The Energy Report: Your list of buy ratings wouldn't be this broad if you weren't still bullish on the spot price of uranium. Are you bullish? If so, what factors are causing you to be?
David Talbot: Yes, I am bullish on the spot price of uranium. I think it's all about demand this time. I believe that in the past, investors were essentially focused on supply disruptions as the driver for uranium prices. This time around, I think the demand fundamentals are strong and people are paying attention to that. If you take a look at the trendlines of the number of reactors that are in operation and that are being planned, built and proposed, this continues to rise month after month without exception.
If you look at China, India and Russia alone, these three countries account for about 50% of the reactor build. China currently has 13 reactors in operation, which is about 2% of their electrical production capacity. But it has 27 reactors that are under construction, 50 in the planning stages, and it has plans to grow that number to about 188 reactors by 2020, which would represent about 7% of its electrical production capacity. This could essentially increase the country's uranium use from its current annual 8 million pounds (Mlb.) to about 45–50 Mlb., which is roughly equal to what the U.S. uses today.
But the story doesn't really stop there. Russia's goal appears to be nuclear power domination, and the country is essentially signing high-level trade agreements with foreign governments. Russia also went after Uranium One Inc. (TSX:UUU). Also, countries like Japan and Korea are building out their nuclear power efforts. So, we believe this access to supply is going to become a real concern for many and that uranium prices are likely to continue to rise. I'm assuming $65/lb. U308 price for 2011, $70/lb. next year, $75/lb. for 2013, $67/lb. in 2014 and $65/lb. thereafter.
TER: Uranium bounced along a $40/lb. baseline for a long time, and during this last six months we've seen an amazing increase in price. Have you seen such a spike before?
DT: I would have to say that the increase in 2006–2007 was probably a larger spike. At that time, the uranium price essentially jumped from $40 to $136 within a year's time. Then, everybody was looking at the spot price. Well, in 2007 spot trading was only about 20 Mlb., or only 8% of the total volume of uranium trades. This time around I think it's a little different. The spot market is much, much bigger—about 50 million pounds, which represents about one-third of the entire market.
TER: Do you believe this is a more sustainable rise than we've seen in the past?
DT: Absolutely. I think it's more sustainable. Last time around, a lot of that speculation also hinged on some of the supply side disruptions—namely Cigar Lake and Ranger. So, this time, not only is there a larger, more robust spot market, it's really the demand that's driving price increases—not supply disruptions.
TER: How does the economy affect the uranium industry? We're in recovery now, but what would happen if we had a double dip?
DT: First of all, the nuclear renaissance really didn't take a break during the credit crisis of 2008 or the economic weakness since. As mentioned before, the trendline showing the number of reactors in operation, and being built, planned and proposed continues to rise month after month without exception. Utilities are notorious for their long-term outlook and, ultimately, another recession probably wouldn't impede their outlook or their uranium requirements.
TER: Do you believe some companies in your coverage universe are more sensitive to economic conditions? And what would those be?
DT: Yes, with an expanding economy I think generalist demand for equities would likely pick up. They often look for new areas to invest their money. We saw this inflow of new money move into the sector quite significantly last November after 52 million pounds worth of the China-AREVA (PAR:CEI) long-term contracts were announced.
Generalist investors often manage larger funds and have greater volumes of cash to place; out of necessity, they're drawn to the large-cap, more liquid names like Uranium Participation Corp. (TSX:U), Cameco Corp. (TSX:CCO; NYSE:CCJ), Paladin Energy Ltd. (TSX:PDN; ASX:PDN) or Uranium One. So, I would say the large-cap stories would be the first ones that would benefit. But typically we all see that trickle-down effect—the smaller stocks, the developers, the explorers also tend to benefit.
TER: What if we were in an economic decline? What companies might suffer from that?
DT: In a declining market, I think the smaller, illiquid names would tend to decline a little more. A lot of those companies are dependent on equity financings to sustain their exploration programs or development programs.
TER: Please compare investment opportunities within the developers versus the explorers.
DT: Developers typically have a certain level of drilling, probably a resource and perhaps at least a scoping-study level report on the project. There may be some visibility as far as the ultimate size of the project the company might be working with, and quite often management teams are bolstered with experience and depth.|
This provides a certain level of comfort for investors, and they may be willing to give up some stock performance for a lower level of risk or assurance of future cash flow, you know, the necessity that a mine will be built. But with the exploration stocks, some of these variables aren't so clear.
TER: Why don't you put target prices on exploration stocks?
DT: I think what it comes down to is that you don't actually have a resource estimate. You definitely don't have a scoping-study level report on the project and, ultimately, you don't know how big that project is going to be. So, for instance, if you were to value one of those early stage projects by throwing an arbitrary target price on it, it may not do justice to the company. I think you really need to wait until you get a bit more information and data before you can start actually running a proper discounted cash flow (DCF) model or even a simple pounds-in-the-ground model.
TER: China has announced that it has the capability to reprocess spent fuel. How does this bode for uranium demand and price?
DT: We believe this news should have no effect on the current supply/demand situation. I don't necessarily subscribe to this recent hype in the media but if this technology is real, its implementation is unlikely for another 10–15 years or more. Fast breeder reactors have been on the drawing board for years, but they're probably not going to be implemented on a commercial scale until perhaps the 2020s or 2030s.
Furthermore, fuel reprocessing is not really a new technology. It's currently being used, mainly in Japan, the UK, France and Russia. The resulting mixed oxide (MOX) fuels, which essentially are blends of natural and reprocessed uranium that contain more than one type of oxide of fissile material, account for about 3% of world nuclear supply right now. So, China's announcements that it has the potential to stretch this uranium by 60-fold are not necessarily believable.
TER: You had some companies that you wanted to talk about?
DT: There are three stocks at the top of the list—Rockgate Capital Corp. (TSX:RGT), Hathor Exploration Ltd. (TSX.V:HAT) and UEX Corp. (TSX:UEX). First of all, Rockgate Capital is one of the darlings of the sector, but we are restricted on the stock at this time. Its main project is the Falea project in (Republic of) Mali in western Africa. It now hosts 27.8 Mlb. of U308 and 40.6 million ounces (Moz.) silver following its recent resource estimate update. The uranium-silver combination isn't that common today, but it has the potential to improve economics of the potential operation here. We saw a large improvement in the average grades of both uranium and silver, and we're looking forward to seeing a scoping study later this quarter.
TER: By the way, congratulations on that. It was $0.72 when you initiated; that's more than a 200% return.
