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Mickey Fulp: Solving the Uranium Price Puzzle

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Mickey Fulp Apparently flouting the law of supply and demand and mystifying experts and analysts alike, depressed uranium prices present some excellent bargain-hunting opportunities for investors, according to Mercenary Geologist Mickey Fulp. In this exclusive interview with The Energy Report, Mickey shares some thoughts about his favorite players in the uranium space. He's also keeping an eye on natural gas stocks.

The Energy Report: When we talked in April, Mickey, you said that the only sector you thought was absolutely undervalued as a whole was uranium, and that it had been beaten up a lot since mid-2007. You felt uranium prices should have started to rebound beginning in 2009, but they haven't done so yet. What's keeping prices down? Should we see a rebound soon?

MF: There has been a little encouragement in the fact that the spot price was up $1 over the last couple of weeks of June, but trading at $41.75 on the spot market is still very low compared to the uranium boom run up. Although it's a minor part of the entire market for uranium, the spot market very much influences the price of uranium stocks.

TER: Will uranium ever return to the 2007 peak?

MF: That was an anomaly, so not in the foreseeable future. Hedge funds basically came in and bought up a bunch of uranium. The crash started earlier for uranium, but all those exorbitant commodity prices in '07 and '08 were due to hedge fund buying.

TER: If we take out that anomaly, where would you say uranium's price stands today?

MF: I think we're still relatively low, in the fact that the cost of production is going up. All the new mines coming on will have higher costs of production than the established mines. We'll need higher uranium prices in the mid to long term to make these mines profitable.

TER: But nuclear facilities are being built, coming online in China and Europe and the United States. Why isn't the additional demand pushing uranium prices up?

MF: Your guess is as good as mine. The long-term contract market for uranium is very opaque. The spot market is a little more transparent. Spot market prices are basically set by whatever trades happened last week or last month, when buyers and sellers sat across the table from one another and negotiated a price. Why the spot price has barely moved puzzles most people in the business and most analysts, because we do see this increased demand and we don't know where the uranium will come from.

There are a couple of wildcards out there though. The U.S. Department of Energy has something on the order of 158 million pounds stockpiled. The price is probably suppressed right now, too, because the Russians still supply a significant amount of uranium through the "Megatons to Megawatts" deal, which ends in three years. Mining currently supplies two-thirds of the world's demand. Secondary sources, the heavy to light enrichment process and stockpiles, have supplied the rest. Most analysts say that certainly within three to five years demand will exceed total supply from these sources. Therefore, it appears the price has to go up. What's the timing of the price going up? ¿Quién sabe?

Demand is exceeding mine supply right now. Obviously, there has been enough uranium to keep power plants going. One thing that's become apparent in the last few months is that utilities and governments, consumers of uranium, are carrying something on the order of 18 months' average forward supply. Historically, that supply stockpile has been more like three years. That difference may represent supply tightness.

I wish I had better answers. I think everybody in this business is grasping for straws as to why prices are still relatively depressed, especially in terms of cost of mine production.

TER: At the close of the G20 Summit in Toronto last month, India and Canada signed a nuclear agreement supposedly paving the way for Canadian firms to export controlled nuclear materials, equipment and technology to India. What does this portend for the sector in North America?

MF: I wouldn't put a lot of stock in the importance of that agreement. We've seen the U.S. and seven other countries already sign deals like this with India. India's building 12 nuclear reactors in the next decade, and because they are not a large uranium producer, they need a uranium supply. That's probably one of the motivating factors. India is one of three countries that never signed the Nuclear Nonproliferation Treaty, the others being China and Pakistan. So for a long while, they were blacklisted.

Both the Climate Conference in Copenhagen and this G20 Summit in Toronto dealt somewhat with world movement to reduce the amount of heavy-enriched uranium (i.e., uranium that could be made into bombs) and convert that to low-enriched uranium. There have been myriad such agreements between countries over the last two years, all in response to the idea that we need to get the bomb-capable uranium into secure facilities to downgrade for use in power plants.

