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.
Companies Mentioned: CanAlaska Uranium Ltd. - FMC Lithium Corporation - Hathor Exploration Ltd. - Nemaska Exploration Inc. - Rockgate Capital Corp. - Rodinia Lithium Inc. - Sociedad Química y Minera de Chile S.A. - Talison Lithium Ltd. - UEX Corp. - Uranium Participation Corp.
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.
