Uranium Is a Deep-Value Sector
Having just founded her own research company, Mine2Capital, Alka Singh has her sights set on the uranium sector, where she sees deep values in a beaten-down industry. With two major catalysts likely to boost spot prices, M&A activity afoot, new mines coming into production and new companies coming to market, well-positioned investors stand to benefit from what just may be a coming boom. In this exclusive interview with The Energy Report, Singh shares what she sees on the horizon.
Companies Mentioned: AREVA - Cameco Corp. - Denison Mines Corp. - Paladin Energy Ltd. - Rio Tinto - Strathmore Minerals Corp. - Ur-Energy Inc. - Uranerz Energy Corp. - Uranium Energy Corp. - Uranium One Inc. - Uranium Resources Inc.
The Energy Report: Alka, after years at Rodman and Renshaw and then at Jennings Capital and Dahlman Rose, you started your own shop, Mine2Capital. What made you decide to set out on your own, and what investing philosophy will you use?
Alka Singh: The reason we founded Mine2Capital was to provide trusted information for reliable investments. That was the theme with which we started this company. In the financial markets around the world, it is not always clear to investors which information can be trusted, because some data are massaged to look different from the reality. It is our vision to provide the buyside with carefully researched data and due diligence backed by our expertise in our specific sectors, and we are very careful to disassociate ourselves from any direct or indirect financial benefits from the mining firms themselves. However, we do nurture access to all the top CEOs in our industries. Another aspect of our company is that we endeavor to connect good companies around the world with capital from the financial markets—connecting mines and capital. That is the philosophy behind the company name, Mine2Capital. That's what our goal is.
TER: Will you provide exclusive proprietary research reports to individual buyside clients, or are you preparing reports that you disseminate generally to the buyside?
AS: Yes, all of that. We do provide exclusive valuation and reports for the buyside. If a client wants us to take a look at a company or at an asset, we do the due-diligence for the assets, build financial models and write research reports. Also, there are some companies that we like and we independently cover them and disseminate information in our reports to the buyside as well.
TER: Along that line, will you be doing any buyside activities yourself? Will you be operating any funds?
AS: That will be phase 2 of Mine2Capital. We definitely want to do that as well, but not right this minute. Right now we will be doing due diligence and completing company valuations for buyside clients. In six months to a year, we will be looking at investing as well.
TER: Alka, your own sector expertise is uranium mining. What is your current theme?
AS: Well, the uranium sector had just started to show some life in late 2010 and early 2011 when the unprecedented tsunami and earthquake hit Japan and brought the sector back to low levels in March 2011. Many countries started reducing their nuclear power generation. Japan has since shut down all of its 54 nuclear power plants, some only for maintenance. And Germany has announced a phaseout of all nine of its nuclear plants by 2022. This has had a negative impact on the uranium price, and of course on uranium equities. Ultimately, given its long-term safety record, low-carbon emission profile and its ability to produce low-cost baseload power, we continue to believe that nuclear power generation will play a key role in the electricity supply chain.
TER: If Japanese reactors begin to come back online, what would it mean for uranium consumption and demand?
AS: We anticipate that Japan will begin to restart its nuclear power plants by year-end. The return of these reactors to the global fleet would increase uranium demand by approximately 12%. Another thing that will push prices higher is the end of the U.S.-Russian Highly Enriched Uranium (HEU) Purchase Agreement in 2013. Right now, Russia supplies the world with an equivalent of 24 million pounds (Mlb) of uranium on an annual basis through the down-blending of its nuclear warheads. Globally, there are 435 nuclear reactors that consume about 180–190 Mlb/year of uranium, and world production is currently only 150 Mlb. Through the HEU agreement, Russia currently supplies 13% of global uranium consumption and 45% of U.S. uranium needs.
So the end of the HEU agreement will force us to seek other sources of material at the end of 2013, and that's why we are very positive on the uranium sector, even now. Russia, China and South Korea continue to propose and plan new reactors. Those new nuclear power plants that are supposed to come online in the next 20 years are not being canceled—at least not yet.
Nuclear power remains the only carbon-free baseload source of electricity, and it is producing far more clean power than even wind or solar. In light of this, we are very positive on uranium prices and equities.
TER: So, you are saying the major catalysts for the uranium mining industry would be Japan restarting some of its reactors and the end of the HEU pact in 2013.
