Investing In Uranium – The Truth

Homer Simpson handles a rod of uranium inside Springfield Nuclear Power Plant.

“Not another uranium article,” I hear you shout at your screen. This isn’t just another piece based on nothing more than speculation and gut feeling. In this series of articles for generalist investors and people new to the uranium space, we will try to shine a light on all aspects of the current uranium impasse, leading us (hopefully) to an answer.

Uranium, to invest or not to invest?

Swamped

At US$10Bn total market size, uranium is small relative to commodities such as gold, copper or even silver.

However, there is no shortage of volume when it comes to uranium opinions. Investors can’t make investment decisions without good quality information, but how can investors discern the quality of information when the discourse around a subject features nothing but mixed messages? Even the most informed voices in this space are only now admitting that they had not realised the volume of U308 available in 2019 and possibly in 2020.

We’ve spoken to some of the biggest names in the uranium business. What facts did they provide us with? Is it enough to form a useful conclusion, or do we remain in the dark?

Macro Macro Macro

Let’s start at the outermost circle of the uranium sphere: the macro story.

There is an almost unanimous belief in the credence of it. However, there are outlying arguments. There was negative sentiment in the uranium market after the Fukushima disaster in 2011, and some countries and investors made it their strategic doctrine. Germany pledging to shut down every single nuclear reactor by 2022 is a good example.

The demand reality is that the nuclear macro story is strong: it is the only carbon-neutral solution that can efficiently provide the energy needs of our growing population. In December, German officials remarked that their anti-nuclear stance was a mistake. Nuclear power plant production is being ramped up hugely in Asia, with around 35 under construction with firm plans to build another 70-80. Billions of dollars of nuclear fission reactors, large and small, are being built as developed countries look to fill the energy needs of the growing and ever more demanding population.

A nuclear power station
A nuclear power plant

The Supply reality has come in to close focus in the past few weeks with the temporary (how long we do not know) shutdown of Cameco’s Cigar Lake and impacted production at Olympic Dam and Kazatomprom, in light of the coronavirus pandemic. Could this be the white swan that uranium investors have been looking for? In part. We still don’t know how much inventory is out there and when utility buying will start to get nervous. We’ve seen a small rise in the spot price of uranium this week to $27.50/lb, but is this a blip or the start of a sustained growth curve? It’s too early to say. What we can say is that long-suffering uranium equities are watching the screen go green for the first time in a long time. In the words of Energy Fuels CEO, Mark Chalmers, in a recent interview with us, if anyone states uranium won’t see price discovery, “that’s baloney.”

Solar, wind and hydroelectric, whilst green and abundant, are faced with criticism based on the carbon footprint required to mine the materials to build this ‘green’ energy story.

Dreaming Of A Fifty-Bagger

So, we’ve made the assumption that demand for new nuclear material is making a comeback. The next two questions are the focus of this article. When, and how dramatic will the price discovery be? This article will explore the question of WHEN?

When?

There are opinions from all over the spectrum flying around when it comes to the timescale of uranium price discovery. Seasoned insiders, industry professionals and casual commentators all have plenty to say. What does the evidence tell us?

Well, let’s start with the most important thing. Existing and prospective uranium investors have to be comfortable with this fact: nobody knows when uranium price discovery will happen.

uranium yellowcake
A photo of yellow cake uranium, a solid form of uranium oxide produced from uranium ore. Yellow cake must be processed further before it is made into nuclear fuel. Courtesy of Energy Fuels Inc.

There are so many variables in this situation, and many of them are unknown. What we do know is the groups with the greatest level of market control: on the demand side, utility companies, and on the supply side, state-backed Kazak uranium producer (the world’s largest), Kazatomprom.

In terms of demand, the utility companies hold all the cards. They have been making use of their inventories for some time, but when will these reserves run out? When will they need to dip into the market? Hardly anyone truly knows, but here is what well-known uranium expert, Brandon Munro, states:

General

  1. All indications of price discovery are happening “behind a curtain.” Investors need to look deeper into the intricacies of the uranium market to extract any useful knowledge.
  2. U.S, Russian and Chinese stockpiles are being locked away for strategic purposes and will not dictate the timescale of uranium price discovery; they will only come into play once the bull is running.

Inventory

  1. The relevant part of the market for investors is “mobile inventory.” What inventory is available to either suppress demand, or is available to be sold once the price goes up? Will this quantity of material supress a price increase?
  2. Uranium inventories are tightening. U3O8 (triuranium octoxide) inventories have been depleted by the supply/demand deficit. “Even after allowing for secondary supplies,” the U3O8 sector has operated a deficit of 20M lbs for the “last couple of years.” The deficit has been created by utilities underbuying.
  3. U3O8 is subject to conversion as part of the nuclear fuel cycle. This is a process that was historically paid for by utility companies to convert U3O8/yellowcake into a gas, UF6 (uranium hexafluoride).
  4. Utility companies then paid for the enrichment service. Uranium bought off mines is enriched to the specifications required for their particular type of reactor technology.
  5. This all changed after Fukushima. Stockpiles of U3O8, UF6 and EUP (enriched uranium product) have been building up ever since.

The Problem

Because all three of these stockpiles have been increasing in recent years, it has given utility companies substitutability between the three forms of nuclear power.

Now companies can arbitrage between the three forms to get the best deals for themselves. They can also avoid the “time criticality of planning.” For example, utility companies used to have to purchase U3O8 at least 2 years in advance of nuclear power production; if they planned poorly, they would suffer the consequences. However, it has stopped mattering if utility companies make a planning error, because UF6 (buy 1 year out) and EUP (buy 6 months out) have been available to them. This has been a large contributing factor in allowing utility companies to avoid restarting uranium contracts with producers.

Problem solved?

  1. UF6 inventories have “tightened, almost entirely.”  A few months ago, Uranium Participation Corporation (UPC) switched out their UF6 for U3O8, to take advantage of the arbitrage.
  2. There has also been a tightening in enrichment, which has been exacerbated by geopolitical concerns around Iran’s nuclear sanction waivers.
  3. EUP and U3O8 inventories are also tightening, but not to the same extent as UF6.
  4. The spot conversion price between U3O8 and UF6 (the difference between what consumers pay for each)has increased by 400% in the past couple of years.
  5. The price for EUP has gone up from the “mid-30s, to about US$50/lb,” another “healthy increase?”

What this means for investors

Investors will want to know what the “critical threshold” is, that will force utility companies to start buying again.

  1. There is an inverse relationship between the mobility of inventory, and the spot price. Logic would denote that dwindling inventories and increasing conversion/enrichment prices would cause a price hike.
  2. Munro states the following: “you only need a sentiment shift for this market to tighten.” Specifically, the purchasing tactics of utility buyers needs to change. Retail buyers aren’t impactful in this equation. Utility companies will do whatever is best for themselves at an optimal time; do they have complete control over this market?

