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Asia:Japan tragedy isn't the end for uranium miners

https://www.chemnet.com   May 05,2011 commodityonline
Companies Mentioned: AREVA Bannerman Resources Ltd. Cameco Corp. Denison Mines Corp. Extract Resources Ltd. Hathor Exploration Ltd. Kalahari Minerals plc Mega Uranium Ltd. Rio Tinto Strateco Resources Inc. Terra Ventures Inc. Ur-Energy Inc. Uranerz Energy Corp. Uranium Energy Corp Uranium One Inc.

The Energy Report: Geordie, take us through what it was like on March 11 once you learned that Japan's nuclear reactors had suffered severe damage in an earthquake and subsequent tsunami.

Geordie Mark: We were all taken aback by the scale of the natural disaster, of which the significance of the event only really translated over the weekend as more data started to become available. The shock of the event hit the markets the next week with uranium stocks taking a significant beating.

TER: Was it more significant than the downturn in late 2008?

GM: Definitely. The results over the entire week were far sharper and more emotion driven than based on tangible knowledge of the events, which are still slowly coming to light. We still don't know everything that has happened at the reactors. We probably won't for quite a while.

Those tangible effects are still going to come out. The market reacted emotionally and moved out of the sector in a big way. In terms of magnitude and timeframe, we believe that it was greater than what we saw in 2008.

TER: Did you have to revise a number of your research reports on uranium companies you cover immediately?

GM: We were waiting to find out more information before we reached a more-definitive conclusion about how the events would affect the sector on a short- and long-term basis. We certainly needed more information. Since then, we have revised some of our expectations and our supply/demand scenarios.

TER: Will the impact of Japan's nuclear problems continue to lower uranium prices? Or will the upward price trend that started in the second half of 2010 continue once the market suffers some memory loss?

GM: That's a good question. I think this sector will continue to go forward still. There are a number of reactors under construction today—62 or more. That represents appreciable growth, about 15%.

We've lost some demand, particularly from Japan and certainly from the reactors in Germany that were shut down in response to the accident in Japan. That loss in near-term demand is somewhat offset of by the loss of production out of the Rio Tinto's (NYSE:RIO; ASX:RIO) Ranger Mine (69% Rio Tinto) in Australia and some shortfalls from of the company's Rössing Mine in Namibia. That leads us to believe that there's pricing protection based on supply/demand fundamentals.

TER: So far this year, the long-term price for uranium is up about 11%. When you talked to The Energy Report in October 2010, you said you expected some price pressure in uranium in 2012 and 2013. Has that outlook changed?

GM: No, that's an area that is still very much in play. Those are very large drivers. We expect to see a number of reactors remain offline in Japan, but the pricing pressure is still there. The supply/demand scenario is largely the same. We've lost some demand on the short end of the curve, but we also lost some production.

We probably will lose a little expected future supply from the advanced exploration-stage companies that we thought might go into production after 2013. I think there may be project development delays now due to greater regulatory oversight in response to the events in Japan. However, it's still very much the same equation that we saw 10 months ago.

TER: Does that mean that you're going to increase the discount rate on some of those juniors?

GM: I think we'll leave them as they are. The discount rate in the juniors still builds in a certain amount of risk depending on the development and permitting stage of the individual projects. Modification of expected production timelines and dilution expectations in our valuation account for more protracted periods of stakeholder interaction, project scrutiny and regulatory oversight.

TER: The Ranger Mine is being shut down due to fear that severe rainfall could push radioactive water over the edge of a tailings dam and into a World Heritage site in Australia's Northern Territory. Do you see this as a first step that could lead to a push for nationwide ban on uranium mining in Australia?

GM: Activist groups have already called for bans on uranium mining. It is too early to say what the response will be.

TER: Do you have an update on what is happening at the Ranger Mine now?

GM: It extended its shutdown period to the end of July.

TER: Do you have any Buy ratings on juniors with projects in Australia?

GM: Sure we do. We cover Mega Uranium Ltd. (TSX:MGA), which has a project in Lake Maitland. It's in the advanced permitting-application phase. It's attempting to win a mine permit for production around 2013 or so. This would be a small-scale mine at about 1.65 million pounds (Mlb.) per year. Mega has an $0.80 price target.

TER: What would the company's costs be per pound?

GM: We expect that cash costs would be somewhere in the mid-$20/lb. range.

TER: What sort of uranium price would Mega need to have a profitable operation?

GM: If long-term prices hold where they are—just north of $70/lb.—it would make an attractive proposition.

TER: Hathor Exploration Ltd. (TSX.V:HAT), which is a junior operating in Saskatchewan's Athabasca Basin, has launched a bid to acquire Terra Ventures Inc. (TSX.V:TAS). If the deal goes through, Hathor would realize full ownership of the Roughrider deposit. Is Hathor's bid to acquire Terra a sign that more consolidation is on the way?

GM: It's a strategic move. Given market sentiment about the sector and the lows we have seen, we could see more opportunities to consolidate further for companies that have good assets or strategic asset portfolios.
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