AS: That is correct, George. Those are the two biggest catalysts. Equities are always valuing events 12 months in advance. So, if the HEU agreement expires in late 2013, we should see an increase in uranium prices later this year. We also expect uranium equities to react positively in response to that increase in uranium prices.
TER: From what you have just said, I would surmise that you believe the uranium mining equities market is at value levels currently.
AS: It is. You are absolutely right. The uranium sector right now is definitely a value sector.
TER: Alka, I am looking at some of these sub-$200 million ($200M) market cap juniors, and some of them have mid-double-digit negative returns over the last three months. It seems that investors should be discounting these important catalysts now. What is the issue here? Is it fear?
AS: Investors tend to hate stocks when they are going down and love them when they are going up, and uranium equities react in the same way as other sectors. But logic should tell you otherwise. When everybody is against the uranium sector and staying away, that is the time to actually get into the sector—not when everybody is buying it.
The whole junior mining space is under scrutiny right now, and a lot of the portfolio managers are in cash-preservation mode and are trying to understand what direction the market is going before forking over their money in any commodity equities, whether it's junior gold equities, junior base metals equities or junior uranium equities. Investors are going toward more liquid names, and uranium juniors have all been getting killed in this kind of a market.
TER: We are seeing consolidation in the market right now. Does this normally signal a bottom in the markets?
AS: Sometimes it does. When you see a period of consolidation, it's either the bottom and stocks take off, or it's just consolidating before taking another leg down. But I think in the uranium equities market this consolidation will see the next leg up rather than down. Uranium prices have been beaten down a lot, and if you look at some of the conventional uranium producers, the cash costs are above $70/lb if you include capex and exploration costs. So uranium prices cannot stay where they are right now. It's only the in-situ recovery (ISR) production projects, which are cheaper than conventional mining projects, that can actually survive this kind of a market. There are exceptions, like Cameco Corp. (CCO:TSX; CCJ:NYSE), which has a high-grade mine with low costs. But if you look at Denison Mines Corp.'s (DML:TSX; DNN:NYSE.A) costs, they are lower than the company's $50/lb projection in Q1/11, and are now estimated at $32.50/lb as of Q1/12. But it is still difficult to be profitable when the uranium spot price is $52/lb.
TER: Would you expect that we will continue to see consolidation?
AS: Yes. It is an M&A market. Rio Tinto (RIO:NYSE; RIO:ASX) recently purchased Hathor Exploration. Cameco purchased AREVA's (AREVA:EPA) interest in the Millennium project. We've also seen Uranium Resources Inc. (URRE:NASDAQ), which is a junior, purchasing Neutron Energy. Given the low uranium price environment, companies with good assets and relatively cheaper valuations will be on the radar screen for majors, and they could get taken out.
TER: What are some of your recommendations to investors?
AS: Let me start off with GoviEx Uranium, which is a private company, and has over 100 Mlb of uranium at its Madaouela Project in Niger, which is one of the highest-grade undeveloped uranium projects in Africa. The company is looking to create value for its shareholders and advance the project to production. For advancing the project, GoviEx could be looking at some financing options. In our view, the company should be looking at the public markets as it can create a lot of value for shareholders if it can time it right. GoviEx had its preliminary economic assessment (PEA) completed in March, 2011 by SRK Consulting. SRK estimates a 15-year mine life with an internal rate of return (IRR) of 22% and a net present value (NPV) of about $240M and had used less than 70% of the total resources at Madaouela I. A prefeasibility study is ongoing to be completed by the end of the year. Also, the company recently received $40M in strategic investment from Toshiba Corp. in an offtake agreement to advance GoviEx's Madaouela project in north central Niger.
Moving on to currently publicly traded companies, I like the ISR names in the U.S. because they have a much lower cost of production than some of the conventional mining names. I like Uranium Energy Corp. (UEC:NYSE.A), Ur-Energy Inc. (URE:TSX; URG:NYSE.A), Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.A) and Uranium Resources. I am also positive about Strathmore Minerals Corp. (STM:TSX; STHJF:OTCQX).
With Uranium Energy Corp., I like the management team and I like the fact it is already in production in Texas, where you only need state approvals for permits. The company is already in production at the Palangana mine. It has five other projects lined up, and Goliad will be the next mine in production. Uranium Energy Corp. recently made an acquisition in Peru, where it will also be producing uranium by ISR methods in the next four to five years. The company's production run rate is ramping up toward approximately 1 Mlb/year of yellow cake (uranium) and will continue to increase to 2 Mlb/year from Texas operations. Uranium Energy Corp. is the first one to bring an ISR mine into production in the U.S. after six years. Its operations in Peru are not going to start for another four or five years, however.