Let’s look at some “rough” numbers regarding how utility companies could modify their behaviour. As mentioned before, the U3O8 sector is currently running a supply deficit of 20Mlbs: the “reactor burn-up” rate is 180Mlbs, but U3O8 demand levels are at 160Mlbs. This has been caused by preferential buying of UF6 and EUP over U3O8, and utilities wearing down inventories.

  1. In 2016, the sector was producing 160Mlbs of U3O8 mined production.
  2. This has now reduced by around 25M bs because of supply destruction instigated by reductions in Kazak U3O8 production, and care & maintenance programs beginning at uranium mines like Cameco’s McArthur River asset.
  3. Secondary supplies currently run at 25Mlbs.
  4. At present, there is not enough demand at the U3O8 level to put pressure on the price.

Is there a realistic example of buying habits changing that could impact price positively? It appears so.

  1. The United States military fleet consumes c. 50Mlbs of uranium per annum.
  2. It has been underbuying for the last few years by around 20%, or 10Mlbs.
  3. If it chooses to change its policy from underbuying to full coverage, 10Mlbs of extra demand for U3O8 will result in the current U3O8 deficit being halved.

Alternatively, we could see financial plays enter the market again.

  1. In 2018, 10Mlbs of U3O8 was taken out of the market by UPC and Yellow Cake plc, as they topped up their supplies.

Both of these examples seem possible. Just one of these possibilities occurring would be enough to generate a “very sharp price response,” which will then affect secondary buying. However, the cost of raising capital at the moment renders the second possibility more unlikely. There are groups interested in purchases, but these are private arrangements with multiple family offices, banks and hedge funds, but this is not the same model and would not deliver the same outcome. Investor sentiment is currently at an all-time low, and for generalists to get involved in the commodity, price discovery and contracts are a necessity.

To conclude, the timescale of price discovery is still uncertain. While the information we have acquired has not given us much to go on, it has provided us with a set of criteria to look out for and knowledge of all the moving pieces of the uranium sector that can impact price. However, when these movements will occur remains pure guesswork, but if you ask me, nothing meaningful is going to happen to uranium equities, and even then just for producers, until the end of 2020 when utilities start issuing contracts +US$45/lb.

Company Website: https://www.bannermanresources.com.au/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Homer Simpson handles a rod of uranium inside Springfield Nuclear Power Plant.

RNC Minerals (TSX: RNX) – 4th Quarter Results Explored

The RNC Minerals Company Logo.
RNC Minerals
  • TSX: RNX
  • Shares Outstanding: 608M
  • Share price C$0.31 (31.03.2020)
  • Market Cap: C$188M

In the wake of a market reset and the COVID-19 crisis, gold investors will be looking for reasons to stay positive.

Gold has traditionally been perceived as a safe haven investment. That changed several weeks ago, when even the most robust gold stocks took a historic plunge. However, in the last week, the gold price has started tracking upwards again and has recovered well to over US$1,600oz, albeit down from a peak of US$1,700 at the start of March.

Regardless of how intimidating current market conditions may be to investors, they have to spot the opportunity here, and they need to understand the timing too. The gold price dip looks like nothing more than a blip; with gold back moving up towards the (possibly farfetched) dream of US$2,000/oz gold, there are plenty of reasons for gold investors to be bullish.

As I stated in an article earlier this week, if you have decided on an investment thesis, do not abandon it out of COVID-19 induced fear. This fear is unlikely to be derived from the operational difficulties at gold companies because there don’t appear to be very many. This fear is a personal fear of the virus itself, and it is causing investors who previously settled on investment theses to throw them into the trash. There is still an awful lot of money to be made in the gold space, especially given the huge discounts current market conditions have enabled.

Gold nuggets on top of dirt.

So, RNC Minerals: one of our favourite turnaround stories of 2019. The company moved from unfocussed nickel blunderer to refined gold producer in the space of a few months. RNC Minerals CEO, Paul Huet, has sat down with us and spoken candidly on a number of occasions. With stable monthly production well over 8,000oz gold, RNC Minerals investors have finally started seeing a reward for their patience.

RNC’s Q4/19 results have been eagerly anticipated. Now there are available, gold investors will be pleased to see they have lived up to expectations.

So, what are the big headline figures?

  1. “Strong Fourth Quarter Results”
  2. Gold Production: 26,874oz
  3. Adjusted Earnings: C$14M
  4. 2H/19 AISC Guidance BEATEN
  5. NO CHANGE to 2020 Guidance

Some great facts and figures there. Let’s unpack them.

2H/19 was an excellent period for gold production at RNC Minerals. The figure of 51,090oz comfortably exceeds RNC Minerals’ 2H/19 guidance (42,000-49,000oz).

The 2H/19 AISC has also exceeded expectations: US$1,144/oz (guided range was US$1,150-$1,250/oz), and the AISC for Q4/19 is even lower: US1,131/oz, a 4% reduction over Q3/19, and a 12% reduction over 1H/19.

Investors will now want to see this AISC continue to fall towards that magic US$1,000/oz figure, and that is exactly what RNC Minerals has stated it intends to achieve by the end of 2020. The company has reiterated the position in its 2020 guidance: 90,000-95,000oz gold in 2020 at an AISC ≈US$1000/oz. This number clearly assumes that COVID-19 has no great impact on RNC Minerals’ operations; we’ll see exactly how this plays out, but Huet seems confident that recently local hires will minimise the impact. It will be interesting to observe how the intended introduction of an ore sorter could transform these economics further, though this appears to remain some way off. Early test indications suggest removal of 20-30% of the ore. That would reduce AISC dramatically.

RNC Minerals CEO, Paul Huet
RNC Minerals CEO, Paul Huet

In terms of earnings, RNC Minerals continues to impress; it looks like Huet has done a really good job here. Adjusted earnings of US$13.7M for Q4/19 are particularly impressive, especially when you consider the full-year earnings for 2019 are only US$15.9M. It is clear Huet’s turnaround is now moving into top gear and share price growth could well be on the cards. 2020 looks like it is going to be about building cash reserves to give them options with regard to the speed at which they develop Beta Hunt or indeed if they turn their attention to the 5 new drill targets.

Looking at some more detailed finances, the adjusted EPS2 was US$0.02 and US$0.03 for Q4/19 and 2019, respectively. The adjusted EBITDA was US$14.4M for Q4/19 and US$18.3M for 2019.

One of the most important issues for investors to consider right now is a company’s balance sheet, with capital being extremely expensive to access. RNC Minerals has managed to strengthen its balance sheet throughout 2019, with a strong cash position of US$34.7 million, net of a US$3 million debt repayment, and working capital of US$26.5 million. Cash is king; never forget that.

