, and Australia has the most uranium of any country in the world. There are some mines in production now. A change in politics and philosophy in the country called for even more uranium mines. Mega’s Lake Maitland Project could be the very first, or possibly second, new mine to be developed. It’s in the feasibility study stage and soon the company will have some detailed information about the economics of that project.
TER: And it has a Japanese partner at Lake Maitland Project, correct?
PW: Yes, Mega has a very strong partner in the Japanese group JAURD (the Japan Australia Uranium Resources Development Co. Ltd.). And shortly it will be in a position to capitalize on the increasing price and shortage of advanced-stage uranium projects and companies. We’re excited about that one.
One of our names that’s had a tremendous amount of success in the last few months and really has just started to get a following is a company called Rockgate Capital Corp. (TSX:RGT). It has a growing resource in Mali, West Africa. We’ve seen a number of African names build and be taken over, including Mantra Resources Ltd. (TSX:MRU), which was taken over by Russia’s AtomRedMetzoloto (ARMZ) Uranium Holding Co., a Russian uranium miner that is wholly owned by Atomenergoprom OAO—a subsidiary of Rosatom and an extension of Uranium One Inc. (TSX:UUU) for a very attractive premium to the price that Rockgate’s trading at now. We’re starting to see monies that were invested in Mantra start to shift over to Rockgate as the company grows its resource. Rockgate’s recent financing puts the company in a very strong position to expand its resource and move its project ahead through economic studies.
One of the geographic regions we focus on that a lot of people have not is in South America. One of our key positions there is a company called U3O8 Corp. (TSX.V:UWE). U308 has projects in Guyana, Colombia and Argentina. This year, U308 is slated to expand its NI 43-101 resources at all of those projects by almost tenfold. We think there’s a lot of upside as other investors start to see South America the way we saw it two years ago—as the next frontier for uranium development.
One company in the U.S. is Energy Fuels, Inc. (TSX:EFR). We’ve been around that story for quite some time. What we saw last year was a very strong management team moving toward a new license to permit and build a mill in the U.S.—something that hasn’t been done for a long, long time. It paid off when the company successfully got that approval earlier this year. We think Energy Fuels is well ahead of the pack in terms of conventional uranium mining in the U.S. In the U.S., there’s a scarcity of uranium supply. We see Energy Fuels as a consolidator in the space. It’s just in a tremendous position to capitalize on what we think is a very strategic place to be in the U.S.
TER: And there’s some vanadium in the mix there on the Colorado Plateau.
PW: Yes, these Colorado Plateau projects, and even those in Utah contain certain ratios of vanadium to uranium. So, you get a nice kick from the vanadium byproduct, even though they’re still fundamentally uranium projects. Energy Fuels is well positioned to deliver new production and the first new mill permitted in the U.S.
Another one that we’re quite keen on right now is a company called Mawson Resources Ltd. (TSX:MAW; OTCPK:MWSNF; Fkft:MRY). This is in an interesting story because it’s much like Energy Fuels, but it’s actually uranium and gold. I would say almost freakishly high-grade gold and uranium. The company acquired a portfolio of projects in Finland from AREVA (PAR:CEI) last year. In prospecting at one of the projects, the company found probably the highest-grade gold and uranium anyone has ever seen on surface—over 20,000 grams per ton (g/t) gold in some places and more than 40% uranium in some places. It’s very early stage exploration at that project, but the company’s been able to delineate a 6 km. strike length to the trend at over 200 meters in width. These high-grade showings are pervasive across the trend and it’s never been drilled. It’s a new discovery with very limited work; but when you see those kinds of results on surface, it’s very, very encouraging.
TER: Does that mean Mawson is putting some of its other projects next door in Sweden aside for the moment?
PW: To a certain extent, yes. There’ll be some money spent on those projects but the bulk of the funds will be directed toward the Rompas Project, the high-grade uranium/gold project in Finland. Why? It’s the results. Mawson is waiting to get the final permits for a drill program that could commence as early as February. There’s just a lot of blue sky in that story and a lot to be learned about what could be there.
