When it comes to uranium market sentiment, "it's all about Japan," says David Talbot, senior mining analyst at Dundee Capital Markets. With restart applications trickling in and reactor construction underway throughout the world, a turnaround looks less like an "if" and more like a "when." In the meantime, Talbot sees many investors sitting on the sidelines. In this interview with The Energy Report, Talbot discusses the catalysts that could trigger the next uranium boom and the companies that could make investors wish they had arrived at the party a little earlier.
The Energy Report: In your last interview with The Energy Report in December, you were expecting that 2013 would be the turnaround year for uranium. What's your assessment of where things stand now?
David Talbot: Our long-term outlook remains essentially the same as last year. What we and most of the industry underestimated was the possible impact of cash-strapped sellers on the spot market. Despite recent spot market weakness, uranium producer equities have pushed ahead 10%, developers 12% and explorers 17%, on average. A uranium supply crisis is still brewing and the fundamentals do remain strong. Demand is stable and reasonably predictable. The weak spot price still threatens future mine supply with more closures, cancellations and deferrals of mining projects. The all-important catalyst at the end of this year is the end of the Russia-U.S. HEU "Megatons to Megawatts" program, which in our view will not be renewed. That means 24 million pounds (24 Mlb) of secondary supply comes offline with no replacement − equivalent to the entire production of Cameco Corp. (CCO:TSX; CCJ:NYSE). Uranium prices are too low to incentivize new builds right now. We think prices must rise, as will the equities. The Uranium One Inc. (UUU:TSX)takeout deal approved in March indicates Russia wanted to lock down a reliable uranium source. Guangdong's (CGNPC) purchase of Extract Resources Ltd. is the preeminent takeover after Uranium One. As these utilities purchase these big projects it leaves less supply on the table for the rest of the utilities.
TER: The big price drop in early July sent uranium down to a seven-year low. What happened there? Was this the bottom or is there more to come?
DT: Uranium prices have dropped significantly in the past month or so. A few weeks ago, near-term requirements appeared low and the first applications for Japanese reactor restarts were not yet filed. Restrictions were also removed from the U.S. Department of Energy regarding how much uranium it's allowed to sell in any given year. That added to the already negative sentiment.
The following week, a few suppliers failed to sell to a certain utility and were forced to place that material on the market relatively cheaply. That led to the spot price retreating even more. More positive news coming out of Japan on restarts should help the price edge back up. But during the summer lull, negative sentiment could still dominate, and prices could drop further.
TER: What catalysts might cause a significant uptrend in prices going to this predicted $70+ per pound ($70+/lb) level?
DT: It's all about Japan. Japanese restarts should provide a psychological boost. Fukushima really ended the last uranium bull run and reactor restarts will likely get that going once again. Once Japan moves forward, the rest of the world will start to catch up on the uranium purchases they've been deferring.
Investors are likely to return at that point. Utilities will also have to return to term contracting as they do have significant unmet uranium requirements over the next four or five years. There are more reactors planned or proposed now than ever before, and we are seeing contract awards for construction of reactors, like in Turkey for example, and the UK reaffirmed its commitment to nuclear only a few months ago. We continue to forecast a supply/demand deficit by the end of 2014. By 2020, we expect about 240 Mlb of demand to be offset by only ~200 Mlb of total supply, including secondary supplies.
TER: The U.S. imports about 90% of its uranium, yet we still have significant recoverable deposits. What do things look like for domestic production?
DT: Things are moving forward on the permitting front in the U.S., which remains the largest uranium consumer in the world with the largest reactor fleet. It produced only about 4.1 Mlb last year, which was about a 4% increase from the prior year. We'd expect that number to increase to perhaps 4.5–5 Mlb this year. Cameco is by far the largest producer in the country and plans to increase production at both its Smith Ranch-Highland plant in Wyoming and its Crow Butte plant in Nebraska. We expect combined production to improve from 1.9 Mlb last year to about 2.6 Mlb this year. That should offset some production losses from, say, Uranium One, which decided not to develop any more well fields at its Willow Creek in-situ recovery (ISR) project in Wyoming.
We're also expecting increased production from Uranium Energy Corp. (UEC:NYSE.MKT) from its Palangana operation in south Texas. We're expecting initial production out of Ur-Energy Inc.'s (URE:TSX; URG:NYSE.MKT) Lost Creek mine in Wyoming. The U.S. still imports about 90% of its 55 Mlb per year consumption. Producers such as Ur-Energy and Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.MKT) have had some preferential contracts in the past. For example, we believe that Ur-Energy's contracts with utilities are in the $60/lb or greater range. That's a pretty good premium to existing spot prices. Energy Fuels Inc. (EFR:TSX; EFRFF:OTCQX) sold its uranium last quarter for an average price of $56.23/lb when the average spot price for the period was in the low $40s.