We interviewed Brandon Munro, CEO of Bannerman Resources (ASX: BMN), the Namibian Uranium explorer. He joins us to talk us through his recent article about the implications of Section 232 as well as the WNA Fuel Report and how it is put together.
Click here to watch the interview.
Matthew Gordon: Good morning Brandon, how are you?
Brandon Munro: Very well Matthew. Thanks for having me on again. I really enjoyed chatting.
Matthew Gordon: That was a great conversation I thought, a lot of people got a lot out of it. It’s good to be talking again. So, a few things have happened since we last talked. Why don’t you give us an update on the company? What’s Bannerman been doing?
Brandon Munro: Yeah well as many of your audience would know, Bannerman Resources has the Etango project in Namibia. It’s a very, very large project. 270Mlbs of U3O8. Namibia is a fantastic jurisdiction to be doing business in. Not only is it a great country for getting things done, it’s a lovely part of Africa, and I’ll in fact spend some time there with the family next week which we’re looking forward to. But it’s also a great Uranium mining jurisdiction. We’ve been mining Uranium there for 45 years, all of the infrastructure is in place. Everyone from the society to the government is very comfortable with Uranium. Very grateful for the contribution that Uranium has made to the country and for that reason we’re permitted. And we just don’t have many of the challenges that are particular to the commodity of Uranium, that are experienced in other jurisdictions. And so that’s our project it’s very advanced as you know, we completed the Definitive Feasibility Study (DFS) back in 2012. The main activity that’s going on the ground, is engineering, picking off aspects of that original DFS and some of the optimisation work done since then, that could do with a refresh. There’s a lot of technology that we looked at back in 2012 that existed but wasn’t sufficiently proven that we were prepared to affect what is a low risk profile of a project by introducing new things. Now obviously things have changed and things have happened and some of those technologies have fallen by the wayside and some of them are well and truly proven. And examples would be some of the nano technology that we’ve successfully deployed with our program. So we are working on that and because it’s such a massive project, an average of more than 7Mlbs per annum, even relatively small and incremental improvements do make a big difference. And we’re continuing that process until we get closer to a market that enables us to finance, at which point we will just draw all of those pieces together and update the DFS work that we’ve done.
Matthew Gordon: Well that’s a really nice segue actually. The old phrase would be, your shovel ready, ready to go. There’s some optimisation which you can look at in terms of the technologies. But the big elephant in the room that everyone’s been talking about and getting excited about, coming on the 13th or 14th of July this year is the announcement around the Section 232 petition. You have done a lovely ‘five things you need to know about a section 232’. You’ve kindly of agreed to talk us through that. I read and I love the simplicity of the way that you laid it out, but it was very intelligently laid out. So, can we run through those five things you need to know?
Brandon Munro: Yeah. Love too. And I enjoyed writing it so I’m glad you and a few others enjoyed reading it.
Matthew Gordon: It’s been really well received. But for those people who haven’t read it or perhaps not quite aware. So, UR-Energy and Energy Fuels, with some help from a couple of other people, have submitted this petition to the US government. Why don’t you tell us about that just very quickly, then we’ll get into the five key points?
Brandon Munro: So, they submitted a petition back in January 2018. And it took the whole market by surprise, including the utilities and those of us on the production side. And it came at a time when the market was starting to improve. Cameco had just announced a couple of months earlier that they were putting McArthur River on to temporary care and maintenance, and within weeks we saw Kazatomprom announce supply cuts. What we saw was a market that was already showing good solid green shoots of improvement, that was suddenly surprised by this action. And the petition had the effect that a lot of bids were withdrawn from the spot market. Whilst utilities and others, and traders, started to try and make sense of what the implications would be. And for a lot of people they, although they’d been a little bit of activity in Section 232 for Aluminium and Steel and so forth, for many, many people they really had to get on Google and start figuring out what this was all about. And we’d been obviously talking to utilities a lot. I’d been in the room with a bunch of them through WNA only a week before the announcement was made and they were actively preparing procurement strategies and procurement programs. In other words, that’s the key precursor to reigniting long-term contracting, and all of a sudden, they were all iced. No one was prepared to make a move until they knew what the implications were and what it actually meant. So that was a petition. Now the petition isn’t the investigation. The petition is simply a request or a petition that the Department of Commerce picks up the investigation. And it’s a bit unusual. The ones that are well known, Steel, Aluminium, autos; they’ve all been initiated by the Department of Commerce themselves with a bit of insistence from the White House. This one was a little bit different and what followed was another six months of uncertainty whilst we waited to know if the Department of Commerce was going to pick the thing up, ignore it, or do something totally different. And so that broke in July 2018. And at least at that point we knew, well something’s happening, and the statutory timeframes that exist under that Trade Expansion Act started to kick in. Fast forward almost 12 months as you say, the process is coming to the end because the Trump administration now needs to decide on whether they accept the Department of Commerce’s recommendation, that there are trade actions that threaten to impair national security. And if so, what actions if any will be taken. And as you say that’s 13th of July in the US, 14th of July for most of the rest of us.
Matthew Gordon: Why don’t we look at the five points that you’ve identified that people need to think about here. And the first thing is, what’s the likely outcome? That’s a big question.
Brandon Munro: The point that I’ll make is there is an array of outcomes here. And it’s impossible to say ‘this one’s more likely than that one. And this is the one that I think is going to happen’. And I know that some of my friends will start poking fun at me because I am a lawyer by background. But I promise you I’m not one of those lawyers who is too scared to ever make a prediction as you will remember from the last time I was on, I’m prepared to put myself out there if I believe something. In this case, there are so many outcomes. We’ve got an administration that has benefited in various sorts of negotiations by remaining unpredictable and has a history of approaching these things in a very unconventional way. And also, when you look at the merits of the case, I think you’ve got a very even hand between the utilities who are opposing the investigation and any remedies. And the proposition on which it’s been based, which is the US imports almost all of its Uranium, which opens it up for a potential impairment of national security.
