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David Talbot: Uranium and Lithium Demand Powers Stocks

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David Talbot Mining Analyst David A. Talbot remains bullish on uranium and sees growing demand for lithium. In this exclusive interview with The Energy Report, he tells us why he believes the nuclear plant building boom will continue worldwide despite the recent setback in Japan. He has positive expectations for select stocks in both arenas.

The Energy Report: Thank you for joining us today David. You last spoke with The Energy Report in late January about the uranium market and the nuclear industry. Two months later we had Fukushima. What is your analysis of the current state of affairs with nuclear and uranium?

David Talbot: We remain bullish on the spot price of uranium. In January, we said it was all about uranium demand and it largely still is. The demand picture hasn't really changed as much as the general media portrays. We might see uranium demand decline about 5% to 10% from where we predicted, by about 2020. But, we still expect about 240 to 280 million pounds (Mlb.) of demand per year by then, which is really about an increase of 30% to 55% from here.

Worldwide, 440 reactors are in operation, 61 under construction and 154 planned. Most of the sentiment over the past several months was driven by emotion and fear and reaction to what is being shown on the news rather than reason. Take Germany, Switzerland and Italy for example. Much of the mainstream media portrays Germany's anti-nuclear stance as the death knell for the industry. People don't understand that as recently as last September, Germany was preparing to get out of the nuclear power industry and did a sudden about face at that time by extending the deadline.

Looking at the numbers, the effect of Germany's shutdown won't be as bad as most think, either. Germany's 17 reactors only use 5% of current demand. This was expected to decline to about 3% by 2020. Switzerland only has five reactors and 1.4 Mlb. of annual requirements. That's less than 1% of world uranium demand. Italy, no reactors, none under construction, none planned. We do believe there will be cancellations and delays, but many of those countries were either on the fence to begin with or really just have smaller nuclear programs.

China, India and Russia alone account for about 50% of the new reactor build and they're all on board. India just announced that its new liability laws are due by the end of the month. This will likely kick start the nuclear build in that country. Saudi Arabia had 16 proposed reactors, which was a pleasant surprise in the land of big oil. That news essentially negated Germany's news in the long-term. Plus, strong support out of the United Arab Emirates and the announcement of new build in the U.K. were positive signs.

TER: Are there really any viable alternatives to nuclear?

DT: Not when it comes to a green alternative. Coal and oil definitely have their environmental drawbacks, even with scrubbers. So does natural gas even though it's currently favored by the green movement. The other alternatives just can't handle base load like nuclear.

TER: So what do you predict for the uranium market in the coming year or two?

DT: I believe supply is more of an issue today than it might have been about six months ago. Development companies need higher prices to make their projects economic and attract the investment they require. Without higher prices we likely won't see a lot of the new mine build that is being forecasted.

We forecast uranium prices between $65 and $75/lb. over the next couple of years, particularly as the HEU Agreement (Highly Enriched Uranium), or the down-blending of Russian nukes goes offline in 2013. Spot prices should strengthen later this year from $53.75/lb. right now. Uranium's term price is still at $68/lb. according to Ux Consulting, which publishes world nuclear fuel prices. It's only off about 7% since March 11th, which is telling us that the utilities are still buying. That's really the price that we should be watching rather than the spot price.

We often use Uranium Participation Corp.'s (TSX:U) price:NAV (net asset value) ratio as a proxy for uranium market sentiment. After almost four months of trading at over a 10% discount to its NAV, we now see only about a 5% discount to that NAV. We've got a buy and a CAD$9.40 target price on Uranium Participation.

Uranium stocks sometimes lead the uranium price. We saw that during the last cycle and we're starting to see some of that again with stocks that sold off too far and are now bouncing back. The developers and the smaller stocks should rebound a bit more quickly than some of the larger caps or producers. It may take some time to get the general investors back into the sector in any meaningful way, although lately, and much to our surprise, we have noticed that many who got into the space in November 2010 after the AREVA-China contracting news are still kicking the tires on the sector. In the meantime, some resource funds may come in and target smaller companies with potential for substantial capital gains but they'll likely target the better companies first.

