URZ on AOTH
Richard (Rick) Mills
Ahead of the Herd
As a general rule, the most successful man in life is the man who has the best information
Today I’m speaking with Dennis Higgs, Executive Chairman of Uranerz Energy Corp. TSX and NYSE Amex – URZ. Dennis has been involved in the financial and venture capital markets for over twenty-five years.
Rick: Lets touch on the global uranium market Dennis.
Dennis: Okay, in our opinion, supply and demand in the global uranium market are not balanced. For 2010 global production was 139, maybe 140 million pounds of uranium. The 440 nuclear reactors in operation worldwide require approximately 180 million pounds to keep them running. So you’ve got about a 40 to 41 million pound shortfall. That’s being covered right now by the U.S./Russian HEU agreement that’s due to end in 2013, and then of course there are some stockpiles; U.S. government stockpiles and utilities’ stockpiles. But the bottom line is there is an unbalanced supply/demand.
Rick: The Russian’s have said they are going to definitely end that program in 2013.
Dennis: Yes, it’s widely believed that the program will not be renewed. So, I think over the next couple of years, you’re going to see a large part of this imbalance; that suddenly there is going to be a shortfall that they can’t cover. And you’ve also got 62 new nuclear reactors being built and coming online, and of course that’s going to increase the demand for uranium, so how’s all this demand going to be filled? Ultimately, it’s quite likely that it’s going to have a strong impact on the price of uranium.
Rick: I don’t mean to sound insensitive, but when you think about it, for an astute investor in the uranium sector, Fukushima could be a blessing in disguise. Like I said, I don’t want to be disrespectful to the Japanese people, but that was an old style reactor nearing the end of its life. It was built on a fault line, and way too close to the ocean, and it was a matter of not if it’s going to happen, but when.
Dennis: If you consider that it was a plant that was built some 40 years ago, probably designed 45 or 50 years ago, and then as you say it was nearing the end of its life and to have it hit by the most powerful earthquake ever to hit Japan, and a subsequent tsunami. The fact that it survived as well as it did is, I don’t call that a nuclear disaster, I call it a nuclear miracle. And as one of the analysts recently wrote, if anything, the event at Fukushima highlights the safety of nuclear power rather than the other way around.
Rick: A hell of a lot safer than coal mining.
Dennis: Exactly. I think part of the problem is that generally people are afraid of the unknown, and radiation is something that’s unknown to most people. I was recently shown a chart that described how much radiation the average person in North America is exposed to. I think the average person would be quite shocked to realize that they are being irradiated every day; by the sun, when they jump in an airplane and travel, by getting, of course, an x-ray for either a dental or medical x-ray. I mean, we’re all being irradiated. I understand even eating a banana irradiates you. But it’s the fear of the unknown, I think, that’s caused part of the reaction.
Rick: I think it is too. People just don’t understand how clean and actually how safe nuclear energy is.
Dennis: Yes. It’s the cleanest and the safest form of energy so far, and one day of course, we’ll all wake up to that fact. And when I say cleanest and so on, I’m also talking about power generation that is economic, rather than something that’s being subsidized like wind or solar. Those types of power or electrical generation, you know, they’re compliments, but they can’t handle the base load, and of course, they need to be subsidized. They’re a very expensive form of electrical generation, so we’ll see what happens in the future with regards to how much compliment we get from solar and wind.
Rick: Exactly, no power from one if the sun doesn’t shine, and no power from the other if the wind doesn’t blow and not suited for base load power generation. I think Germany is proving right now that they cannot get along without their nuclear power.
Dennis: Yes; I saw a report recently where someone had estimated what it was going to cost for Germany to replace or change its plants. And it was a staggering number, and then on top of the cost of changing the facilities was the increased cost of fuel and so on. So they may have a shock coming, and I personally don’t know if Germany will ultimately end up shutting down its nuclear plants as currently proposed. I think they’re being politically correct for the country for the moment, but ultimately, I don’t know if they’re going to end up shutting down those facilities. But having said that, from a nuclear or uranium standpoint, it’s pretty low on the scale of relevance when you consider that they have 17 reactors in Germany, and in Switzerland they’ve got another five plants. And so combined they add up to about five percent of the total reactors worldwide. When you consider that there are 62 nuclear power reactors currently under construction, which is a 14% increase from the current number of reactors running right now, at the end of the day, Germany becomes insignificant in the global demand for uranium.
