Cantor Fitzgerald analyst Rob Chang provides his outlook for the uranium sector and points to one “under the radar” junior that he believes has near-term production capability.
By Peter Epstein, CFA, MBA
This interview with Rob Chang of Cantor Fitzgerald is based entirely on his own uranium sector views. Peter Epstein has no prior or existing relationship with Mr. Chang, Cantor Fitzgerald or any company listed herein. Rob Chang has been a proponent of the uranium sector for years. Like many of his peers, including Rick Rule, Peter Epstein’s friend Alex Molyneux of Azarga Uranium, and Chris Berry who said in 2014, something that very well come true, that the uranium sector rebound is a 2016 event. Issues that are discussed below help explain what has happened and what is likely to happen (exact timing unknown.) Enjoy the interview.
Some consider you to be one of the more bullish analysts in the uranium sector. Do you agree? Can you share your uranium price deck for the annual period from 2016-2019?
I guess I have been one of the more bullish on the space but that is because the fundamentals of uranium is extremely compelling. I have no doubt there will be a violent price movement higher when utilities start scrambling for a limited supply of uranium in the future. We were likely seeing the beginning of this rise for the six-month period just before Fukushima occurred. I firmly believe this is a case of being right too soon. I simply cannot see a scenario where uranium prices do not skyrocket sometime in the future. The question is when. As far as my firm’s uranium forecasts, we currently report $50/lb in 2016, $60/lb in 2017, $70/lb in 2018 and $80/lb in 2019.
Do you believe that the latest news from Japan is truly a sentiment builder, or perhaps not so much since it’s taking so long?
I think the Fukushima restarts would have been a sentiment builder if it were not for China devaluing its currency the following day. Any positive momentum from the restart headline was lost. It appears that uranium is snake bit somehow. The sector always finds a way to not go up. Fukushima derailed what was looking to be an impressive really for uranium a few years ago. Now we have China’s devaluation and current equity market weakness.
Pundits say that the long-term uranium price needs to recover to US$65/lb for new or early-stage projects to move forward. Any thoughts?
We believe that number is really US$80/lb. When you factor in the required amount of uranium that is necessary to fuel all the reactors being built around the world in locations such as China and India, we will need the large but low grade African uranium projects to come online to meet the upcoming demand. Those mines need at least US$80/lb to be economic. Perhaps up to US$100/lb when we factor in things such as country risk.
In-Situ “ISR” projects typically have superior economics than hard rock mining. However, aren’t most ISR projects small?
Almost universally, ISR uranium projects tend to mine deposits in the 1-10M lbs range, which would support production of about 1M lbs annually. The notable exception are the mega deposits in Kazakhstan. Those can get into the +100M lbs in size. Generally speaking that is the difference between ISR mining and conventional mining. The economics for ISR may appear better, but conventional projects tend to have the scale to produce a greater quantity of uranium annually, such as the McArthur River underground mine that Cameco operates in the Athabasca Basin. That mine will produce over 20 million lbs annually.
You initiated coverage on Azarga Uranium. Why now? It seems that one of the Company’s ISR projects, Dewey Burdock, is not getting any love. Why might that be?
Azarga Uranium (TSX: AZZ) is a solid under the radar uranium developer with near-term production capability. At 0.25% U3O8, it is the highest grade ISR uranium deposit in the U.S. There are some ISR uranium companies that are doing decently production cost-wise despite the poor uranium spot price and a best in the U.S. ISR uranium deposit grade would certainly help Azarga land in that category as well. In addition the company is painfully undervalued, at C$21M in market cap the company is trading at 28% of our NAV10% value of C$74M. We recognize that everything is undervalued, but when you look at the grade of the deposit and the near-term nature to production (2018), we think AZZ is too cheap.
When do you think that U.S. utilities will have to come to the table again? Will they likely contract for 3-5 years, or less?
Utilities have historically contracted about three years prior to their need up until the past few years when the events of Fukushima led to excess inventory in the market. At that point, utilities shortened their buying windows and are now buying a large bulk of their needs in the spot market a year or less prior to their need. It is a risky endeavour but they have been rewarded quite well for a few years doing it this way.
While I cannot predict exactly when utilities will come back to longer term contracting (or to increased spot market buying for that matter) I do point out that about 15-20% of the fuel requirements for utilities are still uncovered beginning in 2017. What’s more is that this uncovered amount steadily grows in each successive year. This is a product of the mass contracting that happened many years ago. Many of these same contracts are now rolling off. So utilities will either have to enter into more new contracts to cover these requirements, or step into the spot market in a much more meaningful way.
Can you briefly discuss a few other uranium companies you cover? Have any performed well vs peers?
Our uranium coverage universe is NexGen Energy, Energy Fuels, Ur-Energy, Cameco, Fission Uranium, Denison Mines, Uranium Participation, Uranium Energy Corp, and Kivalliq Energy. Of that list the biggest outperformer has been NexGen Energy as it has recently discovered what appears to be the next monster uranium deposit. Coincidentally it is located adjacent to Fission Uranium’s Triple R deposit and also along trend to Cameco’s Spitfire project.
Regarding the Athabasca region in Canada, I was told by an expert I trust that many early-stage projects there could be 10-15 years from production. Any thoughts?
It’s possible. But then again I could say that about any uranium project anywhere in the world. The fact of the matter is that uranium is the most highly regulated of any commodity on the planet. Permits to explore, develop, and mine take a very long time to obtain due to a combination of slow regulatory movement and opposition from special interest groups that focus more on the Hollywood version of uranium mining’s impact on the environment as opposed to the facts.
Some pundits say the uranium renaissance is at least 2 years away. If true, what might that mean for uranium companies? All bets off, or will some be able to advance projects, even if at a slower pace than desired?
I firmly believe that uranium prices will undergo a violent move higher sometime in the near future due to fact that there is not enough supply to meet the growing demand. Look, we have had several years of poor uranium pricing that has led to little to no incentive for uranium exploration. This while countries like China and India have been aggressively building out their nuclear energy fleets. Primary supply has been less than primary demand for years but it has not raised prices due to the Fukushima-caused excess inventory situation. That’s a one-off situation. At some point, we are going to whittle through all the inventory and we will then have utilities with a serious problem with not having enough uranium to go around. Countries like China and India have been forward thinking about this and have been building uranium stockpiles.Russia has as well.
At times I hear of a company selling uranium, presumably near spot prices or a modest premium to spot. Why not leave the uranium in the ground and wait for better prices?
Well depending on the company it could simply be to keep the lights on.It has been a tough market for many years and some companies are struggling to come up with the cash to finance themselves as a going concern. Another situation is that some companies do not care because uranium is a by-product of their core business. A good example of this is BHP Billiton’s Olympic Dam mine. It’s a major producer of uranium but to BHP its ranked third behind gold and copper in terms of importance to that mega mine. So BHP does not quite care what price they sell the uranium at, it’s a by-product.
With the market for uranium and virtually every other natural resource sector beaten so badly, what catalyst do you think could change things? Again, not just in uranium, but junior stocks in general. Are they all correlated to the price of gold?
That’s a great question. But in general we need China to get back on track. That’s really the big driver of the global economy. That and strength in the U.S. economy, of course. But while we wait, I point out that M&A in the uranium market has been pretty steady. I would not be surprised to see more mergers and acquisitions as companies try to get bigger and/or better.
Thank you Rob Chang of Cantor Fitzgerald for your timely and detailed answers to my questions about the uranium sector.
Peter Epstein can be reached at @peterepstein2 or epstein.peter4@gmail.com. Please sign up for free updates of his work at http://EpsteinResearch.com.
