The Gold Report: Mike, we often hear that the current generation doesn’t realize how good they have it compared to when you had to walk uphill both ways through snow to make a trade. Is it easier to invest today with all the resources online and pundits around every corner or is it harder to cut through the noise and find the best opportunities?

Michael Berry: While the Internet makes it easier to do research and make a trade, that doesn’t mean it is easier

to make a good trade, or better still, a smart long-term investment. I think it’s challenging today. It’s easy to trade, but much more difficult to create real wealth. A P/E multiple used to have real meaning. Today, the pace of the market is so fast, there are so many flash traders, so many games being played and so many nickels being minted, that it is difficult to figure out what is real. There are debt and equity bubbles out there that have been being created for the past two decades. They can be difficult to take advantage of because investors have to go against the prevailing thinking.

Hedge funds can’t make it today; only the private equity players seem to be successful and they have tremendous advantages. Almost all central bankers are in the investment game now. The Federal Reserve owns 25% of the Treasury bond market. What do they plan to do with their investment? There is US$9 trillion sloshing around the world today and a global exchange rate devaluation. These issues make central bankers powerful new players and make the market more challenging for individual investors.

TGR: Chris, did the boomers and the flash traders wreck it for the rest of us?

Chris Berry: Algorithmic trading has raised many issues while at the same time solving others. Regarding the boomers wrecking it for us, I don’t necessarily think so. True, debt and deficits must ultimately be reckoned with and its through debt that we in the West have been able to live beyond our means, but the cost of technology is declining so quickly and the opportunities that it brings paint a reasonably optimistic view of the future, in my eyes. There are clear structural challenges and inefficiencies in the markets today, but I have faith in human nature to confront and solve these. 

TGR: Chris, you just spoke at the Cambridge House Investment Conference in Vancouver (See our story on the Vancouver conference takeaways here). What was your message to current resource investors looking to take advantage of the opportunities you see all over the world?

CB: I discussed the idea of disruption in energy markets and I laid out the case for why segments of the energy markets are ripe for disruption and offered some areas where I think opportunities exist. According to the World Bank, the urbanization rates in China (53%) and India (32%) are still far below those in the West. Most economists would consider a country “urbanized” when the rate hits 75% (the US and Canada are at about 81%). The percentage differences equate to over a billion people who live at a fraction of our quality of life. Data like this shows that there are opportunities to employ new development models that disrupt the old patterns.

TGR: Are energy metals—lithium and cobalt in particular—part of that disruption solution?

CB: Yes, but it may unfold differently than we are currently forecasting. I define an energy metal as any metal or mineral used in the generation or storage of electricity. That includes lithium and cobalt, but also copper and silver, which have much larger markets with a lot more price transparency. The real growth, however, will be in niche energy metals, including lithium, cobalt and scandium, for example. The demand side is positive for all of these metals over the next 5 to 10 years. 

Lithium demand is growing by 8–10% per year. As we sit here today, the potential for supply disruptions exists in lithium due to major producers having production issues and juniors facing difficulties accessing the major funding for production decisions. Cobalt demand is growing anywhere from 7–9% on a year-over-year basis. 

TGR: What companies could move to fill that demand in the lithium, cobalt, copper and scandium space over that time?

CB: In the immediate term, the existing producers of these metals are going to handle the looming demand. Five years from now, we’ll need additional supply and this is when the aspiring producers could benefit.

With cobalt, the large-caps are where I am focused. Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE), Glencore International Plc (GLEN:LSE) and First Quantum Minerals Ltd. (FM:TSX; FQM:LSE) are all examples. To be clear, cobalt is a very small part of their business—it’s essentially a byproduct of copper and nickel mining. However, I think it’s an important one, given the need for cobalt in battery growth. The cobalt value chain is not vertically integrated very well, with a majority of supply coming from one country (the Democratic Republic of Congo) and a majority of the refining taking place in another (China). Freeport-McMoRan is one of the largest refiners of cobalt outside of China, and so it’s been a part of its business I pay close attention to. I have also begun looking at cobalt recycling. A company called Umicore Group (UMI:BRU) is a particular focus in that area. 