Rick: You mentioned a 40 - 41 million pound shortfall of uranium to power existing reactors and then more to power the ones that are being built and in the planning stages, where is this uranium going to come from?
Dennis: Well that’s a very good question. That’s the difference between the mined supply and the required supply to keep the existing global nuclear fleet running, is this 40 million pound deficit. So you’re right, where is it going to come from?
Well, you need new mines to come on stream, you need to increase production from existing mines, and we’ll see how easy or difficult that is to accomplish. The HEU agreement with Russia is likely to be shut down and there are U.S. government stockpiles, but those are not an infinite supply either, and that’s all going to come to an end, so we’ll see what happens.
Rick: What’s the uranium market in the U.S., where you operate, like?
Dennis: Well, the U.S. of course has 104 nuclear reactors operating right now and that is, the U.S. has the largest fleet of nuclear reactors of any country in the world. So the U.S. is still the largest market for uranium. Now looking at just last year, there were about 51 to 55 million pounds required just to keep the existing U.S. nuclear fleet running. And the mined supply last year in the U.S. was about 4 million pounds. So the U.S. is producing only about eight percent of the required uranium to keep the existing U.S. nuclear fleet running. So the U.S. is the biggest market for uranium and of course they are a very small producer, the country as a whole is a very small producer now, so in our situation we’re very fortunate to be developing our mines in an area where we have the largest market for uranium.
Rick: What is up with the U.S. being so dependent for its energy on foreigners?
Dennis: That’s true, and of course Uranerz is actually a U.S. company, so we would be a domestic U.S. producer, which is a good thing.
Rick: People talk about the shortage in rare earths and cobalt, both being strategic minerals, but when you really consider it, when you get down to the basic need of powering a modern society, consider how much oil does the US import, and now we’re looking at another major energy source, that they’re just not self-sufficient in.
Dennis: It’s going to be very interesting to see how this all washes out.
Rick: You’re chairman of Uranerz, the company has a fascinating history. Can you explain a little bit of it to us?
Dennis: Sure. Maybe the easiest way for me to do that is to explain the name. The name of our company is Uranerz Energy. Uranerz is actually two German words. “Uran” is uranium and “erz” is ore, so in actual fact, in the German language, the name of our company is “uranium ore”.
The reason why we have that name is, back in the late 1960s, a large German utility, RWE, one of the largest electricity producers, decided to set out and explore for uranium worldwide because the world, and Germany at the time, were going nuclear. So they set up the Uranerz group of companies.
Uranerz Exploration and Mining was set up in Canada, with Uranerz USA and Uranerz Australia. So they had a global presence. Fast forward 30 years to 1998 and the Uranerz group of companies had become the world’s third largest producer of uranium. However, Germany by that time had gone “no nukes”, and RWE being a large German utility decided to sell the uranium business. So Uranerz was sold; the whole Uranerz group of companies was sold to Cameco, which was the largest uranium producer in the world at the time.
But the reason why we have that name is because we have seven people with our company that were from the original Uranerz group. So these are a bunch of people that have spent most of their careers in the uranium industry, mining uranium, dealing with uranium, and so on. So we have a very experienced and knowledgeable crew.
Rick: They are pretty talented and knowledgeable. You might say they wrote the book on in situ recovery.
Dennis: Well it’s interesting to note that Uranerz’s Executive Vice-President and Chief Operating Officer has four patents issued in his name specific to this in situ recovery mining method.
Also our president Glenn Catchpole was instrumental in developing the Inkai Project. He negotiated the acquisition of the property and took it through pilot production. The Inkai Project which is controlled now by Cameco, after they took over the old Uranerz group, is on its way to becoming the largest ISR uranium mine in the world, and that was Glenn’s responsibility. That’s a project he developed. We do have a very strong team of people that have very extensive experience in the uranium sector.
