Fission Uranium Corp T.FCU

David Sadowski of Raymond James comments on Fission Uranium

[shakerman640]

https://www.theenergyreport.com/pub/na/16499

Raymond James Analyst's Four Top Picks for the Coming Uranium Upswing

Uranium spot prices have shown more life recently, says David Sadowski, mining equity research analyst at Raymond James, and he expects upward pressure to continue as utilities resume buying to meet future needs. In this interview, he tells The Energy Report the time is ripe to invest in uranium company stocks. In addition to his four top picks in the space, Sadowski identifies other companies whose takeout potential will be enhanced by the rising value of their properties, including one he thinks the market has undervalued.

The Energy Report: David, the price of uranium has been volatile recently. What's behind that?

David Sadowski: Spot prices ran in late 2014, touching $44/pound ($44/lb) as a handful of utilities entered the market, either expressing buying interest or buying material outright. At the time, supplies available to the market for spot delivery were quite thin, leading to upward pressure on prices.

But the price ran pretty quickly, and as the calendar and financial end-of-year approached, we saw a big drop-off in volume as buyers retreated to the sidelines. The timing caused the price to move around drastically. This type of thing isn't entirely unusual, if you pull up a 10-year price chart. Right now, the spot price is about $37/lb, and the long-term contract price, which has been a lot less volatile, is $49–50/lb.

TER: Do the sanctions on Russia have any effect on the price?

DS: Right now I would say no, but they could. Russia controls a huge chunk of global uranium supply. Not all of it leaves the country, because Russia has a decent-size, 25 gigawatt (25 GW) domestic nuclear fleet. That's about 7% of global operating capacity. But a lot of that material does get exported both to other countries and to client states, where Russia has constructed reactors and is under contract to supply fuel for the life of a unit under the build/own/operate model.

Quantifying the uranium supply from Russia, we estimate about 8 million pounds per year (8 Mlb/year) is mined annually within Russia, 60 Mlb is mined in Kazakhstan, which has very close ties to Russia, and the country has another 15–20 Mlb from underfeeding and coming out of stockpiles. That's about 45% of the global supply of natural uranium right there. On the enrichment side, a key part of the fuel cycle, Russia controls about half the world's operating capacity. It contributes roughly 20% of the U.S. requirements for enriched uranium product, and about a third of the European Union's. Remember, about 11% of the world's power comes from nuclear. Russia's dominant position in the nuclear fuel cycle could be key if it chooses to exert pressure on the West. If it chooses to cut back on exports, that would have a very positive impact on prices, in our view.

TER: I read that Rosatom is talking about renewing cooperation with the U.S. on nuclear material. Is that anything substantial?

DS: I would say, with the state of Russia–U.S. relations at the moment, we're very unlikely to see another agreement such as the U.S.–Russian Highly Enriched Uranium (HEU) deal, which saw the downblending of about 20,000 warheads and supplied U.S. reactors with fuel from those warheads for about two decades. It was good to see the two major nuclear powers cooperating. But I wouldn't expect another major nuclear or uranium-related deal any time soon because of the relationship today. There are also other geopolitical and economic disincentives that should cause Russia to hesitate from starting a similar HEU program.

TER: Is the price volatility going to continue? What is your forecast for 2015?

DS: 2015 should be a good year. We think we're off the bottom, and we expect utilities to pick up buying activity with renewed annual budgets in the first part of this year. We've already seen increased interest, with Duke Energy Corp. (DUK:NYSE) notably buying 150,000 pounds (150 Klb) and others talking about midterm deals. We're looking for both term and spot buying activity to increase. With spot supplies thinned, buyers will be less likely to dump material at fire sale prices, so we should see the price move upward. The utilities, after all, have been pretty quiet the past couple of years. They need to buy to cover future needs—particularly to meet requirements into 2018 and beyond. Given that the contracting window starts three to four years in advance, we're into that period now.

We project spot prices to average $38/lb in 2015. But I think there's real potential for spot to rocket through the $40/lb level before the year is out. We've all seen how quickly spot can move. With utilities poised to jump back in and supplies thinned by throttle-backs at mines, the spring is coiled pretty tightly. It's just hard to time the move. With another supply side shock—like a win by ConverDyn Corp. (private) in its suit against the U.S. Department of Energy, which is dumping into the market, reduced supply out of Russia in response to Western sanctions, or a disappointment in the planned ramp-up at Cigar Lake, which we think is a 50/50 bet—spot prices could skyrocket.

TER: Nuclear power plants in the U.S. seem to be closing down gradually. What effect is that having on companies in the uranium space?

DS: In the U.S., we've seen some half-dozen reactors announce shutdowns. More are possible, but not many. The most vulnerable are small, old, single-reactor plants with high operating expenses relative to typical U.S. plants, and reactors located in unregulated merchant electricity markets where they get outcompeted by cheap natural gas power plants. Post-Fukushima safety upgrades are also playing a small role at reactors with slim operating margins and short remaining operating lives. The closures will be offset by five new reactors under construction at Watts Bar, V.C. Summer and Vogtle.

