Interview with The Energy Report
Pundits may have closed the book on the so-called nuclear renaissance, but the story is far from over. In this exclusive interview with The Energy Report, Gold Stock Trades Editor Jeb Handwerger names the "sleeping beauties" quietly proving their worth. A new generation of nuclear energy must be part of a diversified happy ending, Handwerger says, but by that time, merger and acquisition activity may have already rewarded the investors who believed in a brighter future. Read on.
The Energy Report: Jeb, at the turn of 2012 you were bullish on junior uranium mining stocks. It's halfway through the year and a lot of these stocks have still underperformed. Is this the result of continued economic fallout after the Fukushima nuclear disaster, or perhaps a consequence of the availability of cheap natural gas?
Jeb Handwerger: We had a really difficult year for uranium equities in the aftermath of both Fukushima and the end of QE2. The whole resource sector went, and uranium was hit extra hard. Cameco Corp. (CCO:TSX; CCJ:NYSE) and Uranium One Inc. (UUU:TSX) declined more than 50%.
However, we are beginning to see a notable improvement in the supply-and-demand fundamentals with more institutional investor interest in uranium. Year-to-date, Cameco is up close to 21%, making a higher low than in late 2011 and holding the 200-day moving average. It seems that the bottom we predicted in uranium miners in late 2011 is still holding. Compare that to the gold miners' ETF (GDX:NYSE), which is down 17% and to the rare earths ETF (REMX), which is down about 12%. The uranium ETF is down only 10%. That shows me that uranium miners are relatively strong in a weak, panic-driven natural resource market where investors are hoarding cash and treasuries.
TER: So what's breathing life into the uranium sector now?
JH: In 2011, nuclear energy had a lot of competitors from alternative energy sources such as solar, wind and natural gas. Since then, the challenges for each of these sources have become more apparent and the entire energy sector has undergone an outright selloff. A lot of articles have talked about cheap natural gas taking the place of nuclear. What the pundits don't say is that natural gas has plenty of its own issues, ranging from the environmental downsides of hydraulic fracturing to greenhouse gas emissions. Furthermore, service stations and natural gas liquefaction plants must be set up along the chain of supply from mine to consumer. Major costs are involved and there is no assurance that the price of natural gas will remain at these low levels. Plus, some parts of the world don't have abundant natural gas. The cost of liquefying it and shipping it can be extravagant. Japan, for instance, tried importing natural gas, but eventually gave up and recently reactivated nuclear plants amid growing fears of power outages affecting industry.
The short position in nuclear miners has increased even as money is being directed toward construction of new nuclear power plants globally. The shorts use the stories of cheap natural gas to depress the uranium sector. This means uranium miners may even have additional upside because of the large short position that may soon have to run for cover in the event of a turnaround. We have seen short covering rallies before in the uranium miners. In the summer of 2010, after QE2 was announced, the sector experienced major gains. The same was true in 2007/2008 before the credit crisis. We saw a huge exponential move. These moves came out of nowhere and were very powerful, with miners moving up 10–20% a day.
We must not tar nuclear energy with the broad brush of the entire resource sector malaise. Construction of new nuclear plants proceeds steadily and the media is not emphasizing that. The U.S., for the first time in three decades, announced the approval of plans for nuclear reactors in Georgia and South Carolina. Even Japan is reactivating nuclear reactors. India and China are moving full speed ahead, and this alone will require an additional 40 million pounds (40 Mlb) of uranium annually by the end of this decade. We must remember that the underperformance right now in junior uranium miners is transient. Nuclear power is here to stay. All energy sources have their own sets of cost and environmental issues. No one source can fulfill everyone's needs for the next 30 years. Nuclear will always be part of the long-term energy mix, and when the market turns, long-term uranium investors have the potential to experience exponential profits.
TER: Japan's Fukushima Nuclear Accident Independent Investigation Commission published its report on the 2011 accident. It largely blamed the Tokyo Electric Power Co. operators for administration and operational failures. What did these findings mean for the future of nuclear power in Japan and around the world?
