From fossil fuels to fission, growing global demand for power generation offers investment opportunities. Geordie Mark, mining analyst with Haywood Securities in Vancouver, shares his thoughts in this exclusive interview. He believes, uranium very much as a strategic commodity, even following the nuclear accident in Fukushima. This view is supported by the acquisition and offer activity in the sector in 2011. The sector's growth outlook looks solid, driven by expected demand increases in China, Russia, South Korea and petroleum-producing nations such as the United Arab Emirates and Saudi Arabia.
Companies Mentioned: Bannerman Resources Ltd. - Cameco Corp. - Coalspur Mines Ltd. - Corsa Coal Corp. - Denison Mines Corp. - Energy Fuels Inc. - Extract Resources Ltd. - Hathor Exploration Ltd. - Kalahari Minerals plc - Paladin Energy Ltd. - Rio Tinto - Strateco Resources Inc. - Titan Uranium Inc. - Ur-Energy Inc. - Uranerz Energy Corp. - Uranium Energy Corp - Uranium One Inc. - Xinergy Ltd.
The Energy Report: There have been recent takeovers in the coal sector, including the $1 billion (B) takeover of Grande Cache Coal by a Chinese and Japanese business combination. What should investors take away from that deal?
Geordie Mark: Investors need to be aware that metallurgical coal is intimately related to the steel market. Our expectations for growth in the steel market drive our expectations for growth in metallurgical coal. It is a positive sign that the market sees the value of such a strategic commodity. We've seen a lot of activity this year in the space, highlighted by the $4B takeover of Riversdale by Rio Tinto (RIO:NYSE; RIO, ASX) primarily for Riversdale's metallurgical coal asset base in Mozambique.
TER: Chinese imports of metallurgical coal have grown along with China's steel sector. Do you see this trend slowing in the near term?
GM: With steel demand increasing, we expect China to have an ever-increasing footprint in terms of metallurgical coal consumption. Long-term, there is still big potential for metallurgical coal, although we may see a plateau in pricing in the near term. China is also the largest producer of metallurgical coal, producing more than 500 million tons (Mt) in 2010, but we are expecting continued importation of the commodity in China, as well as Japan, India and South Korea.
TER: Which juniors with advanced coal projects are likely to see some interest from potential suitors on the heels of the Grande Cache deal?
GM: The first that comes to mind is Xinergy Ltd. (XRG:TSX), a company that produces thermal coal, but which recently acquired two metallurgical coal projects. One already produces high-voltage metallurgical coal and Xinergy aims to bring the other into production next year.
Another name is Corsa Coal Corp. (CSO:TSX), which is in production at its own metallurgical coal projects, both surface and underground, in the U.S.
TER: What about Coalspur Mines Ltd. (CPT:TSX; CPL:ASX)?
GM: To put Coalspur in context, it helps to talk about thermal coal. The company's Vista Coal Project is a strategic asset as there is still underlying, increasing demand for seaborne thermal coal, especially in Asia.
TER: This is coal that is used primarily in power plants, is that right?
GM: Yes, its predominant use is to provide base-load for electricity generation. Coal remains the largest form of base-load power in the U.S. Almost 80% of power in China comes from thermal coal; Japan and India are also very big thermal coal consumers, and importers.
We see Coalspur being able to introduce itself into the thermal coal space through its Vista Project in Alberta, Canada. Coalspur just tied up a contract through the Ridley Terminals in Prince Rupert for up to 8.5 million tons per annum in export volume starting in 2015. Furthermore, the company also signed a memorandum of understanding with CN Rail to co-ordinate coal transport to Prince Rupert starting 2015.
The project is right next to the railroad, so it is ideally positioned to add high-quality thermal coal into the seaborne market over the next few years. The large scale of this project, with such high-quality product, and advanced stage of negotiation for infrastructure support, is unparalleled in Canada. We expect Coalspur to make big inroads over the next few years. We have a 12-month target of $2.80 on Coalspur, and it is trading around $1.80.
TER: There is a lot of negative news about the pollution that coal-burning power plants produce. Are you saying that, despite the headlines, the thermal coal market isn't going away any time soon?
GM: That is definitely what the projections tell us. The International Energy Agency predicts increases in thermal energy consumption over the next 20–25 years. I don't see thermal coal—the largest form of base-load power across most economies—going away anytime soon as most of tomorrow's growth is expected to emanate from the Advancing Economies.
TER: Do you have confidence in Coalspur's management?
GM: Absolutely. The management team has built and run mines in the coal space in various jurisdictions. I am very comfortable with what they will be able to achieve.
TER: The last 12 months have not been kind to uranium companies, especially juniors. Year-over-year, the share price for Denison Mines Corp. (DML:TSX; DNN:NYSE.A), a mid-tier uranium producer, fell 36.5%; Uranium One Inc. (UUU:TSX) dropped 46.2%, and Paladin Energy Ltd. (PDN:TSX; PDN:ASX), a uranium project developer, lost 63.7%. Over the same time period, the TSX Composite Index slipped a mere 4.4%. How do you pitch uranium equities to retail and institutional investors at this point?
GM: The equities have taken a very big hit over the last year, despite the uranium spot price being around where it was a year ago. This equity market artifact is more related to sentiment, I think.
We still see uranium very much as a strategic commodity, even following the nuclear accident in Fukushima. This view is supported by the acquisition and offer activity in the sector in 2011. The sector's growth outlook looks solid, driven by expected demand increases in China, Russia, South Korea and petroleum-producing nations such as the United Arab Emirates and Saudi Arabia.
TER: The Australian Bureau of Agriculture and Resource Economy estimates that roughly 107 thousand tons (Kt) uranium will be needed to meet demand in 2016. That is about 20 Kt more than the 86 Kt yellowcake expected to be consumed this year. Is an extra 20 Kt a year enough to drive up the share prices of uranium juniors?
GM: I think we need some other catalysts. We need to remove the negativity sentiment toward this sector. For example, we need to see new reactors being built. We need to see a timeframe for non-operating reactors, say those in Japan, to be put back online. Investors need to see more usage of existing reactors and new growth coming into play.
We're starting to see new demand. A couple of new reactor proposals got the go-ahead in China recently, with construction for the reactors expected to start next year. Progress is starting to be made, albeit on an incremental basis.
The strategic nature of uranium is highlighted by recent interest shown by Cameco Corp. (CCO:TSX; CCJ:NYSE), the world's largest uranium-only producer, and Rio Tinto in Hathor Exploration Ltd.'s (HAT:TSX.V) Roughrider asset. Rio Tinto's involvement in the space is very interesting because that company deals with a range of commodities, and it allocates capital across geography and across sectors. By taking an interest in North American assets, Rio Tinto is increasing its stance in uranium.