Moving on to exploration, RNC Minerals has been busy drilling. The HGO open pit “production pipeline” has grown, with recent drilling driving mine life extensions of the Baloo and Fairplay North open pits. The recent drilling, combined with a review of a historical exploration database, continues to identify a number of areas at HGO for further exploration, including the Aquarius Project (formerly Corona Project), a newly interpreted 5km structure north of Trident, as well as potential open-pit expansions to both the Mousehollow and Hidden Secret projects, as previously announced on January 23, January 29 and February 27, 2020. We look forward to hearing more about these projects as the story unravels.

There have been other operational optimisations too. At the Higginsville mill, the average availability is up to 97% from 93% in Q3/19. This is huge and should not be underestimated. The numbers should start to show in Q2/20.

RNC Minerals is working on optimising its royalty arrangements. There has been no word yet on how exactly Maverix Metals’ royalty at Beta Hunt of 6% on gold and 1.5% on nickel will develop in the future, though Huet appears fully aware of the situation and seems to be working towards the best possible outcome for RNC shareholders; this is all dependent on if Maverix Metals can be equally pragmatic. Investors will need to keep their eyes on this as it develops. At HGO, the restructured royalty (announced December 19th, 2019) has lowered costs and unlocked ‘significant production potential.’ History tells us that neither side wins in the event of a stand-off. RNC Minerals has options and is producing cash without it and Maverix needs a good year. It makes sense to unlock the value for both companies. If RNC can get an all-in offer around 4-5 that would be a good result. However, as the Morgan Stanley negotiation should us, it’s always more structured than that. Also, with all this cash, would it make sense for RNC to buy out the rest of the Morgan Stanley royalty? We shall see.

Nickel ore
Nickel could become relevant for RNC in the future

In other news, on February 6, 2020, RNC Minerals filed the technical report for the maiden gold mineral reserve at Beta Hunt of 306,000oz (3.4Mt at an average grade of 2.8g/t). Investors will be happy to see RNC Minerals delivering solid numbers to the market as it inspires confidence in these testing times. On May 30, 2019, RNC announced an updated Feasibility Study on its option on nickel-cobalt at Dumont, and claims positive results (US$920 million NPV8%). An interview with Johnna Muinonen is due with CRUX Investor later this week.

The final part of RNC’s Q4/19 Results concerns management appointments: ‘as part of the next phase of RNC’s growth, a number of management changes and additions were made during 2019 and early 2020, with the objective of maximizing the value of each of the assets within the Corporation’s portfolio and advancing RNC’s corporate strategy.’ Will they be doing the same review with the current board members?

All in all, it is nice to see RNC Minerals put its strong performance throughout 2019 into formal writing. RNC Minerals investors will be hoping the market pays attention to this progress, and RNC can start pushing its market cap back up to previous highs; after all, shareholders have been patient for long enough.

Company Website: http://www.rncminerals.com/


If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

The RNC Minerals Company Logo.

Noun: #COVIDITY

USA, New Jersey, Jersey City, Businesswoman in front of computer, looking tired.

Noun: COVIDITY

(1) The state of being totally bored

(2) The study of a topic digitally

A Wild Week

I’ve seen some hilarious videos on social media over the course of the last week. The Italian pianist entertaining his neighbours from his balcony is my favourite so far.

As the coronavirus continues to dominate the news and the attention of our governments, many people are bored out of their minds in their state of isolation and are resorting to going online in search of distraction.

The government’s ‘social distancing’ request is being embraced by many and being ignored by an unthinking and reckless few.

Social Distancing

However, social distancing is what I’ve managed to do effortlessly with my mobile phone and tablet for so long I was getting good at it.

So, if you are anything like me right now, you are sitting on your sofa in your house reading this. You probably still have your morning coffee on your table staring at you, cold and like everything around you, static. There is nothing less inspiring than a cold coffee. You know that you need to take it to the kitchen and put it in the dishwasher, but given the lack of things to do, maybe save that for later. It’s not like you have to be anywhere…

A Still World – Get Online!

In this stationary world, it would be all too easy to slide into a holding pattern, putting decision making on the back burner. Looking out your window at an empty road may reinforce this mood. A still world creates a mob mentality: why bother moving when nobody else is? However, the reality is that the world of opportunity is right now, and it is all accessible online.

Crux Investor knows all too well about going digital. We can be at the office in London in the evening, interviewing an Australian CEO in the morning. We buy and sell shares on exchanges around the world, and we invest in mining companies with assets in countries many would struggle to pick out on a map. We have access to all the information we need, both via our own sources, and online media (not the fake news kind). There is very little we can achieve physically that we can’t achieve digitally. In reality, on a normal working day, in a non-COVID-19 world, we spend hours of it in an office, staring at a computer screen anyway. Has our daily working routine really changed that much? No. The only real difference is that, at present, some supply chains are disrupted, some demand is curtailed, and investor sentiment has been flushed down the toilet. A violent bear market takes no prisoners. I’m not enjoying not being able to buy any bread either…

Volatility is a perfectly good reason for nervous investors to steer clear; after all, why take an unnecessary risk? However, volatility brings with it an immense opportunity to experience some of the biggest returns in your investment career. Investors might feel they lack the knowledge to navigate volatile markets. However, it’s not like you don’t have a lot of free time on your hands to learn how…

Crux Investor is going to keep the content streaming out, so if you’d rather do something productive with your time, now is the moment to change your mindset: become digitally minded. On our website, you will find in-depth interviews, articles, company profiles, opinion pieces, podcasts and transcriptions. All our content should help turn the next few months from coma-inducing into profit-inducing.

It’s time to take advantage of your free time, even if you just use the time to learn and monitor rather than to invest.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

USA, New Jersey, Jersey City, Businesswoman in front of computer, looking tired.

The COVID-19 Crisis – The Inside Word From Goldman Sachs

A crowd of people wearing masks on a busy public street.

COVID-19 – The Reality

There is plenty of blatant fearmongering right now, be that from the media or from individuals. It has struck the heart of the business world, causing convulsions of panic selling to overwhelm international markets. Investors have seemingly lost their bottle, but that is hardly surprising when the ‘news media’ constitutes clueless, dramatic speculation, rather than cold, hard evidence. I recently penned a different article about COVID-19 that you may be interested in reading.

Investors need to cut through the misinformation that is currently thriving and hear what the big business institutions are actually saying. Who better to hear from than Wall Street powerhouse, Goldman Sachs Group?

In an emergency conference call on Sunday 15th March, Goldman cut through the palpable anxiety and explained the fundamentals of the COVID-19 situation in a pragmatic way to 1500 of its clients.

