by Mike Kapsch, Investment U Research
Thursday, November 15, 2012
In September, I wrote about an impending uranium supply shortage that could hit full-on by the end of 2013. At that time, supply constraints and increasing demand could ultimately send the price of uranium up for several years.
But no one knows what’s really going to happen in the uranium market more than the industry’s insiders themselves. This past week, I was fortunate enough to speak with one of them.
His name is Jim Paterson, and he’s the CEO of a uranium junior exploration company called Kivalliq Energy Corporation (TSX: KIV) based out of Vancouver, Canada.
Here’s his insider’s take on what’s about to happen to uranium and why investors should be paying close attention…
What is Kivalliq Energy Corp?
To give you an understanding of who Mr. Paterson is, I asked him to tell me a little bit about his company and what he does:
“I have been involved in the mineral exploration and mining sector since 1997 and an independent director of Kivalliq Energy since the company’s inception in 2008. In 2010, I became the CEO.
“We have raised CDN$50 million in equity from some of best junior mining investors in the world over the past three years, with $35 million of those dollars raised post-Fukushima in very challenging small-cap equity environments. We’ve focused those dollars on exploration programs at Kivalliq’s 250,000-plus-acre uranium project in northern Canada with great success – measured by our rate of discovery and the conversion rate of those discoveries to high grade uranium resources in an inferred 43-101 category.
“Our company has truly been in a growth mode over the past few years – despite the state of the general market and specifically the challenges experienced in the uranium space. We have kept the team together and even made key additions to our management and board of directors within the past year.”
Current Challenges Facing Uranium?
As any uranium investor knows, there certainly have been challenges over the past few years for the industry. Today, the spot price of uranium is about $43.50 per pound. A lot of analysts predict prices could fall even further in the short term.
That’s why I had to get Jim’s take on what challenges are currently facing the global uranium market, and whether he thought these prices should be seen as an opportunity for investors:
“There is a chance that uranium spot prices could fall even further in the short term, but for most global uranium projects in the development and production phases even the current spot prices are not sustainable. Certainly, the current pricing environment makes it very hard for most uranium explorers to raise money to advance their projects. The lack of capital available from investors is the single biggest challenge for our segment of the sector right now. Kivalliq’s ability to raise capital in this environment has really set us apart and increased our profile dramatically.
“Because we appreciate the confidence our shareholders have shown us in the form of their investment, we are maniacs about sticking to our annual exploration budgets. We are always very clear about which activities (e.g. number of metres drilled) we intend to accomplish each season and the funds needed to execute the program. At the end of the season we clearly lay out what we did and how much we spent to do it. In addition to our rate of discovery, one of the main reasons our investors continue to support us is that we stick to budget.
“Simply put, when times are good, there is a lot of money available from investors and thus their money has less value on a relative basis. When times are tough, money becomes highly coveted again, thus an investor’s money goes a lot further for him or her. I think it goes without saying that you can get a lot for your money as an investor now in the uranium space – much more than in 2010.”
What’s All This About a Supply Shortage?
With so many producers finding it hard to raise capital, I asked Jim if this is why companies such as Cameco Energy predict, by the end of 2013, a supply shortage will hit the uranium market and start sending prices higher for the next few years:
“What we know is related to the exploration segment of the uranium business and as a uranium explorer we are part of the picture as far as potential future supply. The current depressed pricing environment is causing a lot of delays, cancellations and shutdowns of existing development and mining projects, as well as a total lack of investment in exploration, i.e. the finding of new sources; and it WILL cause a lot more of all of these reductions if the price stays down at these levels.
“This will have a major effect on supply and cause some pretty serious revisions to the amount of uranium in the project pipeline. From the perspective of a uranium explorer with a high quality asset, bad news in the form of sub-economic project cancellations is actually very good news as it takes future competition out of the mix.”
… And the Demand Side of the Equation?
