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Uranium Has a New Hot Spot: Haywood's Mick Carew
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Mick Carew Several developments in the uranium space, including the restart of a reactor in Japan that has been offline since the Fukushima disaster, have primed the commodity for a price surge. In this interview with The Energy Report, Mick Carew, research analyst with Haywood Securities, explains how, in addition to the Japanese restart, expansion in the Athabasca Basin is bolstering prospects for consolidation in the sector, and describes how a Brazilian phosphate company with a first-rate product might produce for portfolios.

The Energy Report: Mick, some prime assets are available in the junior market, but uranium prices continue to languish by and large. In Japan, the Kyushu Electric Power Co. Inc. (9508:TYO) recently restarted a Sendai reactor on the west coast of Kyushu. It is the first start-up of a nuclear reactor in Japan since 2013, in the wake of the Fukushima meltdown in March 2011. How does Haywood view the impact of this news on near-term uranium prices?

Mick Carew: The start-up of the nuclear reactors in Japan is definitely considered a positive for the uranium sector. But there are uncertainties in terms of the backlog of uranium stored in inventory in the country. With the reactor fleet being offline for four years now, Japan certainly has a significant supply of uranium on hand. How much it will purchase in the spot market in the short to medium term is uncertain. Needless to say, with the reactor restart and a good likelihood of further reactors to follow suit, demand is now lifting.

TER: The Canadian government recently granted an exemption to foreign ownership restrictions on producing uranium mines. Do you see consolidation as a dominant theme in the uranium space, especially in Canada, in the near and medium terms?

MC: We've seen the beginning of consolidation in the sector, which includes the recent merger of Energy Fuels Inc. (EFR:TSX; UUUU:NYSE.MKT; EFRFF:OTCQX) and Uranerz Energy Corp. [Editor's note: On July 6, Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT) and Fission Uranium Corp. (FCU:TSX) announced a consolidation agreement as well.] It is certainly a ripe environment for consolidation, with uranium prices the way they are, having plummeted following the Fukushima disaster.

"DuSolo Fertilizers Inc. holds an impressive exploration portfolio."

The number of players in the uranium sector is small, particularly in the Athabasca Basin. Being a niche commodity in terms of the number of companies involved in the sector, the prospect of consolidation is more limited when you compare it to, say, the gold sector. In terms of small-cap juniors, we see the potential for consolidation as access to capital dries up. Among the majors, there's already been ample opportunity for consolidation. But consolidation has not been overly significant in the sector. We see the southern margin of the Athabasca Basin in particular as a newly discovered region where mid-large cap miners will continue to focus, whether it be through consolidation or exploration. There is definitely potential to have further consolidation in that regard.

TER: What companies is Haywood Securities following in the uranium space?

MC: In the Junior space, we have followed NexGen Energy Ltd. (NXE:TSX.V) closely; the company was recently featured in Haywood's last "Junior Exploration Report." The southern margin of the Athabasca Basin has become the new hot spot for uranium discoveries in the last three to four years, through the discovery of Fission Uranium's Triple R, followed by NexGen's Arrow. Prior to these, discoveries were in the eastern part of the basin, with a couple of exceptions. These discoveries have opened up a new, highly prospective region.

More important, Fission and NexGen have accumulated significant lease holdings surrounding their respective projects. NexGen, in particular, is an earlier-stage explorer. Not only does it have the Arrow discovery, but it also has significant land holdings around that discovery.

TER: Winter drilling at the Arrow zone in Saskatchewan expanded the high-grade core A2 Shear zone on the Rook 1 property. Do the intercepts suggest that NexGen does indeed own property hosting the extension of Fission's Patterson Lake South discovery?

MC: The results from Arrow are certainly significant—concentrating on the high-grade zones known as the A2 and A3 Shears. Through aggressive drilling, NexGen has been able to expand the extent of those zones, which is obviously a positive.

"The results that Fission Uranium Corp. has released of late are aiming to extend the R780 Zone, and are very good results."

But the Triple R and the Arrow deposits are actually on different conductors, so to say that Arrow is the extension of Fission's discovery is not really accurate. What it does say is that, in effect, there is more than one structure in that part of the basin with potential for significant uranium mineralization, so it's not just a one-off. There are, potentially, multiple structures, which open the door for further discoveries in that part of the basin. Arrow is not an extension, but a separate discovery. I see this as a positive for the southern part of the basin.

TER: There was one structure, and now there are two. Could there be three? Four? Is that the thought process there?

MC: If you consider the number of pounds of uranium that have been discovered in the eastern part of the basin over the last several decades, and if you look at the strike rate and the amount of drilling being completed in the southern part of the basin versus the level of discovery of significant intersections, that suggests there's enormous potential. There are a number of conductors, or structures, that have been tested in that part of that basin, but it's still very much in its infancy. In terms of exploration, there's no reason to suggest there are not more discoveries to be found. I think it is the next growth area in the uranium sector.

TER: How did Fission's recent drill results compare with those of NexGen, in your view?

MC: In some ways, you are asking me to compare apples to oranges, in the sense that these two companies are in very different stages. Fission has released an Inferred resource of +100 million pounds. It's a significant resource. The results that Fission has released of late are aiming to extend the R780 Zone and are very good results. NexGen, on the other hand, is in an earlier phase of discovery, very pre-resource. The company is testing the extension potential of the higher-grade uranium mineralization it has discovered. NexGen needs to follow up this extensional drilling with infill drilling to determine the continuity of the uranium mineralization between the widely spaced holes it has just released.