Matthew Gordon: You said something which I think which we haven’t really been discussing with the Uranium companies. You’re saying that the utility companies are opposing the basis of the petition?
Brandon Munro: Yes, very strongly.
Matthew Gordon: And on what basis are they opposing it? What’s the problem that it will cause for them?
Brandon Munro: The primary argument from the utilities is that any trade action, particularly the quota, and obviously a tariff that will increase their costs. And they obtain some economic analysis that they have on their website and that they’ve filed with the Department of Commerce during the process, which indicates somewhere between a $500M and $800M impost compared with what they can currently buy on the spot. Now there’s a few arguments that you might levy against that. For a start, they aren’t paying what they can currently buy on the spot, they are paying blended prices and that’s quite transparent and significantly above what they can buy on the spot at the moment. But the theories and the concern from them is that a 25% quota would create a marginal cost of at least $70/lbs in order to incentivise enough US production to meet that requirement. Now the argument with the utilities, which I think has been very intelligently and strategically made, is it’s a tipping point argument. So as many of your listeners would know, U3O8 as a component of nuclear fuel, is a very small part of the cost of producing nuclear power. The cost of Uranium is typically about 6% of the cost of producing nuclear power. The vast bulk is capital then followed by things like green tape, compliance; all of the necessary procedural matters that you have to have around it. And then followed by nuclear fuel of which Uranium is, the U3O8, is only a small proportion. So, 6% of the cost of American nuclear power is Uranium, compared with say gas or coal where it’s often up to about 80% of the cost. The cost of nuclear power and this is one of the beauties of it as an energy source, is its relatively price inelastic to the cost of Uranium. The utilities have had to frame up their argument as more of a tipping point argument. They can’t just say ‘oh you increase the cost of Uranium and we’re going to go out of business’. They have to point to vulnerable reactors in the merchant power markets, that are already under pressure largely because of renewable subsidies but also because of cheap gas. Perhaps there are only one or two reactors which make them less economic to run than a large power station with four or six reactors, and they basically said any further pressure might be the straw that breaks the camel’s back here. And President Trump, you will have the responsibility for job losses if we need to close any more plants. So that’s been the strength of the utilities argument and we need to caution Uranium investors that that can be a very strong argument when they are such a big employer.
Matthew Gordon: I can see that. But maybe we should discuss that later because I think it comes up in one of your points when you talk about the different scenarios. But to just finish off on this, the likely outcomes – you don’t think there is one because the unpredictability of Trump seems to be the key driver here. There’s not going to be any single outcome. But who can tell. What happens if there is a delay? What’s the impact of that? This 180-day component which the automotive industry took advantage of.
Brandon Munro: Yes, so there is the possibility of a delay. It could be a temporary delay. Under the Act, the administration has to make a decision by the 13th of July but it can take another 15 days to implement the decision, whatever that means. There is also the possibility that you might see the administration taking a liberal view of the way that the act is drafted. Which means their obligation to report back to Congress is only 30 days after that. So, they might interpret it in such a way where they don’t have to announce their decision for as long as 45 days. As long as they’re implementing in the meantime. I think that’s fairly unlikely but we are dealing with an unpredictable administration here. The other possibility is that the administration says that our solution or our decision here is to engage in trade negotiations, which then gives them up to another six months. And that is as you say what happened in autos. And I note that the senior representative of the Kazakh government was at the White House just during the week. So that might be pure coincidence. It might be lobbying, or delivering some bad news on the part of the White House. But regardless of what it does, what it does do is give something of a preface for saying there will be trade negotiations and therefore we’d like to buy another six months. It is a possibility. Now what that means is it will certainly test the patience of Uranium investors. There’s no doubt about that. It’s been a long time for us waiting as investors for this to be resolved. It will put a lot of pressure on any Uranium companies that need to raise capital. It will be fine for a company like Bannerman. We’ve still got more than $6M in the bank and a very low burn, so we will sail through. We will be fine. It will probably even open up opportunities for us if we see other companies and their assets under distress. But it will test the patience.
Matthew Gordon: Well that’s a topic which I’ve discussed recently with quite a few Uranium companies. And we did bring it up when we spoke, in terms of junior companies have got so much cash. This potential delay or whatever the timeframe is, it is going to cause people to need to go and raise capital. And the thing is, for investors, they’re in this. I can’t see how investors get out of it, go play somewhere else and come back and come back in. Because no one knows when this thing is going to pop. And I think people are frightened of missing the party when it does. But at the same time, it is deeply frustrating. I’m being told by funds, I’m told by the companies that their investors are very frustrated by the whole process. I agree with you. But we know a couple of companies who’ve had to go and raise money and it’s expensive at this point. But you’re okay.
Brandon Munro: Oh, we’re fine. And what it will do in the medium-term, will be essentially positive. And the reason I say this is a three to six-month delay won’t be long enough that utilities need to change their strategy in the meantime. They will simply sit it out. That will further consume inventory, it will tighten things up in the market but it will put additional pressure on the spring, that is Uranium supply and demand. What it means is three years from now, there will be greater upside volatility on the Uranium price. And in the context of very significant pressure being there already because of the imminency of the US long term contracts rolling off and their need to re-contract. It certainly wouldn’t be all bad. It would just be a difficult period for some companies for the next six months.
Matthew Gordon: The whole thing about 232, people just want a decision one way or the other. It’s almost irrelevant what the decision is. Just decide – kind of like Brexit here actually. Give us a decision. We know where we are. We know how to make plans on that basis. Because there are stockpiles of Uranium, no one’s able to give me a number of what that what that looks like. But at some point, that’s running down clearly and there’s going to be, as you say, a gap in production if we’re not careful if this thing does keep going on for very much longer. The money, or cheap money, is not there to enable companies to get going.
