Simon Tonkin: Uranium Supply-Demand to Remain Tight
Source: The Energy Report (5/21/09)
A worldwide dearth of uranium mines and highly skilled metallurgical teams to mine it has investors seeing yellow (cake, that is). "The thing with uranium is it's easy to dig up but hard to get out," says Simon Tonkin, who covers base metals, including uranium, at Thomas Weisel Partners. In this exclusive interview with The Energy Report, Simon discusses emerging challenges in the uranium sector and the deficits he foresees in the global race for supply.
The Energy Report: Simon, why have the uranium stocks made such a nice move in the last week or two when oil's been coming down? I thought part of what was driving the uranium stocks in the previous cycle was the ever-spiraling upward price of oil, making more and more people want to look to alternatives (one being uranium). Could you comment on that?
Simon Tonkin: First of all, I think the supply-demand picture looks tight. We're forecasting deficits to about 2013 and, potentially, if Cigar Lake—the biggest undeveloped uranium deposit in the world—doesn't come online, then we could see deficits further out than that. Secondly, there's a scarcity of uranium mines throughout the world. Most of them are owned by big companies like BHP Billiton Ltd. (NYSE:BHP) (ASX:BHP) (PK SHEETS:BHPLF), Kazatomprom, Cameco Corp. (TSX:CCO), and Rio Tinto (NYSE:RTP).
Most recently what we have seen in the uranium space is the power utilities coming in to buy stakes in uranium producers to potentially guarantee supply. We've seen the Japanese and Koreans come and buy stakes in uranium mines, and last week the Chinese said they are interested in buying stakes in mines and, a while back, the Indians also indicated that they were looking at that. So it's these emerging economies with big reactor plants that are buying up stakes in uranium mines and projects. That's actually sparked the market to realize supply is potentially scarce.
The thing with uranium is it's easy to dig up, but it's hard to get it out. It's the processing that's the key to getting the actual uranium out. Each deposit is fairly unique in terms of its processing, and getting a good metallurgical team together to actually recover the uranium is most important.
TER: I would assume there'd be a shortage of those types of people with this pullback. Are there people available?
ST: There is a shortage of people with good metallurgical skills, but, obviously, once a really good guy irons out some of the issues, then he may be needed somewhere else and Mega Uranium has one of those guys.
TER: Is Mega Uranium Ltd. (TSX:MGA) on your coverage list?
ST: Yes, it's on my coverage list. Mega has the Lake Maitland Project in Western Australia (WA). Western Australia had an election in September 2008, and the Liberal party won. They were pro-uranium, so they got rid of the anti-uranium government and Lake Maitland represents, potentially, one of the first new uranium mines in WA. The government is very supportive of uranium mining, and they're working towards getting uranium mines permitted to start bringing some royalties and revenues into the state.
TER: I thought Australia had a three-mine policy. Remind me how that policy works.
ST: Originally in 1983, the Labor party government restricted the number of mines in Australia to three and, basically, it stayed like that for over 20 years until the Labor party had a convention in 2007. At that point they overturned this policy, so it opened up the potential to develop uranium mines in Australia. The opposition leader at the time and now Australia’s Prime Minister, Kevin Rudd, basically said it's up to the states to decide on whether they mine uranium or not, and then the Western Australia election reversed the ban there.
Queensland still has a ban on uranium mining and everywhere else is pro-uranium. So Martin Ferguson, the Federal Resources Minister, came out about a month ago and said that Queensland will change its mind eventually. So the current Labor government is supportive of uranium mining. It's actually the State Premier, Anna Bligh, who has voiced her opposition to uranium mining because she believes it will create only 150 jobs, long term. That was according to the Deloitte study. However, there are potentially thousands of jobs created during the construction period. She was referring more to the longer-term period.
TER: Are mines just coming into production this year, or is there a delay while they get their permits and start up? I'm thinking about Mega, which you were referring to earlier.
ST: Mega is a while off yet—it will be 2012. They're still working on the definitive feasibility study. But the two closest mines to production are Alliance's Four Mile Project, which is permitted, and Honeymoon, which is owed by Uranium One. So they're the two closest ones and they're both in South Australia, where Olympic Dam is currently the last copper-uranium mine and provides most of BHP's uranium production. I've done a full report on the companies we think are going to be in production next in Australia.
I'd like to talk a bit more about Mega before moving on to other companies. It could potentially be the first new uranium mine in Western Australia. We recently visited the site and were impressed by the potential for lower operating and capital costs. One of the most positive things about Mega is that the Japanese are looking to take a 35% stake in the Lake Maitland project and that's for $49 million U.S. The capital costs of the project are around $85.1mn; so, effectively, with that $49 and the cash position of Mega, they could virtually afford to develop this project. This is the key focus for them and they're spending around $20 million on the project this year to bring it up to do the definitive feasibility study, which is due in Q1 of 2010.