In the U.S., nuclear power represents about 100 GW of operating capacity. We expect that to pick up slightly over the next several years. Aside from a small amount of inventory that was potentially being sold as a result of shutdowns, things remain really positive for U.S. uranium demand. We continue to expect the U.S. to be the top dog in the world of nuclear power until surpassed by China in the mid-2020s, so uranium investors shouldn't be overly concerned by U.S. shutdowns.

TER: What are the prospects for restarting Japanese nuclear power plants?

DS: We expect at least four restarts this year—Sendai 1 and 2 and Takahama 3 and 4—and there is potential to get several more by year-end. We expect the pace of restarts to accelerate after the first handful, as utilities and the Japanese Nuclear Regulation Authority learn the process of how best to submit and approve restart applications. It is, after all, a brand-new process for both sides.

Further out, at least a third of the pre-Fukushima 54-reactor fleet should return to operation. Another third is more uncertain, based on the reactor locations and design of the units. The world's biggest plant, Kashiwazaki-Kariwa, is a good example. But we continue to view the restart of reactors as a critical psychological event for the uranium space. It's unlikely to result in an immediate jump in the uranium price or a surge in contracting by Japanese utilities, but it should provide comfort that Japan won't dump its significant inventories, and that delivery deferral requests will slow down further.

TER: You said it's not likely to result in a jump in new orders. Is that because the utilities are using up the stockpiled inventories?

DS: That's right. We expect the utilities in Japan to slowly chew through their existing inventories, for the most part.

TER: Is Japan still deferring fuel deliveries?

DS: Getting firm data on that subject is a little tricky, but indications from producers are that Japanese utilities have stopped requesting new deferrals. Undoubtedly, some of the material destined for delivery in 2015 will now be delivered in the future—or perhaps not at all. But new requests for deferrals, based on what we're hearing, have dwindled. And that's a positive sign. It shows that Japan's utilities see nuclear restarts as inevitable.

TER: What companies are your top picks today?

DS: Our top picks in the uranium space are Fission Uranium Corp. (FCU:TSX), Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT) and Ur-Energy Inc. (URE:TSX; URG:NYSE.MKT). We also like Uranium Participation Corp. (U:TSX), the world's only physically backed fund, for pure uranium exposure without the exploration and mining risk.

On Fission, we have a $2.20/share target price. We like the stock for a bunch of reasons, including the recent maiden resource at Patterson Lake South (PLS), which totaled 105 Mlb grading 1.5% U3O8—a stellar outcome and the first time we have firm numbers on the project from a reliable engineering firm. Our model suggests that even in a $40/lb uranium price environment, and assuming development costs of $1.2 billion and production startup by the mid-2020s, Patterson throws off heaps of cash flow and generates a positive net present value.

This increased visibility on excellent economic and standalone viability should ramp up takeout potential for Fission. The project is the world's last known, high-grade, open-pittable uranium asset, which drives massive scarcity value. Juniors that own the best undeveloped asset in any commodity usually don't last long before getting taken out. Looking ahead, we expect more good drill results on the main trend this year, as well as exciting targets off-trend. Plus, we're hopeful for a maiden preliminary economic assessment late in 2015.

TER: Fission Uranium's PLS lease in the Athabasca is consistently described as superlative. Why hasn't the company been a takeout target?

DS: There are a few ways to explain this. Weakness in the uranium price is an obvious explanation, as buyers don't feel the need to rush out and buy more pipeline pounds when the revenue potential is not clearly evident. Another reason is some skepticism about the lateral continuity of mineralization, since the majority of holes drilled prior to last year's summer program were vertical. These concerns should be eased by the successful angled holes drilled in 2014.

Some buyers may also want to see a completed NI 43-101 resource estimate and the full document before buying the company. In fact, it's rare to see a major buy a junior in the pre-resource stage. Rather, the likes of Cameco Corp. (CCO:TSX; CCJ:NYSE) have used the junior space as an extension of an exploration arm, derisking potential acquisition targets without spending any money. A good example is Hathor Exploration Ltd., which had completed its third resource at Roughrider before the initial Cameco bid came. Fission, on the other hand, just completed its maiden resource, which is nearly double the size of the Roughrider resource.

Standalone viability may also be a pushback. Detractors have long pointed to Patterson's lack of a nearby mill as making the project a nonstarter. Potential complications with draining the lake in an open-pit scenario have also been suggested, but historic analogs imply this is not an insurmountable hurdle.

In light of these issues, Fission's market cap may be viewed as too high to justify the potential cash flows and development risks. Just for the record, we're speculating here, and we actually don't share these concerns. In fact, our model suggests an open-pit mine would generate significant free cash flow even at modest uranium prices. We see a very high takeout potential, and that's one of the key reasons we rate Fission a top pick.

TER: Do you think Fission can continue to produce good results?

DS: We think so. The $10 million ($10M) budget is expected to fund exploration of more than 20,000 meters in 63 holes, split almost evenly between the main Triple R deposit and regional exploration. We're particularly excited about the regional program's potential for discovering new zones. Forest Lake, about 8 kilometers southeast of Triple R, has been one of our favorite targets on the property since we launched research coverage on Fission. The area will receive the most regional attention, with 22 holes this winter.