Brandon Munro: Yeah. That’s right. And I think while we’re talking about all this we should emphasise, I don’t think a delay is a probable outcome. It’s one of the many outcomes and we’re going to have a much better idea about this in just over a week’s time. So it is well worth investors having it in the back of their mind and probably building their strategies around what happens if there is a delay. But as you say, any decision is positive because it enables the market to get on with it and creates certainty that hasn’t been there for 18 months.
Matthew Gordon: Let’s talk about the second thing that you mentioned in your document. Investors must have a balanced perspective. Now there’s a question I ask everyone. And I asked you, you gave us your opinion and it’s this fervour, America first doctrine on the one side and then it seems to be the rest of the world on the other. Whether people believe it’s a security issue or a commercial proposition, it’s divided the room. What’s your take? Remind everyone of what your take is on this.
Brandon Munro: I think there are sufficient grounds for the administration to find that their importation of nuclear fuel, whether it’s Uranium conversion, enrichment or fabrication; does threaten impair national security. However –
Matthew Gordon: What does that mean? What does national security mean?
Brandon Munro: Well it depends on the administration. If you look back over time since 1962 when this part of the Trade Expansion Act was introduced. There’s been three dozen different investigations of this nature and only a small proportion of those have actually found that the relevant trade practice threatens to impair national security. But we’ve had it in Steel, Aluminium and even autos. It seems the interpretation of that view is somewhat more concerned than what it has been in recent times. I mean if Mercedes Benz and Hyundai can impair national security by delivering pretty good motor cars, then I have no difficulty finding that a reliance on Kazakhstan for the world’s cheapest Uranium can impair the electricity source for one in five households. What it means? I’ve got no idea. But as a lawyer we use precedent the whole time, and I’ve got three very strong precedents to suggest that we have a situation to impair national security here. Now my take on it though, is that that’s not really the issue here. The issue here, as we discussed last time, is that the world’s biggest industrial economy is fast becoming a nobody when it comes to a technology driven power source that still powers more than a tenth of the world’s electricity, and is expected to grow with strong climate change fundamental policies behind it. How can the US even be in that situation? It wasn’t that long ago that they absolutely dominated the nuclear power industry. And they find themselves not producing any Uranium, not having any conversion capacity, having very little enrichment capacity that they can control and virtually building no reactors around the world. They’ve given ground not only to their Western arch rivals the French, and Électricité de France (EDF). But they’ve also given huge ground to Rosatom out of Russia, CNNC and CGN out of China and even South Korea. So they’ve been relegated outside the top five because essentially of government policy and stress on their domestic nuclear fleet for the reasons that we’ve described. So that for me is what needs to be solved here.
Matthew Gordon: A couple of quotes from you. You say that AHUG which is the American, what does it stand for again?
Brandon Munro: Ad Hoc Utilities Group.
Matthew Gordon: Okay. They have, as you say, cleverly positioned themselves as being vulnerable to Uranium prices. But the Uranium sector itself employs currently about 500 jobs. If it comes back, it may create 3000 jobs. It’s not on the register. It’s nothing. That’s just a medium sized company in the States. But the nuclear industry, about 100,000 jobs. If you say ‘I can buy Uranium anywhere in the world’, the nuclear industry jobs are safe. It’s not an issue. 500 jobs, you don’t have many lobbyists for 500 jobs. Is that part of the problem?
Brandon Munro: That’s part of the challenge for the petitioners and for US Uranium producers and developers. It’s a challenge in the context of an administration that’s been very jobs focused and prefers solutions that can be expressed succinctly and in relatively simple terms. So jobs, jobs, jobs, is a much easier argument to make than some of the more nuanced and equally valid arguments that are being made by the petitioners.
Matthew Gordon: Okay. Well I guess that’ll be answered in next couple of weeks. But let’s try and hypothesise what the possible outcomes could be. Because you talk in your document about quotas and tariffs, and I think five different scenarios or possible solutions, not necessarily one but maybe a bit of all five. But let’s start with domestic quotas.
Brandon Munro: The petitioners for your audience requested a 25% domestic quota. Now to put that in context, they would need to move from current production, which is a bit less than a million pounds per annum to between 12Mlbs and 14Mlbs per annum. The Uranium resources are there, but they’re certainly aren’t shovel ready projects that can turn that on quickly. It will take time, it will take an adjustment period. And as I pointed out, there was a leak from the Department of Commerce to Bloomberg that suggested a 5% initial tariff that escalates by 5% per year. Bloomberg didn’t go as far as reporting if it escalates all the way to 25% or not, but one might expect that it would. And that’s consistent with the general view which is that 12Mlbs to 14Mlbs couldn’t possibly come on in less than about five years. Now the thing is that these leaks are very rarely done by accident. It’s usually, and I dare say in this case, in order to test the waters a little bit amongst the key stakeholders. The leak gets out there and the Department of Commerce and the White House sits back and waits for the reaction.
Matthew Gordon: Which was?
Brandon Munro: Well from the point of view of the utilities, think about it. They’ve been hard at this for 18 months now. They’re almost at the end. They’re not going to give up now. They came back with what I understand was a very strong response to that, which served as a warning that ‘no you can’t test the waters with us on this because that won’t make us happy’. It’s a little bit like someone training for a marathon for 18 months, it’s race day, they’re out and they’ve been running hard for three or four hours and they’re 100 meters from the finishing line. That’s not the point to sit down and have a cup of tea. You’ve got a grit up and finish it. And that’s where we’re at with the utilities. I’m confident that that’s the message that’s come back to the Department of Commerce on that. And I think the domestic quota, apart from the time aspect and the capacity to adjust which was foreshadowed in that leak, there’s also a question of to whether it should be 25%, whether it should be 15%, perhaps even 10%. And it’s relevant because the marginal cost or incentive price that would be needed to push from say a 10% to a 25% is quite significant. There’s enough mid-cost assets in the US that could probably produce at a price of $55/lbs to satisfy 10%. But once you start going beyond that you’ve really got to offer a lot more than that to incentivise these smaller US projects. And the analysis that I cite in my article is that you need to get $70/lbs to start bringing on those extra projects.