The Goldman Sachs logo on a wooden wall.

Even the most logical investors do not have their heads in the sand. This is a serious, worrying situation that will take thousands of lives. However, let’s hear how the market is reacting beyond sentiment. It would be ignorant and insensitive to have a ‘good’ and ‘bad’ category for the impact of COVID-19 on markets given the large number of deceased individuals. Let’s settle on reasons to be bearish, and reasons to be more bullish.

Bearish (1/2)

  • “50% of Americans will contract the virus (150m people) as it’s very communicable.”

This is an enormous number, and there is no getting away from the unavoidable impact that COVID-19 is going to have on investors and markets. The scale of the problem creates immense volatility and unpredictability. The scale of this number is likely one of the main drivers behind current investor sentiment.

Bullish (2/2)

  • “This is on a par with the common cold (Rhinovirus) of which there are about 200 strains and which the majority of Americans will get 2-4 per year.”

This puts the Coronavirus situation into perspective. While nobody is pretending this is a normal flu situation, it is important for investors to avoid getting carried away. For the vast, vast majority of people, COVID-19 will exhibit either moderate or no symptoms. The elderly population and those with pre-existing conditions, especially respiratory, are at an increased risk, and this needs to be a constant consideration. However, let’s all calm down and take a breath before unnecessarily panicking.

Bearish

  • “70% of Germany will contract it (58M people). This is the next most relevant industrial economy to be affected.”

This is an even more intimidating number than the figure for the U.S and is likely generated by the greater population density in Germany. The German economy is integral to international trade, especially the automotive industry. One of the most important global economies possibly descending into paralysis is a very persuasive factor behind the mass panic selling.

Bearish

  • “Peak-virus is expected over the next eight weeks, declining thereafter.”

Investors will be seriously considering why they should invest now in these unprecedented market conditions, rather than waiting several months to global markets to begin to recover and stabilise. The extended timescale of the virus makes a strong case of caution.

Bearish/Bullish

It Depends On The Geographical Location Of Your Investments!

  • “The virus appears to be concentrated in a band between 30-50 degrees north latitude, meaning that like the common cold and flu, it prefers cold weather.”          

If you are investing in mining companies that are listed on an exchange that either finds itself in the cold season, or operates in an environment that is currently wintry/cold year-round, investors should make this a consideration. The virus appears to flourish in colder environments, so it is likely that environment will play a large factor in national economic performance.

COVID-19 on a cell level.

The coming summer in the northern hemisphere should help. The virus is regarded by many experts as seasonal. Investors like myself are interested in the climate logistics: does this mean a gold mine in what is currently and usually a very hot country, such as in Northern and Central Africa, is a safer, more predictable investment than one in Canada?

Bullish

  • “Of those impacted 80% will be early-stage, 15% mid-stage and 5% critical-stage. Early-stage symptoms are like the common cold and mid-stage symptoms are like the flu; these are stay at home for two weeks and rest. 5% will be critical and highly weighted towards the elderly.”

While this is devastating news, investors will hopefully be able to process these statistics for what they are. The majority of the workforce should be either unaffected or mildly affected. It is incredibly sad that the elderly people are suffering by far the worst, but investors will be aware that elderly individuals do not comprise a huge portion of the mining workforce. The lives of older people do not matter any less; that goes without saying. However, the logistics of this situation are clear.

Bullish

  • “Mortality rate on average of up to 2%, heavily weighted towards the elderly and immunocompromised; meaning up to 3m people (150m*.02).”

The mortality rate is a shocking figure but is relatively low. In addition, the mortality rate is based on total confirmed cases, when the true number may be much higher (but let’s not speculate). Again, the mortality rate is weighted towards the elderly, who play a reduced role in the world of mining and wider business.

Bullish (1/2)

  • “In the US about 3M/year die, mostly due to old age and disease, those two being highly correlated (as a percent very few from accidents). There will be significant overlap, so this does not mean 3M new deaths from the virus, it means elderly people dying sooner due to respiratory issues.”

This further confirms the COVID-19 situation. COVID-19 is not usually the sole cause behind an individual’s demise. It often hastens the death of those already suffering from severe health conditions. That is not to say that all those suffering from these underlying conditions are usually in any mortal danger on a day-to-day basis.

Bearish (2/2)

  • “This may however stress the healthcare system.”

An overworked, possibly overwhelmed healthcare system is rarely an indicator of economic prosperity.

Bearish/Bullish

  • “There is a debate as to how to address the virus pre-vaccine. The US is tending towards quarantine. The UK is tending towards allowing it to spread so that the population can develop natural immunity. Quarantine is likely to be ineffective and result in significant economic damage but will slow        the rate of transmission giving the healthcare system more time to deal with the caseload.”

How well your national economy is preserved depends on the competence of your government, the effectiveness of their coping strategy, and the actions of the populace. If Goldman Sachs is right on the ineffective nature of quarantine, which has perhaps been demonstrated by the situation in Italy, western investors seem to have a big reason to be concerned.

NYSE workers look stressed while talking over a headset.

A lack of national trust in the polarising Donald Trump and Boris Johnson could reduce the confidence of investors in their COVID-19 strategy, creating more volatility and leading to citizens refusing to heed advice. This could cause further deterioration to the situation.

Let’s hope the U.S and UK electorates have elected the right people for the job.

Bearish/Bullish

  • “China’s economy has been largely impacted which has affected raw materials and the global supply chain. It may take up to six months for it to recover.”

China’s economy is crucial to world economic health. The world relies on China for a huge amount of manufacturing. Disruption to the supply chain will create global uncertainty and this looks to be for an extended time period. This likely means more investors will be keen to sell and remain passive.

However, western investors will be hoping China’s economic frailties can be capitalised on by western businesses. Will western businesses be able to position themselves more strongly? Most of how this plays how depends on a company’s ability to mitigate losses from supply chain and demand disruption, in addition to ability of national governments to deal with this situation appropriately. This is far from a predictable outcome.

Bearish

  • “Global GDP growth rate will be the lowest in 30 years at around 2%. S&P 500 will see a negative growth rate of -15% to -20% for 2020 overall.”

Even the most ardent of contrarians will be aware this is likely to destroy investor sentiment for the foreseeable future and have a negative impact on growth.

Bearish/Bullish

  • “There will be economic damage from the virus itself, but the real damage is driven mostly by market psychology. Viruses have been with us forever. Stock markets should fully recover in the 2nd half of the year.”

This is encouraging for investors because, if Goldman Sachs is to be believed, it shows that markets should fully recover from the impact of COVID-19 by 2H/20. However, the impact on investor sentiment/market psychology will be much more long-lasting, insidious and damaging. 