TER: In January, you talked about three uranium companies that were at the top of your list: Rockgate Capital Corp. (TSX:RGT); Hathor Exploration Ltd. (TSX.V:HAT) and UEX Corp. (TSX:UEX). What's the story now?

DT: Not much has changed. All three companies have very good projects. All three remain at the top of the list. Rockgate is my top pick right now with a buy and CAD$4 target price on the stock. The stock is up about 66% since June 20th when the sector turned upward. It was fairly hard hit by Fukushima. Rockgate is working on its 100%-owned Falea project in Mali. That's a uranium-silver-copper deposit. It shows amongst the highest grades, up to 6.5% U3O8, that we've seen outside of the Athabasca Basin. It has a resource of about 28 Mlb. of uranium and 41 Moz. silver, which is likely to grow through aggressive drilling. We're expecting a comprehensive preliminary assessment report this month. This should give us further comfort regarding metallurgy of this high-grade uranium-silver-copper resource with potential for low-cost, long-life uranium and silver production. We just think the stock is undervalued and see a triple from here.

Hathor is a buy here with a CAD$5.60 target price. This stock is unique on the sector. It's up significantly, almost 92% up since March, is even up 3% since before Fukushima and back to the levels that we saw last November. We still think there is more room to go. It has joined the TSX. It has a new very strong management team that has over-delivered. And it is currently buying out its partner at Roughrider to own 100% of the property. Resources for a second zone were just announced and a third zone discovered. The second resource estimate announced in May brought the entire project to about 58 Mlb. If you look at just the high-grade portions of the deposit, you can really see about 54 Mlb. grading 12%, making this the fourth-highest grade uranium deposit on the planet. That should turn some heads and, we think, essentially make Hathor a potential takeout target. That is one of the main reasons the stock has been performing so well.

For UEX Corporation, we've got a buy and CAD$3 target price on this stock. The stock is up 16% over the last two months. It was also very hard hit by Fukushima. UEX actually started to rally earlier than most of its peers. It started going up about six weeks ago. This is a tale of two stories. It's about the Shea Creek joint venture with AREVA (PAR:CEI) and the third-largest uranium deposit in the Athabasca at 88 Mlb. Mineralization is open in almost every direction and we see high potential to expand. In the east, the company wholly owns the Hidden Bay Project. This is the sixth-largest undeveloped resource in the Athabasca Basin with about 40 Mlb. The preliminary assessment came out positively. It has a modest cash operating cost and capex (capital expenditure). This company has potential to toll mill its uranium at a couple of existing uranium mill facilities, including Cameco Corp.'s (TSX: CCO; NYSE: CCJ) Rabbit Lake Mill, which is located about 4 km. away from the project. Cameco already owns about 22.6% of the company.

TER: What do you think the prospects are for a lot of these smaller companies that are out there looking for uranium? How feasible are these prospects?

DT: I think that investors are now entering the small cap companies with good projects, but some of those microcap stocks haven't started to move yet. Therein is the opportunity. For example, take CanAlaska Uranium Ltd. (TSX.V:CVV; OTCBB:CVVUF; Fkft:DH7). CanAlaska is in our Mineral Exploration Watch List, we have a buy rating with no target price. We have been following it for quite some time and it seems to be a bargain right now with a market cap of about $14M. It is a grassroots explorer with one of the largest exploration portfolios in the Athabasca Basin. I personally like high grades and that is why I like the Athabasca. CVV has formed joint venture agreements with Japanese and Korean strategic partners, raising about $42M through such partnerships to date. It has between 25,000m and 30,000m of drilling planned through 2011. The key focus is going to be the Fond du Lac Project located on the northern edge of the Athabasca where the company recently found 0.5% over 2m. We see potential to follow-up on that hit.

TER: Another area that you've been quite hot on is lithium. That's become a popular metal here in the last several years as the electric automobile business has taken off and lithium batteries are being used in all sorts of applications. Can you give us a review of that general market and what's going to happen there?