Matthew Gordon: And we’re a long way from that. I can’t imagine too many people unhappy about that. Apart from the Canadians and Kazakhs who are producing a lot cheaper than that, which I guess we’ll talk about when we get into some geopolitics in a bit. People should go and take a look at this document and look at the diagram, the Red Cloud KS estimates which you referenced earlier. Let’s talk about quota with allies as an option.
Brandon Munro: So that could take two forms. It could be a quota. Call it 25%. That’s both domestic US production but also would allow for example Canada. So there has been some pre-emptive trade negotiations between the Trudeau administration and the Trump administration. There is an agreement that if there are trade actions on Uranium that adversely affect Canada, there will be a stall of the implementation of those while they are discussed. Canada would be a logical candidate for inclusion. There is a chance that Australia would lobby to be included as well as they were with Steel. And if the US objective here is to try and maintain open markets amongst nonaligned friendly nations, which you can read as non-CIS, non-Chinese nations, then it would be very logical to open the door to Africa as well. Namibia is the fourth largest producer of Uranium in the world and Niger is the fifth largest producer of Uranium.
Matthew Gordon: It’s an interesting one because it’s the equivalent of picking a team at school. You’ve got to work out who you want to be friends with and who you don’t. Because there’s a very clear divide between China and Russia making friends in Africa, where you are. The French, they’ve been there a long time. You’ve got 14 countries that speak French in Africa. And the US which tries to have some kind of influence. I think we spoke about this last time, it’s a waning influence in Africa for most things because Russia, China, the French have been putting money in there for a long time and it would be interesting to see how that turns out. Who gets picked for the team?
Brandon Munro: Well absolutely. Team Niger is very much dominated by France. The production is dominated by France of course, the mines majority owned by France. But also, as a sovereign nation, France is responsible for providing an enormous amount of bilateral support and security to enable those mines to carry on in Niger. And Uranium is important to a country like Namibia. But it is absolutely vital to a country like Niger. There are some companies that you’ve spoken to who are doing great work in Niger, but it’s not as open as a place like Namibia for example, which has Russian investment and has Chinese investment, it has Indian investment, it has Australian, Canadian, US, South African investment as well. So that’s the team that everyone wants to be on I’d like to say. But it’s certainly the team that you don’t want to pick a fight with in school because you could find yourself being squeezed right out, and that’s the conundrum that the US would face if it does start picking friends. You can either go up to Namibia and say come and play with us or it can punch Namibia in the nose and have them run off to the Chinese and the Russians.
Matthew Gordon: To keep the analogy going, it’s playground politics. There’s a lot more to it than just Uranium. There are other things at play here. So again, maybe one to look at. The next thing you talk about is tariffs. We’ve seen a lot of talk about tariffs in the market, obviously with Trump and China recently, North Korea et cetera. What’s your take on this as a possible option?
Brandon Munro: I think it’s possible. It doesn’t make much sense because the Kazakh production is so competitive compared to US production that it would need to be an enormous tariff to actually try and create some level of economic parity. But it’s easy.
Matthew Gordon: You quote a huge number in here. You say the tariff would need to be somewhere in excess of 200% to make economic sense. And clearly that’s insane.
Brandon Munro: If you look at the cost of Kazakh production compared to the marginal cost of US production, it is in the range of somewhere between 100% and 300% to start Making sense. A 20% tariff is not going to make Kazakh production uncompetitive at all. But it will irritate the utilities and it will irritate the miners as well. But a tariff is simple. It can be implemented quickly, it can be withdrawn quickly. And there’s another variation which is halfway between the quota and the tariff and that is a limitation. Much as what we have with the Russian suspension agreement on Kazakhstan and Uzbekistan and potentially Chinese production. So rather than saying these are the school boys and girls that I want on my team, it would be more saying ‘we can’t allow those people onto the playground’. That or ‘you’re not allowed to pick all of the best players in the one team, you can only have one good player on each team’. And so that would be the alternative which would be more constructive and it has got precedent. As I say, there’s the Russian suspension agreement, but also Youratom has quotas effectively, or has limitations on how much of the Youratom state member, the utilities in Europe, can import from any one supply source. And so that would be a constructive way of resolving the national security limitations although it wouldn’t actually help the petitioners as much as they get from a quota.
Matthew Gordon: I think that’s a particularly complicated solution. Again, let’s see what comes up. You talk next about a no trade action. Is that a reality?
Brandon Munro: I think it is. What I mean by that is no protectionist measures, but the opportunity to improve the health of either the nuclear power industry or the Uranium miners, through exercising the Section 232 powers in other ways. It could be as simple as cutting some of the green tape that exists. It might be creating a subsidies regime for nuclear power beyond the ZEC or Zero Emission Credits that are implemented in a number of states. It could be fixing some of the distortions in the renewable’s subsidy regime that particularly and unfairly hurts nuclear power. There’s a bunch of different things that could be done here and I sometimes wonder if at the heart of the utility’s strategy, it’s about drawing attention to this tipping point argument as a way to get the attention of the administration to some of their other grievances which are entirely appropriate grievances to air. And it would be great to see the administration actually tackle those. It would be very constructive for the industry and also it would be good for the health of the US nuclear power industry.
