Thursday December 06, 2012 15:14
Source: Zig Lambo of The Energy Report (12/4/12)
After two years of uncertainty, David Talbot tells The Energy Report why he expects 2013 to be the year that the balance in the uranium energy equation finally begins its tilt toward the demand side, with 2014 marking a probable supply shortfall.
The Energy Report: It's been just over three months since we last discussed the nuclear industry and the market prospects for companies in the uranium space. What have been the most important developments since then?
David Talbot: There have been a number, both on the supply side and the demand side, since early August. All the catalysts appear to strengthen the long-term fundamentals of the sector, and while they haven't necessarily moved the market, we believe they ultimately will help.
In addition, the United Arab Emirates signed a $3 billion ($3B) nuclear fuel supply contract covering the first seven years of operations at the first four of its reactors.
Beyond the demand side, we also see the supply side tightening, with the HEU (highly enriched uranium) agreement expected to go off-line in about 13 months, removing 24 Mlb of supply.
TER: Despite the continued positive long-term outlook for uranium demand, the price has been in a downtrend since midyear. Why is that?
DT: We believe the recent spot price downturn has to do with excess short-term uranium supply and low discretionary demand mainly from utilities. For much of the summer, China was not buying uranium on the spot market, and many utilities were covered for 2013 requirements. Uncertainty still surrounds long-term nuclear plans for some developed nations, including Germany, France and, of course, Japan—although we do believe some of those decisions are more political than scientific. So investors weren't touching the commodity either.
TER: Despite this recent price weakness, are you still bullish on the uranium space overall?
DT: We are still bullish. As we have stated in a couple of recent sector updates, the uranium renaissance still appears to be moving forward. There are more reactors planned or under construction today than before the Fukushima Daiichi disaster and we don't believe that anyone will step away from nuclear energy entirely. Emerging markets are going to be the real growth story, specifically China, India and Russia. Despite the current overhang, we remain bullish and expect to see 240–260 Mlb of demand by 2020, offset by maybe 200 Mlb of combined primary and secondary supply. We expect demand to exceed supply by 2014. Without higher uranium prices to support development of new mines, a long-term supply gap does exist.
Low prices are pushing expansions off or canceling them altogether, which is negative from a company standpoint but is actually positive from a long-term supply-demand perspective.
TER: What do you think will reverse the downtrend in uranium prices, and when would you expect that to occur?
DT: Price is the only catalyst that uranium sector investors care about right now, in our opinion. The main trend reversal will likely be in spot uranium buying from China and Japan, as well as from investors. In the second half of next year we'll hopefully see some movement, as the Japanese get restart approvals. China has already resumed its purchasing in the spot market and started importing uranium again. That's helping to remove some supply overhang in the spot market.
We cannot underestimate China's impact—it currently has 15 reactors in operation, 26 under construction and 51 planned, according to the World Nuclear Association. We estimate that China is going to need 45–50 Mlb annually by 2020. That's the same as what the U.S., the largest nuclear power generator, uses today. Japan is going to have to resolve its nuclear regulatory issues before it comes back on-line in any big way. In general, we could see a more robust spot market in 2013 as utilities cover requirements for 2014 and beyond. The market is waiting for the end of the HEU agreement, which is going to take 24–28 Mlb out of the secondary supply at the end of 2013.
TER: Has the recent price performance of spot uranium had much effect on your evaluation models for the uranium producers?
DT: It has. On Nov. 1 we adjusted our price assumptions downward to $49/lb for 2012 and $54/lb for 2013. We are leaving our long-term price assumption at $65/lb. Prices had previously been in the $65–70/lb range. This decrease in our short-term spot price largely impacted current or near-term producers, but made few meaningful impacts on our long-term NAV estimates for some explorers and developers.
TER: Looking forward into 2013, what is the best strategy for making money and minimizing downside?
DT: We almost always recommend buying a basket of juniors to mitigate risk, particularly if the stocks are small, but an investor's strategy must also depend on his or her view of where uranium prices will be in 2013. We recently divided the uranium sector into producers, developers and explorers, tracking their relationships with spot prices over the past two years. Explorers have the highest leverage to spot prices, with a 2.79 beta, followed by the developers with a 2.27 beta and finally the producers with a 0.81 beta.
If you're bullish on uranium, invest in developers and explorers. If you're more defensive, look to the more stable producers. Investors are watching the spot market, which represents only 17% of total uranium trading so far this year, and has little to do with the actual long-term fundamentals of this sector, which are just getting stronger.
TER: Do you think things are at a bottom, and that it is just a matter of when the turn comes and how quickly it moves?
DT: We believe a large, rapid and more sustained rally might be deferred until the second half of 2013, when Japan gets things going again. We have seen a bit of a rebound over the last couple of weeks, with the uranium prices rising for the first time in five months. Hopefully there are brighter days ahead.
TER: We'll all stay tuned and hope for the best. Thanks for talking with us today, David, and for all your insights.
DT: My pleasure.
Dundee Securities Senior Mining Analyst David Talbot worked for nine years as a geologist in the gold exploration industry in Northern Ontario. David joined Dundee's research department in May 2003 and in the summer of 2007, he took over the role of analyzing the fast-growing uranium sector. David is a member of the PDAC, the Society of Economic Geologists and graduated with distinction from the University of Western Ontario, with an Honours B.Sc. degree in geology.
Dundee Securities Ltd. and its affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by companies under coverage: Energy Fuels Inc.
Dundee Securities Ltd. and/or its affiliates, in the aggregate, own and/or exercise control and direction over greater than 10% of a class of equity securities issued by companies under coverage: None.
Dundee Securities Ltd. has provided investment banking services to the following companies under coverage in the past 12 months: Energy Fuels Inc., Fission Energy Corp., Ur-Energy Inc. and Kivalliq Energy Corp.
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