TER: Moving on, what's the appeal of Ur-Energy?
AS: Ur-Energy has one regulatory hurdle remaining, which is approval for the plan of operations from the Bureau of Land Management (BLM) for its Lost Creek project in Wyoming. This one catalyst will be very beneficial for the company. Between Lost Creek and Lost Soldier, Ur-Energy has about 24 Mlb of uranium, $36M in cash, with the remaining capex on the project at about $31M. The recent PEA was completed in the end of April of this year, and cash costs have actually come down to an average of around $16/lb. So, even if the company sells uranium at a spot price of $52/lb, that low cash cost is what I like. I also like that production is coming soon, beginning in Q2/13.
TER: You mentioned Uranerz. Can you elaborate on that?
AS: Uranerz is targeting production for H2/12 at its Nichols Ranch processing facility from its five deposits, located in Wyoming's Powder River basin in Wyoming, which is the second-largest uranium-producing state after New Mexico in the U.S. The company is waiting for one last major permit, which is the deep disposal well permit. Uranerz has about 18 Mlb of uranium, and it is already licensed for a maximum production of about 2 Mlb/year of yellow cake. The one thing that is different about Uranerz is that its operating costs are slightly higher than the others, at about $35/lb.
I also like Uranium Resources because it has a large resource with about 101 Mlb of uranium, out of which 50% is ISR amenable.
Strathmore Minerals is another one I like in pre-production stage. Korea Electric Power Corp. (KEP:NYSE) owns about 14% of it. It is active in Wyoming and New Mexico. Strathmore is in the permitting process for production at Roca Honda, which is in New Mexico, and a feasibility study is now being completed with a Q3/12 release target. It is also permitting production at Gas Hills, which is in Wyoming. Strathmore would be in production in 2016. I actually expect Strathmore and Uranium Resources to come together in some sort of a merger or asset swap arrangement. The Nose Rock, Roca Honda, Marquez and Church Rock projects in New Mexico are owned by Uranium Resources and Strathmore Minerals jointly.
TER: Uranium Resources has shown itself to be acquisitive. But it is a small company with an $82M market cap, while Strathmore has a smaller still market cap of $40M. Would you expect this to be a stock transaction if Uranium Resources bought Strathmore?
AS: You are absolutely right. If there is a transaction, and I'm not aware of one happening now, I think it would be a stock transaction. If you look at a map of the properties that they own, the two companies basically have stakes in each other's properties. They have land positions close to each other, and it just makes sense for them to join hands. In that case, they would only have to build one central mill, and Uranium Resources has already taken one step by buying Neutron Energy.
TER: My understanding is that Strathmore's Roca Honda project is the largest uranium mine development proposal in the U.S. in decades. How long would it take for that project to get to production?
AS: Yes, Roca Honda is one of the largest and highest-grade proposed uranium mines in the U.S. in over 30 years. If the permits are obtained on time, we should see Roca Honda in production by late 2016.
TER: Uranerz, which is a near-term ISR producer, is surrounded by much larger companies—Uranium One Inc. (UUU:TSX) and Cameco. Do you think of that as a takeover target?
AS: Uranerz could be a takeover target. So could Ur-Energy and Strathmore Minerals. Once Uranerz gets that last permit and starts production later this year, it will become more attractive as a takeover candidate. Denison, Paladin Energy Ltd. (PDN:TSX; PDN:ASX) and Cameco are all looking to grow their production profiles. Cameco even made a bid for Hathor, but Rio Tinto won the bidding war, and so Cameco is definitely looking for assets as well.
TER: It sounds like there is a lot of action ahead in this sector. Thank you Alka, I enjoyed speaking with you.
AS: I enjoyed it too. Thank you.
Alka Singh started her career as a mining research associate with Wellington West Capital Markets in Toronto. Since then she has worked for Orion Securities and Merrill Lynch in Canada. She then moved to New York City to build the mining franchise for Rodman and Renshaw, where she covered 24 precious metals, base metals and uranium names. Singh has since started her own independent research firm, Mine2Capital, to provide unbiased research for clients. She holds a Bachelor of Science in geology and a Master of Business Administration in finance. She is a CFA charter holder.
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DISCLOSURE: 1) George S. Mack of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
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June 5th, 2020
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