Matthew Gordon: It would but I guess there’s a lot of other things fighting for share of voice going on out there and no one really wants to get into this level of admin. That’s the difficulty here. Again, one to watch but it seems unlikely given the rhetoric at the moment but we’ll see. You talk about the Department of Defence procurement because clearly the heart of this, the emotional heart of this is the nuclear fleet and is there a bifurcation of the market necessary to deal with that.
Brandon Munro: Well this would be an extremely constructive outcome. It would address the concerns for national security in a very direct way. And if the Department of Defence was to sign a contract, over say 10 years for 4Mlbs, 5Mlbs or 6Mlbs per annum, it would top up its reserves of Uranium in a very appropriate way. It would draw out all of the concerns that the petition has happened at that level there would be enough to go around to the other immediate producers as well. It would keep the utilities happy because there’d be no trade action that levied against them. And most importantly, it would be a great thing for the Uranium sector because not only would we have certainty in a way that doesn’t create admin for other players, but also it creates a new demand source. There’s been a lot of talk that the Department of Defence is well provision for Uranium. But there are a few things that are happening at the moment that would see those stocks drawn down a lot faster. One of the ones that I point to in the article is the demand or request for HALEU (High-Assay Low Enriched Uranium) which is basically 20% Uranium rather than the 3% to 5% Uranium that is put into nuclear power plants. This Uranium is used for some of the new technology. Some of the Generation 4 technologies that Bill Gates is pushing and that has a lot of bipartisan support within the US Congress. I think that’s something we will see. We’ll see it develop, we’ll see the Department of Defence and the US government enabling their technology ventures to produce this new technology through that. And that brings forward quite rapidly the depletion date for these Department of Defence reserves. I’m still hopeful. Again, it’s not probable or likely but I’m hopeful that we would see action from the Department of Defence, and we do know that they’re engaged in the process.
Matthew Gordon: Well that’s interesting and probably one for another day, which is the technological advance in the space with people like Bill Gates putting his money where his mouth is and others. I think people putting a lot of store in that as part of the solution going forward as well. The final component to this is the quota for US controlled Uranium. What do you mean by that? Because again that feels like pick a team but we’re going to have a little bit more control.
Brandon Munro: I said this one’s probably a lot less likely. Partly because it hasn’t been mooted so far and partly because it’s very much in the nuanced range of outcomes here. But if I was President Trump, what I would do here is I would use this opportunity to expand the US influence around the world in direct competition with China, Russia, Middle East and other sovereign nations that have a big appetite for Uranium. And it goes back to the earlier comments that the US is losing its relevance in the nuclear power industry at a time when the playbook that Russia has been very successful with, and China is trying to compete with in the Belt and Road Initiative is to build nuclear power reactors on a build-own operate model. If you look at Turkey or Bangladesh for example, Rosatom goes in there and all that Bangladesh needs to provide is a site and the domestic country approvals. Rosatom finances, they build, they operate, they train the Bangladesh employees over time but very importantly what they do is they provide the nuclear fuel and take the waste away at the end. They just need an off-take and a site to be able to do that. It’s a tremendously valuable and persuasive method of building nuclear reactors, particularly amongst the developing world which is obviously China’s focus on Belt and Road. They’ve got an appetite for Uranium well beyond their own domestic borders and that is where the US could get completely squeezed out. They could become totally dependent on Kazakhstan and a small handful of commercial operators in Australia and Canada, if they don’t address this in some way. And the most powerful way that America addresses these types of things is using capitalism to its advantage. So if the administration was for example to say ‘we will create a quota, we will give privileged access to the world’s biggest nuclear fleet in the US but the way it works is it has to be American controlled Uranium, whether it comes from inside the borders of America or elsewhere’; that would enable public companies to have an additional competitive advantage which means they can go and compete with various Uranium assets versus the Chinese and the Russians, the Middle East and the Indians.
Matthew Gordon: So how does the US deal with this? Because that whole PPP model has been used by the Chinese, now by Russians and now French, for a long time. I’ve worked in Africa for a long time and you saw huge infrastructure projects being paid by these countries, in exchange for mineral rights, obviously, and now with Uranium being highly topical at the moment and say a very emotive topic at that. How did the US use their financial might, their financial control; the U.S. dollar, to affect that decision making because if they can’t supply alternative energy solutions, why shouldn’t Bangladesh, why shouldn’t the UAE, why shouldn’t these countries take up the offer of this zero-carbon energy source paid for, built by, run by competitors of the of the US?
Brandon Munro: Well clearly from their perspective they should and they are. Rosatom, the Russians are building in almost a dozen jurisdictions around the world at the moment and they’re in advanced negotiations with another 10 countries. Everywhere from Bangladesh and Turkey through to Egypt and Kenya for example. It has been a very successful model particularly given the capital costs involved in nuclear. And it’s very attractive to Russia and China because it creates a bilateral umbilical cord that lasts over many, many decades. From the US point of view, my personal opinion is that the horse is well and truly bolted here, and it’s probably bolted for all of the West. Maybe with the exception of South Korea if they can sort out their own domestic quandary on nuclear power. But the US still has an opportunity with Gen 4 reactors and new technologies, small modular reactors for example, and that’s where the Bill Gates push with various reactor designs such as new scale. There’s still an opportunity there and also the US still has to protect a large nuclear fleet. The issue here is maintaining relevance on the one hand but also ensuring it doesn’t get totally squeezed out from the success of the Russian and Chinese reactor programs.
Matthew Gordon: But what are the levers that the US can pull here? Because typically it’s been using the US dollar. That that’s been a big lever, I’ve seen it work in South Sudan and other places across Africa where it’s a hard-hearted approach to it, but they get what they want as a result, the implied threat et cetera. But that’s not working anymore. Do they need to just say that’s a battle we can’t win? Security issue at home, that’s another topic but how do we remain relevant in Africa, the Middle East, the West with regards to energy? Do they need to go and own renewables or other forms of renewable? What do they need to do? What do you think these levers are?
