Raymond James comments RE. Fission Uranium.
Mining & Natural Resources
January 10, 2014
Industry Comment - Changes
David Sadowski | 604.659.8255 | david.sadowski@raymondjames.ca
Uranium: 2014 Setting up for Highly Enriched Returns - Highlighting Top Picks
Expecting Higher Prices. Uranium spot prices ended 2013 at US$34.50/lb – a 21% drop y/y – and a rise to US$36.25/lb in late November after several reductions in supply were announced proved to be short-lived. However, we expect 2014 to be a rebound year for the commodity as Japanese reactors resume operations (16 have applied for restarts; we anticipate ~6 units online by year-end), de-risking the space and spurring a resumption of contracting by utilities. Utilities contracted for only 20 Mlbs in 2013E (vs. the ~160 Mlbs average over the last decade), despite an ever-increasing future uranium supply risk profile (see below) and per UxC, significant uncovered uranium requirements in the 2016-2018E period (38, 53, and 71 Mlbs).
Supply Risk Increasing for Utilities. Nuclear end-users that do not soon move to cover their requirements via long-term contracting (recall, utilities typically contract for material 3-4 years ahead) may find that producers have insufficient levels of production to meet their needs in the latter half of the decade. The risk of this shortfall appears to be increasing with each passing month. In our Dec-03-13 Comment, “Supply Cuts Pull Forward Global Shortfall and Underline Need for Higher Prices” we note that global over-supply is forecasted to persist through 2016E; however, since that report, four of the world’s largest operations, comprising 22.4 Mlbs or 15% of 2014E global mine output, have shutdown: Rio Tinto’s Ranger (Australia) and Rössing (Namibia), due to leach tank failure, and in mid-December, Areva’s Cominak and Somair (Niger) halted for ‘re-scheduled maintenance’ as the company struggles to reach royalty terms with the government on a 10-year extension to production agreements. Areva stated that given current weak uranium prices, these high cost mines would be uneconomic if royalties are raised to 12% (from 5.5%) as sought by Niamey and thousands of protesters. These events not only highlight the fragility and high costs of existing uranium production, but also boost the inevitability of a global uranium shortfall should prices remain depressed, significantly increasing the go-forward risk profile for nuclear utilities that have future requirements not covered by inventories or reliable supply contracts. Prices simply must go higher to ensure the stability of supply to global nuclear utilities.
Buy the Uranium Equities. We forecast spot prices to average US$42/lb in 2014E (with a more prominent rise in the back half of the year) and US$56/lb in 2015 – 20% and 62%, respectively, above current levels and the highest y/y price gains of any metal forecasted by RJL. The equities have historically been highly efficient at telegraphing such rises; accordingly, we believe investors should immediately bolster positions in the highest-quality uranium companies:
Fission Uranium – Strong Buy, $2.00 – superb upside from 36 Mlbs (RJL est); C$20M cash; aggressive drilling resumes this month
Ur-Energy – Strong Buy, $1.80 target – Lost Creek ramp-up outperforming; balance sheet risk lower; trades like a developer
Cameco – Outperform, $25 – we expect a market re-rating in ’14 with strong 4Q13E results, Cigar start-up and Japanese restarts
Other companies we believe will perform well this year include:
Denison Mines – Outperform, $2.00 – significant cash (~$35M) and initial Cigar toll revenues to drive aggressive drilling in 2014
Uranium Participation – Outperform, $6.50 – the world’s only physical fund: a lower risk call option on a uranium price rebound
Company
Ticker(s)
Current
Target Price
Div.
Total
Suitability
Rating
Primary
Secondary
Price
Old
New
Yield
Return
Old
New
Old
New
Uranium
Cameco Corp.
CCO-TSX
CCJ-NYSE
C$21.79
C$25.00
C$25.00
2%
26%
AG
AG
OP2
OP2
Denison Mines Corp.
DML-TSX
DNN-NYSE MKT
C$1.27
C$2.00
C$2.00
nm
68%
VR
VR
OP2
OP2
Fission Uranium Corp.
FCU-TSXV
C$1.06
C$2.00
C$2.00
0%
89%
VR
VR
SB1
SB1
Kivalliq Energy Corp.
KIV-TSXV
C$0.20
C$0.50
C$0.50
0%
127%
VR
VR
MP3
MP3
Paladin Energy
PDN-TSX
PDN-ASX
C$0.44
C$0.30
C$0.30
nm
-22%
HR
HR
UP4
UP4
UEX Corp.