Rick: Let’s get into the projects that you’re going to put in to production. Can you explain how we’re going to get uranium out of them?
Dennis: Sure. We’re focused specifically in the Powder River Basin, and these deposits occur on what’s called the reduction-oxidation boundary.
The uranium primary deposition is when the uranium came up from the depths of the earth and was deposited in the granites in the mountains and so on, millions of years ago. But through millions of years of weathering, the granites break down, the rock breaks down, and the uranium ends up dissolving in the water and flowing in the water and the streams and so on. And then through millions of more years of weathering, over time, what happens is the uranium ends up re-concentrating in a chemically reduced environment.
So you have the uranium flowing in the water and then when it reached a chemically reduced environment, it re-concentrated. Those deposits are called secondary deposition, and those are the deposits that we are proposing to mine. They will be anywhere from 300 some odd feet to about 700 - 900 feet under the surface in the Powder River Basin. What we will do is, the deposits will be sitting in water in an aquifer, and we’ll bring the water to the surface and add oxygen, as well as baking soda and carbon dioxide and we pump that solution back down through an injection well. It percolates through the deposit and dissolves the uranium and brings it to the surface.
The roll fronts, they all occur along what’s called the reduction-oxidation boundary, the redox boundary. And we have over 300 miles of this redox boundary on our property and that’s our upside potential. We’ve so far outlined about 19 million pounds on our existing project areas, and that’s seven projects on which we’ve put out a 43-101 report out of perhaps as many as 37 project areas. So we have a large amount of this redox boundary where these deposits, these roll front deposits potentially occur, and we’ve got a lot of exploration work to continue developing and building our pounds. But we’re currently developing our first ISR uranium mine at the Nichols Ranch area.
Rick: So we’ve got 300 kilometers, we’ve got the Nichols Ranch that we’re going to start to mine, and we’re going to use one central processing facility, start with the Nichols and then add others.
Dennis: That’s correct, so because you have several of these deposits along these redox boundaries, you develop one central plant. Then wherever you have another deposit, you typically develop what’s called a satellite plant. All the satellite does is basically collect uranium in the resin at the surface, and then you ship the resin from your satellite plant over to your main or central processing plant, which we’re building now at Nichols Ranch. That’s under construction right now.
Rick: What are we starting with, tonnage wise?
Dennis: We’re licensed at Nichols Ranch for 2 million pounds per year. The plan is to build it for probably just under a million pounds a year capacity initially, to handle 800,000 pounds a year capacity, because you can easily expand them once you get these things built. We’ll get up running and our initial targeted production level is 600,000 to 800,000 pounds a year. Then we can start bringing our satellites on and increase that production level.
Rick: Okay, let’s make something clear here. This is not shale natural gas fracking, this is benign to the environment, and in Wyoming, you are bound by law to put the water back to the same quality, at least, as when you pulled it out.
Dennis: That’s correct. The main environmental issue here is the water. If you saw one of these things on the surface, you might not know that it was a mine. In fact I’m sure a lot of people have seen them on the surface and didn’t know what they were. If you’re in Nebraska, there’s the Crow Butte mine for example. In Wyoming in the Powder River Basin right now there are two of these in situ recovery mines operating. One’s called the Smith Ranch Highland mine which is controlled by Cameco, and they’re our neighbors to the south. Our neighbors to the northwest are Uranium One with their Irigaray facility and the Christensen Ranch, which has changed names; now it’s now called Willow Creek. But if you looked at these things, these well fields, you would see cattle grazing or antelope grazing. You would not know that there is a uranium mine there. All that’s at the surface are well heads. All the plumbing and everything is underground and all the fluids get pumped to your main ion exchange plant. And then, of course, the resin is shipped from there to your main processing plant. So, they’re very benign. The main environmental issue is the water, and you’ve already mentioned it.
