Brandon Munro – Uranium Hots Up as USA Battles Russia & China (Transcript)

Bannerman Resources Ltd.
  • ASX: BMN
  • Shares Outstanding: 1.06B
  • Share price: A$0.04 (02.06.2020)
  • Market Cap: A$37M

A Conversation with Brandon Munro, CEO of Bannerman Resources (ASX: BMN).

We have interviewed Munro throughout this uranium bear cycle; his insights have been incredibly useful for investors. Here is his previous interview.

We Discuss:

  1. Iran Sanctions Lift: Announcement’s Impact and Possible Workarounds
  2. Russia’s Involvement: Can it Be a Mediator or Will it Have to Choose Sides?
  3. Geopolitical Games and China’s Position
  4. Measures to Speed up US Mining Processes and Manage Strategic Imports: How Will it Impact Uranium Miners?
  5. EIA Uranium Marketing Report’s Numbers: A Shock to the System
  6. Utilities and Junior Uranium Miners: How Long Can They Hold on?
  7. EU Numbers Due: What Should We Expect?
  8. Hope for Uranium Investors
  9. Tiny Update on Bannerman Resources

CLICK HERE to watch the full interview.

Matthew Gordon: Hey Brandon, how are you doing, Sir?

Brandon Munro: Yes, I’m well. Matt, what about you?

Matthew Gordon: Yes, yes. Good. You’re up at the cottage, I can tell, up in the mountains?

Brandon Munro: Yes. So, we’ve had builders down here, so it’s been lots of banging and clanging and sawing today. So, I’m very pleased to be using this machine instead of all of the other stuff.

Matthew Gordon: Fantastic. Fantastic. And maybe pick up some bottles of wine while you’re there.

Brandon Munro: It is in the right region for that, yes, if we were to run short.

Matthew Gordon: Well, look, I think that that line is good for now whilst you’re out on the sticks. So, we had better take advantage of it and sort of rush straight into this. And plus, I’m sure you want to get stuck into your Friday night. So, a few things happened this week. I’ve got to start with the big one – Mr. Trump and Mr. Pompeo have made an announcement with regards to the Iran sanctions waiver. So, what’s your take on that move of theirs?

Brandon Munro: Yes, I think a little bit of background: we’re talking about the Iran sanctions waiver. Back in 2015, the JCPOA, the Joint Cooperative Parties of Agreement was signed. So, we talked about that when I was in London, so maybe in the show notes we can put some of the details for people on that. At the end of last year in November, the Trump administration ceased the waivers in respect of the Fordow enrichment plant, which at the time was an easy one for them to stop the waivers on because, you know, it was built into a mountain, deliberately concealed and had the potential to be reconfigured for weapons-grade enrichment. At the time there was a bit of a scramble, and a couple of days after that event Sergei Lazur of the Russian, a foreign minister, confirmed that Russia would stand by Iran.

And then a couple of weeks later they said, Oh, look, because of technical reasons, we can no longer provide any support to Fordow. So that’s how the last little mini crisis here was resolved. What we’ve seen now is the Secretary of State refuse to grant any further waivers in respect of three of the remaining four nuclear facilities in Iran. And the only one that remains, importantly is the Bushehr nuclear power plant, which is being built by RosAtom and others. So, they have granted a 60-day sort of cool off period in which any companies, any European or US or other companies that are involved in those can basically wind down their support for those programs before the sanction start to kick in. And then there’s been a 90-day waiver granted in respect to the Bushehr nuclear power plant.

So, that’s the background. Now, in terms of implications, it will depend on how much of RosAtom’s different divisions are involved in those other three activities. My understanding is there isn’t an awful lot. The big one is the Bushehr nuclear power plant. That’s a signature project by RosAtom. And we’ve talked before about how RosAtom has the lion’s share of nuclear plant exports at the moment, and their USD$133Bn forward order book. And this is just another example of how they have very effectively built nuclear power plants outside of Russia and even outside of the former Soviet sphere of influence. They aren’t going to want to give that up. And I think the Trump administration is astute enough to realise that if they would have put that jewel in the Russian crown at risk, well then, we really do have a big problem here.

