Monday, April 15, 2013

Don't Miss Uranium's Spike: Outlook, Drivers, Japan, Value, Uranerz -

Uranium Outlook

Evidence supporting uranium's imminent revival continues to build. You wouldn't know this by looking at the U3O8 spot price—still barely above its November lows—currently at $42.25 per pound. However, longer-term uranium prices and forecasts tell a different story of robust fundamentals, reflecting both growing demand and tightening supplies worldwide.

We have written about several large uranium developments that have been deferred and likely not going ahead until prices double. A recent 28-page Uranium Market Outlook analysts' report seems to support this view. They also see China's rapidly growing nuclear industry as the main uranium demand driver through 2020, and that the existing production base is insufficient to satisfy demand growth without substantially higher prices—needed to motivate more exploration and production.

In addition to the many new mines already mothballed or delayed due to low prices, supply will further tighten materially—around 24Mlbs. or 13%+ of the 180Mlbs. consumed worldwide in 2012—as the Megatons to Megawatts HEU program ends in 2013. The only major incremental new supply expected is (NYSE: CCJ)(TSX: CCO) Cameco Corp.'s Cigar Lake mine that is ramping up this year—but this will only partially offset the impending uranium supply gap.

The report forecasts uranium prices improving later this year—more than 14% over the current spot price. In 2014 this moves up to $65lb., for 2015-2016 they estimate $75lb., and $80lb. for 2017-2020. For U3O8 term prices they estimate $75lb. next year, $80lb. in 2015-2016, and $85lb. in 2017-2020. For the market to balance, by 2017 they expect $80-$85lb.—about double today's spot, like we said.

Uranium Drivers

From a timing perspective, our February 4th and March 10th newsletters outlined eight potential uranium catalysts. On the supply-side, these range from uneconomic prices causing additional mine delays and deferments, to the world's current 40Mlb. uranium mining deficit widening 60% after Russia is done with HEU down-blending.

Two events that haven't impacted spot prices as much as I expected were when Kazakhstan—world's largest uranium producing country—experienced severe damage to power lines over the winter that some thought could impact supply by as much as 2.4-3.2Mlbs. this year. Then there's the intensifying military actions in Mali, West Africa, with France's involvement—presumably to protect Areva's mines next-door in Niger that will produce close to 11Mlbs of uranium in 2013.

On the demand side, catalysts range from nuclear power growth—435 operable reactors, increasing to 983 including those under construction, planned and proposed, to stockpiling—major producers, utilities, China and others, to increased M&A activity—(NYSE: RIO) Rio Tinto's CA$654M takeover battle for Hathor Exploration, this year's ARMZ buyout of the rest of (TSX: UUU) Uranium One, and (TSX: DML)(AMEX: DNN) Denison Mines buying (TSXV: FIS) Fission Energy.

Japan, Uranium's Surprise—Again

Japan's March 11, 2011 record earthquake and tsunami caused the Fukushima power plant accident—the primary catalyst that turned a then hot uranium market instantly on its ear. Uranium investments have suffered since, as have the Japanese people with frequent power blackouts, higher energy prices, trade deficits replacing surpluses, and more pollution—from importing and burning more fossil fuels.

We've been bullish on uranium since before Fukushima, and continue to see the resulting sell-off as a deep dip within a long-term up-trend. The market seems more acceptable to this thesis now, although it continues to hesitate—regardless of how many catalysts there are—perhaps because nuclear power plants take years to approve and construct.

However, perhaps they are also forgetting that the 2011 uranium boom-bust—and I believe soon to boom again—cycle may have completed last December. Japan again has a pro-nuclear government, with 50 operable reactors, 3 under construction, 9 planned and 3 more proposed, as of April 2013. With only two of their large fleet of operable reactors back online, Japan has the potential to spike the uranium market instantly with a simple policy change statement.

Think about the market impact of Japan—where the current uranium bear-market started—totally changing tack to allow these 48 idle but operable nuclear reactors to restart faster. Stricter regulations with safety upgrades are to be expected, but the point is to picture how long it takes to build a nuclear reactor from scratch compared to turning a switch on again.