I could argue that we’re actually cleaning the water, because we are taking out the uranium. But we mine the uranium out of that water or out of that deposit, and then when we’re finished we work to return that water to the same quality it was before we started mining. That’s the way we do this process. So it’s benign, and has a small environmental impact on the surface. It’s a closed loop. It’s a very environmentally friendly way of mining uranium.
Rick: How’s Wyoming to work in regarding uranium exploration, development and mining permitting and then developing your plan.
Dennis: Wyoming is great and it’s great for many reasons. First of all, it’s got a very mining-friendly environment there. The regulators and so on, you’ve got some of the largest coal mines in the United States in Wyoming. You’ve got natural gas, you’ve got coal bed methane, you’ve got oil and gas, you’ve got all these different things going on in Wyoming, and it has the smallest human population of any of the U.S. states, so it’s all very mining friendly.
The regulatory bodies are good to deal with and reasonable, and of course the people are very supportive because that’s their industry; mining and oil and gas. Wyoming was built on resources.
Rick: Tell us a little bit about your company’s stats, shares outstanding, and everybody wants to know how much money you have and will you get to production with what you have.
Dennis: Sure. Okay, so our share structure right now is, we have about 77 million shares outstanding, just under 77 million. There are a small number of warrants outstanding, two million warrants outstanding, and about 6-1/2 options outstanding for employees, so fully diluted about 85-1/2 million shares. Management currently owns about 8-1/2% of that and then we have some big long term loyal shareholders that have significant positions as well.
Cash position right now, we’ve got over $40 million in our treasury.
Rick: Are you kidding me? Almost 50 cents per share in the treasury and that’s fully diluted?
Dennis: Almost 50 cents a share fully diluted. On a current issue and outstanding basis, we do have over 50 cents per share cash in our treasury right now, so we’re in good shape.
Rick: How far does that money carry us Dennis?
Dennis: Well, our capital expenditures are estimated to be about $35 million dollars to put our Nichols Ranch Project in production. That includes the first well fields and the central plant. So, we should have enough capital in our treasury to start production.
We don’t want to go below $10 million dollars in our treasury for working capital and get us in a bind. So, we may consider looking at a financing within the next year or year and a half. Having said that, we don’t have any debt on our books, and the company is expecting to be producing uranium the second half of next year and therefore will have significant cash flow and revenue, so the company could handle a little bit of debt on its books if we decide to go that route.
Rick: And we should mention we do have two signed off-take agreements.
Dennis: I was coming to that. We also have two signed off-take agreements with two of the largest nuclear operators in the U.S. In fact, one of the off-take agreements is with Exelon. They have the largest nuclear fleet in the U.S. and the third largest fleet in the world.
We have good contracts. They were negotiated a couple years back and we’re quite happy with them now, and we look forward to delivering pursuant to those contracts. That will bring in significant revenue for us.
Rick: Uranerz has some pretty heavyweight neighbors to the north and south. One of them seems to be in acquisition mode. Do we have a target on our back?
Dennis: Very interesting question. We do have some very significant neighbors. Cameco is our neighbor throughout the project area; more prominently to the north and to the south. They have the North Butte Project to the north of us that they are developing now, and they have their operating facility and mine called the Smith Ranch to the south of us in the Powder River Basin. Also to the north and the south of us is Uranium One. They have their operating facility called Irigaray and their Christensen Ranch mine, which they have changed the name now to Willow Creek, and they’re in production there. That’s to the northwest of us. Uranium One also has various projects within our project area as well as to the southwest.
So between Uranium One and Cameco, they’re two of the largest ISR uranium miners in the world, and they’re our neighbors.
Rick: What would say, Cameco produce a year from their facilities, Dennis?
Dennis: Cameco, I think produced about 1.8 million pounds last year at their U.S. uranium mines.
Rick: So they’d have to look at us coming in, licensed for two million pounds a year, building a million pound a year plant and starting at 600 – 800,000 pounds and go “wow”, that’s fairly significant for a start-up.
Dennis: We’ll start at about 600,000 to 800,000 pounds and build from there with satellites.
Rick: Interesting. Thanks Dennis, it’s been a pleasure talking with you.
Richard (Rick) Mills
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