Bearish/Bullish

  • “In the past week there has been a conflating of the impact of the virus with the developing oil price war between USA and Russia. While reduced energy prices are generally good for industrial economies, the US is now a large energy exporter, so there has been a negative impact on the valuation of the domestic energy sector. This will continue for some time as the Russians are attempting to economically squeeze the American shale producers and the Saudi’s are caught in the middle and do not want to further cede market share to Russia or the US.”

Whether this is a positive or negative for you depends entirely on which side of the investment aisle you are stood. Investors perhaps need to decide how they feel this geopolitical situation will develop and may need to adjust their position depending on their degree of confidence in their predicted outcome.

Bullish

  • “Technically the market generally has been looking for a reason to reset after the longest bull market in history.”

If Goldman Sachs is right, COVID-19 could have taken the form of any other catalyst. The message appears to be that this market reset was inevitable, but even optimistic investors will acknowledge the current market situation is far from routine or intentional.

Bullish

  • There is NO systemic risk. No one is even talking about that. Governments are intervening in the markets to stabilize them, and the private banking sector is very well capitalized. It feels more like ​9/11 than it does like 2008.

This is a very significant point. If Goldman Sachs it to be believed, the ferocity of the panic of investors is not fundamentally justified. There are obvious reasons for caution, but the risk appears more temporary than previous economic crashes, and the idea that markets are in dire straits appears to be exaggerated.

After reading this, I hope investors can at least feel more informed about the COVID-19 situation. I hope this article has brought some balance to the discussion, and investors now need to continue to go digital, research, and make their own minds up.

There are significant obstacles for us to overcome. However, this is no reason for people to switch off from investment entirely. Volatility brings risk, but it also brings opportunity. This situation will not last forever. In the meantime, take advantage of your free time at home as my country of residence, the U.K, edges towards what looks like an inevitable total lockdown.

Things will likely get worse before they get better. Stay safe, take care, and be selfless.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

A crowd of people wearing masks on a busy public street.

The COVID-19 Crisis – A Time Of Opportunity?

A virtual photo of COVID-19 attacking cells

In his famous 1986 letter to investors of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), Warren Buffett came out with one of his most famous pearls of advice:

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

“I’m A Contrarian… Honest!”

Investors across the world have endorsed and repeated this advice for years, describing themselves as dedicated contrarians.

Indeed, one need only consult Twitter to see an endless flow of age-old contrarian adages that are loyally reiterated with complete faith.

However, another adage is especially relevant, considering the international market’s plight at the invisible hands of coronavirus disease (COVID-19), ‘It is easy to be brave when there is no danger.’ That is what is becoming abundantly clear. Shareholders are currently selling hard in a blind panic.

If you are a contrarian investor, be a contrarian investor. This is the exact economic environment the phrase was coined for. Investors spend their entire lives with faith in a certain investment philosophy but abandon it at the first sign of risk. Yes, anxiety in this situation is a natural human reaction, but the simple reality is that unless you are willing to accept a certain degree of risk, investing isn’t for you. Volatility is a fixture in the world of investment, and this is an inescapable reality. If you want to play this game, be brave, or suffer the consequences. Just as a disclaimer, in case it isn’t already obvious, that doesn’t mean being reckless. Don’t invest money you can’t afford to lose.

COVID-19: Remarkable Fear

So, COVID-19; I’ve been shackled by jury service for the last few weeks and returning to work has been frenetic to say the least.

With Wall Street experiencing its biggest drop since the Black Monday crash of 1987, and the FTSE 100 & 250 plummeting further with each passing day, fears of a global recession are becoming as menacing as the virus that is causing them.

A graph of a market crash

There is no one piece of universal advice that can put investors’ minds at ease in a situation like this. Make no mistake, the COVID-19 pandemic creates a level of concern that I haven’t witnessed for many years, not least because of the initial un-co-ordinated response by governments around the world and the lack of clear data used to make these decisions (fake news is alive and well folks). This virus is going to take, and already has taken, thousands of lives across the world. We need to take this scenario extremely seriously, react selflessly and follow advice from our national medical establishments.

half of America will get sick

Goldman Sachs In An Emergency Conference Call To Clients Last Sunday

In fact, in an emergency Sunday conference call, The Goldman Sachs Group, Inc., told 1500 clients that “half of America will get sick.” They acknowledged the fed is in serious trouble and provided some additional insights into the current market situation. I’ll be looking at those in a future article.

Volatility = Opportunity?

However, despite the obvious and somewhat justified fear, it does not mean we cannot be pragmatic.

This is not a time to panic. Do not buy into the media-induced hysteria that is currently sweeping the land. While COVID-19 is terrible, potentially fatal news, investors must not lose sight of reality: this is a time of immense volatility, but also of immense opportunity. Stocks across the board have gargantuan discounts, and investors need to keep their cool, unlike the thousands of inconsiderate individuals piling their trolleys, quite bizarrely, with mountains of toilet rolls. We’ll be looking at some specific undervalued stocks in the near future.

All indications from the mining industry are that COVID-19 shouldn’t have a particularly damaging impact on the mining sector. I’ve spoken to many CEOs and the message is a cautious ‘it’s business as usual.’ Mining communities are often housed in isolation, away from general society and urban areas, and the workforce is usually young and fit, with no underlying health conditions. This means that while the virus will undoubtedly cause some disruption, the vast majority of the workforce is not in an at-risk category. Therefore, business should continue close to normal with minimal major health concerns. It is worth noting that this could change, and investors should monitor this situation closely as it develops.

So, what should investors be doing right now? They shouldn’t be panic selling, and they shouldn’t be abandoning investment philosophies they have believed in for so long. Selling at a loss and hoping to get back in the bottom, or even to preserve cash, seems an approach at odds to contrarian mentality. It seems much more like fear than rational thought.

attempt to be fearful when others are greedy and to be greedy only when others are fearful

Warren Buffett

Most gold producers have seen meaningful drops to their share price in the past month. What happened to gold being a safe haven investment? Possibly, the fear is not about what the markets are doing and is instead more of personal fear: a fear of dying? Whatever it is, it is changing the way investors have traditionally reacted and behaved in previous scenarios. Has the situation been exacerbated by social media and fear-mongering online? Some terrifying health headlines out there seem very far from the reality of the situation.

It might be time to stop, take a deep breath and pause for thought. It’s not like we don’t have plenty of time on our hands in this new stationary world.

