'uranium stocks to rise from $50 to $64 '

'Uranium stocks to rise from $50 to $64 in long-term'
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While Germany and Switzerland have made headlines with sudden phase-out plans, world leaders from North America to Africa to Asia have reaffirmed their commitment to nuclear power as a low-carbon, low-cost energy solution. Development plans continue for the industry, and the long-term growth picture shows continued uranium demand. In this exclusive interview, Rob Chang discusses prospects for both junior and major uranium developers and producers, and which companies could be the next belle of the bidding war ball.

Companies Mentioned: AREVA - Cameco Corp. - Energy Fuels Inc. - Extract Resources Ltd. - Fission Energy Corp. - Hathor Exploration Ltd. - Kalahari Minerals plc - Kivalliq Energy Corp. - Rio Tinto - Uranerz Energy Corp. - Uranium Energy Corp - Uranium One Inc.

[Editor's note: This interview took place on October 24, 2011. Mr. Chang's comments were made prior to Versant Partners' engagement on Fission Energy's financing.]

The Energy Report: Thank you for joining us again. What major changes have unfolded in the uranium sector since you last spoke with The Energy Report in June?

Rob Chang: Let's look at uranium pricing first. The spot price went through the summer doldrums, as it usually does. It dipped slightly but stayed relatively flat since June. It's down about 3% and is currently in the low $50s. The long-term price declined by about 6%. It was around $68 when we last spoke. It's now $64. But there has been some good news. Looking at it from a global standpoint, the number of nuclear reactors under construction, planned or proposed has significantly increased. There are currently 565 in various stages as opposed to 553 back in June. We've also seen some M&A activity heat up the market. Cameco Corp.'s (CCO:TSX; CCJ:NYSE) and Rio Tinto's (RIO:NYSE; RIO:ASX) bids for Hathor Exploration Ltd. (HAT:TSX.V) were huge news items. More recently, the China Guangdong Nuclear Power Corp has resumed talks with Kalahari Minerals plc (KAH:LSE; KAH:NSX) and Extract Resources Ltd. (EXT:TSX; EXT:ASX) to acquire them as well. It's been a pretty interesting time for the uranium space since we last spoke.

TER: It sounds like some stability has returned to the sector and long-term prospects remain positive.

RC: I would definitely agree. The prospects haven't changed in terms of supply and demand. There was a lot of initial negative sentiment toward what happened with Fukushima. Since then, what we've actually seen is something that, in my opinion, is beneficial in the long term for the industry in that countries around the world reassessed their nuclear programs. As a result, the overwhelming majority came out saying that they're fine or that they're putting in place improvements that will make them better. Outside of the more publicized Germany, Italy and Switzerland news regarding anti-nuclear decisions and phasing out in Germany and Italy—those are the exceptions rather than the rule. For example, Japan's own Prime Minister said he thinks it's impossible for Japan to maintain its economy without nuclear power. China has completed safety assessments a month ahead of schedule. Spain has deemed nuclear power to be irreplaceable. And the Czech Republic came out with an energy plan wherein nuclear will contribute 60–80% of the nation's power by 2050. Overall, the worldwide perception of nuclear energy has been pretty positive.

TER: Looking at the price chart, we've had a bottom around $49. Have we seen a permanent turnaround in the price of uranium, or do you foresee it fluctuating in a similar range?

RC: The $49 figure is unnaturally low based on supply and demand fundamentals. In our opinion, long-term spot prices should be closer to $70 in order for supply to match demand. This would also make new mines economic, especially low-grade mines in Africa, for example. What we've seen more recently concerns utility buying, which usually occurs in the last quarter of the year. Because utilities weren't really buying, we saw a lot more volatility than we normally do. Instead, producers became the major buyers, soaking up excess supply rather than selling the uranium they're producing—it's actually more cost-effective for them to simply buy off the market and sell it at a higher price, fulfilling their contracts that way. There will always be short-term volatility, especially since uranium is viewed as a high-beta commodity.

No matter how we look at it, we're going to see uranium and uranium equities higher than they are presently. The key question now is, when will they rebound? Right now the uranium market is negatively affected by the global economic crisis and investors are not willing to take on risk. Once things settle down, the supply/demand fundamentals behind the nuclear industry should take hold.

TER: Can you bring us up to date on the developments that have taken place with uranium companies you've been covering?

RC: Sure. Starting off with Fission Energy Corp. (FIS:TSX.V; FSSIF:OTCQX), other than the bids for Hathor coming in from Cameco and Rio Tinto, the company has had some interesting exploration results. Its Patterson Lake South Project has some exploration results showing boulder trains of high-grade uranium. It's looking very prospective and the company just announced that it's doing additional trenching.

The numbers there look very exciting, with potential for something pretty significant. It will certainly add another layer of interest to what has already been a very exciting story, given that Waterbury is right beside Hathor's Roughrider Project. On top of that, the company also has its Dieter Lake property and the Macusani as well. We're monitoring Fission's progress there with a great interest. Just from looking at it, it seems just the boulders themselves are high-grade enough to potentially have a resource.

TER: Can you clarify for people who aren't acquainted with the geology of uranium—where do the boulders come from and what is their significance?

RC: That's the interesting thing. The company is currently doing some exploration to find out exactly where the boulders originated. The potential source is northeast of where the boulders were found on the property and hopefully the whole resource is all still on the property. But, these boulders are just basically rocks on the surface. Fission has been finding pretty high-grade mineralization there.

Another company we're covering and very excited about is Kivalliq Energy Corp. (KIV:TSX.V). It has identified the western and eastern extensions to their Lac Cinquante Deposit, which has 14.15 million pounds (Mlb) of 0.79% uranium—the highest-grade uranium deposit in the world outside of the Athabasca Basin. It's located in Nunavut. The western extension has shown a high-grade intercept of 2.25% over 2.3 meters (m). That's just one hole, but we've seen interesting results from both sides. It may potentially be a much larger resource. The Lac Cinquante Deposit itself is a very small part of the overall area that Kivalliq can explore. Looking at some of their target maps, it seems like there are many targets the company can potentially test that will last them quite a long time. It's quite exciting for them as well.

TER: Nunavut—that's pretty remote.

RC: Yes, but there are other projects being developed right now in the area. AREVA (CEI:PAR), to the northeast of Kivalliq, is currently working on their Kiggavik uranium project. It is reassuring for investors to see a large uranium miner currently moving forward on an asset in the area. But you are correct; there is less infrastructure and the deposit will definitely have to be high grade and relatively large for it to be economic. However, it is the highest-grade uranium deposit outside of the Athabasca Basin, so it's got the potential.