I think a top-down approach is also the best method to evaluating the lithium sector. I’ve said in the past that lithium is really an oligopoly and when you look at the major producers, they’re really chemical or agricultural companies with lithium as a side business. I suppose the opportunity lies in the fact the major producers are all facing different challenges. Sociedad Química y Minera de Chile S.A. (SQM:NYSE; SQM-B:SSX; SQM-A:SSX) is facing political challenges in Chile and is effectively capped on what it can produce. FMC Lithium Corp. (FMC:NYSE), one of the other major lithium producers in the world, has had production and political challenges. That said, companies like those can produce lithium at a low cost, so any companies looking to compete will have to meet or beat their production costs. I think this requires leveraging technology to do so. 

Albemarle Corp. (ALB:NYSE) looks particularly well placed given its acquisition of Rockwood Holdings, which was the number one producer of lithium compounds in the world before it was taken out in a $6.2 billion deal. Lithium production also emanates from China from the likes of Sichuan Tianqui Lithium Industries (002466:SHE) and Jianxi Gangfeng Lithium (002460:SHE), but the insane volatility of the share performance in the Chinese markets are not for the faint of heart. 

On the junior side, Lithium Americas Corp. (LAC:TSX; LHMAF:OTCQX) and POSCO (PKX:NYSE) are in discussions to mutually pursue a commercialization strategy. If Lithium Americas and POSCO can put a deal together to leverage POSCO’s proprietary lithium production technology, which can increase recovery rates, lower the time to market and lower the overall environmental footprint, that is a win-win all the way around. More importantly, it could serve as a model for other aspiring lithium producers on how to enter this rapidly growing space. There are a number of competing technologies in the lithium space that are focused on lowering costs, which I think is an exciting example of evolution in action in mining. 

I also think that optionality is important in the mining sector. One company that’s demonstrating this concept is Galaxy Resources Ltd. (GXY:ASX; GALXF:OTCMKTS). The company has a storied history in the lithium space, but one important thing it has now, relative to a lot of its peers, is cash. The company sold off its Jiangsu lithium plant in China, and struck a deal with General Mining, an Australian junior. The deal was recently revised, but will see Galaxy sell 50% of its Mt. Cattlin lithium mine for a total consideration of AU$25M. That gives management of both companies choices and flexibility. What it will probably do is focus on bringing its Sal de Vida lithium development play in Argentina closer to production.

TGR: What about copper?

MB: Today’s announcement by Quaterra Resources Inc. (QTA:TSX.V; QTRRF:OTCQX)that Freeport-McMoRan Nevada has committed $7.1 million toward option payments over the next 12 months is certainly a welcome one for Quaterra investors. I have been associated with the company for the past 15 years and participated in its private placements. Two years ago I was elected to the Board of Directors. It appears that Yerington has the potential to become a world-class mine once again. 

The Bear deposit, a large porphyry copper system on the Yerington property, will now be explored with Freeport’s decision to move into phase two. This will be a $7.1 million program over the next 12 months run by Quaterra to explore the Bear. Of course Freeport, the world’s largest copper producer, can opt out at any point in the future, but it can also spend up to $138 million over a period of several years to earn a 75% interest in the property. How many companies with a market cap of $13 million have a direct investment of almost $10 million from a major mining company with little or no dilution to shareholders? Hats off to Quaterra’s CEO Steve Dischler and to Chairman Thomas Patton for their hard work in seeing this relationship with a major mining company begin to bloom. I own shares in Quaterra and in fact have never sold a share. From the viewpoint of the city of Yerington and state of Nevada, this agreement has benefits all round. Now it’s time for Quaterra management to explore the Yerington property, which could become a major world-class copper resource. 

TGR: Mike and Chris, you’ve both lived through a number of investing cycles. Where are we in terms of the rare earth (RE) cycle? 

CB: We’re close to the bottom. It’s difficult to tell when the current down cycle will turn, as getting reliable data out of China is always challenging. It looks like China is serious about addressing its environmental challenges and demand for certain products that require REs continues to grow well above global GDP—two supportive factors for the market. Illegal mining has added excess supply to the marketplace and kept a lid on prices. Because of this, leveraging technology to ensure aspiring producers can compete with the “China price” is imperative. 

I’m paying particularly close attention to advances in molecular recognition technology, ion exchange and solvent extraction, all of which are very promising. China is not going to give up its stranglehold on the market no matter what the World Trade Organization or anybody says. If you want market share in this space, you have to beat China on price. The Siemens AG (SI:NYSE) deal with Molycorp is a positive sign that major end users are looking to secure REs outside of China, despite the bleak future for Molycorp. We need to see more of that to reignite investor interest. 

TGR: What is more important for a RE company, the resource, the processing chemistry or the agreements with the end users?