DT: Certainly. I believe the lithium industry is fairly concentrated. About 80% of world production is in the hands of the four largest lithium companies, Sociedad Química y Minera de Chile S.A. (NYSE:SQM; SSX:SQM-B; SQM-A) Chemetall, a division of Rockwood Holdings Inc. (NYSE:ROC), Talison Lithium Ltd. (TSX:TLH) and FMC Lithium Corp. (NYSE:FMC). World production is now roughly 120,000 tons per annum (tpa) of lithium carbonate equivalent. Actual capacity is closer to 180,000 tpa. New projects scheduled to come online in the next few years could perhaps add another 100,000 tpa. As expected in any fledgling industry, technical and permitting challenges could result in postponements. So, we might see some of those newer projects encounter a little bit of difficulty getting off the ground. Lithium carbonate demand appears to be growing somewhere between 7% and 15% annually. By 2020, lithium carbonate demand might reach as high as 240,000-270,000 tpa. If electric vehicle penetration picks up as expected, primarily in Asia or China, we could see a true renaissance that might help keep up with the potential production coming online.

TER: Is there potentially more supply than there is demand?

DT: I really think that remains to be seen, but there is that risk. China right now has about 100,000 electric vehicles and the country is striving for about one million by 2012 with 5 to 10 million by 2020. It has programs that urge first-time buyers to purchase electric vehicles of all kinds—cars, motorcycles, mopeds or e-bikes. We definitely see electric vehicle use increasing in China. So, it comes down to how well a retail product is adopted by the masses. We do think it will be adopted, but to what extent? We're not quite sure. Outside of Asia, a lot of hype is going on in Europe and North America. No one knows how quickly people in those countries will adopt new electric vehicles.

TER: How does potential demand affect the price of lithium or is that a contract market worked out by suppliers and buyers?

DT: Yes. Lithium prices are based on really long-term contract pricing between the buyers and the sellers and well disseminated to the public. However, the general consensus is that prices weakened around the financial collapse and really have just started recovering in the last few months. Prices right now are bouncing around $5,000/ton of lithium carbonate equivalent (LCE). Recent announcements by two of the four large producers, FMC and Chemetall, indicated their prices are going up by about 20% starting in July to over $6,000/ton. We use about $5,500/ton LCE for our forecast, which really is at the lower end of some of the studies out there and possibly below where a couple of the large producers are selling.

TER: You wrote a report dated June 9th, on the lithium industry where you described some companies you feel have pretty good prospects. Can you talk about some of those for us?

DT: Certainly. There are two fairly small companies in particular that I like at this time. Our top pick in the lithium sector is Rodinia Lithium Inc. (TSX.V:RM; OTCQX:RDNAF), despite its $30M market cap. We've got a buy with a CAD$1 target price on this stock. RM continues to be one of the most undervalued stocks on our lithium coverage list. Rodinia is developing a brine project at its flagship Salar de Diablillos site in the Province of Salta, Argentina, about 11 km. from the world's second-largest producer, FMC's Salar del Hombre Muerto. It just reported a couple of pit samples that were about three times the average lithium grade of the deposit. Rodinia also has its Clayton Valley Project in Nevada adjacent to Chemetall's Silver Peak brine operation and the only U.S. producer of lithium. Given the company's significant resource in Argentina, good brine chemistry, lack of competition on the Salar and its three aquifers, we think now is a good entry point for investors looking to share in Rodinia's growth. Our target price suggests a triple from here.

TER: And the other one?

DT: Nemaska Exploration Inc. (TSX.V:NMX; OTCQX:NMKEF) is located in mining-friendly Québec. We've got a buy and CAD$1.10 target price on it. Nemaska's hard-rock Whabouchi Project is expected to start production in 2012. It has a high-grade resource of 29 Mt. of ore grading over 1.5% lithium oxide. So, this is one of the higher grade lithium oxide pegmatites in the world. Not as high grade as Talison's in Australia, but it definitely does the trick. Nemaska anticipates production of a 6% lithium oxide concentrate that it could very quickly export to China where it has a strategic alliance with China's largest lithium battery materials provider Tianqi Lithium, a company that already owns 10% of Nemaska. Its projected initial gross margins are estimated in the 50% range based on a preliminary estimate from earlier this year and a modest $86M capex. This project has good infrastructure, support from the provincial government, the local native community and we think this is a good way to participate in short-term lithium concentrate production potential.