And I think, just to remind the listeners, the problem here is that RosAtom still provides a significant proportion of the enriched Uranium product, the EUP that is required for the US nuclear power plants, and European for that matter. So, it’s in the order of 20% to 25% for the US and a little bit more for Euratom, the EU power plants, and that’s higher because of former Soviet sphere of influence, countries like Czech Republic and Hungary and so on. So that would be really serious difficult news for the US nuclear fleet and the EU nuclear fleet if all of a sudden, let’s call it in 90-days’ time, those utilities no longer had access to that Russian enriched Uranium. And there’s other Russian nuclear supplies that are important as well, but that’s the main one.

Matthew Gordon: So, what’s the workaround here for the US? Because obviously they’re making demands of the countries and companies working in Iran: being Germany, France, UK, Russia (through RosAtom), and China. And they’re obviously threatening sanctions to anyone who breaks that agreement, sorry who continues to work with Iran, should I say. So, the US has got to come up with some kind of workaround because Russia is just so, you know, I heard a Russian Senator this week say that obviously they disagree with Trump’s move, Pompeo’s move. They think that this will actually drive the Iranians to build a nuclear weapon because, you know, things are tough in Iran. Sanctions are very, very severe as it is and there’s a lot of tension with regards to the relationship between Iran and the US. So, if Russia sides with Iran, can it also work with the USA?

Brandon Munro: There are two workarounds: the one workaround which will be driven outside of the US is that the various players who are involved in the three facilities that will no longer be granted sanctions waivers will need to withdraw. So that would effectively be a repeat of what we saw with the Fordow plant when the Russian interests gracefully withdrew on a technicality. The alternative workaround, which is still the one that I think from a world peace point of view and a stability and a non-proliferation point of view is the favoured one, is the US and the Trump administration use this leverage that they have got to try and renegotiate the JCPOA or a replacement. That’s what the other parties to that agreement are calling for. That’s what they have wanted for quite some time. And it might just be that this additional pressure now, particularly on Russian interests, and to a lesser extent, Chinese interests, will help to bring Iran to the table in such a way that a workable solution can be obtained.

What we saw from last time is that I don’t think we should hold high hopes for that. It seems to have been a signature foreign policy for the Trump administration as we get closer to the elections. I’m not sure that this is the type of outcome that would please the more hawkish ends of their support base. So, I would very much like to see an outcome along those lines, but I’m not particularly optimistic about it.

Matthew Gordon: Obviously, Pompeo and Mnuchin have been at loggerheads over this topic. There’s a sort of doves and hawks battle yet again, on another topic, but you know, the tensions are high between the US and Iran. As you said, you know, with the killing of Soleimani, the Iranian general, you know, there was some retaliation at the US base. There’s a lot going on in the region, which perhaps the Russians are better suited to try and resolve, are they not? Because this is a very sensitive, we always talk about the geopolitical sensitivity of the topic and you know, this is a prima facie case in point here for us: the US is interfering with other people’s ability to generate energy.

Brandon Munro: Quite right. So, yes, I think Russia does have the influence to be in the best position to resolve this, but it will require a degree of compromise from the US side as well. Russia needs to be able to resolve this whilst retaining face itself, and not being seen as simply cratering to a strong arm or hawkish US position here. So, without a degree of that compromise, I think it’s very unrealistic to think that Russia will compromise unilaterally. And unfortunately, that just leaves the Iranian citizens caught in the middle. And as well as the assassination, or the death of the Iranian general, we have also seen tensions high with Iran in the world spotlight receiving a fair bit of sympathy in relation to the compounding detrimental effect of US sanctions at the time of COVID-19. I think they have used that channel of communication quite effectively. The US would call it propaganda, and there’s always an element of that. But I think there’s a number of parties internationally who are thinking that maybe hard-line sanctions are not really the humanitarian approach when a country is on its knees because of a pandemic. So maybe that will find its way into this calculation at the same time

Matthew Gordon: I find it quite interesting at the moment; again, the geopolitical component here, you’ve got the British, the Germans, the French, who have one view against the Americans, and say we will issue sanctions against anyone who, who doesn’t follow our lead. And it’s such a small market, the Uranium market is such a small, it’s very important, obviously, but it’s a very small market. To stand up to the US over what is insignificant amounts of money, which may be detrimental on other much bigger projects, that’s, you know, that’s a big call for these countries to have to make, either individually or collectively as the EU. China on the other hand, they don’t care. Do they?