CB: If you don’t have an offtake agreement, and I don’t mean a letter of intent or a memorandum of understanding, I mean a binding offtake agreement, then nothing else matters. A binding offtake agreement is a vote of confidence that you can produce a product that an end user is certain it can integrate into its existing supply chain. Unfortunately for investors, the offtake is typically the last piece of the puzzle to fall into place. Usually, a mining company will need to establish positive economics for a project at a number of different pricing scenarios first. Unless the economics are robust, getting an offtake agreement is not likely, but without an offtake in place, the project is never going to move forward. So it’s sort of a chicken-and-egg phenomenon. And it is not just with REs. It’s the same thing with lithium, cobalt, graphite and some of these other niche metals. 

TGR: Mike, are you seeing the producers stepping up and doing deals as they see explorers moving projects forward? Are you anticipating more mergers and acquisitions in the near future?

MB: Many explorers have stopped moving projects forward for a lack of capital infusion. Mergers are getting done. Unfortunately, because of the duration of this bear market, too many are being done for pennies on the dollar. Even the big gold companies are trimming marginal projects that they otherwise would have developed and kept in inventory. They will wish they had kept them. This bleak setting sets the stage for a massive renaissance in the price of these metals in two to three years. And we’ll benefit from that when it comes. Inflationary expectations, when they arise, will tell us when this renaissance is in front of us.

TGR: What are some RE, silver or gold companies that you think are poised to be bought out?

MB: Almost all of them are struggling. One that’s struggling with an extremely undervalued share price is Silver Wheaton Corp. (SLW:TSX; SLW:NYSE). It is a great buy right now. The stock has really been beaten up. It gets 25% of production from a number of different silver deposits at $4/oz or $5/oz, including Goldcorp Inc.’s (G:TSX; GG:NYSE)Penasquito project with 1 billion ounces of silver in reserve. The shares are presently trading down 33% from their 52-week high.

There are some really good plays out there that I think will eventually be taken out by their bigger brothers. Quite a few of them are cheap. I’m more interested now in silver and gold companies because they are such a bargain relative to the energy metals companies Chris has been watching. I am focusing on companies that are not in production, not likely to be in production and have enough cash to sustain themselves through the next couple of years. I like to invest in non-public companies at present. There are some great projects that will bloom by 2020 out there. 

CB: On the niche metal side, I am not anticipating a lot of accretive M&A. The global RE market is too small for a major mining company to acquire a junior. It doesn’t “move the needle” on the balance sheet. In lithium, I think the Albemarle-Rockwood deal was the last large deal we’ll see for awhile. I would be extremely surprised if an auto manufacturer actually bought an equity stake in a lithium or graphite aspiring producer. Perhaps technology sharing or possibly a long-term offtake agreement that would act as a long-term call option, but that’s it. The energy metals companies are going to have to manage their balance sheets appropriately, minimize dilution and survive until demand outstrips supply. That is why I am focusing on companies that can leverage technology to lower costs. Low-cost potential producers have a chance. The rest do not. 

MB: I agree with Chris about the power of technology. Look at the oil industry. The Saudis came out last Thanksgiving and said, we’re going to take the American oil industry’s staggering new production, specifically the shale oil industry, off line. They did not reduce their production. In effect, the Saudis flooded the market with oil to drive oil prices from $100/barrel ($100/bbl) to $40/bbl. American shale drillers got technology hungry, and they learned how to be better, more cost-effective drillers. Now, the U.S. shale oil industry is absolutely the swing producer in the world. At $60–65/bbl oil, shale producers make money in spite of what the Saudis have tried to do. 

The same thing is starting to happen with some of the geophysical techniques that are being used to locate ore bodies in the mining space. Recently, U.S. Precious Metals Inc. (USPR:OTCQB) used Russian satellite technology to map its large property in Michoacan, Mexico. The company has reported high-grade intercepts in its subsequent drilling. 

We just used a helicopter technique called VTEM Plus to see several hundred meters deep on our privately held Nieves property. We may have identified a very large intrusive system. The cost? A little over $200,000 for the 55 square mile property. So technology is coming to mining, and it will separate the men from the boys. 

TGR: Are you focused more on macroeconomic trends like whether oil prices are going up, or on specific stories and whether they’re taking advantage of new technology?