This type of speculation can't accurately—or likely at all—be factored into analysts' uranium price forecasts, as nobody knows when or how this may play out. It's a wildcard that on its own could turn the uranium market around in a heartbeat. Watch closely for any indications of Japan putting more of their reactors back online faster than expected—and how uranium spot prices react.

Fukushima—What Radiation?

Opponents of allowing Japan's reactors to be put back online faster—or at all—will continue to raise fears of radiation. They will point to the almost 20,000 lives lost, including 3,000 missing—though most of these deaths were from drowning. The fact is that not a single person died from radiation.

Here's the link and a few snippets from a Stars and Stripes article published last month on the two-year anniversary titled, "Fukushima radiation proves less deadly than feared":

... "Even considering the upper boundary of estimated effects, there is unlikely to be any detectable increase in cancers in Japan, Asia or the world except close to the facility, according to a World Health Organization report. There will almost certainly be no increase in birth defects or genetic abnormalities from radiation.

... Rather than stand as a warning of the radiation danger posed by nuclear power, in other words, Fukushima has become a reminder that uninformed fears aren’t the same as actual risks.

... People naturally worried about eating fish from the ocean around Fukushima, and stringent mitigation actions were taken. Bluefin tuna caught off California six months later were found to have traces of cesium-137 from Fukushima, though less ounce for ounce than the amount of radioactive potassium-40 found in a banana.

... Japan has few domestic energy resources and depends on imports for about 85 percent of its energy. What price will the country pay if it abandons nuclear energy and uses only fossil fuels? Air pollution from coal-fired power plants causes about 500 times more deaths per unit of electricity produced than radiation from nuclear plants does. Electricity produced from oil isn’t much safer. Even natural gas causes about 60 times more deaths than nuclear does because of pollution. And consider that more than 100,000 coal miners died in the U.S. in the past century and more than 6,000 die every year in China.

If, in response to Fukushima, Japan switches to more fossil fuels, the resulting carbon dioxide emissions, greenhouse gases and global warming could affect all of us. Already, because of the nuclear shutdown since the accident, there is no longer any chance Japan will meet its commitments in the 2009 Copenhagen Accord to cut greenhouse-gas emissions from 1990 levels by 25 percent by 2020. The country’s 2012 estimate for greenhouse gases is about 1.3 billion tons, the most since 2007, making Japan the fifth top emitter worldwide." ...

Why Wait Until After Uranium Spikes?

By looking at most mining share prices and trading volumes these days, it seems there's no rush and that investors are content to wait and watch for higher commodities prices to lead—not just for uranium but also other precious, base and rare earth metals. But what if any of uranium's catalyst events intensify and shoot up U3O8 prices before 2014? Why miss uranium's next big move?

While I agree that timing any absolute bottom is usually a mugs game, for uranium it has to be close. Even if you discount all of the above as already in-the-market—with prices staying where they are for another year—this would then likely lead to even more consolidation, even fewer players, with even tighter supplies. More M&A activity alone tends to ignite investor interest.

The bottom line is, how long can spot prices remain this low—with such a tight uranium market? While these catalysts are starting to be recognized and worked into analysts' 2014 forward U3O8 projections, anyone looking at the huge spikes in past uranium price charts might also be asking if they should wait or act now?

As a side-note about Fission Energy, and as a wakeup to those convinced that junior mining is dead money—regardless of the news—the hottest play on the TSX Venture Exchange this year has been uranium exploration. Fission—and it's 50% JV-partner (TSXV: AMW) Alpha Minerals—has reported several holes with off-scale radioactivity at their PLS uranium discovery in the Athabasca Basin.

Alpha has been the most posted stock on our homepage's live Filtered Mid-Day Market Movers area, with both stocks posted regularly from mid-February to the end of March—and in our Weekend Recap newsletters. V.AMW has come from its $0.40 November low to a high of $5.10—more than a 12-bagger in less than 5-months. V.FIS—added to our Top 30 Small-Caps in November at $0.35—recently traded as high as $1.26, up 260%. Both stocks are respectively 28%-23% off their March 26th-25th highs, and their current 9-10,000 meter winter PLS drill program is winding down.