JH: Many countries are still stuck with the old, 40-year-old nuclear reactors, which is what Fukushima was. A renaissance has since occurred in nuclear engineering. The next generation of reactors has a fraction of the risks involved with the old reactors. That is what is being built in China, India and Russia. Even Saudi Arabia has 16 plants under serious consideration. Four are in the works in the United States.
TER: Given that more than 500 new reactors are in some phase of the building pipeline right now, how attractive are investments in the engineering and contracting firms that design and build reactors?
JH: Investors are looking into the companies that build the reactors. The Shaw Group Inc. (SHAW:NYSE)is building the South Carolina reactors. Babcock & Wilcox Co. (BWC:NYSE) used to build nuclear submarines, but has also moved into small modular nuclear reactors. Fluor Corp. (FLR:NYSE) and General Electric Co. (GE:NYSE) are other names with exposure to nuclear power. One can also look at utilities likeExelon Corp. (EXC:NYSE) who are major players in nuclear power generation in the United States.
TER: If this is where the increased demand for uranium will come from, what about the supply? The large producers will probably deliver, but will the explorers eventually benefit as they find the fuel for the future? From an investment point of view, what is the best way to capitalize on this coming trend? Is it through the big companies or the juniors?
JH: To answer that, I think we need to take a look at what happened in 2011. One of the biggest deals was that Hathor Exploration, which owned the Roughrider deposit up in the Athabasca Basin, was bought up for multiples by the giant Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK). Rio Tinto's stock price did not move nearly as much as Hathor's price. Hathor received over $11/lb uranium. If you are looking to leverage the sector, a good way to play it might be to find a suitable candidate for the major uranium miners, many of which are trading at one-tenth of that value right now. Cameco and Rio Tinto have expressed ongoing interest in further acquisitions of juniors. That is why we are specifically looking at areas that are in mining-friendly jurisdictions where the majors are going to be looking to develop economic resources. The undervaluation of quality uranium miners is creating a possible once-in-a-lifetime buying opportunity.
TER: Do you see other buying opportunities in the Athabasca Basin?
JH: Following the Hathor buyout, we expect even more consolidation in the Athabasca Basin. When a company that large sinks $650 million into an area, we don't think that's the end. It is just the beginning. Rio Tinto will want to build resources and consolidate its position. We also think Cameco and possibly BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) is going to try to build a larger position in the basin. Target candidates include Denison Mines Corp. (DML:TSX; DNN:NYSE.A). It has the Wheeler River deposit, which is one of the best undeveloped projects in the basin. UEX Corp. (UEX:TSX) has a large resource base in the basin and is already 22% owned by Cameco. Fission Energy Corp. (FIS:TSX.V; FSSIF:OTCQX) has the J Zone, which is pretty much a continuation of the Roughrider deposit.
Athabasca Uranium Inc. (UAX:TSX.V; ATURF:OTCQX) is an early-stage company in the area, but it has some great prospects at Keefe Lake. Athabasca has an interesting team with Dr. Zoltan Hajnal from the University of Saskatchewan, who is an expert at using seismic data for uranium exploration. He did this successfully for Hathor. He is a world-class seismic expert and he has joined Athabasca's advisory board, along with Kim Goheen, who recently retired as CFO for Cameco. The company also came out with spring drilling program results that showed some very promising early-stage success using that seismic data. The second half of 2012/2013 may be interesting.
TER: Could Athabasca Uranium or any of these be standalone projects, or are they mainly acquisitions targets?
JH: In time, there won't be many juniors in the Athabasca Basin. The high-quality ones will be a part of Rio Tinto or Cameco. The same thing will happen in the U.S., where we follow three juniors who are currently very active. Uranium Energy Corp. (UEC:NYSE.A), Ur-Energy Inc. (URE:TSX; URG:NYSE.A) and Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.A) are going to be U.S. producers who are part of the solution to the U.S. supply crisis. Just under 20% of U.S power comes from nuclear reactors, however more than 95% of the uranium is imported. The U.S. used to be one of the largest uranium exporters. Now it produces less than 4 Mlb of uranium.