TER: Let’s move away from uranium, toward another clean energy commodity that’s getting a lot of play—lithium. Increasingly, lithium is being used in batteries to power electric vehicles (EVs). Those were nickel-metal hydride batteries just a few years ago, but now they’re mostly lithium-ion batteries. Lithium is also finding its way into some other new technologies. Judging by the number of investments that you have in lithium plays, Pinetree is betting heavily in its investment potential. Why did you get into lithium?
PW: A couple of years ago, we saw the potential in this space in terms of electric cars. Our analysis showed that even though some other battery types would fit into the mix, lithium would ultimately be the dominant player. There are a very small number of players that dominate on the production side; in fact, there’s a lot of room for juniors to come in and acquire projects—brine, hard rock or clay projects. You can acquire projects for relatively low costs and add a significant amount of value through exploration and development. We saw that as a great opportunity to make some very strong returns.
TER: Does Pinetree show a preference for brine versus hard rock lithium plays?
PW: We have in the past but we don’t like to make general statements about one type of project versus another. We really look at the individual investment opportunity. In some cases, the hard rock assets might be so mispriced that you could make a much better return even if you took a stance ideologically that the brines were going to be the better projects overall. For example, we’ve been quite positive on Canada Lithium Corp. (TSX:CLQ; OTCQX:CLQMF) even though we’ve spent most of our time focusing on the brines and names like Lithium Americas Corp. (TSX:LAC), Orocobre Limited (TSX:ORL; ASX:ORE) and others in South America. But really we try to find those mispriced or misunderstood assets where management has the wherewithal to move ahead, add value and realize the right price in the market.
TER: Yes, but some of those brine lithium deposits have potassium in the mix. If your processing circuit is developed properly, you could get potash as well as lithium.
PW: Absolutely. There’s tremendous opportunity in those kinds of plays.
TER: What are some that Pinetree is rather bullish on?
PW: Lithium Americas is at the top of our list. We’ve been involved in that story from the very early days, and it’s just blossomed into a tremendous story. It’s one of the largest brine deposits on the planet. The company’s made tremendous strides on the technical side, as well as understanding the economics. We’re going to see two major studies published this year with a prefeasibility study first, and then a feasibility study by year-end. The story has come together in a very short amount of time, but we see tremendous upside.
TER: And Lithium Americas’ Salar de Cauchari lithium project is not far from one owned by another company you mentioned, Orocobre.
PW: In fact, Cauchari and Orocobre’s Olaroz project are abutting each other.
TER: Given the proximity to each other, did Pinetree make its investment in Lithium Americas with an eye toward potential consolidation?
PW: In general, we always look for assets that we think will ultimately be consolidated or could be the consolidators. We certainly see that as something that should happen in that particular region. We’re not sure whether Lithium Americas will be the consolidator or not, but the company has tremendous partners and could easily go it alone. As I said, it’s one of the largest brine resources on the planet; so, it’s not a requirement but it’s certainly an exit that’s possible for LAC.
TER: Are you vested in Orocobre, too?
PW: We’re not a disclosed holder of Orocobre.
TER: Could you leave us with thoughts on how these clean technologies are influencing the mining sector and some of the opportunities they are creating?
PW: One area that we didn’t touch on is rare earth elements, which are used in a lot of cleantech applications. We also have quite a few investments in that area. We believe there will be strong opportunities in the cleantech space over the next few years for many reasons. China is dominating rare earths production, and finding supply outside of China is an absolute must for companies that want to be in those cleantech spaces. We’re tremendously bullish on rare earths, at least for the next year or two. Clean energy is certainly one reason we’re in the uranium space. When you stack up nuclear versus coal-generated power, uranium is a hands-down winner. We see more and more people getting behind nuclear energy, and it’s a great place to be vested.
TER: Thank you for talking with us today, Philip.
Philip Williams joined Pinetree Capital in January 2009 and was appointed to the position of resources analyst. Philip brings almost 10 years of financial market experience to the company. Prior to joining Pinetree, he spent five years working for several institutional brokerage firms in the equity research department. Most recently, he was a uranium analyst focused on companies with advanced development projects in Australia, the United States and Namibia.
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