TER: Do you see any technological developments on the horizon that could significantly impact the lithium market, either negatively or positively?

DT: I think most of the technical advancements are going to be positive. The term "lithium-ion battery" actually comprises a range of battery designs. Many of them are still experimental and research is underway. But really, designers are looking to improve lithium's already high-energy density, take advantage of its ability to hold a charge and its lack of memory effect that allows it to recharge over and over again. But failure to reduce costs while maintaining and improving safety and durability could hamper growth prospects for electric vehicles. That would be a negative for the industry in general. Now, beyond vehicle applications, we may start seeing some lithium batteries being used for large-scale electrical storage. Single batteries storing dozens of megawatts might power a small town or factory. That application could potentially drive demand further.

TER: Is there any competing technology on the horizon that could knock lithium out of the market at some point?

DT: Not when it comes to the smaller applications. Lithium is pretty light. It's ideal for use in iPods and laptops. And because it's light, I think it'll be used more in vehicles. When it comes to long-term storage applications, vanadium could be substituted.

TER: Do you have any final thoughts you would like to leave with our readers?

DT: To summarize, we're bullish on the prospects for the uranium sector. Because of the undeniable long-term demand, we are on course for a uranium shortage by the year 2014. We expect that uranium prices will begin to reflect that situation. Beyond that, we do see a little bit of a rally here in the uranium stocks. We think that they are definitely undervalued. And, we've seen some pretty good news lately. The U.K. is expanding its fleet of reactors, which is a very positive signal to the market, and the Indian nuclear build is finally getting its own kickstart.

In the lithium space, we're optimistic demand will continue to increase in the manufacturing of greases, glass and ceramics. But we really think it will explode in the lithium-ion battery segment where small batteries, laptops and iPods will be joined by growth in electric vehicle and large-storage batteries. We will keep an eye on supply over the next few years.

TER: So, as far as you're concerned, things generally look pretty positive and this looks like a good time for people to be buying. Is that right?

DT: Absolutely.

TER: Well, thank you very much for taking time out of your busy schedule. I'm sure that our readers will find this all very interesting and hopefully, useful.

DT: I appreciate the conversation.

Dundee Securities Senior Mining Analyst David Talbot worked for nine years as a geologist in the gold exploration industry in Northern Ontario. His field experience included three years with Placer Dome and six years managing projects for Franco-Nevada Corp. and its successor, Newmont Capital. David joined Dundee's research department in May 2003; in the summer of 2007 he took over the role of analyzing the fast-growing uranium sector, and has since launched the lithium sector. David is a member of the Prospectors and Developers Association of Canada, the Society of Economic Geologists and graduated with distinction from the University of Western Ontario with an Honours B.Sc. degree in geology.

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1) Zig Lambo of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: CanAlaska Uranium Ltd., Talison Lithium Ltd., Rodinia Lithium Inc.
3) David Talbot: I personally and/or my family own shares of the following companies mentioned in this interview: CanAlaska Uranium Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: None.

David Talbot has visited certain material operations of the following issuer(s): Hathor Exploration Ltd., Nemaska Exploration Inc., Rockgate Capital Corp., Rodinia Lithium Inc., and UEX Corp.

David Talbot and/or Dundee Securities Ltd. has been partially reimbursed for expenses by the following issuer(s) for travel to material operations of the issuer(s): Hathor Exploration Ltd., Nemaska Exploration Inc., Rockgate Capital Corp., Rodinia Lithium Inc., and UEX Corp.

Dundee Securities Ltd. has provided investment banking services to Rockgate Capital Corp., Hathor Exploration Ltd., UEX Corp., Rodinia Lithium Inc., and Nemaska Exploration Inc. in the past 12 months.

Dundee Securities Ltd. and/or its affiliates, in the aggregate, own and/or exercise control and direction over greater than 10% of a class of equity securities issued by Rockgate Capital Corp.

Garth MacRae, a director of Dundee Capital Markets Inc., Dundee Corp., DundeeWealth and Dundee Precious Metals Inc., is a director of Uranium Participation Corp.

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