Brandon Munro: I’m sure they care. There’s no question that this is very, very important to them, and their nuclear export ambitions are enormously strategic to China. But whilst they do care, they aren’t at the same sort of commercial risk that RosAtom and the Russian interests are. China imports very little nuclear fuels into the US. A number of their suppliers are already on US sanctions lists. So, it doesn’t make a big difference to them. They haven’t yet significantly cracked the EU import market for nuclear fuels. And China’s main focus at the moment is domestically, and they will try, as they have in many other industries, to perfect the nuclear fuel chain and the nuclear power cycle internally and domestically before they turn their focus to exports. So, they don’t have as much skin in this particular game. But what I’d say, Matt, is your point about this being a small but very important cog in a bigger wheel – it’s very true and it’s certainly escalates the risks here. We’ve got an industry that’s still worth very small amounts relative to other industrial interests and certainly relative to military expenditure and other geopolitical large cogs that we’ve got at play here. So that puts America probably more at risk than Russia in this situation.

If RosAtom was to say, look, we’ve invested in our foreign policy that’s based on being a reliable party here, and we agreed to build the Bushehr nuclear power plant. And if in 90 days, the Trump administration says that’s off the sanctions list as well, I think we could easily see a scenario where Russia says, our priority is our firm commitments with our foreign policy partners including Iran. And if that means that we have to suffer commercial losses into the US and potentially the EU as well, in the grand scheme of things, that is something that Russia certainly could bear as a nation. And RosAtom, being an apparatus of state, they of course would have to toe the line in terms of what Russia’s strategic interests dictate.

That’s a difficult situation for the sector, but in particular it’s a difficult situation for the US, and if it escalated further, then I could well see a scenario where Russia puts its arm around Kazakhstan and says, right, you know, you’ve got to remember where your allegiances are here. And that’s something that was made in different ways as part of the section 2.32 investigation. And whilst it wasn’t specifically named in the working group, I think reading between the lines, you can see that there is a vulnerability there. And look, if RosAtom lost USD$20Bn because of all of this, again, just in the scheme of things and what this actually means for foreign policy for decades to come, that’s a standoff that I think Russia would be prepared to take and it would only really be at the cost of US and EU utilities.

Matthew Gordon: Well, I think for fear of being dragged into a kind of political discussion, we probably better go elsewhere; I saw some interesting commentary here, because I think the EU or European countries are keen to get some sort of peaceful resolution. And as you say, there’s a kind of in a softening in their stance with regards to, in these difficult times, because Iran has not got the infrastructure system to deal with COVID-19, that perhaps we should be looking for new ways to have these conversations. If you keep treating a country, and unfortunately the poor bystanders of that country, in a certain way, unless you’re expecting some kind of collective Stockholm Syndrome, I think the resentment just builds and builds. So there’s a kind of, there’s a conversation that needs to happen and hopefully that gets resolved for the sake of the ordinary people there.

Let’s get on to the kind of commercial component here, which is what are the implications now? Because one of the other notes that came out this week was, and it kind of reflects on what follows on from something that we talked about last week with regards to the Republicans and bi-partisan submission. Some House Republicans have introduced a measure which would speed up the mining process in the US. Obviously, we’re talking Uranium. So, I think Uranium companies, let’s talk about the impact or what they hope the impact will be of that.

Brandon Munro: The first thing to say about that, in common with our conversation last week is that there was a lot of criticism about the report from the Nuclear Fuel Working Group: that it wasn’t specific enough, that it was too rhetoric based and so forth. And we saw it as a policy document, and now, two announcements really in 2-weeks following that report, they’d go very much to the heart of what that report was driving at. So, the US administration is very keen to demonstrate that whilst the report might have been big on rhetoric and small on action, the actions are flowing, and presumably they’ll continue to flow. So that’s the first thing that I think is important and significant here. The second thing I’d say, which is similar to what I said last week, is this doesn’t come as a surprise. It did have a significant gestation period and the administration with the help of the US Uranium producers has been analysing these issues for quite some time and I suspect what’s happened here is that they were just waiting for free or open air time that the reports delivery grants them to then be able to start pushing this through Congress.