The other thing that could come into play is consolidation in the region because there's a number of other uranium hopefuls in the region. BHP's Yeelirrie is in there. The largest undeveloped uranium deposit in Western Australia. I think there are some opportunities around for Mega, especially if they're the first mover in the region. They may be able to process other deposits around the area. Longer term, they've got a couple of projects in Queensland if the government decides to change their anti-uranium stance. We think they will in the next 12 to 24 months; we're saying more longer term.
TER: What about some other names in the Australian uranium space that you like?
ST: In the Australian uranium space, we have Toro Energy Ltd. (ASX:TOE) (not covered), which is fairly close to Mega Uranium—about 60 kilometers away. We have Energy Metals (not covered), which has the Bigrlyi Project in the Northern Territory. Uranium Equities Ltd. (ASX:UEQ) (not covered), out of South Australia, is quite interesting. They have developed a process to get uranium out of phosphates for fertilizers and they're working closely with a large U.S. firm; that has potential. They want to start off around 5 million pounds per annum of uranium, and then move up towards 20 million pounds. Twenty million pounds represents around 15% of global production, so it could be significant. But, again, it's further down the track.
Basically, there are three uranium mines in Australia. The first one is Ranger, which is owned by ERA, and it's in production. Ranger produces around 13.1 million pounds per annum and is 68%-owned by Rio Tinto.
Then we have the Beverly Mine, a U.S. company, which is an ISL (in situ leaching) operation. It is owned by Quasar and General Dynamics. Beverly's almost mined out, and that's where the Four Mile Project, owned by Alliance and Quasar, comes into play. Basically, Beverly's nearly done, so they need to go onto the next deposit, which is right next door. Four Mile is permitted and they're working to go into production by either the end of the year or early next year.
Olympic Dam, the largest copper-uranium deposit in the world, is owned by BHP. It has very unique iron ore copper, gold and uranium and produces around 4,000 tons per quarter.
So those three mines are the producers in Australia. Moving on to the next-nearest producers that I mentioned before are the Four Mile Project owned by Alliance and Quasar, which is near Beverly, and the Honeymoon Project owned by Uranium One. Both of these are slated for early 2010.
After those we move on to companies like Mega and several Western Australia companies that are the uranium hopefuls, looking to be the next producers. Western Australia certainly has a large resource base.
The largest project there is Yeelirrie. Yeelirrie is a calcrete deposit. It's located a little ways from Mega. Also, we have Toro Energy about 60 kilometers to the north of Mega and they also have a calcrete deposit there. These calcretes are very close to surface and fairly easy to mine. As I said before, the processing is the key to get this stuff out, the metallurgical properties; and each deposit is potentially different, so they have to adjust the processing facility to handle the different types of ore.
TER: Could you go over your stocks that you have over-weighted ratings on, ones you'd like to point out to our readers?
ST: Yes. I've got a number of overweight stocks. One of the companies I have been following since last August, when I initiated coverage of the uranium space, is Extract Resources Ltd. (TSX:EXT) (ASX:EXT) based in Western Australia. They're in the Rossing South deposit in Namibia. The Rossing South deposit is located roughly 7 kilometers south of the Rossing mine, which is Rio Tinto's mine in Namibia. That mine produces around 9 million pounds per annum, and Extract made a very exciting discovery in early 2008—drilling 108 million pounds of uranium in the first zone. The grades are 430 parts per million. This makes it the highest-grade uranium deposit in Namibia. Rio Tinto took some interest in the deposit; they actually own around a 20% stake in the combined Extract because Kalahari owns 39% of Extract and Rio owns a bit of both. There's good potential there for 100 million pounds and that will take this resource over 200 million pounds, which potentially makes it the biggest uranium discovery in the world in the last 20 years.
TER: Another name you want to bring up?
ST: We've recently increased our price targets in the last week on Paladin Energy Ltd. (TSX:PDN) (ASX:PDN). They've got some good projects and they're doing all the right things. John Borshoff's got over 30 years of experience in uranium and has Langer Heinrich in Namibia, and they're just starting out Kayelekera in Malawi. The diversification of the projects is a positive thing. They're looking at producing 3.7 million pounds from Langer Heinrich Stage II and then 3.3 million pounds from Kayelekera, but they're only earning 85% of Kayelekera because of the government. So Paladin's got a good jurisdiction in Namibia, they've got a quality management team, and they have quality assets in Queensland as well. .
I also like Uranium One (TSX:UUU). They are in Kazakhstan, which is a little more risky, but the positive for them is that they have the in-situ leach deposits. Akdala and South Inkai are both in production now and they are low cost. They're between $16 and $22 a pound compared to Paladin, which is more like $25 to $30 a pound. So you can see there are big advantages there. The other thing that's been a real positive for Uranium One is that the Japanese have come in to take 20% (subject to finalization) of the company, and they have a large cash balance of around $400 million. With that money, they are also looking around to potentially acquire further production assets. The other thing that Uranium One has going for it is that the Honeymoon Project should be in production in 2010. That should provide a million pounds per annum.
