The energy sector will become the most important growth market worldwide. Emerging nations like China, India, Brazil and Indonesia, but also Russia have to accommodate increasing demand for energy to the increasing effects of climate change. The trend goes away from carbon based commodities like oil and coal towards alternative energies. Solar plants, wind power and geothermal energy are good opportunities to minimize the greenhouse effect, but these technologies will not be able to cover the upcoming demand for energy. Uranium power seems to be the only alternative.
But the uranium market is also limited. Worldwide uranium production lies at about 40,000 tons per year. The leading producing countries are Australia, Canada, Russia, Niger, Namibia, Kazakhstan, Uzbekistan, South Africa and the US. The consumption of uranium lies at about 70,000 tons per year. The International Atomic Energy Agency estimates a yearly demand for uranium of 125,000 tons for the year 2030. Current production covers about 60% of demand. The rest comes from inventory, recycling and demobilized nuclear weapons. But the recovery of uranium from nuclear weapons will be finished soon.
All these points seem to be fantastic opportunities for all companies which own uranium and fully licensed production plants. Currently there are only a few companies worldwide with a fully permitted uranium deposit. One of these companies is Uranium Energy (AMEX: UEC, Stock Forum), a US-based uranium exploration company with two near-term producing deposits in Texas.
We spoke with Uranium Energy’s CEO Amir Adnani about the sensational deal with Uranium One (TSX: T.UUU, Stock Forum), about the current uranium market and the future of Uranium Energy.
DYOR: To start-off, please tell us what the implications are for last week's announcement (Uranium One deal)?
A.A.: On October 14th, Uranium Energy Corp announced the acquisition of South Texas Mining Venture, which includes a fully licensed uranium processing facility, a fully permitted ISR uranium project, and a portfolio of exploration properties in Texas from Uranium One (UUU) and Everest exploration for $10 million in stock plus $1mm cash.
The major implications of this acquisition are that with a fully licensed and permitted processing facility, the company will have an initial production capacity of 1M lbs per year with the ability to increase to 2 M lbs per year. This will become the basis of a new regional mining strategy in which a number of satellite projects, all less than 100 miles away, will feed the Hobson plant.
The acquisition positions UEC with near-term, permitted production visibility in the USA and revenues from low-cost ISR operations with potential for additional production growth. Additionally, UEC doubles its 43-101 compliant resource base in Texas.
Ultimately, the transaction makes UEC the only new producer with a fully licensed processing facility while extracting uranium from two separate satellite facilities in the next 12-15 months.
DYOR: What strategic considerations or motivations led Uranium One (UUU) to make this deal with UEC?
A.A.: Uranium One decided that their Texas resource base did not provide them with a long-enough mine life to justify starting operations. Furthermore, their core focus is currently in Kazakhstan, South Australia and Wyoming, hence they did not want to dilute their efforts. They saw a win-win situation in divesting of their Texas portfolio to UEC, since combining UUU and UEC resources leads to a very attractive resource profile in Texas and UEC has the necessary management and expertise to advance these assets to production. Uranium One’s confidence in UEC is supported by the fact that they were happy to take shares in this deal, they see considerable upside in UEC shares (they took $10MM in UEC shares for assets that carried a $93MM book-value).
DYOR: Why are production licenses so rare in the U.S.?
A.A.: After the cold war ended and USA/Russia signed the HEU Agreement, down-blended Russian nuclear weapons became the main supply source of uranium fuel for the US utilities. As result, from 1989 onwards the US uranium industry basically vanished; US went from producing 40mm lbs of U3O8 annually to just around 4mm lbs of annual production. Hence, much of the infrastructure and permitted processing facilities were shut-down and reclaimed. The only operations that survived this long period of inactivity were the low-cost ISR operations of Texas and Wyoming. Hence, today there are only a few permitted ISR plants active or available in the US and Hobson happens to be one of them.
DYOR: How does this acquisition improve your timing to production, when's the earliest date you can start production and which project will go first?
A.A.: The Hobson ISR Plant is fully permitted, as is mine unit #1 at Palangana, which allows UEC to initiate production at Hobson via satellite facilities in the region. This move lowers UEC’s reliance on permitting timelines for Goliad, in particular the award of a Radioactive Materials License, and also reduces capital expenditures requirements to complete a new processing plant. The acquisition positions the company to become the only new producer with a fully licensed processing facility and extracting uranium from 2 separate satellite facilities in the next 12-15 months. We expect Palangana to start production in Q3/10 and Goliad coming online in late Q4/10.