An empty toilet roll shelf in a supermarket: the consequence of panic buying.
Panic Buyers Seem To Be Big Fans Of Toilet Roll

Without wanting to sound like a Hunger Games obsessive, we humans adapt, evolve and survive. Based on every single piece of data from the scientific community, while coronavirus is here to stay for the short-term, this is not something that is going to affect markets forever. Using existing evidence, investors need to decide on a timescale estimate, after which point their shares should have rebounded towards pre-outbreak levels. Investors will also need to decide if they think a company can survive this new obstacle. It is without question that COVID-19 will drown some companies that otherwise would have splashed and spluttered to shore in normal market conditions.

The biggest discounts are likely to be had in the coming weeks. Remember before COVID-19 hit, the institutions had taken some profit off the table, so they will be back. However, like an ‘everything must go’ shop sale, investors need to make sure the goods they select have a strong resale value.

Stay healthy. Stay sane. Think.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

A virtual photo of COVID-19 attacking cells

The Volatile Nickel Market: How Can Investors Make Money?

Nickel is a commodity with volatility at its core, but investors just want to know how to navigate this and make themselves a tidy profit. We recently interviewed Mark Selby; he helped shed a light on this.

Why not read a different nickel article once you’ve finished with this one?

History Of The Nickel Market

Nickel has always been much more volatile than other base metals. It is a large market, but not relative to copper, zinc or aluminium.

Since the 1980s, Nickel has been regarded as a boom/bust metal that moves in giant super-cycles:

A nickel price chart from 1989 to 2019.
A chequered history…
Source: InfoMine

In the late 1960s, nickel reached the equivalent of US$50/lb (in today’s dollars).

Contextually, nickel was a hot topic at the time. Rising demand, driven primarily by the Vietnam War, in association with a shortage of supply caused by industrial action at one of Canada’s largest suppliers, Inco, tipped the supply-demand scale of nickel into massive shortages and kicked prices into overdrive.

 This, in turn, led to the Poseidon bubble: a stock market bubble in which the price of Australian mining shares skyrocketed towards the end of 1969 before they crashed in early 1970. The peak was generated by the discovery of a purported promising nickel deposit by ASX-listed nickel producer, Poseidon Nickel, in September of 1969.

While the official Rae Committee report cited trading malpractice as the reason behind this bubble, it serves as a reminder to investors that nickel and volatility have always been joined at the hip.

In the 1980s, nickel went through another supercycle as supply from the Soviet Union dropped off and a new wave of demand emerged from the Asian tigers at that time, Korea and Taiwan.  Unfortunately, the collapse of the Soviet Union in the 1990s led to a complete drop in demand from a country that had been a substantial consumer, which was then followed by the influx of mass quantities of scrap into the market, generated by the collapse.

The most recent nickel crash had ramifications that remain active today. It came off the back off a price rise to over $50,000/t in 2006, as demand globally and from China outstripped supply; traditional nickel industry participants were slow to respond. This led to world warehouse stocks of nickel falling to an extremely low level. Nickel really did lose ‘touch with industrial reality’ during this period, as warned by the biggest nickel producer in the world at the time, Jinchuan Group Ltd.

The Outlook for the future

A picture of a vehicle being charged at a very modern looking EV charging port with a graphical interface in a parking lot. A future EV car concept.
The hype around the EV revolution is growing more and more rapturous.

With a decade of underinvestment in new nickel supply, in addition to the increasingly prominent electric vehicle (EV) thematic, investors can look towards a possible super cycle in the early-to-mid 2020s.

Selby himself believes we have completed “leg one, of what will be three or four legs” in terms of price increase.

But what does the evidence say? Here are some of the current market conditions Selby claims can occur before the dawn of a supercycle:

  1. A period where investment is lacking. There are several large mining companies that own a number of leading nickel assets, but they have chosen to allocate capital to non-nickel projects over the last decade. The majority of existing production has shrunk.
  2. Many of the existing nickel mines are deep underground mines or larger scale processing plants, which means they would not be able to rapidly ramp up production within a 12-month timescale. It would take multiple years to develop them. Projects need to be approved, production needs to begin, then it needs to be ramped up. In many instances, this can take at least 5 years (from announcement to full production capacity). Selby gives several examples of this.
  3. Selby says there needs to be a surge of demand, similar to what was seen in the 1960s when Japanese industry increased nickel consumption exponentially, and the 1980s, when Korea and Taiwan were industrialising. In the 2020s, EVs are the source of price-discovery-related hope. A demand growth of 4% (slower than the 5% growth seen in recent years) and a reasonable forecast of EV demand, nickel supply lead to forecasts that place nickel use between 2018-2030 at a 782000t increase on the previous 12-year period.

Now investors know some of the history, they can make more educated investment decisions in the future. You now know what you’re looking for in the market. If you buy the nickel macro story, it’s time to get busy.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

HPAL Plants & Nickel – The Facts

The case for nickel has been conveyed to the market well in the last few years. However, there are certain components of the nickel industry that are nebulous. In this series of articles, we seek to shine a light on the intricacies of a commodity with some of the most exciting projections around.

Feel free to check out some of our recent nickel-related interviews or one of our informative nickel-related articles.

HPAL  – What Is It?

High-Pressure Acid Leach (HPAL) is a process used to extract nickel and cobalt from laterite ore bodies. HPAL uses high temperatures, c. 255 degrees Celsius, elevated pressures, and sulfuric acid, which enables the process to separate both nickel and cobalt from the laterite ore.

A diagram of an HPAL extraction process.
Source: Caldera Engineering

Why Should I Care?

Investors should care for a variety of reasons. HPAL has numerous advantages over traditional leaching methods, chiefly of which is the significantly reduced timescale and largely increase percentage recovery rate; this is why it has become the most commonly used approach for leaching laterite ores containing nickel and cobalt.

That Sounds Great. So What’s The Catch?

HPAL is a much more complicated process to ramp up and operate than pyrometallurgical processes used to make nickel pig iron (NPI) or ferronickel.   Well, in terms of the logistics of an operational HPAL process, there isn’t one. HPAL is clearly the optimal solution for producers looking to get the best bang for their buck in the nickel space, but there are only a handful of successful HPAL operations globally:  Moa Bay in Cuba run by Sherritt, and the Coral Bay and Taganito operations in the Philippines operated by Sumitomo Metal Mining. Why?

Many HPAL plants have had massive cost overruns and have approached US$10 billion in costs: a multiple of their initial capital estimate.  Because of the challenges caused by trying to operate many plants at design capacity, unit operating costs also end up high in many instances. In a perpetual debate, it seems most industry experts claim a 30+ktpa HPAL plant can’t be constructed for any less than even the most conservative figure of US$1B, and that’s if things go well from the off. We recently interviewed widely heralded nickel market commentator, Mark Selby, and he reinforced this argument.

US$1Bn might seem a monstrous figure, but it’s actually quite optimistic. Taganito was constructed in the low-cost jurisdiction of the Philippines at a cost of ~$US 1.4 billion. Already, we’re looking at a scaled-up cost for companies who want to build in alternative regions, but we’re just getting started.