For more on uranium producers, Haywood Securities' Colin Healey covers a number of companies in the sector including Denison Mines, Energy Fuels, Paladin Energy Ltd. (PDN:TSX; PDN:ASX), Ur-Energy Inc. (URG:NYSE.MKT; URE:TSX), Uranium Energy Corp. (UEC:NYSE.MKT) and Uranium Participation Corp. (U:TSX).

TER: Consolidation is also happening in the fertilizer space with PotashCorp (POT:TSX; POT:NYSE) making multiple overtures for Germany's K+S Aktiengesellschaft (SDFG:FSE). What should investors learn from those repeated attempts to complete a takeover?

MC: The recent takeover bid by PotashCorp reflects a similar trend in other commodities. You have lower prices and oversupply globally, particularly in North America, encouraging consolidation. There are concerns over the impact that increased supply will have on the potash market after K+S' Legacy project in southern Saskatchewan is brought on line. There's no doubt streamlining operations in Saskatchewan, where PotashCorp has a major position, could reduce costs and improve returns.

"NexGen Energy Ltd. is testing the extension potential of the higher-grade uranium mineralization it has discovered."

This is not the first time PotashCorp has gone after K+S. PotashCorp tried to purchase 51% of K+S back in 1997. It has made a number of overtures of late. Funnily enough, PotashCorp was blocked by Germany over antitrust concerns, which ironically is the same issue that prevented BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) from acquiring PotashCorp last year.

Consolidation in the potash space, particularly among the larger producers, will likely continue to attract antitrust concerns. Overseas, projects might be scaled back to stabilize global supply. In addition, similar to the uranium sector, the fertilizer sector has been a niche market, so there are fewer companies in the sector compared to other commodities. This limits the potential for significant consolidation in the sector.

TER: Do you expect other large players to seek upstream or strategic assets?

MC: In the fertilizer sector, again, it will be more limited because there are only a few key players in the space. I certainly think some of the other major players will be looking at these types of assets given the depressed commodity prices.

TER: What fertilizer equities do you follow?

MC: We have followed DuSolo Fertilizers Inc. (DSF:TSX.V) for some time. The company has successfully brought its flagship Bomfim phosphate project in Brazil to production this year, and is currently producing direct application natural fertilizer (DANF) from high-grade phosphate rocks. Once modifications to its processing facility are complete, DuSolo will have the capacity to produce approximately 160,000 tons (160 Kt) of DANF per annum.

We note that the company has secured numerous sales contracts for the 2015 plantation season, totaling approximately $8.5 million, demonstrating its ability to negotiate sales contracts in the local Brazilian market. The last sales contract it secured was with a major Brazilian fertilizer distributor for approximately 60,000 tonnes at a price of BRL230 for BRL13,800,000, or $5.2 million at today's exchange rate (Aug. 17, 2015).

DuSolo recently issued a press release in which it explained that the planting season in Brazil has been hampered by an unusually long rainfall season. The company has received a $750,000 bridge loan to see it through the period while it ramps up to full production. Despite the setback, we see a bright future for DuSolo in the medium to long term given its location—it's within one of the fastest growing agriculture districts in the world. While Bomfim has considerable expansion potential, we note DuSolo also holds an impressive exploration portfolio. In addition, there is potential to produce alternative phosphate products to meet both global market and local market demand, given the high grade of the phosphate material at Bomfim and elsewhere.

TER: DANF is basically material you can put directly on a soil, right?

MC: Exactly. DANF is very simple to produce from the original rock. You just grind it and sort it and send it away. The properties are such that it's a very in-demand fertilizer. As long as you have sufficient grade to produce DANF, it's very simple to process,

TER: Does the size of this company affect the market's confidence in it?

MC: I think so. The key is transparency in terms of price assumptions. We're dealing with a local market here. We're not dealing with a floated commodity, as with gold and some others. Both transparency and confidence in supply and demand in that local market are more difficult to ascertain. It was unfortunate that the rainy season endured as long as it did. The weather did hamper production and limit the level of production and sales DuSolo could achieve. Once the company has been able to demonstrate that it can produce this product, sell it to its customers and fulfill the sales contracts that it has negotiated, then I think investors will have more confidence in the company moving forward.

TER: Do you have any parting thoughts for us on the energy space?

MC: The uranium sector has been depressed, but all commodities have been. With Japan coming on line, I think investors are feeling more confident of the sector now. And if Japan comes on line with confidence in uranium as an energy source, I think the uranium space is the place to be. We'll see that reflected in the uranium price accordingly.

TER: Thank you for your time, Mick.

Mick Carew is a mining research analyst with Haywood Securities. Carew has mineral exploration experience on three continents, Asia, Australia and North America, with specific expertise in a variety of uranium, base and precious metal ore deposits. He also brings extensive technical experience in the evaluation of potential targets and geological properties. Carew holds an Honors Bachelor of Science from Monash University of Melbourne and a Ph.D. from James Cook University.

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DISCLOSURE:
1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: DuSolo Fertilizers Inc., Fission Uranium Corp., NexGen Energy Ltd. and Energy Fuels Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Mick Carew: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Energy Fuels Inc., DuSolo Fertilizers Inc. and NexGen Energy Ltd. Haywood Securities Inc. is a financial advisor for Denison Mines Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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