MB: We have shifted a little to playing the royalty side of the equation more. Investors have established a royalty package in the Texas oil fields. They don’t drill; they simply buy the property and lease it back to the drillers. Last year, this investment yielded 9.5%. It’s just a different way of thinking about how to play the commodity market in a market that doesn’t have a yield where the interest rate is negative. So we hope to win no matter what happens, and we do not have working interest risks. So far, it’s worked pretty well. 

There are some great companies, by the way, in the shale sector—EOG Resources Inc. (EOG:NYSE) and Chesapeake Energy Corp. (CHK:NYSE) to name two. Plus the survivors in the shale oil fields will be highly technology competent. But we don’t invest in the companies. We buy properties and lease it back to the operator. 

TGR: What about solar power? Are there some solar companies you like?

CB: I’ve spent a lot of time looking at the solar industry over the last three years. This is where the growth is, and both solar cell costs per watt and energy storage costs are falling precipitously. I think increased scale and distributed generation have the potential to remake our energy infrastructure in the coming decade. 

The solar panel business has really become commoditized and today you see a great deal of research and development going toward increasing panel efficiency, which is the percentage of sunlight that gets converted into electricity. The best I’ve seen today are in the low 20% range, but this is slowly increasing, which helps the overall economics. 

One area to think about in the solar space is with “yieldcos.” Essentially, the yieldco is publicly traded and owns solar power projects with power purchase agreements that can provide long-term income. The yieldcos have one product, electricity, and they “pay” their investors with revenues generated from the sale of the electricity. The solar companies like this, as it provides a low-cost source of capital for expansion. Investors benefit in that there is an income stream and the risky parts of the business are separated. This concept is similar to the master limited partnership in oil and gas. The most recent example is a yieldco formed between First Solar Inc. (FSLR:NYSE) and SunPower Corp. (SPWR:NASDAQ), but the idea has been around since 1999. 

TGR: Chris, you’re a father. What will be the hot investing areas for your children?

CB: Everything is cyclical, particularly the commodity space, so I’m not sure if there’s a specific area I’d tell them to focus on. I have begun to save money for my girls for college and I hope to be able to give them a choice: You can use the money for college, or you can use the money to start a business that can help address some of the societal issues we addressed earlier in the interview. Entrepreneurialism increases quality of life and creates wealth at the same time. That’s a lesson I hope I can impart to my girls. 

TGR: Mike, what advice do you have for investors just learning about the natural resource space?

MB: In a world with seven billion people seeking a higher quality of life, I think copper, gold and silver eventually will be more valuable than ever. Gold is constant. Gold is going to continue to be valuable because even now, China is buying as much gold as possible. It is rumored to have purchased the equivalent of the total mined gold production in 2014. The Chinese want their currency, the yuan, to be part of the reserve currency standard, and it will be eventually. They are going to have to have enough gold to back it. Silver, in addition to its monetary character, is used in so many industrial and health care products. 

I think oil will bounce above $100/bbl again. Prices will go up and down, and you have to play it as it moves. But I think those liquid markets are easier to manage than smaller markets like graphite. But then again, I’ve been around for a while, so I could be wrong.

Chris Berry is a writer, speaker and analyst who is focused on the dynamism of energy metals—those metals or minerals used in the generation or storage of energy. He is a student of the theory of Convergence and believes it will have profound effects across the globe in the coming years as urbanization, innovation, and technology create multiple opportunities. He helped create a start up focused on computing with words. Active on the speaking circuit throughout the world and frequently quoted in the press, Berry spent 15 years working across various roles in sales and brokerage on Wall Street before shifting focus and taking control of his destiny. He is the co-author of The Disruptive Discoveries Journal. Berry holds a Master of Business Administration in finance with an international focus from Fordham University, and a Bachelor of Arts in International Studies from The Virginia Military Institute.

From 1982–1990,  Michael Berry served as a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia, during which time he published a book, “Managing Investments: A Case Approach.” He was the Wheat First Professor of Investments at James Madison University. He has managed small- and mid-cap value portfolios for Heartland Advisors and Kemper Scudder. His publication, Morning Notes, analyzes emerging geopolitical, technological and economic trends. He travels the world with his son, Chris, looking for discovery opportunities for his readers.

DISCLOSURE: 
1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None. 
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Galaxy Resources Ltd. and Silver Wheaton Corp. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Chris Berry: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
4) Michael Berry: I own, or my family owns, shares of the following companies mentioned in this interview: Quaterra Resources Inc. and Goldcorp Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
5) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent. 
6) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
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The Energy Report: The uranium spot price balloon has lost air again and is back down in the mid-$30/pound (mid-$30/lb) range. It was stalled there for months last year. What pushed the spot price up in the first place? Why is it falling now?