TER: What about Bannerman Resources Ltd. (TSX:BAN) (ASX:BMN)?
ST: Yes. Bannerman's really interesting in that it's right next door to Extract. The positive thing about Bannerman is it doesn't have a cornerstone shareholder per se. No one has their finger on it, but Clive Jones and Nathan McMahon do own a fair whack of Bannerman, and they also own 20% of the project that Bannerman doesn't own. Bannerman's got around 126 million pounds of uranium in the Etango deposit. The grade on their resource is around 200 parts per million below that of Extract but, if they increase the cutoff then we get grade at around 275 parts per million; but the resource comes down to around 54 million pounds. So I think there's potential there for a starter pit and the new CEO, Len Jubber, is quite a good operator. He's got a plan to get this thing developed and his first big milestone will be the pre-feasibility study in the middle of the year. Then we should see a definitive feasibility study by the end of the year. Early 2010 we'll see the results from that.
TER: Back to your original comments about supply and demand and how supply is getting tighter and tighter and demand is increasing—what about a play with Uranium Participation Corp. (TSX:U)? Isn't that a straight play on uranium?
ST: Yes, Uranium Participation Corp. owns around 5.4 million pounds of uranium equivalent. So, all these uranium mining companies have the technical risks that go along with having a mine. They've had their fair share of issues they've had to deal and risks for investors. The beauty of Uranium Participation Corp. is that it has none of those risks and you're basically investing in a share in 5.4 million pounds of uranium. Uranium Participation Corp. should run with the spot price, which it has increased. I think it's $6 to around $7.50. With the spot price moving, it could be a safer investment for an operational uranium company. I have a 12-month target price of $10.
TER: I see two more companies that I'm familiar with that are not in the energy space on your list. One is Quadra Mining Ltd. (TSX:QUA) and the other is GlobeStar Mining Corp. (TSX:GMI). Any words of wisdom there?
ST: GlobeStar is in the Dominican Republic. They've got the Cerro de Maimón deposit and they're producing around 30 million pounds of copper this year. This is a good little project; it's quite high grade. The company is doing a bit of drilling around the mine with potential to find sort of parallel ore bodies. I haven't seen the stock price today, but at 70 cents the stock has got a fairly good return there; and they seemed to hit their targets in Q1. We're still waiting on the financials to come out, but certainly their production targets were met. There were some issues with the oxide circuit, but that was made up by higher grades in the sulphide circuit. I think GlobeStar is a good little play.
Quadra's a more solid, larger company. It's got a market cap of between $500 and $600 million. They've got an aggressive acquisition strategy. They just picked up Centenario, which owns the Franke deposit down in Chile—a good fit for them. This year they're going to produce 150 million pounds, but with Franke it'll be more like 220. These guys want to get 500 million pounds of copper by acquisition. They have the team to build mines, and they are searching to add pounds.
TER: Thank you, Simon, this has been great.
Simon Tonkin covers base metals including uranium at Thomas Weisel Partners. He came to Thomas Weisel Partners in January 2008 as part of the Westwind Partners acquisition, after joining the firm in 2007. Simon is based in Toronto. Previously, he was a Resources Analyst at Hartleys Ltd., Australia, from 2003 through 2007. He was a Resources Associate at Hartleys from 1999 through 2002. Simon received a Graduate Diploma of Applied Finance and Investment from the Financial Services Institute of Australasia, Perth, and a B. Ed. Degree (first class honors) from Edith Cowan University, Perth.
Thomas Weisel Partners LLC or an affiliate has managed or co-managed a public offering of securities over the past 12 months for the following company or companies: Bannerman Resources Limited; CIC Energy Corp.; GlobeStar Mining Corporation.
Thomas Weisel Partners LLC or an affiliate has received compensation for investment banking services from the following company or companies mentioned in this report over the past 12 months: Bannerman Resources Limited; CIC Energy Corp.; GlobeStar Mining Corporation.
Thomas Weisel Partners LLC or an affiliate expects to receive or intends to seek compensation for investment banking services from the following company or companies mentioned in this report over the next three months: Bannerman Resources Limited; CIC Energy Corp.; Extract Resources Limited; GlobeStar Mining Corporation; Quadra Mining Limited.
Thomas Weisel Partners LLC or an affiliate has provided or is currently providing investment banking services to the following company or companies mentioned in this report during the past 12 months: Bannerman Resources Limited; CIC Energy Corp.; GlobeStar Mining Corporation.
The analyst has viewed the material operations of the following company or companies mentioned in this report during a recent site visit. The following company or companies mentioned in this report paid for a portion of the trip: CIC Energy Corp.
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