UEX Corp UEXCF

Raymond James analyst David Sadowski comments on UEX Corp.

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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.

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TER: Is there another company you can comment on?

DS: UEX Corp. (UEX:TSX) has gotten beaten up alongside its uranium peers. While there's been renewed fascination with Athabasca Basin explorers, we think the realization among investors that not all high-grade pounds are created equal has weighed on the company.

To be specific, companies like Fission have benefited from defining near-surface, high-grade pounds, whereas UEX, with its massive Shea Creek resource just down the road from Fission, trades at pennies on the dollar by comparison. We don't think it's fair. Although UEX is deeper and not entirely hosted in stable basement rock, it's a great call option on higher uranium prices. It's the third biggest, undeveloped asset in the basin after Fission's Triple R resource and Cameco's Millennium project. We also think the market is undervaluing the potential at Hidden Bay on the east side of the basin.

TER: In spite of all its assets both in ground and in its relationships, UEX is trading near its 52-week low. What will it take to boost the share price?

DS: Obviously, a pickup in the uranium price and/or broader industry sentiment will help, but the key thing is success on the upcoming program at Hidden Bay, located on the infrastructure-rich east side of the basin within a stone's throw from Cameco's underutilized Rabbit Lake mill.

In early January, UEX launched a $2.5M, 30-hole, winter drilling campaign designed to test four shallow, basin-hosted targets. What differentiates this program is the amount of data used to generate the targets. UEX has access to 1,800 historic drill holes that were drilled through shallow Athabasca sandstones and basin nonconformity, but were abandoned once basement rock was reached—such was exploration dogma at the time. Given the high number of basement-hosted discoveries over the past 15 years, such as Millennium, Centennial, Roughrider and PLS, the historic operators were overlooking the significant underlying potential at Hidden Bay. We think there's a good chance for drilling success over the next few months.