Rob Chang: The uranium spot market is generally pretty thin, and any number of transactions on either the buy or sell side could push it in any direction. What’s moved it higher recently could be the news of Japanese reactor restarts happening this summer. A couple of reactors are set to restart in the next few months or so, and we believe that helped push the price along a little bit.

But the spot price really depends on near-term utility demand. I think that’s the key point here. In terms of utility demand, according to the numbers that we’ve seen, globally about 15–20% of uranium requirements for 2016 onward are still uncovered. Between now and the end of 2016, there needs to be some buying, either in the spot market or through some other means, to cover those requirements. We saw a bit of a lift because of that need, but certainly there hasn’t been a big rush back toward buying uranium ex-spot yet.

TER: I’ve heard repeatedly that the deficit is going to occur in 2019 or 2020. Why aren’t the mining companies moving ahead to address the deficit they know is coming? 

RC: Right now, there is no incentive. For them to spend the money to do the exploration or to develop a uranium project, they need to have a price that justifies the capital that’s required to get that going. Based on what I’ve seen, that magic number is probably in the $80/lb range for a meaningful amount of supply to come online. Currently, we’re sitting in the mid-$30s/lb. To justify any project, a company would need a return of, let’s say, at least 20%, but likely much, much higher. At a $35/lb, why would anyone spend the money to develop a project? That’s where we’re stuck.

“Fission Uranium Corp. has a world-class project; the R600W is looking quite solid and has the benefit of being on land.“

Everyone knows that prices need to move higher for additional supply to come, but utilities, seeing excess inventory in the market, have been sitting back and only buying what they need when they need it. At some point this will come to a head, and prices will need to move simply because utilities will need to buy and the spot market is thin. At that point there will be a big scramble to see who can put on production quickly enough to satisfy the demand. It will be very interesting, and it’s the primary reason why I believe there’s going to be a violent price increase. 

TER: Is the long-term price following the same trajectory?

RC: We believe it will. Currently, it has not. It’s been pretty static. However, as activity in the spot market picks up, we expect to see term prices move higher as well.

TER: Japan Atomic Power Co. (JAPCO; private) and Tokyo Electric Power Co. [9501:OSE; TKECF:OTCPK]; TEPCO) both have reported selling some of their uranium stockpiles. Is that going to further deflate the price? 

RC: I think that might be the reason we saw a step back in uranium prices recently. JAPCO’s sale was earlier, and TEPCO’s was more recent. However, I think the latter’s news is a bit overblown. 

TEPCO stated that it was going to reduce its inventories from current levels (17,570 tonnes of uranium/tU) to pre-Fukushima levels (16,805 tU). The 765 tU difference translates into just under 2 million pounds of uranium (2 Mlb). This figure is the potential amount of new material that may be available in the spot market, and while it is a decent amount, I would argue that it will not notably weigh on the market. A larger, 19,317 tU figure that was mentioned likely includes uranium deliveries scheduled for this year under long-term contracts. TEPCO has likely been returning this contracted material to producers for a while post-Fukushima, as evidenced by the fact that TEPCO’s inventories only marginally increased from pre-Fukushima levels, yet the company has not canceled any contracts and has not consumed any uranium via operating reactors in years.

“The time is right for uranium investing because we see the volatility on the upside rather than on the downside.”

So TEPCO likely is not doing anything new, but instead a news agency happened to find a report within TEPCO that described this process and made it public. My belief is that TEPCO was always planning on reselling the material, as it usually does. If you look at it, a 2 Mlb increase in inventory doesn’t quite make sense for a company that was getting deliveries each year for several reactors that require more than that amount to operate annually, if they are running.

TER: This sale might suggest that Japanese utilities are cutting back on their purchases. How would that affect the uranium space? 

RC: Japanese utilities generally have throttled back on taking deliveries of their purchases. There have been very few, if any, outright cancellations, as far as I’ve heard, over the past few years since Fukushima. The companies know they don’t need to take it all in, so some have been returning uranium to the producers and having the producers resell it in the market. That’s why we’ve seen price weakness for the last three years; the producers have material that was earmarked for Japan that has come back, and they sell it through other means. 

TER: The Nuclear Regulation Authority just approved restart for Japan’s reactors. What will that do to the uranium price?