Something that I think would perhaps be more important is the fact that Cameco Corp. (NYSE:CCJ; TSX:CCO) has just signed a contract to sell 23 million pounds of uranium to China over the next decade. China has an aggressive goal of increasing nuclear capacity for electricity generation from about nine gigawatts (GW) to as much as 160 GW by 2030. So what we're seeing now is that yellowcake, or low-enriched uranium, will cross international boundaries freely. Of course this will not be the case with rogue nations such as North Korea, Iran and other places where the civilized world would not be certain about that uranium being used for peaceful purposes.

TER: If non-peaceful nations got the uranium, they would still have to enrich it to make weapons?

MF: Right. And they need the facilities to be able to do that. It's fairly apparent that North Korea and Iran have those capabilities. Low-enriched uranium is something on the order of 3% to 4% U-235, whereas high-enriched uranium—the bomb-making stuff—is more like 85% U-235. So there’s considerable upgrading to achieve weapons-grade uranium and it's an iterative process to get those high concentrations. Conversely, it’s also a laborious process to downgrade weapons-grade uranium to concentrations suitable for power plant fuel.

TER: As with the Megatons to Megawatts program.

MF: Exactly. You take high-enriched uranium, bomb-capable uranium, and downgrade the enrichment factor 25–30 times.

TER: That's why it's lasting so long in terms of being part of the supply.

MF: Right.

TER: So we now have international demand and capability to ship uranium internationally. We've got the supply chain now 18 months out as opposed to three years. We've got the Russian program starting to wind down. What are some good investments for people who agree with you in that this is an undervalued sector?

MF: Well, my favorite company for a long time has been uranium developer Strathmore Minerals Corp. (TSX.V:STM; OTC.PK SHEETS:STHJF). I call them a development generator. They have two flagship properties in the Grants Mineral Belt of New Mexico and the Gas Hills of Wyoming. They are a development generator because they're in the process of monetizing all their non-core assets, including seven other development projects in the Western U.S.

I see some sort of unitization in the Grants Mineral Belt in the mid-term future. There are half a dozen major deposits in the Grants Mineral Belt, which is the largest uranium province in the United States. Ownership of all of those deposits is divided among multiple owners. Strathmore, Uranium Resources, Inc. (OTCBB:URIX), Neutron Energy and Rio Grande Resources—two private companies—are the major players. All of them except Rio Grande own bits and pieces of everybody else's deposit. At some point I expect to see deals made where one company controls a particular asset and another company controls another asset. So I think we're going to see some movement toward unitization in the Grants Mineral Belt. That would be very positive for Strathmore. It's already happening in South Texas.

TER: Any other plays in the uranium space that you like?

MF: Sure. I like Hathor Exploration Ltd. (TSX.V:HAT). Hathor keeps getting bigger. The exploration potential in the northeastern Athabasca Basin continues to grow. Fission Energy (TSX.V:FIS) has a discovery along the same east-west structural corridor. They will expand that. Both Hathor and Fission Energy will start drilling soon.

Another play on the Midwest trend and joint ventured with Hathor is Forum Uranium Corp.'s (TSX.V:FDC) Henday project. I've been accumulating that stock on weakness and it's been pretty weak so I continue to accumulate it at lower and lower prices. It'll be next March before we can expect drill results from a winter time drilling program. That's a bit of a longer-term play.

Another company maybe worth looking at would be Uranium Energy Corp., (NYSE.A:UEC), which is moving toward new production in South Texas in the fourth quarter this year. All these companies are pretty beaten up right now in terms of share price.

TER: Speaking about South Texas takes us pretty close to the Gulf of Mexico and a very serious situation. What's your take on the future of deepwater offshore drilling?

MF: With something on the order of 25% of our domestic oil production coming from the Gulf of Mexico, it is very important to the U.S. economy. Among the ramifications, I think we're going to see increased regulation, permitting delays and environmental lawsuits. All of this means less drilling for both production and exploration, which means we'll have less oil and more dependence on the Middle East. It's also going to mean an increasing move to onshore oil. It's a very sad situation.

TER: Do you expect a greater focus on alternative energies as another possible outcome?

MF: I think that's likely.

TER: How might that play out and which players stand to benefit?

MF: Uranium first and foremost. I certainly think the rare earth elements (REE) sector will benefit because these are so-called green metals. They are necessary for alternative energies; for example, wind turbines need a lot of neodymium. Hybrid cars require lanthanum, neodymium, dysprosium, terbium and europium. So an increase in the green-and-clean energy technologies will benefit the REE sector.