Strategic Value Positioning

While momentum players continue to chase the major markets' next higher-highs ledge—like lemmings, contrarian investors of beaten-up uranium and other mining companies need to focus on value. However in any downtrend—like mining since 2011—finding undervalued stocks is usually not enough as they often get even cheaper. As they say it's like catching a falling knife, so you need to be patient and prepared to pick even lower spots when to nibble again—over time.

Slowly building positions in a downtrend may provide levered returns later as the mining cycle finally turns higher again. The objective is to then have a meaningful position at as low an average cost as possible. To instead wait for the market to turn higher-first usually means paying more for fewer shares—as the first move is often fast and the biggest in percentage terms.

Stock picking is especially important during a downtrend. Investors need to be as concerned with Return-of-Capital as with Return-on-Capital. For balance and liquidity, never over commit to any single investment—no matter how cheap it seems—and always keep some powder dry.

Pure exploration plays can be exciting for a while, but when talking about value in a down-market you need to consider all the time and costs involved to turn a discovery into a National Instrument 43-101 Resource, and through the Preliminary Economic Assessment, Bankable Feasibility and Regulatory Permits stages. For me—to qualify as value—a company should have a qualified resource at the permitting stage, with management experienced in building mines and not desperate for cash.

Major producers qualify and seem attractive as they are close to their 5-year lows. However quality development stage uranium companies have been beaten-up significantly more and may offer even greater value. For safety's sake, focus on companies in an established mining district, with a fully permitted mine that is in construction and expected to be producing in the near-term.

Uranerz Energy

We have mentioned some of these companies before, including our featured uranium stock (AMEX: URZ)(TSX: URZ) Uranerz Energy Corp. URZ' first ISR mine—Nichols Ranch—is located in the prolific Central Powder River Basin of Wyoming—WY and the PRB produces more uranium than any other U.S. state. Uranerz' last NI 43-101 resource report shows over 19Mlbs. U3O8—from only 7 out of 30 projects explored so far, on the company's 80k acres in the PRB.

Uranerz' management has a history of financing, finding, permitting, building, operating and even selling uranium mines. Nichols Ranch is now in the final stages of construction, with production expected to commence sometime this year. Last October the company received its Deep Disposal Well permit—the last authorization required to begin operations and commercial uranium production.

Since that release, the company's news flow has been somewhat quiet and URZ' shares have sagged with most uranium stocks—from around $1.70 then, to around $1.00 today. The only other announcements have been administrative, being their Q3-2012 financial results, and an accounting adjustment in how certain construction costs were treated as an expense rather than capitalized—restated in their 2012 year-end financial results that were released on March 28, 2013.

Uranerz' year-end financial summary shows $7M cash and $5.7M working capital. Last November the Wyoming Business Council (WBC) recommended approval of the company's application for a $20M low-interest loan under the state's Industrial Development Bond financing program. Final approval is subject to the completion of due diligence and satisfaction of various state approvals.

Based mainly on digging around the WBC's website:, my understanding is that this loan has been approved by the WBC, Johnson and Campbell Counties Wyoming—where URZ' mine operations are located, and by an independent consultant—Behre Dolbear & Company—which has completed its assessment to validate the economics of the Nichols Ranch mine.

Unless I'm missing something, the only other approvals are for Wyoming's governor, attorney general and state treasurer to sign-off. Perhaps an update or some other type of financing announcement might be in the works soon—as it has been five months since Uranerz' last new release about this loan.

Now that winter is over, we might also see URZ' news-flow heat up again with mine construction updates, and when the company expects to be drilling its deep disposal wells. I'd also like to know how they plan to follow-up on last year's discovery of a new uranium trend at their Monument Project, and any other drilling plans for this year.

Several reports suggest that URZ is an attractive takeover candidate for uranium mining companies already producing around Uranerz' properties—or by other majors looking to enter the PRB. We remain focused on the company's potential value as mine construction completes—as analysts start to re-rate URZ as a producer—and as additional feedstock resources are explored and developed.

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1 comment:

  1. I think Energy Fuels -- EFR.tsx has serious potential.