DYOR: Up until recently, the market was not talking much about Texas. What is giving more attention now and why the shift in the street's perspective of Texas?
A.A.: Texas offers the best of all worlds; it’s the only uranium district in the world where you benefit from:
1) No political risk and Texas is the energy capital of US
2) Fast-track permitting with all necessary permits issued at state-level only,
3) Low-cost exploration and production with ISR amenable resources/geology
Historically, Texas had been one of the largest explored and uranium production areas in the U.S. Although market conditions have started to gain some strength again, the credit market is still very tight. This makes large-scale conventional mining operations very difficult to finance and therefore mine. Texas has large 300 mile long trend with unique geology that is amenable to low cost ISR solution mining.
DYOR: Your management has a lot of experience on the corporate and operations fronts. On the technical side, what is so special about the ISR Solution Mining?
A.A.: Well, as mentioned, ISR mining has many benefits. It has a low environmental impact, low cost construction and operations. The key challenge is having an ISR specialized team. Internationally and in the US, the ISR mining community is very small. Our technical team has decades of knowledge working specifically in the Texas and Wyoming ISR districts. More specifically four of our team members were involved in permitting, engineering, and construction of the most recent ISR mine that commenced production four years ago (Texas based Mestena Uranium). Lastly, the UEC team has been involved at a senior level with 4 out of 5 currently operating ISR mines in the US. Final point, collectively, the UEC management team (technical team, officers and directors) has strong vested interest as we own 25% of the company.
DYOR: As an investor, what stages of future development would you recommend paying attention to? Could UEC be taken over by a major mining company?
A.A.: Achieving production is certainly the most important milestone for UEC and all energies are being directed towards this result. It is also important for UEC to continue to grow its resource base by rolling out drill programs in South Texas adjacent to our recently acquired Palangana deposit. We would also hope to release an updated NI-43-101 report for Palangana within 45 days of closing the transaction. Regarding UEC becoming a takeover target, this is always possible as the company nears production given the lack of fully licensed and permitted facilities in the U.S.
DYOR: If yes, how does UEC’s shareholder base look like, how loyal are the major shareholders and do these shareholders have a minimum take-over price in mind?
A.A.: Many of UEC’s key investors have played in numerous of the company’s financings over the past three years and have held their shares through perhaps the worst financial crisis since the Great Depression. This is an extremely loyal group of long term investors.
DYOR: Your chart indicates a steady upswing trend. Is this based on company specific events, the underlying commodity, or which other things?
A.A.: The upward trend that our shareholders have enjoyed since the beginning of the year is largely due UEC’s advancements with permitting, financing and other project and company milestones achieved. You could say that YTD the uranium price has not been as stellar as other commodities i.e. copper and gold.
The uranium spot price is trending upwards since the recent news from BHP’s massive Olympic Dam project malfunctioning (Olympic Dam is producing 10% of global uranium supply). This news combined with nuclear growth from China, India, Russia, Brazil, and the U.S. should translate to a very bullish case for uranium prices over the next 6-12 months (Olympic Dam shut-down is expected to last for at least 6 months).
Permitting for uranium projects is one of the largest hurdles to get into production as it is a long drawn out bureaucratic process. As a company shifts from an explorer to a producer, the stock is rewarded with more attractive multiples and ratings. UEC is positioning to become the next new producer in North America is validated by the analyst coverage from 7 major institutions (all calling for UEC to become the next producer in North America).
DYOR: What is your opinion about the future development of the uranium sector?
A.A.: The future development of the uranium sector continues its renaissance worldwide. This continues to be a function of a global shift away from carbon emissions and an awareness of global warming and climate change by governments around the world. Nuclear power will continue to play a key role in reducing carbon emissions and providing the electricity needs, and especially in nations like India and China where reactors are going up at a brisk pace.
DYOR: Why should potential investors invest in UEC right now?
A.A.: After closing the transaction with Uranium One, UEC will become the only permitted near-term producer in the world with a fully licensed processing plant. All of this in pro-energy Texas and from low-cost ISR operations. Also, UEC will have the advantage to lower its production risk exposure by having two advanced projects (Palangana and Goliad) that can start in the next 12 -15 months. This coupled with strong market fundamentals for uranium prices especially with the recent Olympic Dam malfunction, make UEC a great investment right now.