TER: You've called the REE sector one of your favorites. Do you still feel that way?

MF: I do, but as we've seen lately, it's very dependent on the health of the world economy. I have several core positions in the REE sector that I hold for the long term.

TER: Who do you like, and why?

MF: Avalon Rare Metals Inc. (TSX:AVL; OTCQX:AVARF) just put out the first economic study of any junior in the sector, a prefeasibility study. The market reacted negatively because of high capex and relatively low internal rate of return (IRR). I spent a long time talking with CEO Don Bubar about it. There are lots of low-cost tweaks available in the mining, processing and marketing at Thor Lake. For instance, a 1% increase in metallurgical recovery results in a 1% increase in IRR. After talking with Don, I was very pleased and had somewhat of a different idea about what this prefeasibility study means. This is a mine-to-market sector, and those of us who cover it have been saying from the get-go that offtake contracts will be paramount. Western world consumers of rare earth elements are very worried about mid-term supplies, and are now positioning themselves for product for the next three to five years. I think that's all behind the scenes, but I expect some movement in this regard in the short term.

TGR: So you're seeing production in the short term?

MF: Not production, that's four to five years away, but commitment to product flow from mines. Consumers will line themselves up and make sure they have a secure source. They're concerned about where their raw materials will come from.

TER: If consumers are lining up to buy, why, then, would the IRR cause a decrease in share price?

MF: The market doesn't understand that. The market looks at a very large capex and a 12% IRR and says it's a marginally economic deposit. It may be, but the Western world requires rare earths—and they'll have to come from somewhere other than China.

TER: What companies do you see lined up to take advantage of these offtake agreements?

MF: Avalon will be first in North America. Quest Rare Minerals Ltd. (TSX.V:QRM) is one of my favorites. They are trading somewhere around 50% of their yearly highs, just initiating a 15,000-meter drill program, with four rigs at their flagship Strange Lake heavy REE project. They'll delineate the west half of the deposit, drill the east half—which has never been drilled—and their metallurgical results probably will come out in early August.

I particularly like Rare Element Resources Ltd. (TSX.V:RES), with their Bear Lodge light REE project. Their new resource estimate is 50% larger than before and they're drilling now. They're also drilling on the adjacent Sundance Gold project and will follow that with a resource estimate. I can speculate that eventually this will be a two-for-one; there will be a gold company spinout.

My other favorite is Tasman Metals Ltd. (TSX.V:TSM), a European REE play. Since we last talked, they've raised $3 million, completed a drilling program with positive results at their Norra Kärr project in Sweden and acquired the Bastnäs project. That's particularly interesting, because Bastnäs is where rare earths were first discovered in the early 1800s. The mineral bastnäsite is named for this locale. Tasman also has acquired an advanced deposit in Finland (Korsnäs), and I think you'll be seeing a pipeline of additional projects coming in the door. This play is especially important because the European Union has stated they want to become more self-sufficient in critical and strategic metals, and Tasman is well positioned for that.

Dacha Capital Inc. (TSX.V:DAC; OTCQX:DCHAF) has an interesting business model. It's a rare earth element ETF.

TER: Can you describe Dacha Capital's approach?

MF: Their corporate strategy is to buy REE metals, alloys and oxides in China and take them out of China; presently, they're storing in Singapore and South Korea. They can monetize that various ways with the net asset value of the stock. With the increasing REE prices we've been seeing, Dacha Capital's stock price will go up; and, if things go up very rapidly, they can always sell these stores to consumers.

TER: So to the extent that it brings alternative energies more front and center, rare earths may benefit from the Gulf disaster. Any other sectors?

MF: Yes. I also think it will benefit the natural gas industry because that's much cleaner than other hydrocarbon products. The U.S. is the world's largest gas producer now. Gas is cheap and relatively clean; but gas storage is still high. The oil-to-gas price ratio right now is way out of whack, approaching 15, with historical ratios somewhere around 6. So in relation to oil, gas is quite cheap.

TER: What about solar?

MF: I don't particularly like the wind or solar sectors because they still require government subsidies to be economic. I don't like private industry depending on elected government to generate cash flow.

TER: And geothermal?