Now, from the perspective of an aspiring Uranium producer, or Explorer for that matter, it’s obviously great news. The amount of green tape that had built up during the previous administration was significant. Some of it you would argue is necessary and good for both the environment and the industry, and from an industry perspective the last thing we want to see is companies not being appropriately regulated. So, I do hope that these actions are measured and appropriate in the circumstances and they reduce unnecessary green tape rather than reducing protection of the environment per se. But nonetheless, it’s good news for those players. And it also just continues to put this issue onto the agenda, which is a good thing in general for our sector.

Matthew Gordon: Yes. I mean, obviously in a wider context, it wasn’t just talking about Uranium, it was talking about, you know, lots of different commodities where,  I think they talked about a list of 50 commodities, I’m sorry, maybe 48 commodities of which, you know, they had to import in varying degrees, 18 of which a hundred percent were imported. There are some great numbers in there as well. So it makes you realise that perhaps the US mining sector does need a boost, does need some love and attention, and it seems to be getting it off the back of not just the nuclear field working group report, but lots of other impetus, which is again, coming up in an election year was probably always going to happen because you have got to win some votes. It would be nice to sort of see how these things actually manifest themselves down the line. But you know, the Uranium sector, I guess, will hope that the market starts taking note of them in particular.

Brandon Munro: Look, I think it goes a little bit further than an election year. I think we will see, coming out of all of the different implications of COVID-19, I think what we will see is increased protectionism and a slowing down of globalization more generally. And this is a combination of, no doubt the election year, the Sino-US trade war, but also some positioning for a restriction in trade because of those dynamics. So those minerals that the US imports very significantly, there are examples where they’re imported from China where the US is very vulnerable of course. But there are other examples; Niobium being a good one, where the importation is from countries that are on very good terms with the US, they’re just extremely concentrated. And these issues have been flagged through strategic minerals reports, both by the US Geological Bureau, but also in the EU. And these things were flagged 10-years ago, but we haven’t really seen substantive measures taken to really protect these economies from their lack of diversity on their own production. And that’s the sort of inactivity that will catch economies napping, if there is indeed a strong move towards protectionism and also towards the slowing of globalisation and a restriction of trade.

Matthew Gordon: Good point. And again, I think it is maybe worthy of a conversation another day, because that’s a nice big juicy topic right there. Because I think the implications of some of the actions that we are seeing with the, certainly from the US at the moment, certainly the language is going to have a huge impact on the way that other countries are going to have to start to think. Something that was, you know, four years ago inconceivable in some cases.

 But let’s move on to this other big topic because this kind of through the market somewhat: the EIA Uranium marketing annual report. The numbers in there I think shocked some people, I think they were hoping to see that the cupboards were bare, and the cupboards aren’t bare. It would seem. But again, what was your take on what you saw?

Brandon Munro: Yes, the report came out and it did catch some people by surprise because they were expecting a decrease. And I was in that category. What we saw was a small increase in the total composition of inventories held by US utilities and a decrease in the total inventory is held by US utilities and US producers of those nuclear fuels. So, in rough terms, what we’ve got is an increase in U308, of about 5M lbs. So, to put that in perspective, at the end of 2018, the US utilities, amongst all of the different forms of nuclear fuel, had totally inventories of other 111Mlbs. And that’s against an annual consumption of about 50Mlbs. So just over 2-years, which when you think that the fuel cycle itself, takes about two years to move from U308 to UF6 to enriched UF6 back into an oxide and then fabricated into fuel rods, they were leaving themselves very little manoeuvrability if their only option for restocking was to go to the beginning of that fuel cycle and buy U308, and carry that U308 all the way through the fuel cycle. So, what we’ve now seen is that number of 111Mlbs increase to 112,800Mlbs, so 1.6Mlbs – not that big a deal unless you were expecting or hoping for another big drop, which is what we had between 2017 and 2018.

Now, what I find interesting; the first comment that I’d make is although I expected the number to go down and it went down by bit and it went up by a bit, it really isn’t a big deal. We’re talking about a small number of pounds in the overall context of the market. But understanding the composition of these pounds generates far more interest and I think gives us far more clues as to how the market’s operating at the moment than simply looking at one of those headline numbers.