RC: The approval wasn’t for the entire fleet. It would be great if it were. It’s actually on a case-by-case basis. The recent restart approval news was for two Sendai reactors, but the agency has also given partial approval to the Takahama reactors, and to Ikata 3 as well. So restarts are moving along. 

The key will be seeing some reactors actually turn on. That’s going to be the first domino to fall, and we expect many dominoes to follow. But the first one is the hardest to get over the line. Once we see that, we think restarts would occur on a much more frequent basis.

TER: What effect do you expect on the uranium price from that?

RC: It’s funny. On a supply-and-demand basis, it really wouldn’t move the price too much because, as I said, Japan has a lot of inventory already. It’s not as if the restart of just two reactors—or four or even six—is going to significantly impact the overall market. 

“Given the way the whole sector has been beaten up, I think the entire space is a bargain.”

What it does do, however, is bring back a lot more investor attention. There are some out there who still are skeptical that Japan will turn on any reactors. I believe they’re wrong, but we need to see the reactors turned on before that can be proved. Seeing that Japan is actually going to start consuming uranium, rather than just deferring it or stockpiling it, is certainly a positive in that the global inventory won’t just keep on growing and we’ll start to see some usage out of Japan. 

As we know, the spot market is really just between producers, utilities and a few market players. There isn’t much investor speculation, so it’s not as if a restart will cause more buying unless we start seeing investors step into the market and buy, like we saw in uranium’s heyday during the mid-2000s.

TER: How will the price slump affect the companies you cover?

RC: What we’re seeing now is a slight step back in some of the uranium equities that moved higher earlier this year because of the expectation of restarts and an improving supply-and-demand picture. What I do think, though, is that the downside is limited. Uranium prices really don’t have much downside from here, in my opinion, simply because there isn’t a large amount of supply coming out of nowhere, which was the catalyst for prices to move down before. Now, when I speak to producers and utilities alike, many expect prices to stay the same and, long term, to move a lot higher. I think the volatility is going to be on the upside. 

TER: Would you consider any of the companies that you cover bargains or deadwood?

RC: Actually, given the way the whole sector has been beaten up, I think the entire space is a bargain. Some companies, depending on an investor’s appetite, are more appealing. But across the board, the uranium companies that I cover are still excellent values at the price points that they’re currently trading at. 

TER: What companies are you particularly interested in right now?

RC: Cameco Corp. (CCO:TSX; CCJ:NYSE) is our No. 1 conversation piece, primarily because of its status in the space. It is the only uranium company that’s publicly traded with a market cap over $1 billion. It dominates the Athabasca Basin, is low cost, and is ramping up its Cigar Lake mine. It recently declared commercial production, which is certainly positive. Cameco does have its tax issue, but I think we’ll be a few years down the road before that issue starts to crystallize either positively or negatively. Either way, uranium prices would be higher by then and would justify an increase in the Cameco stock price.

TER: Cameco Corp. scored a coup with its long-term sale to India. Is China another possible market?

RC: China could certainly be a possible market. I’m not sure if Cameco currently has any agreements with the Chinese, because it doesn’t specifically itemize whom it has deals with. But it certainly is potentially a great area to sell to, given that China is the No. 1 growth country with respect to nuclear. 

But the deal with India certainly is a feather in Cameco’s cap because India is the second-fastest-growing nuclear builder in the world.

“There will be increasing uranium demand from countries such as India and China.”

I think the key takeaway here is the fact that countries such as India have identified Canada as the preferred place to source their uranium from. That speaks to definitely Cameco, because Cameco is the only producer in the area, but it also speaks to the quality of the projects in Canada, and to the excellent operational ability of companies—Cameco, in particular, but potentially other companies in the area. Of course, there’s also the good jurisdiction in Canada, which means that the supply agreement will be safe. If I were to expand on this, China has recently noted that it is looking to still acquire more assets, and it has identified Canada, along with Kazakhstan and Australia, as key countries for its acquisitions.

TER: Interesting. Are any other of your companies selling to India and China?

RC: Not that I’m aware of. There are very few producers to begin with. Cameco is the primary one that I deal with that would sell outside of North America. 

TER: Is there another Canadian company that you like? 