UEX-TSX
C$0.39
C$0.50
C$0.50
0%
30%
VR
VR
MP3
MP3
Ur-Energy Inc.
URE-TSX
URG-NYSE MKT
C$1.40
C$1.80
C$1.80
nm
29%
VR
VR
SB1
SB1
Uranium Participation Corporation
U-TSX
C$5.35
C$6.50
C$6.50
nm
18%
HR
HR
OP2
OP2
Note: Target prices are for a 6-12 month period; TR - Total Return, G - Growth, AG - Aggressive Growth, HR - High Risk, VR - Venture Risk; SB1 - Strong Buy, OP2 - Outperform, MP3 - Market Perform, UP4 - Underperform, UR - Under Review, R - Restricted.
Raymond James Ltd.
Canada Research | Page 2 of 26 Mining & Natural Resources
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Rising Uranium Supply Risk for Global End-Users
Minimal Recent Contracting. Central to our thesis for higher uranium prices over the
next few years is the pressure on global nuclear utilities to increase their rate of
uranium purchases. Over the last year – perhaps due to an apparent glut of uranium in
the market following Fukushima and only limited uncovered requirements in the
forward one or two years – long-term contracting has dried up (see Exhibit 1).
Exhibit 1: Historic Spot and Long-term Market Volumes (Mlbs/year U3O8)
0
50
100
150
200
250
300
350
2005 2006 2007 2008 2009 2010 2011 2012 2013
Market Volume (Mlbs U3O8)
Spot Volumes LT Volumes
Source: UxC, Raymond James Ltd.
Spike in Uncovered Requirements. This has led to a stark rise in the cumulative
uncovered uranium requirements (UUR) amongst global utilities starting in ~2016E. UUR
is calculated by UxC as a utility’s uranium requirements (demand), less discretionary
inventories (i.e., material in excess of the levels expected to be maintained for strategic
purposes) and less supply contracts in place. In other words, UUR represents what
utilities have to buy to meet their needs in future years, while maintaining strategic
inventory levels.
Based on UxC’s latest data, UUR is now 38 Mlbs, 53 Mlbs and 71 Mlbs for 2016-2018E –
in aggregate, a 25 Mlbs rise from only one year ago (using similar relative data points,
i.e., 2015-2017E). The rise in UUR is attributable to lower figures for discretionary
inventory and future supply contracts in place – a sign corroborating the data we see in
Exhibit 1 (utilities have reduced their levels of buying significantly).
The takeaway is that due to a major slowdown in buying we have seen a pronounced
rise in the amount of uranium utilities will have to buy going-forward.
Exhibit 2: UxC Global Utility Uncovered Uranium Requirements Estimate 2014-2025E
(Mlbs/year U3O8)
7.2
18.1
37.8
53.3
71.4
82.4
102.4
117.2
136.3
170.0
186.8
199.3
0
25
50
75
100
125
150
175
200
225
2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Source: UxC, Raymond James Ltd.
Mining & Natural Resources Canada Research | Page 3 of 26
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Future Supply Appears Insufficient. However, as outlined in our Dec-3-13 Comment,
“Supply Cuts Pull Forward Global Shortfall and Underline Need for Higher Prices,” as
well as highlighted below, with many projects deferred or cancelled, some existing
mines shutdown and demand continuing to grow, we see an over-supply situation
persisting only through 2016E, suggesting it may become increasingly challenging for
these uncovered needs to be met by material in the market. Utilities that are not fully
covered may have to rush for what is available. And, as utilities have historically
contracted three to four years in advance of their needs (largely depending on region,
with Asian utilities being the most conservative), we are now in the window of when
this ‘rush’ may occur.
Exhibit 3: RJL Global Uranium Supply-Demand Summary (Mlbs/year U3O8)
2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Mine Supply 154.8 163.9 169.3 171.3 177.0 180.9 183.3 178.9 176.2 169.3 170.2 170.8
Secondary Supplies 34.9 34.5 34.4 33.0 30.3 31.4 29.2 29.2 29.0 30.0 29.0 30.0
Total Supply 189.8 198.4 203.6 204.3 207.3 212.3 212.5 208.1 205.2 199.2 199.2 200.7
Total Demand 180.9 189.6 189.4 204.4 209.5 217.7 228.0 229.0 237.8 245.2 244.7 249.3
Supply/Demand Balance (reference) 8.8 8.8 14.2 -0.1 -2.2 -5.4 -15.5 -20.9 -32.6 -46.0 -45.5 -48.6
Source: UxC, WNA, NIW, company and industry reports, Raymond James Ltd.