MF: Especially in the junior resource sector, I look at geothermal as too long term and the junior plays too risky. The payback schedules for geothermal electrical generating plants is okay for monopolistic utilities, but I just really don't get it for a junior that has a limited lifespan. In my opinion geothermal is best suited for local space-heating needs where the geothermal fields exist.

TER: OK, any other energy sectors that you follow?

MF: I follow natural gas. As a contrarian, I like to find things that no one else is looking at right now, are off people's radar screens or are not the flavor of the year. So uranium and natural gas have piqued my interest lately.

TER: Is it a good time to buy natural gas stocks?

MF: I'm watching right now. I haven't waded into this sector yet. I would say that if you do, you want to buy the best and strongest companies with good balance sheets and the ability to generate cash flow and not exceed their revolving credit lines. It's a bit of a different philosophy because all oil and gas companies carry debt whereas juniors in the metals sectors generally don't carry debt.

TER: What's keeping you from jumping into the market at this time?

MF: I think it's a little early. I'd like to see some more positive indications that gas prices are going to be relatively strong and that demand is going to increase in the mid to long term. I think it will because it's cheaper and cleaner than burning coal or burning gasoline or diesel in your car.

TER: What cues are you looking for to make your move?

MF: I generally listen to other analysts, take it all in and try to make my own decisions.

TER: Is that time drawing close?

MF: I'm not sure. If it were getting close, I would be going into the natural gas sector right now. I'm still on the sidelines watching.

TER: Mickey, you are a big proponent of investors doing their due diligence. For those new to investing in energy, what conferences, books, seminars or newsletters would you recommend to them?

MF: There are numerous investment conferences every year, and I personally speak at about 10 or 12 of them. They're held in various large cities—Vancouver, Toronto, Calgary, Chicago, Phoenix, New York City, New Orleans, San Francisco. I encourage investors to go to these; most of them are free to the investing public. At the upcoming San Francisco show (Hard Assets Conference, November 21–22), some educational workshops will be free and some will have small fees.

TER: You'll be there?

MF: Yes. I will be presenting my educational workshop called "Geology for Lay Investors." Probably the most difficult thing for lay investors to get a handle on is the geology of these junior resource companies' projects. We geologists tend to speak our own language; we understand the jargon, but it's probably puzzling to the investing public with no background in the science. In an hour-long seminar, and however long I stay for questions—which tends to be quite a while—I try to boil it down into the basics of geology. Geology is a science, but the best geologists are artists. So through these educational seminars, my mentoring of investors and a book I'm writing on resource investing for the lay investor. . .

TER: When is that coming out?

MF: I keep saying a year, but it keeps getting put off as I keep adding more chapters, kind of like most juniors' Gantt charts. I'm chipping away at it but then I get busy with other things. I'm writing it chapter by chapter, so it's a work in progress.

TER: Any final thoughts you'd like to share today, Mickey?

MF: Yeah, I've got two. "There ain't no cure for the summertime blues" except that. . ."Time is on my side, yes it is."

TER: You ought to set that to music.

MF: I think that's already been done.

The Mercenary Geologist, Michael S. "Mickey" Fulp is a Certified Professional Geologist with a bachelor's degree in Earth Sciences with honors from the University of Tulsa (1975), and a master's degree in Geology from the University of New Mexico (1982). He has more than 30 years' experience as an exploration geologist searching for economic deposits of base and precious metals and other resources. Mickey has worked for junior explorers, major mining companies, private firms and investors as a consulting economic geologist for the past 22 years, specializing in geological mapping, property evaluation and business development. Respected throughout the mining and exploration community due to his ongoing work as an analyst, newsletter writer and speaker, Mickey can be reached at [email protected].

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1) The Energy Report Publisher Karen Roche and Barbara Templeton conducted this interview. They personally and/or their families own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report or The Gold Report: Strathmore, Dacha, Rare Element and Avalon.
3) Mickey Fulp: I personally own shares of the following companies mentioned in this interview: Fission Energy, Forum Uranium, Hathor Exploration, Strathmore Minerals, Avalon Rare Metals, Quest Rare Minerals, Rare Element Resources and Tasman Metals. I personally am paid by the following companies mentioned in this interview: Avalon, Quest, Strathmore and Tasman are sponsors of my website.

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