So what we’ve got is U308 going up significantly, about 5Mlbs, and that’s the bit that was surprising, when all you have access to is perhaps a summary numbers. What we know about this is that a large number of pounds were bought in the spot market at the end of 2018. That’s when the Uranium price was lifting substantially, shortly after Cameco put McArthur River onto indeterminant care and maintenance. And that volume for 2018 was about 88Mlbs through the spot market with significant a reactor, or utility participation. What would have happened is the vast majority of those pounds purchased in the spot market would only have settled for delivery in 2019. So, what we’ve got here is something of a smoothing effect; between 2017 and 2018, there was a fairly dramatic a fall in U308, and that was smoothed by those deliveries taking place in 2019, which then increased that number. So that’s the first thing to understand.

The second thing is just talking to people inside the industry, there seems to be a view that one utility in particular had bought quite aggressively and opportunistically in the spot market when prices were low. That is also going to distort those numbers to a significant extent. And if you’d taken that one utility’s numbers, or its aggressive spot buying out, then that would all but even out that U308 number. So that one utility, from what I understand, is a substantial proportion of those 5Mlbs where the U308 price has gone up.

So, for those two reasons, I don’t think it’s valid to see this as a broad indication of the functioning of the market, the health of the market, the attitudes of US utilities and so on. It’s partly a function of how the spot market works, or how ineffective it is you could say, and the activities of one particular utility.

So, the next thing that’s interesting is then to look at the downstream nuclear fuel components here. So UF6 dropped by 3Mlbs and EUP dropped by 4.5Mlbs. And for the audience here, they’re not measured in million pounds. These are all converted into the equivalent of U308 pounds. And then correspondingly, fabricated fuel, so fuel that’s in rod’s, ready to go into reactors, increased by about 4Mlbs. So, what to understand there? First of all, the increase in 4Mlbs in fabricated fuel is not surprising in the least because we’ve got quite a glut of refuelling outages coming up in the spring and then the fall of 2020. So, the utilities would have needed to finish 2019 with strong levels of fabricated fuel so that they could do that refuelling. So that I would have totally expected to see. The UF6 and the EUP dropping that is indicative of the tightening of those markets that we’ve discussed before and is also reflected in the price of conversion for example. And then if you look at the supply inventories, they dropped by 5Mlbs, although the supplier numbers of U308 only dropped by about a million pounds, even less than 1Mlbs. So, what that’s telling me is that we’ve got utility downstream dropping, and also supplier downstream dropping as well. So those two numbers together indicate quite a significant tightening of UF6 and EUP within the US market. And when you add those numbers together, that’s close to 20% of annual consumption that’s tightened in that way. So, in summary lots of interest from it and lots of indicators, and I would have liked to have seen it drop by a couple of million pounds as a whole rather than go up by a couple of million pounds. But when you do add back those producer changes, the total number of both utilities and producer inventory contracted by about 3Mlbs, which is reflective of what we understand, which is an overall contracting in inventory around the globe.

Matthew Gordon: So, what does this now tell us? Because like I say, I keep saying, I can’t believe how opaque this is. Opaque is the keyword for this industry. What does it tell us about how long utilities can keep going without necessarily being impacted by, you know, obviously, supply disruption because of COVID and more, more generally, you know with production, when things do come back online? Can they string this out to the end of 2021 before they come back into the market? Because if we look at the long-term forecast from, you know, UXC and Trade Tech and so forth, we’re talking 2021, 2022 numbers of below 40. That has a big impact for Uranium juniors hoping to get into production and get financed to be able to try and get into production sometime soon. So again, what’s your take on timing now that you’ve seen these numbers?