Note: Our reference supply/demand outlook incorporates secondary supplies, current mining
operations, as well as new mining projects, but only those which would either be economic in the
current pricing environment (very few projects qualify, e.g. Cigar Lake) or have significant noneconomic
impetus in place (e.g. Husab in Namibia, which will supply China’s burgeoning nuclear
program).
Disruptions Underline Supply Risk at Existing Mines. Recent supply disruptions further
amplify the tenuousness of the situation. Several of the world’s largest mines have been
shut down in the past several weeks – Rio Tinto’s Ranger and Rössing (due to leach tank
failures) and Areva’s Somair and Cominak (due to re-scheduled maintenance, albeit,
there is much speculation that also playing a role are on-going negotiations to renew
production agreements with the government).
We do not argue here that all four operations will remain offline; indeed, at this point
only Ranger seems most likely to face a protracted outage as regulatory hurdles in
Namibia are low and the government of Niger appears to be softening on its previously
firm negotiating stance. However, the interruptions speak to the ramping geopolitical,
technical, and economic (particularly in the current uranium price environment) risk
profile at a significant portion of the world’s existing production – these four operations
(plus Paladin’s Kayelekera, another conventional asset we have previously flagged as a
curtailment candidate in 2014E) comprise 23-27 Mlbs/year output or 13 – 17% of global
mine supply over the next eight years.
Exhibit 4: RJL Forecast Output from Mines Highlighted by Recent Events to be ‘At Risk’ on Geopolitics, Costs and/or
Technical Issues (Mlbs/year U3O8)
2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Somair (currently offline) 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5
% of world 4.8% 4.6% 4.4% 4.4% 4.2% 4.1% 4.1% 4.2% 4.3% 4.4% 4.4% 4.4%
Cominak (currently offline) 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 0.0 0.0 0.0
% of world 2.5% 2.4% 2.3% 2.3% 2.2% 2.2% 2.1% 2.2% 2.2% 0.0% 0.0% 0.0%
Total Niger (Areva mines) 11.4 11.4 11.4 11.4 11.4 11.4 11.4 11.4 11.4 7.5 7.5 7.5
Ranger (currently offline) 5.0 4.5 3.3 1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
% of world 3.2% 2.7% 1.9% 0.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Rössing (currently offline) 6.0 6.0 6.0 6.5 7.0 7.5 7.5 7.5 7.5 7.5 7.5 7.5
% of world 3.9% 3.7% 3.5% 3.8% 4.0% 4.1% 4.1% 4.2% 4.3% 4.4% 4.4% 4.4%
Kayelekera (shutdown candidate) 3.6 3.6 3.5 3.3 3.3 3.3 3.3 2.7 2.0 2.0 2.0 2.0
% of world 2.3% 2.2% 2.1% 1.9% 1.9% 1.8% 1.8% 1.5% 1.1% 1.2% 1.2% 1.2%
Total "Higher Risk" Mine Supply 26.0 25.5 24.2 22.2 21.7 22.2 22.2 21.6 20.9 17.0 17.0 17.0
% of world 16.8% 15.6% 14.3% 13.0% 12.3% 12.3% 12.1% 12.0% 11.9% 10.0% 10.0% 10.0%
Source: UxC, WNA, NIW, company and industry reports, Raymond James Ltd.
Canada Research | Page 4 of 26 Mining & Natural Resources
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Japan Restarts the Key Potential Catalyst to Spark a Return to Equilibrium Pricing. We
believe the first reactor restarts in Japan, expected mid-2014E, will be the potential
catalyst that sparks a return to a normal rate of buying as global utilities recognize the
growing risk to future supply availability. Specifically, as restarts become more tangible
and the eventual number of restarts more clear, Japan would appear less likely to either
(i) dump its vast inventories into the marketplace (~100 Mlbs RJL est.) or (ii) continue
deferring uranium deliveries (which according to some reports had reached rates of >10
Mlbs/year). Additional mine shutdowns or longer than expected outages at the four
aforementioned operations could further accelerate buying.
