Dr. Geordie Mark, a research analyst with Haywood Securities, focuses principally on uranium companies involved in exploration, development and production. He joined Haywood Securities from the junior exploration sector, where he was vice president of exploration for Cash Minerals, which concentrated on uranium and iron oxide-copper-gold targets across Canada. Immediately prior to joining the exploration industry full-time, Dr. Mark lectured in economic geology at Monash University, Australia and served as an industry consultant. He completed his Ph.D. in geology in 1998 at James Cook University's Economic Geology Research Unit in Australia, specializing in aqueous geochemistry and igneous petrology applied to ore-forming systems.
Because of ongoing nuclear power development in China, Africa and the Middle East, uranium prices could bounce back to pre-Fukushima levels of $70/lb. in 2012, says Mark. Instead of waiting for prices to rebound, some mining companies are moving ahead with regulatory and construction projects to drive value. In this exclusive interview with The Energy Report, Mark points to the ones that could be poised to pay off for investors when the market turns.
Companies Mentioned: Bannerman Resources Ltd. - Cameco Corp. - Denison Mines Corp. - Energy Fuels Inc. - Kivalliq Energy Corp. - Mawson Resources Ltd. - Mega Uranium Ltd. - Paladin Energy Ltd. - Rockgate Capital Corp. - Ur-Energy Inc. - Uranerz Energy Corp. - Uranium Energy Corp
The Energy Report: Investors have focused on how the Japanese earthquake and the tsunami that shut down the nuclear plant in Fukushima might influence the demand for nuclear fuel going forward. Clearly, this has been the elephant in the room. But, I wonder about the other shoe that dropped on May 30 when Germany formally announced plans to abandon nuclear energy completely within 11 years. That includes the immediate closure of seven plants. Switzerland and Italy may follow suit. Will this have a watershed effect on any other major economic powers?
Geordie Mark: Changing political sentiment toward nuclear power in advanced economies like Germany, Switzerland and Italy will have a tangible effect on uranium demand in the next 10 years. However, we really don't see it affecting the main growth picture in advancing economies of China and India. We're also looking for growth out of South Korea, Russia and other new entrants, probably the United Arab Emirates (UAE) and Saudi Arabia. These growing countries are looking to diversify their energy base.
TER: How big are the growing nuclear power users in Africa, UAE and Southwest Asia compared to China?
GM: I don't see these areas being equal drivers. Nuclear power is a significant part of China's growth strategy. That is evidenced by the government's target of 40 gigawatts of electric capacity by 2015. That represents some significant, real growth. China has a number of reactors under construction now, well ahead of the rest of the world. The other nations you mentioned certainly play a potential growth role about 5-10 years out. For nearer-term suppliers, the bigger demand sinks are those countries that either have a significant number of reactors under construction or plan to in the next three to five years.
TER: Recently, uranium was selling for around $51/lb. and trending down. Is the price finding support?
GM: We are in the slow, summer siesta period with fewer volumes being transacted on the spot market. The average for the year is about $61/lb. We see support at or around the low-$50/lb. range this time of year. We certainly are looking for strength in the commodity price coming into Q4 as purchasers look for discretionary demand for 2012, and for any contract shortfalls to come into the market around that time.
TER: What is the breakeven price for a pound of uranium for small producers compared to the bigger producers?
GM: We are still looking at some of the producers having expected cash costs in the low $30/lb. range on average. That would be Paladin Energy Ltd. (TSX:PDN; ASX:PDN). Denison Mines Corp. (TSX:DML; NYSE.A:DNN) is probably looking at the $50/lb. range. It is a marginal producer leveraged to the uranium price. The new entrants for in-situ recovery (ISR) uranium production out of the U.S. are Uranium Energy Corp (NYSE.A:UEC) and, potentially next year, Uranerz Energy Corp. (TSX:URZ; NYSE.A:URZ). They are coming in around the mid-$20/lb. to low $30/lb. price range. So, we are still looking at many of those companies being able to continue to operate under those conditions. But, certainly, we don't see the current price being a stimulus for the development of large-scale projects that involve significant capital investment.
TER: You forecast that by Q4 of this year, you would see some strength. What is your forecast for uranium now?
GM: For this year, we are looking for an average of around $60/lb. So, we see some strengthening in price from where it is today. Next year, we are looking at $70/lb. and our long-term projection is $75/lb.
TER: So, you see uranium production and pricing getting back to what it was.
GM: Yes. We see a slow recovery coming back up to what we were starting to see at the end of last year, but this is expected to take some time as the market progressively crystallizes a picture for tomorrow's supply-demand equation. The main uncertainty will be around what happens in Japan with the reactor operations, and whether additional countries join Germany in walking away from nuclear power.
TER: Could some of the undamaged reactors possibly come back online anytime soon?
GM: We have currently written those reactors off along with expectations for other reactor units to be constructed at that site, and within Japan.
TER: What about the regulatory picture? I know that it's different for each jurisdiction. But, what does it look like now, particularly on the mining side?
GM: We see enhanced project regulation and oversight on mining operations going forward. This will most likely result in more protracted permitting and more stringent requirements for mining projects and processing plants. We also expect that stakeholders will be more engaged during the permitting processes. All of these factors likely will culminate into greater review periods. For that reason, we have delayed our commissioning dates for a number of the larger development-stage projects undertaking project permitting and licensing. Concurrently, the events in Japan and the political shakeout across various European nations have led to softening the front end of our demand curve. These two factors have led to an overall smaller supply-demand picture for the next several years, when China's growth plans will have an even greater impact on the sector's size.
TER: Do you see institutional investors dipping their toes back into uranium mining companies? Is this a good time to reenter the market through equities?
GM: Well, we are seeing some interest from institutional investors looking at low-equity valuations out there. They are largely looking at large-cap producers such as Cameco Corp. (TSX:CCO; NYSE:CCJ) and other larger producers. Investors currently participating in the markets are those who believe in the long-term viability of the sector and have had that view for some time. Investors waiting on the sidelines comprise a significant proportion of the investor base and are fundamentally uncertain about the sector's trajectory post March 11.
In terms of investment, we have certainly seen lowering in equity valuations on simplistic enterprise value (EV)/lb. metrics as well as forward cashflow and EBITDA (earnings before interest, taxes, depreciation and amortization) multiples. Equities across the board have obviously taken a hit with earlier-stage companies commonly taking the brunt of the negative sentiment.