Brandon Munro: Well, what it tells us is that US utilities across all of their components of nuclear fuel have still only got just over two years of inventory. That leaves them very exposed to a shortage which could be generated by geopolitical reasons. It could be generated by other commercial reasons. And in particular, it leaves them very exposed to a shortage of EUP or UF6. And the reason I say that, two- and a-bit years – it does sound like a lot of time, but not if you have to go through the entire nuclear fuel cycle. So, if there’s a shortage for whatever reason, they have about 12 million pounds collectively across the whole industry that gives them that buffer if they can’t buy EUP or UF6 in the marketplace. So that leaves them vulnerable. And so, it tells me two things: it means that this sector is well set up for some form of catalyst, and you know, given what we’ve been talking about, there’s every chance we’d see a geopolitical catalyst here. And it also tells me that this sector, and the US sector in particular remains ripe for a re-evaluation of risk management and procurement strategies. Carrying that little inventory, given the amount of risk that’s out there to supply in the sector, both commercial and geopolitical seems to me to be bordering on irresponsible. And I think to me, in my opinion, there has got to be some realisation generally speaking amongst the utilities that they need to manage their risk in a different way. And it’s going to come from all sorts of different directions. We’ve talked about the carry trade diminishing. So that was one of the key risks mitigants that the utilities could use. They could just maintain their current inventory level knowing that they can buy on the carry trade for delivery in 1 or 2-years’ time.

The other risk mitigant that they were able to use as to buy EUP, six months out of when they needed to fabricate rather than buying U308 one and a half years out of when they needed to fabricate. But if any of those risk mitigations fall away, and I think both of those will become less available over the next year, the utilities will have to go back to using you U308 as their primary risk mitigation via long-term contracting. And I think that’s the setup that we’re all looking for by the end of the year.

Matthew Gordon: That’s the US numbers, but the EU numbers, when are they due?

Brandon Munro: If they don’t come out next week, they should come out the week after. So very imminent.

Matthew Gordon: Right. And do we expect to see the same sorts of things? I mean, I know we talked last week about, you know, they recommended that they have three years’ worth of inventory, but is that the case or is that just a recommendation?

Brandon Munro: I’d expect that to be the case. So, I’d expect to see stable numbers out of the EU and any significant build-ups I think will be disappointing and any significant drawdowns will be interesting.

Matthew Gordon: Okay. Okay. Well look, I think we maybe need to wrap it up there because I know you have got to get off, and so have I unfortunately. I do enjoy these conversations.  Just one last thought; obviously we’ve seen what Gold is doing in the market. People are getting very excited. Lots of projects getting financed. Silver too, actually, has had a couple of very good weeks. What would you say to people looking at Uranium? Because it’s been a roller coaster in the last three months.

Brandon Munro: Well, it has been a roller coaster, but that’s been driven by broader equity sentiment. What we’ve seen in the sector is, again, it hasn’t been spectacular in the last week, but the Uranium price has kicked up a touch. We’ve got a Uranium price. It’s on a generally upward trajectory with a very, very strong setup for later in the year, based on fundamentals. So, I still think when you look at how under-priced Uranium equities are at the moment, particularly on the ASX, they didn’t have the lift this week that most of the North American stocks had after these sanctions waiver announcement, or the speculation by the Washington post. So, on the ASX in particular, the equities are still very, very good buying for investors that are prepared to hold to the end of the year and perhaps into next year to see those fundamentals work out. So, for anyone out there who’s buying in the market today, good luck to them. And I think they’re doing the right thing.

Matthew Gordon: That’s a good point actually. We are speaking to someone later today about irrational exuberance as part of investment rationale, and I am looking forward to that, but I think that has a large bearing on what you’ve just said with regards to, you know, place your bets based on fundamentals not on the psychology of the market.

Brandon Munro: I’m not seeing any exuberance in Uranium at the moment. So, by definition is not irrational exuberance.

Matthew Gordon: Well yes, maybe, maybe. Well look, I will look forward to catching up with you next week. It has been another sort of surprising week in the world of Uranium. I know it seems a little bit macro at the moment. There are some great stories out there, people getting people getting financed, getting some money through the door. It is a little bit of a waiting game. You guys are good. You’re fully cashed up down at Bannerman, aren’t you? How are things progressing?

Brandon Munro: Yes, well, we’ve got a couple of years of runway and lots of things that we can do to add value right at the moment.

Matthew Gordon: Beautiful. Beautiful. Good man. Okay buddy. Well, I’ll let you go and have a great weekend.

Brandon Munro: Thanks, Matt. Great to chat again. Look forward to next week.

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