As part of a plan to meet that demand, in the near term Uranerz, could be a takeover target for Cameco or Uranium One. It already has a processing agreement with Cameco and an off-take agreement with Exelon Corp. Uranerz has an incredible land package right between the two majors in the Powder River Basin, which has been producing uranium for five decades. The company employs in-situ mining, which also has many benefits over conventional mining when it comes to environmental issues and costs.
TER: How soon might a takeover happen? Is there some catalyst in the wings?
JH: You just never know when it's going to happen, although I do know it will be sooner rather than later. I think as we get closer to 2013 there's going to be more pressure. Over the next 6-18 months a huge amount of consolidation could come to the industry.
TER: Has the market already priced in these takeovers?
JH: No, no, no. Uranerz is trading near three-year lows. Investors have a chance to get into these companies on historic lows.
In South America, a company I like is U3O8 Corp. (UWE:TSX.V; OTCQX:UWEFF) in Colombia, Guyana and Argentina. The main project is Berlin in Colombia. The company has shown incredible resource growth during the past year. It has increased the Indicated and Inferred resource sevenfold, from 7.1 Mlb to 47.6 Mlb, and it has only documented the three southern kilometers (km) of a 10.5 km mineralized trend. The Berlin deposit is also home to phosphate and vanadium and has shown some very positive metallurgical recoveries. U3O8 is rapidly growing and derisking its resources in South American countries that are mining friendly. I understand the company will be completing a PEA in the second half of 2012. The company thinks it can potentially grow this asset in the near term to 40–50 Mlb uranium.
U308 already has a strong cash position with institutional support. What is really interesting is that the phosphate, vanadium and rare earths may pay the way with the uranium as pure profit. That is what we are looking for in the second half of the year from this company.
TER: U308 Corp is trading at $0.33 right now. How much could it go up from there?
JH: Right now, U3O8 is priced at about $0.77/lb uranium; Hathor was bought out for $11/lb and Mantra for $10/lb. That is almost a potential tenfold increase. As the project is derisked in the second half of the year, the stock should get to at least a comparable value to some of its current competitors, at over $1/lb.
TER: Are you looking at any uranium companies in Europe?
JH: Yes. We have one that we really like in Slovakia called European Uranium Resources Ltd. (EUU:TSX.V; TGP:FSE). First of all, it has a great management team. Plus, Europe is the largest user of nuclear power per capita. There is only one operating uranium mine in Slovakia at the moment and that is rapidly depleting. European Uranium Resources is really Europe's next answer for uranium production. The deposit may be one of the lowest-cost uranium mines in the world. The prefeasibility study is very impressive from an environmental and economic perspective. The real momentous catalyst is if the company can sign an off-take agreement with the Slovakian government, with a surplus going to other EU nations.
AREVA (AREVA:EPA), the third-largest uranium producer in the world, already took a 10% position at approximately $0.35 a share and is on the European Uranium board giving technical expertise. The company is now trading at three-year lows of $0.22 per share. This may be a real undervalued situation in Europe.
Overall, Europe and the Americas are much better mining pictures than Africa and Australia right now. Rising resource nationalism in Africa and rising costs in Australia make these other stories much more attractive.
TER: So, is the overarching story mergers and acquisitions?
JH: I think so. There is going to be a dramatic change of landscape in the uranium sector. As the high-quality juniors come closer to production, they'll be taken over by the majors. We saw the beginnings of that in 2011 and we will see it continue. One needs patience and fortitude and the ability to go against the consensus.
TER: Thank you for your time and your insights, Jeb.
JH: Thank you.
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: Fission Energy Corp, Athabasca Uranium, Uranium Energy Corp., Ur-Energy, Uranerz and U308 Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Jeb Handwerger: I personally and/or my family own shares of the following companies mentioned in this interview: Uranerz Energy Corp., Ur-Energy, Denison Mines Inc., Athabasca Uranium Inc., European Uranium Resources Ltd. and U3O8 Corp. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise for participating in this interview.