RC: NexGen Energy Ltd. (NXE:TSX.V) is currently our top pick in the space due to its tremendous upside. The company’s Arrow discovery, located northeast and along trend of Fission Uranium’s Patterson Lake South deposit, has produced several world-class intercepts—some among the best ever reported by anyone. It is still relatively early in the company’s exploration progress, and it does not have a NI-43-101-compliant resource estimate yet. However, based on what has been reported to date, we estimate that Arrow has 91 Mlb already in its A2 and A3 shears combined, with significant upside potential. The mineralization starts about 100 meters below surface, is not located beneath water, and is basement-hosted, which is different from the sandstone-hosted Cigar Lake and, as such, is not likely to have the same issues. Based on our resource estimate, NexGen is trading at a significant discount to its peers.

Other companies of interest in Canada include Fission Uranium Corp. (FCU:TSX). Fission has a world-class project, Patterson Lake South, which has 105 Mlb of resource already and clear visibility on much more. It has a Western zone, the R600W, which is looking quite solid and has the benefit of being on land, whereas most of Fission’s deposit is located under water. That’s important because it’s going to be easier to permit. It’s going to be cheaper to develop. It makes things a lot easier from the standpoint of, for example, a development scenario that includes starting from the R600W and moving east to the high-grade Triple R deposits. Fission is an excellent story that people should certainly take a look at. 

TER: Aside from some of the best real estate in the Athabasca Basin, what does Fission Uranium have going for it? 

RC: Fission’s management has done quite well, with Chairman and CEO Dev Randhawa and President and COO Ross McElroy at the helm. They have done it once before, in terms of defining a deposit, growing, and then selling it. They’ve done even better with what they have now with Patterson Lake South, and what is clearly a world-class deposit. Fission has a strong team; they’ve done a good job.

“At a $35/lb, why would anyone spend the money to develop a project?”

One of the key things I’ve noticed is that Fission drills on water at an angle, which is a pretty difficult thing to do. Angle drilling, as many people know, is an important aspect of drilling a deposit because it provides much better information on the geometry of the deposit. Being able to drill at an angle is certainly positive, and it’s much more difficult to do so on water with barges than it is on stable land. 

TER: Is there another story in the Athabasca Basin you’d like to discuss?

RC: Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT) is a very interesting story, given that the company holds a very sizable and notable position in the Athabasca Basin for nonproducing assets. Along with Fission and NexGen, you could argue that Denison probably has the best assets in the Athabasca Basin. The key with Denison is, its assets are on the eastern side of the basin, in close proximity to the infrastructure that’s been built up on that side because that’s where all the producing mines are currently located.

Denison also owns a part of the McClean Lake mill and is getting cash flow from the Cigar Lake feed that’s going through the mill now. That’s certainly positive. But it also has some excellent projects. The Wheeler River property and its Phoenix and Gryphon deposits are world-class on their own—among the highest grades of any deposit on the planet. The news flow coming from that particular property has been very exciting. We expect to see more good news from Denison as well. 

TER: Denison Mines was going to report on its winter drilling program. Was that report satisfactory?

RC: It did excellent work. The world-class Wheeler River property had some excellent results. The company doesn’t tend to release many drill results, but the results that it did come out with for this batch were certainly positive, world-class intercepts, long and high-grade, so certainly moving things in the right direction. 

TER: What’s the goal of its summer program? 

RC: Denison’s summer drilling program will focus on Wheeler River, Bell Lake, Murphy Lake, Jasper Lake, Stevenson River, Crawford Lake and Bachman Lake. Of course Wheeler River will be the focus, and the big item of interest for us will be the work done on the Gryphon zone, which should support the preparation of an initial resource estimate.

TER: Are there other companies you’d like to mention?

RC: Another company that makes a lot of sense is Uranium Participation Corp. (U:TSX). We like that name primarily because it’s undervalued. It currently trades at a 5–9% discount to its net asset value (NAV). The fact that the company is currently trading below its NAV makes it a good value for anyone who expects or believes uranium prices will move higher. 

You also have the benefit of not being exposed to company-specific risks or even country-specific risks, and that’s certainly positive. For anyone who is worried about a potential mine issue, they won’t have that problem with Uranium Participation. In fact, whenever there is any issue with anyone’s mine, Uranium Participation would move higher simply because there’s potentially less supply coming out. The value of uranium should move higher in those situations. 

“We’ve seen price weakness for the last three years because producers have material that was earmarked for Japan that has come back.”

Uranium Energy Corp. (UEC:NYSE.MKT) is another interesting story. It’s an in-situ recovery producer located in Texas, and it has an excellent management team, with company president and CEO Amir Adnani appearing quite prevalently in the media talking about the uranium secctor. He is a very good champion for the space. He gets good visibility. 