Taganito is only equipped to produce an intermediate product, which requires shipping to an existing refinery in Japan before going into the market. For a company to create an HPAL process capable of churning out the finished article, this would create another cost increase. Some unsuccessful HPAL plants have seen their CAPEX balloon to US$7-10Bn, courtesy of the difficult nature of optimising an HPAL process. One might think they’d have been better off not spending at all.

An HPAL flowsheet diagram
Source: Mascot Industrial

Lastly, there’s the complexity of the construction process itself. Because this technology is far from prevalent, it seems likely that issues could arise left, right and centre during the building process. Companies will need to source the right contractors, with the right experience, at the right price, and given the performance to date for many projects, this may be too risky for many investors.

The Big Problem

We’ve heard from the CEOs of some nickel companies in recent months, and without naming any names, several have touted a potential sub-US$1Bn HPAL plant as a near-term target for their business. This seems to be a worryingly common theme running through the industry and can mislead retail investors who perhaps appreciate the technical prowess of HPAL, without being fully informed of the cost.

To conclude, if nickel CEOs are telling you they can build an HPAL plant for some US$1Bn, they have a big question to confront: why do they have the capability to construct a plant better than market-leaders Sumitomo? We heard in the Horizonte Minerals investor call that they feel that it is possible with new technology, citing that the Sumitomo technology is 30-years old. Hopefully, they will expand on this and give clarity to the market.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Denison Mines (TSX: DML) – A Smartly Positioned Uranium Junior?

The Denison Mines Logo.
Denison Mines Corp.
  • TSX: EQX
  • Shares Outstanding: 597M
  • Share price C$0.44 (27.02.2020)
  • Market Cap: C$278M

Uranium has been a stagnant investment for some time. However, in the last few weeks, particularly after the US Department of Energy (DoE)announcement of a US$150M uranium reserve budget, uranium equities were starting to show signs of life, only to see their legs kicked from under them this week. The DoE announcement, whist welcome and moderately positive, did nothing to clear up the continued uncertainty as to the US government’s stance on the nuclear energy market in the US. It has been perceived by some as pre-election posturing.

The selling has possibly been triggered by broader market conditions and alarmist news surrounding the Coronavirus impacts in Asia, but right now, it feels like guesswork to understand the uranium investment space. Even the brightest admit to being baffled and operating in a void, so they wait. Uranium equities holders though seem to have lost the FOMO element. They know they can come back in cheaply and have been missing out on other opportunities; even the gold guys have been making money…

Regardless of what the uranium price is doing right now, prospective and existing uranium investors share an unmoving philosophy: this is a sector with big unfulfilled potential. So, if you have settled on the thesis, aren’t jaded by the whole experience and haven’t had to average down for the last several months, it might be the perfect time to start picking winners as these market conditions could create some real buying opportunities for new entrants.

A uranium photo with uranium text and a nuclear logo

Denison Mines

CRUXinvestor interviewed David Cates, President and CEO of Uranium developer, Denison Mines (TSX: DML). It was an intriguing interview that you can watch by clicking HERE. There are numerous useful articles on our platform regarding picking uranium space winners and detailing potential red flags. Click HERE or HERE to read one.

Cates says Denison Mines has some unique qualities that could set it apart from the pack. It is a question of whether the market believes in the company’s business model and its ability to deliver it. However, as with all things mining, there are a few red flags, such as permitting, but Cates feels that they will be able to resolve this particular issue. Then it’s just a question of funding the CapEx in a difficult market, but Cates tells us they are clear on how they can do this too.

Denison Mines is a uranium exploration/development company with 90% ownership interest in the Wheeler River project, the ‘largest undeveloped high-grade uranium project in the eastern portion of the Athabasca Basin.’

Denison Mines’ c. 310,000ha Athabasca exploration portfolio also includes:

  1. A 22.5% ownership interest in the McClean Lake joint venture (which is currently processing ore from the Cigar Lake mine under a toll milling agreement)
  2. A 25.17% interest in the Midwest & Midwest A deposits
  3. A 65.92% interest in the J Zone & Huskie deposits and Huskie discovery on the Waterbury Lake property. Each project is located within 20km of the McClean Lake mill.

A High-Grade Flagship?

The Wheeler River project features two high-grade uranium deposits: Phoenix and Gryphon.

Phoenix’s high-grade core is estimated to contain 62,900t at 43.2% U3O8 for 59.9Mlbs U3O8. Denison Mines states probable mineral reserves of 109.4Mlbs U3O8 (Phoenix 59.7Mlbs U3O8 from 141,000t at 19.1% U3O8; Gryphon 49.7Mlbs U3O8 from 1,257,000t at 1.8% U3O8). A PFS conducted in 2018 puts the operating cost of Phoenix at US$3.33/lb U3O8.

While the resources at the Wheeler River Project aren’t enormous, they are high-grade, low-cost, and have a significant amount of explorational upside potential to “squeeze out.” Scale is one thing; a technically proficient management team, affordable mining costs, exploration upside, effective storytelling to the market and coherent business strategies are quite another. Our interview with Cates gets in to the detail of how he plans to deliver on all of those variables.

A nuclear reactor

Denison originally optioned the Wheeler River Project from Cameco. The team has delineated the uranium resources and expanded it. The story has been, to this stage, fairly conventional. Cates was able to explain ISR vs conventional mining debate.

Denison Mines has spent C$100M on exploration at Wheeler. It has repeatedly raised capital. Investors will need to decide if this has been spent astutely. Denison Mines is now prioritising its capital to further develop existing projects and delineate additional ISR-amenable resources. As of Q3/19 Denison Mines had C$10M cash on the books, and the company raised an additional C$4.7M in December 2019 and had a burn rate of around C$1M per month in 2019. We wouldn’t be surprised to see Denison Mines going back to the market soon. Investors clearly have interest in this story, and Cates is a straight -talker, but all uranium players are treading water right now. This week’s hit to their share price won’t help the mood of investors, nor Denison’s ability to raise capital. Cates is talking about structured finance as a possibility, but again the permits are the long-pole in the tent.

A nuclear power plant

Cates expanded on the Canadian permitting situation: in our opinion, an important and potentially disruptive stumbling block for Denison Mines. He admits it can be more difficult to obtain permits when utilising technology that individuals are unfamiliar with, but he maintains the lack of waste (no long-term tailings dump and minimal surface impact) generated by ISR is an advantage they will not be able to ignore. After all, Cates states that permitting is largely an environmental impact story. This is currently the main concern of this otherwise encouraging uranium story. Even the most bullish uranium investor will likely feel nervous because, despite Cates’ claims, the permitting process it entirely at the discretion of the Canadian government, and we don’t know what sort of timescale we’re truly looking at. Is this a red flag for investors? Can investors accept the risk that comes with operational choice being taken out of a company’s hands?