Brandon Munro: Well there’s no easy answer at the moment for the US and as you know, we both really enjoy a good geopolitical discussion and your point about the US dollar is quite right. Whether it’s influence from crypto-currencies eroding their monopoly that the US dollar has had on cross-border financing. Or whether it’s the resilience that countries like Iran are needing to show, in order to get on with life when they’re deprived of US dollars and all of the financial centre around them. So over time we do see that mechanism decrease. The US still has a defence capability, the dominant defence capability in the world. At a time, whilst we are seeing China implement more assertive measures in South China Sea and so on, China doesn’t appear to be trying to challenge particularly the Navy but also the other defence capability of the US in a direct way. One would expect that that is the US’ main avenue for trying to deploy energy influence. In which case it needs to do it amongst its direct allies. And that’s quite contradictory to a lot of the policy that we’re seeing from the Trump administration.
Matthew Gordon: But that’s tantamount to gunboat policy which the British employed in Hong Kong. Surely that is not a reasonable form of commercial economic expansion any more.
Brandon Munro: I would agree. So then where do they go and I guess that’s the point that you’re raising. One of the potential answers there is through technology ascendancy. As you know there’s a lot of commentators who believe that that’s really what’s behind the Trump position on the trade war with China, that they need to arrest the erosion of technology ascendancy. And that then does bring us back to the next generation nuclear power technologies, and the US still has a competitive advantage on the technology front although it’s losing a lot of that competitive advantage to Russia and China because of a regulatory perspective. They are bogged down and they need to accelerate that regulatory approval process and commercialisation before they lose that technology ascendancy.
Matthew Gordon: I agree with that. And for anyone listening to this has got some views on that one. Post them to the YouTube channel or on Twitter. We’re delighted to hear what people think about that. Fourth point, you’re talking about all outcomes strengthening the Uranium market. Now I think you and I are going to disagree here. Tell me your view.
Brandon Munro: My view, simply and then please challenge me on it, my view in simple terms is I’ve had a deep dive on all of the potential outcomes here and I can’t find one that doesn’t lead to a strengthening of the Uranium market. Even the outcomes that are neutral, possibly even negative on the face of it for the Uranium price, they’re totally overwhelmed by the resumption of certainty and the resumption of market activity as the nuclear power cycle. The nuclear fuel cycle can just get on with life after 18 months of uncertainty. So that’s the premise.
Matthew Gordon: The bit I agree about is I think it’s good for the market, clearly, as a whole. But you say in here that it’s a common perception that there will be winners and losers. You say well, actually there’s going to be no bad outcome for Uranium investors. At the end of the day, mining is mining. The market is the market. Things go wrong and people still need…that quote that People throw out you know ‘high tide raises all boats’. It’s true to a point but there are going to be companies who are better equipped than others. Investors still need to remember the basics or the fundamentals of investing. You’ve got to trust the team. You’ve got to believe that the asset is fundamentally a good one. Can it be economically mined and does it have a route to market and the people to know how to get into the market, because Uranium is a more complex commodity than Gold, than Copper, than Nickel because of the predominant buying cycles of contract. I think, Uranium more than others, people need to think who they put their money with. We’ve talked with some companies and I go ‘Oh we’re in the right postcode, it’s all fine’ for ‘we’ve done this before. It’ll be fine. And it’s never fine, there’s a lot of hard work you know mining is a tough business. I think my point is, investors please remember the fundamentals here and don’t get swept away by the euphoria of this this huge wave of enthusiasm for the Uranium space. So that’s why my answer slightly differs from you.
Brandon Munro: And I don’t think we’re disagreeing with each other here. My point is that from a Uranium market point of view the commodity market, it’s all positive. Now from an equities point of view, there’ll be differing effects on some of the players. Some of the players are already trading at a premium pricing in some of the expectation from 232. There are disappointing outcomes for those companies. Even as the Uranium price goes up, some companies will outperform others and they’ll see a flow of capital towards that performance which will impact other companies. And as you say, in any industry including Uranium they are pretenders out there and those pretenders will be found out as more people start to analyse the sector and as sentiment improves. I agree with everything that you just said. Perhaps I should have been a bit clearer that I’m talking about the commodity market. I can’t see a scenario where the commodity market doesn’t benefit. So if you are already positioned as an investor in a quality Uranium story and I would certainly advocate Bannerman as being one of those, if you position in a quality Uranium story, well things are about to get better as long as we see a decision and as long as it’s a clear decision that can be interpreted and understood.
Matthew Gordon: I had an interesting conversation with someone yesterday, a Uranium company and they were talking about ‘we’re in the right post code’ but they’ve just started, they’ve started exploration drilling and I think they will probably do quite well. But as happened in the last cycle, a lot of new companies and a lot of new entrants into the marketplace who didn’t make it. Some had good assets and some didn’t. But it’s a question of timing. You guys have got your DFS. You are shovel ready, ready to go. Just waiting on this uncertainty in the market. Let’s talk about your last point, which is the enduring legacy of the 232 petition. What do you think people will have learnt from this process and how can we use this positively going forward?
