The Energy Report: Alka, how robust is the global supply of uranium fuel?
Alka Singh: There are 433 operable nuclear power reactors around the world. Annually, they consume 177 million pounds (Mlb) of uranium. The world does not produce that much yellow cake. Last year, production was 130 Mlb. Much of the supply gap is currently being filled by the Highly Enriched Uranium Agreement (HEU) with Russia and by other sources. As we approach the 2013 HEU Agreement expiry date, the supply/demand fundamentals will prove positive for uranium prices, and that will boost the price of uranium equities.
TER: Who has the pricing power in this market?
AS: When electrical power utilities buy uranium through long-term contracts, the agreements run as long as 8–10 years. That's why utilities have pricing power. The challenge now is that spot uranium prices are at $48 a pound (lb). But for many mines, the cost of production is $50–60/lb. The utilities have an enormous amount of power when it comes to determining the price of yellow cake. They are happy to sit on the sidelines and jump in to buy supply at basement prices. When spot prices compare favorably to the long-term prices, the utilities will buy supply from the short-term market. But, over time, the long-term prices determine where the market is heading.
TER: Globally, do state-owned energy utilities have a competitive advantage over the private utilities when it comes to obtaining uranium?
AS: Yes. Since state-owned utilities receive government backing for resources and loan guarantees, it's always easier for the public enterprises to be more successful. But, that is more so in developing countries, such as South Africa, than in the developed countries.
TER: How significant is military demand for uranium globally versus demand from electrical utilities?
AS: Most of the demand comes from the civilian nuclear reactors rather than military need. Some military applications require enriched uranium, but they compose a very small percentage of market demand.
TER: How can the HEU Agreement supply gap be filled?
AS: That's the question that every uranium investor should be considering. The HEU Agreement annually supplies about 24 Mlb of uranium. The uranium producers are having difficulty in scaling up production to fill the looming gap. For example, BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) recently announced a decision to delay expansion at Olympic Dam by at least a couple of years. The initial expected expansions would have brought production up to about 20 Mlb from about 9 Mlb.
Kazakhstan is the world's largest uranium producer, followed by Canada and Australia. However, at the current market prices, production in these regions cannot increase a lot. The supply/demand fundamentals for uranium are looking good, because the long-term prices and the spot prices will have to increase to catalyze enough production to meet demand.
Foreseeable events are priced into stocks, before the events actually occur. The HEU Agreement is slated to expire late in 2013, so by late 2012 uranium equities and prices should be discounting the market's loss of 24 Mlb. Obviously, there will be some increase in production from Kazakhstan and Australia and Canada. But that is not likely to fill the expanding gap. The U.S. has 104 operating nuclear power reactors out of the 433 reactors in the world. But last year, the U.S. produced less than 4 Mlb of uranium while consuming 55 Mlb.
TER: Are there any uranium producing regions in South America?
AS: Exploration is picking up pace in South America. For example, Uranium Energy recently acquired an asset in Paraguay, which is amenable to in-situ leaching. There are a few companies exploring for uranium in Argentina, Bolivia, Brazil, Chile, Ecuador and Guyana. But 65% of the world's uranium production still comes from Kazakhstan, Canada and Australia. There are several upcoming uranium producers in Russia, Niger, Nigeria and other parts of the world. But, most of the current production comes from only three countries.
TER: Let's talk about U.S. uranium supply solutions. There are several junior firms developing properties in uranium-rich regions in Wyoming and Texas. Where do these projects stand right now?
AS: In those areas, I've been tracking Uranium Energy Corp. (UEC:NYSE.A) and Ur-Energy Inc. (URE:TSX; URG:NYSE.A).
Ur-Energy will soon be in production; it has been permitted by the Bureau of Land Management to construct the Lost Creek project in Wyoming. Production could commence in Q2/13 at a cash cost of $20/lb. That is economical, even given today's relatively low uranium prices.
UEC is producing from its Palangana deposit. It is also making progress at its Goliad project. Uranium Energy Corp., Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.A) and Ur-Energy are all low-cost producers that utilize in-situ recovery (ISR) methods. The ISR technique is similar to water purification, which is also an ion-exchange technology. One environmental benefit is that nothing is mined in the traditional sense. The ISR method entails injecting oxygen-fortified water into the deposit. The liquid dissolves the uranium underground, and the mineral-laden water is then pumped up to the surface, where the heavy metal is recovered.
TER: How prevalent is ISR?
AS: The ISR technique is not applicable to every kind of deposit. Sandstone-hosted, roll-front uranium deposits are especially amenable to ISR. In 2011, 45% of world uranium was mined through ISL operations. Most uranium mining in the U.S. and Kazakhstan is now executed using ISR.
TER: Let's talk about advanced technology mining (ATM) techniques, such as audio magnetic geophysical exploration. Are these techniques cost effective?
AS: As with gold and silver deposits, uranium deposits are discovered through geochemical and geophysical techniques. The audio magnetic geophysical exploration technology is relatively new. It uncovers the deeper deposits. ATM, generally, has been very successful in unearthing new uranium deposits in Canada's Athabasca Basin. Clay mineralogy is another technology used to find new uranium deposits. None of these technologies are very cheap—but it's getting tougher and tougher to find large deposits these days.
TER: Will the uranium juniors be able to hang on for as long as it takes for the demand metrics to substantially improve their stocks?
AS: That's the big question. Equity prices are depressed, but mergers and acquisitions (M&A) are taking place. Cameco Corp. (CCO:TSX; CCJ:NYSE) recently paid $430 million for BHP's Yeelirrie Uranium Project in Australia. Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) bought Hathor. Mantra was also taken over by ARMZ Uranium Holding Co. early last year. Some juniors are also looking for assets. And, there could be a merger of equals in the U.S. uranium space. The bottom line is that M&A will continue apace, especially because the asset valuations are currently depressed.
When the price of uranium improves, the junior mining sector will take off. But, until then, if I were investing, I would invest in producers with positive cash flows. My top picks are Paladin Energy Ltd. (PDN:TSX; PDN:ASX), Uranium One Inc. (UUU:TSX), Cameco and Uranium Energy Corp. I also like Ur-Energy, because it is within reach of an important milestone as construction starts at Lost Creek. Fission Energy Corp. (FIS:TSX.V; FSSIF:OTCQX) is another one to watch in Canada.
TER: Thanks for talking with us, Alka.
AS: You are welcome.
Alka Singh started her career as a mining research associate with Wellington West Capital Markets in Toronto. Since then she has worked for Orion Securities and Merrill Lynch in Canada. She then moved to New York City to build the mining franchise for Rodman and Renshaw, where she covered 24 precious metals, base metals and uranium names. Singh has since started her own independent research firm, Mine2Capital, to provide unbiased research for clients. She holds a Bachelor of Science in geology and a Master of Business Administration in finance. She is a CFA charter holder.
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1) Peter Byrne 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: Uranium Energy Corp., Uranerz, Ur-Energy and Fission Energy Corp. Interview are edited for clarity.
3) Alka Singh: I personally and/or my family and Mine2Capital may own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story.