Increased buying pressure should support contract uranium prices, pushing them
towards the levels required to incentivize badly-needed new mine supply (>US$70/lb).
This outlook drives our spot uranium price forecast in Exhibit 5 – a rebound
commencing in 2H14E and accelerating in 2015E.
Exhibit 5: RJL Spot Uranium Price Forecast (US$/lb)
$42.00
$56.00
$0
$20
$40
$60
$80
$100
$120
$140
2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E
Uranium Price (US$/lb U3O8)
UxC Spot Price UxC LT Price RJL Price Forecast (Annual Average)
2017E
$70.00 $70.00
2014E
2015E
2016E
2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A
Source: UxC, WNA, NIW, company and industry reports, Raymond James Ltd.
Valuation Comparison of RJL-Covered Uraniums
Exhibit 6: Current Valuation Comparison for our Covered Uranium Equities
Earnings Multiples
0.57x
0.78x
1.06x 1.09x
0.40x
0.58x 0.61x
0.0
0.2
0.4
0.6
0.8
1.0
1.2
PDN URE U CCO KIV UEX DML
P/NAV (x)
nm
10.5x
12.4x
8.7x
6.4x
10.1x
0x
5x
10x
15x
20x
PDN URE CCO
P/CF (x)
2014E 2015E
$1.70
$2.84
$7.95
$37.13
$0.74
$1.46
$8.41
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
PDN URE CCO U KIV DML FCU
EV/Resources (US$/lb)
Producer /Fund Developer/Explorer
Producer /Fund Developer/Explorer
nm
20.5x
nm
19.4x
16.4x
0x
10x
20x
30x
40x
PDN URE CCO
P/E (x)
2014E 2015E
14.4x 15.0x
8.2x
6.6x
12.0x
0x
5x
10x
15x
20x
25x
PDN URE CCO
EV/EBITDA (x)
2014E 2015E
Source: Raymond James Ltd., company reports
Mining & Natural Resources Canada Research | Page 5 of 26
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Top Uranium Picks
As uranium equities have historically telegraphed the underlying commodity price, we urge investors to buy the stocks today. Below, we outline our top picks and other recommended names, as well as flag recent corporate developments and model updates. We have incorporated the revised RJL Canadian Dollar forecast assumption of US$0.94 (from US$0.96), which has a slightly positive effect across our models.
Fission Uranium (FCU-TSXV) – Strong Buy, $2.00 target
Recent Results. In late-December, Fission released assay results from 11 holes at its 100%-owned Patterson Lake South (PLS) project, including seven at R390E Zone, one at R585E, one at R945E and two from R1155E. Highlights include:
R390E Zone. No barn-burners (best result 17.5 m grading 0.53%, including 4.0 m of 1.63%), but R390E has now been extended eastwards to within 105 m of R585E zone, corroborating our thesis that all seven zones are likely to be linked, with some pinching and swelling along trend; R390E remains open in all directions.
R585E Zone. Hole 98 cut an outstanding 16.5 m grading 8.47% starting at 123 m core depth (the fourth highest grade-thickness of any assayed interval from the summer 2013 program), including 4.5 m of 26.36%, suggesting potential for further high-grade pods within the 105 m gap to R390E to the west. Hole 98 returned the highest-grading assay yet observed on the property from a 0.5 m single sample: 60.3%.
R945E Zone. Hole 99 cut three separate high-grade zones, highlighted by a wide 30.5 m span grading 2.69%. R945E is now defined by four holes over a 30 m E-W strike length, all of which returned significant high-grade intervals. The zone is shaping up to be one of the most prolific on the property, with excellent down-hole continuity of high-grade mineralization, and similar to PLS’ other six zones, is open in all directions.
R1155E Zone. The two holes tested a subtle radon anomaly at this far east area and returned somewhat weak (i.e., weak for PLS) intervals, including 12.0 m of 0.09% and 3.5 m of 0.06%; however, these are highly anomalously values that serve to confirm the R1155E area as a ‘zone’, increasing the prospectivity of finding higher grades in the immediate area, as ‘in-fill’ towards R945E to the west, and in extensions further east. As we have previously mentioned, PLS’ now assay-confirmed strike length of 1.78 km rivals that of some of the world’s great high-grade deposits, including Cigar Lake (1.95 km) and McArthur River (1.70 km, 2P