Brandon Munro: The first thing that’s happened on the positive front is it has created a lot of attention for the Uranium sector particularly in the US. It’s had people thinking about Uranium that probably haven’t given it any thought since the heady days of 2007. And we’re seeing that at a time when there is a lot more commentary on the sector. We’ve had people who are in a public sense quite new to it, yourself being a great example, putting a lot of effort and a lot of intellect and a lot of thought and analysis into the sector. And that’s been largely helped along by 232. In terms of a more enduring legacy, I think we’re seeing far more attention being put on geopolitical risk and geopolitical issues. I’ve said for a long time and I used to start some of my presentations with a Venn diagram that had supply demand and geopolitics, and that is a very particular and important aspect of the Uranium sector. You can’t just simply look at supply and demand. You have to look at geopolitics to be able to interpret not only the sector at a macro level, but also different stocks and different opportunities and different assets. You always need to pass a geopolitical filter over a Uranium asset and a Uranium company, to be able to value their prospects going forward. It’s been a helpful reminder for investors of that fact. I think it’s likely to ramp up the geopolitical stakes even further. And I’m of the view that we have a greater level of geopolitical tension in the world than we’ve had since the collapse of the Soviet Union. The difference back then was the major geopolitical event had a dampening effect on Uranium because it led to a flood of downed-blended Soviet era warheads through the Megatons to Megawatts program. Here we’ve got the opposite happening. We’ve got very high levels of geopolitical tension across a number of world stages, that will have the effect of ramping up supply uncertainties in supply risk to the nuclear power industry. And we’re only at the very beginning of understanding the implications of that. One of the points that I make in my article is it’s very easy to simply ignore those risks when prices are cheap. You can look past them, you can figure well this is perhaps just for the next few years, we just won’t worry about who are buying our Uranium for or how concentrated our book has become because ‘well at sub $30 this is just such a bargain’, in the same way that our suppose some shoppers will overlook quality if they’re buying something at a third of the price that they normally do, that’ll change. And as it changes, not only the utilities will become more focused on that but the sovereigns will become more focused on that. Uranium investors will become more focused on that. And all of those things that some of us in the sector have been saying for a number of years in terms of geopolitical positioning, will come to be. Investors with anything more than the very shortest of timeframes with an investment decision, really need to be looking at that because it will create winners and losers as this geopolitical risk plays out.
Matthew Gordon: Absolutely. You finish off with a line which says ‘will the US be a catalyst or a bystander in the next two weeks’. What’s your bet?
Brandon Munro: I do think catalyst. We’ve got an administration that has proved to be fearless on these issues. Happy to be unconventional. Happier to be unconventional you might say. And certainly, willing to enable chaos. Either deliberately or accidentally as an outcome from its decisions. And chaos is an outcome that we could well see from this. Chaos in itself will become a catalyst. The outcomes that might relegate the US to being a bystander are less likely than the ones that will either show leadership from the US and some of the reasons we’ve described or be some other form catalyst because the market gets thrown into relative chaos.
Matthew Gordon: Well it will be interesting to see who the winners are. Whether the US is a leader or whether they’re going to have to come up with an alternative plan. Let’s wait and see. Just to finish off, you’re involved with the WNA. You’re on one of the groups there. I think you are co-chair of the fuel report. Is that right?
Brandon Munro: Yeah that’s right. I’m co-chair of the demand group. I also sit on the Uranium supply group and I also sit on the secondary supply group. I’m involved in three committees, but my involvement is much greater in the nuclear demand group. For your listeners that’s a working group established in the WNA consisting of a bunch of utilities, some Uranium producers and other market participants including traders and so on, that is responsible for forecasting in articulating three demand scenarios for nuclear power and therefore Uranium. Between now and 2040.
Matthew Gordon: The WNA have got a symposium in London in September, they’re going to release the Biannual Fuel Report. Some people are seeing that, or I guess, hoping that that is yet another catalyst on top of the 232 announcement. So just gives us the outline of what is contained in the fuel report.
Brandon Munro: Yeah so last year’s report looks like this, it’s quite a thick document.
Matthew Gordon: Sorry does it come out annually or biannually?
Brandon Munro: Every second year. And it has chapters that deal with demand of course and various aspects of that. Secondary supply, primary Uranium supply, conversion, enrichment, fabrication and of course conclusions. It’s a very rigorous process. There’s a detailed model behind all of this. If there’s been a criticism that’s levied against the process, it’s because the restrictions on cartels and so forth mean that when a bunch of Uranium producers get in the same room and a bunch of utilities get in the same room, they can’t talk price. And in past years I think the industry is falling into the trap of stepping back too far from that line. And the whole concept of economics has fallen out of this report. So last year the conclusion was there’s plenty of Uranium. Sure, there is plenty of Uranium at $100/lbs but there is bugger all at $20/lbs as the price was when the report was released and I think that affected the credibility of it, particularly for the audiences that were more financially literate. This has been my first report that I’m sharing that committee and I think what we will see in the next report is a lot more focus on economics. It still won’t talk about price and it can’t talk about price. But there will be a lot more focus on economic paradigms. We’ve introduced for example, different supply scenarios. So not only demand scenarios but supply scenarios, so investors and others can look at it and say well, ‘if we don’t see a new economic paradigm with a recovering price, this is what we’re going to see’. And I think it’s just become a lot more relevant particularly to financial investors. It tended to be a bit more for policymakers and a bit more for industry participants and so on. But someone like yourself and your colleagues will be able to look at the next version and get a good sense of some of the burning issues such as secondary supply, where the demand is coming from. And I think it’ll be an enabler and it will be a slow burn catalyst for that reason.
Matthew Gordon: It sounds like it’s evolving. For someone like me, putting the price in there would be… I can understand why you haven’t, but putting the price in there or at least having a flexible model where you can look at the effects would be much more useful and that’s something that we would have to put in using your assumptions. You’re painting a picture of this Uranium arena in which we play. The demand side I kind of get, that information I imagine is very, very robust in the sense of how many reactors are there, how many are coming on, how many are being built, how many are going to come online, and all of the associated components there. It’s the supply side which makes me wonder about the detail here because you’re getting that from producers, developers, explorers and you’re forecasting these numbers. Certainly, for the public companies, they have to paint a rosy picture. Are the numbers accurate? How do you ensure the numbers are accurate? And clearly for them it does matter what the price is, so how do they give you those numbers without talking about price?