On top of that, Uranium Energy has the benefit of being the only entirely unhedged producer. With the expectation of uranium prices moving higher, Uranium Energy will be arguably the best positioned to fully capitalize on and realize the increases in uranium prices, because companies such as Cameco—and pretty much everyone else—have contracts. These contracts are helping companies out right now because they are higher than current spot pricing. But when prices do go up, they will eventually rise above these contract prices. Companies like Uranium Energy, which are entirely unhedged, will really stand to benefit then.

Ur-Energy Inc. (URG:NYSE.MKT; URE:TSX) is also one of our top picks in the space. We like Ur-Energy because its Lost Creek deposit has been outperforming for some time now. Since it started about a year and a half ago, the deposit has produced at a higher flow rate, so it produces uranium at a lower cost than expected. The company generally produces on the low end of the cost curve—among the lowest of any producer. Ur-Energy is among the top companies on our list due to its low cost profile.

TER: What was the conclusion of the preliminary economic assessment (PEA) published in January for Ur-Energy on the Shirley Basin uranium project?

RC: It’s positive. The PEA produced an internal rate of return of 117%, and a before-tax NPV of US$215.9M. The PEA estimates production costs of US$14.54/lb., which is incredibly low. Even if we adjust for conservatism, the numbers remain pretty compelling. Shirley Basin is one of the strong growth aspects of Ur-Energy, and we expect it to be the next project that gets developed, alongside the current Lost Creek project. We’re excited to see the company move forward on that one.

TER: How should investors approach the uranium space going forward? 

RC: The way I look at it generally is in terms of upside versus downside. From what I see in the uranium market, there is limited downside. I do not see a catalyst that would push prices significantly downward, say into the $20/lb range. But I see many opportunities for uranium to move higher. Uranium moved significantly down before because Japanese utilities were sending material back into the market, and that material had to be resold. On top of that, some uranium companies were in slightly distressed situations and were selling uranium because they needed to raise capital to maintain operations. Right now, we’re not seeing that as much. 

On the flip side, we’re seeing 15–20% uncovered requirements beginning in 2016, and we’re seeing uncovered requirements continuing to grow as the years go out from 2017 and onward. We need to see some uranium buying to shore those requirements up at the very least. 

On top of that, based on our forecasts for uranium production and global reactor growth, including reactor shutdowns, there is an unavoidable supply deficit in 2020, no matter what happens. Layer on the fact that, because of the low uranium price environment, there has been very little exploration and there are only a handful of identified large-scale projects in the world. You have the Fissions, the Denisons, the upcoming NexGen Energy, and those are pretty much the only companies with potential development at a meaningful scale in the next eight to 10 years.

And there will be increasing demand from countries such as India and China. Even if all the uranium projects around the world were put on a path to production as quickly as possible, you’re looking at 2023–2025 before those projects get online. But the deficit kicks into gear in 2020.

These are pretty compelling reasons for uranium prices to move higher sometime within the next year or two. On top of that, for more event-driven investors, there is the fact that the Japanese Sendai reactors are expected to turn on in the next couple of months—the operator is hoping for July, we’re thinking it’s probably August/September. It’ll be a front-page news item when those reactors turn on. There will be a big rush into the space on that news. We think the time is right for uranium investing because we see the volatility on the upside rather than on the downside. We expect a violent increase in the price of uranium in the near future.

TER: Rob, thank you very much for your comments.

Cantor Fitzgerald Canada’s Senior Analyst and Head of Metals and Mining Rob Chang has covered the metals and mining space for over eight years for the sellside and the buyside. Prior to Cantor, Chang served on the equity research teams at Versant Partners, Octagon Capital and BMO Capital Markets. His buyside experience includes managing $3 billion in assets as a director of research/portfolio manager at Middlefield Capital, where his primary resource portfolio outperformed its direct peer and benchmark by over 28% and 18%, respectively. He was also on a five-person multistrategy hedge fund team, where he specialized in equity and derivative investments. He completed his master’s degree in business administration at the University of Toronto’s Rotman School of Management.

1) Tom Armistead conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, and The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Fission Uranium Corp. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services. 
3) Rob Chang: I own, or my family owns, shares of the following companies mentioned in this interview: Fission Uranium Corp, Denison Mines Corp. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Fission Uranium Corp., NexGen Energy Ltd. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
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