There seems to be a lot going on in the uranium sector in terms of consolidation activity and market-related news, so I invited Alex Molyneux, Founder of Azarga Resources and Chairman of Azarga Uranium Corp. (AZZ.TO) / (PWURF) (market cap ~ C$ 22 million) to answer a few pressing questions. Alex is based in Asia and formed his own minerals investment group to take advantage of regional themes. Uranium has been his core focus due to his views that China will be heavily reliant on nuclear power to deliver clean reliable energy.
This interview was conducted 5-9th of July via email and Skype. The interviewer, Peter Epstein, CFA, MBA of EpsteinResearch.com. Has no prior or existing relationship with any of Mr. Molyneux’s or his business’ interests. Mr. Epstein does not own any of the stocks mentioned herein.
Q: Before we get onto the topic of consolidation, I have to ask, is it me or has there been a big divergence in uranium equities and the uranium price?
AM: It’s not you Peter. There has been a bizarre disconnect happening in the market. The uranium spot price has actually been a bright spot for global commodities, up around 30% from where it was 12 months ago. However, uranium-related equities have gone the other way. In looking at the Global X Uranium ETF (URA), an ETF made up of 20 uranium company stocks. URA is down roughly 35% over the same period and in fact is now at an all-time low since its inception in 2010.
Q: What’s driving the ‘bizarre disconnect’ as you call it?
AM: In one or two cases there are company-specific cases. For example, Energy Resources of Australia was one of the top five largest publicly listed uranium companies. They lost two-thirds of their market cap when they announced they had shelved the Ranger 3 Deeps project, which means the company effectively exits uranium production in the next couple of years when it’s through the material it’s processing from its older mine. However, there certainly has been a broad decline in uranium equities and we can say it became a rather precipitous drop in the last two months. I think the key here is a macro trade. As many major commodities are faltering with lower prices (iron ore, base metals, precious metals, coal and oil), investors are dumping everything in the minerals and energy space. Uranium equities are caught up in that storm. We speak to fund investors all the time and we know this is the case for certain names. It’s a classic, “sell what you can, not what you should.”
Q: Is this a buying opportunity? If so, why?
AM: OK, so I have to say yes because I’m the major shareholder and Chairman of a publicly listed uranium company but I think I can put some color around it. I can say some shares are really incredibly cheap. We are at a new low point in the valuations of uranium companies. Most if not many are at all-time lows. Even the grandaddy of them all, Cameco is cheap, not at an all-time share price, but it’s certainly low in terms of price to cash flow multiples and price to NPV per share. What makes this trough in uranium equities interesting is that unlike previous lows, it’s not driven by a falling uranium price.
In fact we’ve had a positive trailing 12-month trend for uranium and we have positive events in the sector such as Japan’s first nuclear reactor restart since Fukushima and plenty of news of new reactors being commissioned in China. Even Goldman Sachs came out in the last couple of weeks with a research note forecasting increased uranium prices and a positive outlook for the sector. In terms of timing, it may be that the macro dislike for commodities in general won’t turn around immediately.
For investors, I think there’s no harm dipping a toe in now because further downside seems relatively limited but we should keep an eye on the uranium market in the late summer. There’s always a big coming together of uranium suppliers and utility customers in September and we often see more spot market activity in the lead up to that. The Spot uranium price has traded in a narrow band around US$36 per pound since the start of May. Now if this year’s market follows last year’s, then we will see all the price upside action in August & September. My personal view is we will see a materially higher uranium price by the end of September. If we do see that move, then that’s the signal for investors to ‘pile in’.
Q: How can investors keep track of the uranium price so watch for a buying signal?
AM: We have it up on our home page www.azargauranium.com and some publishers like UxC publish it on theirs (www.uxc.com) but they may have a time delay on their proprietary pricing. A moderate increase in the spot or longer-term uranium price will certainly be picked up by the companies and research analysts.
Q: Alex, we were supposed to talk about consolidation but we got side-tracked. Let’s return to that…
AM: Well lets see. We have had at least three major corporate transactions announced in 2015. Certainly the busiest first half of a year for investment bankers focused on uranium in a long time. The first deal came in January when Energy Fuels Inc announced an acquisition of Uranerz Energy Corp. That deal has now closed. On announcement, it valued Uranerz at around US$120 million. The next announcement came at the start of June when Uranium Resources Inc announced an approximately US$35 million acquisition of Anatolia Energy Limited, followed this week with the proposed merger between Denison Mines Corp. & Fission Uranium Corp. to create the grand daddy of early-stage uranium exploration companies.
Q: What is one supposed to take away from this consolidation?
AM: There are a couple of key take-aways:
(1) Experienced industry leaders are taking advantage of this market environment to get their asset portfolios in shape for the continued upturn in uranium prices. Generally low valuations and hard financing markets for these companies, the barriers to getting deals done are not there. People are quite receptive to dealmaking and so the deal makers are active.
(2) In-situ recovery (“ISR”) mines are in focus – Even though uranium prices are off their lows of last year, they’re still quite low compared to historical levels. Two of the aforementioned acquisition deals are about getting control of ISR mines. ISR deposits are typically smaller than conventionally mined counterparts but they’re mined by drilling wells into the ore body and then pumping a solution through to dissolve the uranium particles and bring them to the surface. The mining method is almost always cheaper both in terms of capital expenditure and cash costs than conventional mining because it doesn’t need the expense of physical movement of ore and expensive milling.
Q: Is this consolidation a positive or a negative indicator?
AM: Positive. We typically see a rash of consolidation at peak valuations in a mineral sector as companies want to spend their expensive paper, or at very depressed valuations when companies are more receptive to teaming up to save costs, improve access to funding etc. I can certainly say this ain’t no peak!
Q: Any other themes investors should be aware of?
AM: One key mistake I see going on at the moment and I would say to investors, be wary trading uranium in correlation with the whole energy complex. Oil and coal may be in the toilet but on a medium term basis there isn’t much correlation between uranium and those markets, Nuclear power stations cannot switch to other fuel sources and once they’re built they’re incredibly cheap to run. You don’t see substitution on a meaningful scale to cheap oil or coal. Another driver here are CO2 emissions. Of course nuclear is zero CO2 emitting power so for environmental reasons hard to substitute. Where we sit today we have an incredibly robust outlook for uranium demand growth, spot prices at levels where production is being curtailed not grown and most analysts projecting substantial increases in uranium price.
Q: Any comments about your company, where it sits in the market as you see it?
AM: Yes, I would just encourage those thinking about investing in the space to take a look at Azarga Uranium. We have a balanced portfolio of assets and investments in USA, Kyrgyzstan and Turkey. Our key property is the highest grade undeveloped ISR project, Dewey Burdock, in South Dakota. Last year we received our US Nuclear Regulatory Commission license. That property has projected strong returns (revised PEA completed) at moderate uranium prices and is moving out of the permitting stage and into the construction stage.
Q: I was going to let you go but I have to ask because I know outside of Azarga Uranium, you invest across the minerals space, what other commodities are interesting?
AM: Well we do not do ‘dumb’ commodities. What I mean by that is we don’t take bets that the macro economy will grow and all major industrial commodities will rise. We look at: (a) long term demand and supply; (b) technological change; and (c) external pressures such as climate change. For those reasons we ‘hate’ iron ore and coal for example. What we love are uranium, lithium and copper. We also feel like we like rare earths but need to dig deeper into that one. We are really interested in clean energy, evolution of the power grid, autonomous and electrification of the car fleet.
Thank you Alex for spending your time and your expert thoughts with readers.