Brandon Munro: Well it will always require additional interpretation and you’re quite right, the demand numbers are fairly robust. Obviously as we get out plus $20 – $30, more judgment needs to be exercised and there is a natural conservatism in anybody but particularly amongst the types of players that we’ve got here. So even the upper scenario, I think it’s got a lot of room for out-performance. If we see policy changes and if we see China continuing in the way that I think it has to. But essentially, they’re reliable numbers, they’re robust. The methodology is very robust and very detailed behind it. You’re quite right when it comes to Uranium supply. The requirement for the report is to rely on either public information or to rely on the response from questionnaires that are sent to the different asset finders.
Matthew Gordon: That’s a good point you make. The reliance on public information, the age of that information and well quite frankly the efficacy of that information. Where has it come from? Are the sources robust? Who’s done it? Are they reliable? Do they know what they’re talking about? Etc. etc. So how do you validate all of this? There’s a lot of moving parts.
Brandon Munro: Essentially you can’t validate that when you’re in the position of the WNA because you can’t go out there and say we think that that asset is run by a bunch of scallywag promoters and we’re just not going to take their numbers. You and I know that that is the case with some companies, but it’s not the WNA’s position to do that. And equally there’s a lot of reasons why companies would fail to update certain information. It might not be in their interests to let the world know that they’ve got a technical challenge with something. There is a baseline robustness because most of the Uranium producers are publicly listed companies. If we take some of the outliers out, there is that credibility there are, the rigour of the JORC process and the NI 43-101 and so forth. You get a pretty good level of information. But when it comes to timing, when it comes to ability to produce in certain economic outcomes and prospects of getting approvals and so on, that’s where you’d certainly as the audience need to use your own judgment. The way that the report has quite appropriately considered all of this is they have basically said, ‘right we’re going to take all of this public information and put it into the one bucket. So here is the theoretical amount of production that could possibly come on. And then we’re going to make some assumptions about how much of that will realistically come on’. And they have concepts like reserve projects and concepts like unidentified supply. And I think given the constraints, that’s as well as you could possibly do and then it’ll be in a number of these debates where we sit around and we argue whether 65% is realistic in an upper-supply scenario, or whether it should be 45%, and what sort of delay should be allocated. There’s been a lot, and this is a new model and it’s a new way of doing things and a new methodology, that I think creates some level of realism to the whole picture. And then it’s also disclosed quite well so you could read it and you could say well ‘I’m looking at this array of different projects and I think 65% is still too optimistic’ or whatever your approach might be.
Matthew Gordon: It sounds like it’s evolved. A lot of moving parts and we’re going to have to say ‘well thanks for making us aware of all of these components, treat each one individually and make your own assumptions on each of those variables’ to come up with your own number. I suppose fund managers are going to find that a lot easier than a retail investor because they’ve got the necessary skills and ability to do that. And retail may not necessarily. It would be interesting to see what comes out. We should we shouldn’t prejudge. There was another report but UXC Forecast. Have you seen that?
Brandon Munro: I don’t subscribe to UXC but people tell me about their stuff quite often.
Matthew Gordon: Do they? What’s your take on what they’re producing versus what you’re producing.
Brandon Munro: As Bannerman or as WNA?
Matthew Gordon: Sorry, with your WNA hat on.
It’s different. So UXC is designed to provide price forecasts, which we don’t go near as WNA. They provide trade information. They have an agenda over time which is to represent the interests of utilities and that has become more generalised in recent years. But I believe that it’s still there, whereas the World Nuclear Association is designed to represent the entire fuel industry – the nuclear industry including the fuel industry, so buyers, producers, developers et cetera, et cetera. You get a very different type of information. The WNA information tends to be a lot more global and a lot more macro because it’s often drawn upon by policymakers. Whereas UXC information tends to be a lot more micro, because its individual utilities make decisions on their procurement processes for example.
Matthew Gordon: For utilities, they’re going to look at UXC for guidance. Do you think they’re going to find your report useful?
Brandon Munro: Most definitely. And I think the other point is even for investors, you might know everything that’s in the fuel report. I actually don’t think that will be common because it’s still very interesting. But you might know the bulk if you’re very well-informed and have your own views. But what you can do is you can read it and get an idea of what the industry thinks, and that’s so important with Uranium because sentiment still plays such a big role. It plays such a big role in the timing and intensity of utilities procurement decisions, it plays such big role in the downstream part of the industry. And you mentioned the symposium in September. I’m going to be there with a lot of interest following exactly that point. What does the industry think? What I think is relevant for our internal strategy, but it’s not so relevant for the development of the next 6 to 12 months. I want to see what everyone else is talking about, what they’ve been told. There’s been a huge amount of positive news in the nuclear industry, the nuclear power industry. And in many cases the people in the downstream part of the nuclear power industry. They’ve got very complicated jobs, they’re very clever people. They’ve got to concentrate really hard on that and they only pop their head up and talk to the broader industry once or twice a year. I think that will be a crucial point for everyone to start getting bombarded with all of these very positive news and be able to take stock and say, ‘gee, it’s been pretty hard since 2011 but we finally turned a corner’. That will be relevant because for the utilities, they won’t be so accepting of the UXC view of the world, which is this low price is just going to continue forever and demand curves will be flat and nuclear is a dying industry and all of these things that might be quite helpful in a price negotiation with the producer, but actually doesn’t help the overall health of the industry.
Matthew Gordon: That’s a great answer. Well let’s wrap it up there. I appreciate your time. Insightful as ever. For those watching, do have a look at Bannerman. It’s one of the better utility stories out there. Brandon, thanks again for your time. I look forward to seeing you in September hopefully, if we don’t speak before and go grab that beer, hopefully in the sunshine.
Brandon Munro: Yeah, yeah. September tends to be good. I enjoy the Indian Summers that you can manage to put on most years in London. Always great to chat. And always great to get such probing questions.
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