On the other hand, here’s what Jim had to say about the demand side:
“I don’t know what’s going to happen with the Japanese and German policies on nuclear power. Quite frankly, they don’t seem to know what is going to happen policy wise either, but from a commercial perspective it makes a lot of sense to include nuclear power as a component of an industrial nation’s power supply. I think that the leaders of China, India, South Korea and UAE understand this and will provide the industry with leadership on the demand side through the building of new reactors. If the Japanese begin turning reactors back on again, it will be a great bonus.
“You have to understand that when reactors are built, the companies responsible for the build must guarantee their customers that their very expensive reactors will always have fuel with which to generate power. They must guarantee many decades of uranium feed, sometimes up to 60 years of supply, so each new reactor built represents a major new and very dependent long-term customer.
“From experience, I can assure you that finding an economic mineral deposit of any kind, in a mining-friendly region of the world, is no cakewalk. That is even harder with a uranium deposit. This means that a commercially viable uranium source in a stable and mining-friendly jurisdiction is very valuable.”
How Will This Affect Bottom Lines?
With so many uranium players being affected by the current downturn, any increase in prices could have a vast effect on a company’s bottom line. For instance, in 2010, there was a bit of a trickle-down effect in the uranium sector that first came from the major producer and worked its way down to the junior miners significantly higher.
Jim explained to me a little bit more of how this works and how an impending spike in uranium prices could be a boon to his company Kivalliq:
“In mid-2010 the uranium spot price was in the low US$40s per pound but, due in part to a few high-profile long-term contracts being signed in the sector, the spot price moved to around US$70 per pound U3O8 by Q1 2011. The positive effect on the share prices of the public companies operating in the U space was dramatic – from the largest like Cameco, right down to companies like Kivalliq with a CDN$12-million market capitalization at the time.
“We grew to approximately a $100-million market cap by Q1 2011. The difference between now and then is that the after-effects of Fukushima have hobbled our industry so dramatically that there are even fewer players in the space now than there were in 2010. I think that any up-swing in the uranium spot price will have massive effects on those companies which hold high-quality uranium assets – the list of those is very short, so any major reinvestment in the sector will have considerable impact.”
How is Kivalliq Positioned?
Jim also gave me a rundown of Kivalliq’s current operations, its track record, and what his company is working on for the future:
“Since 2010 on a global basis, Kivalliq has conducted some of the largest annual exploration and drilling programs in its uranium explorer peer group. Ten mineralized zones have been discovered within five kilometers of the Lac Cinquante Uranium Deposit since 2010. Lac Cinquante is northern Canada’s highest grade uranium deposit and, outside of Canada’s Athabasca Basin, one of the highest grade uranium deposits in the world. We are focused on growing the value of the company through exploration and discovery and our goal is prove our thesis that we now control a major new mineral district; that our Angilak Property has the potential to be a major new uranium mining camp.
“Earlier this month, Kivalliq also released news on another new mineralized ‘Hot Zone’ drilled late in the season as part of the 2012 exploration program at our 252,830 acre Angilak Property in Nunavut, Canada. We found significant assay results from six of seven diamond drill holes at the newly discovered Hot Zone, which continue to add momentum to our exploration efforts at the Angilak Property. This is the tenth discovery since 2010 and the fifth uranium zone discovered by drilling this season, within the Lac 50 Trend, a three-kilometre-wide by 15-kilometer-long southeast striking structural trend within Archean volcanic rocks adjacent to an unconformity with Proterozoic sediments of the Angikuni sub-basin. Our exploration work and the identification of these new mineralized zones like the Hot Zone continue to validate the massive potential of the Angilak Property.”
A Look Ahead
Are uranium prices set to head higher? It appears current prices are consolidating the industry and they’ll have to turn around at some point, most likely in 2013, as supplies begin to dry up. At that point, it certainly could be an opportune time to look at some players in the junior mining and exploration space.
P.S. Back in May, Investment U editor Justin Dove spoke with legendary mining expert and contrarian investor Rick Rule, along with Investment U commodities expert Matthew Carr, to discuss their take on uranium as an investment over the next 5-10 years. To find out what they think, click here.The Uranium Mining Forecast for 2013 and Beyond,