Denison Mines appears concerned in positioning itself to be able to get in to production sooner than its peers, rather than building a large resource:

  1. It will look to get into production before both NexGen and Fission.
  2. The project development CAPEX will also be around C$350M, rather than some of the numbers that we have seen in excess of C$1Bn.
  3. Once in production, Denison Mines can have contract conversations with utility companies which should provide long-term financial certainty to the market, or so Cates hopes.

Utility companies are unlikely to sign contracts with uranium companies not in production, so Denison Mines is positioning itself smartly. This is definitely a story to keep an eye on. If the team can time this right, they could well be on to a winner; that is if the province and state plays ball.

Company Website: https://www.denisonmines.com/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

The Denison Mines Logo.

Equinox Gold (TSX: EQX) – The Sum of the Parts Sets it Apart.

A graph of rising gold bars with a red arrow curving up them.
Equinox Gold Corp.
  • TSX: EQX
  • Shares Outstanding: 113.5M
  • Share price C$9.73 (29.02.2020)
  • Market Cap: C$1.1B

We recently interviewed Christian Milau, CEO of large-cap gold producer, Equinox Gold (TSX: EQX). CLICK HERE to watch the full interview.

Equinox Gold Corp.

Equinox Gold is a story most gold investors should be familiar with: it is the model of how to build a gold producer in a short timeframe. This gold producer has had a remarkable rise over the past 18 months. Its share price hovered around C$5 at the start of 2019 and rose to heights of C$13.54 this year.

However, this week has seen even successful gold producers, like Equinox Gold, have their share prices brought to a shuddering halt, and even drop back. Equinox Gold’s share price has fallen this week alone from C$13.34 to C$9.73; this has been a truly extraordinary and noteworthy week of panic selling of a commodity that has been traditionally positioned and heralded as a ‘safe haven.’ It seems that truism isn’t true.

Let’s try to look to the world before the Coronavirus and hopefully the world after it. I know that may seem like a casual, almost dismissive statement, but it is not meant to be. There is clearly great global concern about the near-term impact on society and business, and possibly in the light of the current media spotlight, a normal future seems implausible, but history tells us that we humans persevere, adapt and survive, and we will again.

So let’s look to the future, if we may.

Equinox Gold was listed around 2 years ago, with the prodigious Ross Beaty as the main shareholder; if you are familiar with the school of ‘Bet on Beaty Bets’ investing, it will be no surprise to see Equinox Gold doing so well. Its founding goal was to become a multi-jurisdiction, large-cap, low-grade, bulk-tonage gold mining company.

Assets

Equinox Gold has a promising portfolio of assets:

  1. Mesquite Gold Mine, a Californian project producing 125,000-145,000oz gold per annum with an AISC of US$930-$980/oz and a grade of 0.46g/t gold (exclusive of reserves)
  2. Aurizona Gold Mine, a Brazilian gold mine producing 75,000-90,000oz per annum with inferred Resources of 1.1Moz @ 1.98g/t gold (with an exploration upside) and an AISC of US$950-$1,025
  3. Castle Mountain Gold Mine, an under-construction gold mine with a PFS and production potential of 200,000oz per annum and a 16-year life-of-mine (LOM)
  4. A copper-focussed spin-out operation in the form of Solaris Copper Inc.

Our Interview

Milau covered a variety of topics. Equinox Gold’s targets have been well and truly delivered. Mesquite and Aurizona are up and running, producing at a reasonable scale with a good AISC. Castle Mountain should be ready to rock by Q3/20.

These have not been without their hiccups; after all, this is mining. Equinox Gold has, however, kept things simple and it is reaping the rewards. The portfolio is focussed. The management team has created a relentless mining business for low-grade bulk processing. Equinox Gold’s message is simple: make strong acquisitions, then get that gold out of the ground!

Equinox Gold's Corp.'s share price for the last year.
Despite a late tail-off, what a year for Equinox Gold!

Equinox Gold has a significant 11% insider ownership: another reassuring fact for investors. The management team has succeeded in attracting a diversified shareholder base since the last time we spoke with Milau.

Milau also discussed Equinox Gold’s spending strategy and his view on the gold macro environment. What does the outlook for the gold market look like for 2020? He states this is only the beginning of this new gold cycle. He is conscious it won’t all be plain sailing in the gold sector, but this is in the early stage of the turn (US$17T of negative-yielding debt, solid stock markets and slowing global growth). Is the best really yet to come? Gold investors will be breathing heavily and hoping for more.

Equinox Gold has no intention of being taken out, and why would it? The company plans to become a long-term investment opportunity that can last through several cycles. Equinox Gold has had great momentum for those seeking fast returns, but it now also looks supremely appealing to those looking for steadier returns. Could it be a dividend payer in the next 2-3 years? Milau suggest so, but that is a long way away, and markets change. Let’s focus on today. Can that share price continue to grow at the same rate?  

As a gold producer, Equinox Gold has the rising gold price working in its favour, should the price continue on its recent trajectory. Can the management team start to accumulate cash, given they have been buying ounces in the ground? We appreciate Milau’s pragmatic take on gold margins: Equinox Gold is not rushing to produce and there is no spike in production. Equinox Gold is managing a steady, structured increase. However, the markets often don’t reward pragmatism and sensible management decisions. They often prefer pie in the sky stories of twenty-baggers and miracle proprietary technology. The fact the market has latched onto Equinox Gold with such excitement is a testament to just how solid this project seems to be. 1Moz per annum of gold is impressive, but this degree of investor enthusiasm is rare to say the least.

To continue on this trend of growth, Equinox Gold will proceed to develop its current assets and look at new acquisitions when the time is right. On the 28th January, Equinox Gold announced a merger with Leagold Mining Corporation that will combine the companies, ‘creating one of the world’s top gold producing companies operating entirely in the Americas.’ This should position Equinox Gold even more strongly.

one of the world’s top gold producing companies operating entirely in the Americas

Equinox Gold has recently received Serabi Gold’s C$14M payment for the Coringa project in Brazil, as it targets becoming a 1Moz per annum producer.

As far as remuneration, one of our favourite elements of the story, Milau stated that Equinox Gold has continued with its directors’ remuneration policy of paying them mainly shares. Milau claims he hasn’t cashed any in yet, but we can’t see any reason why he’d want to.

A photo of a Seal with a sign saying 'yes.' The words seal of approval are written underneath.
We Are Big Fans Of The Equinox Story

Equinox Gold is an anomaly. It is an abnormal story of inspired management, favourable prices, excellent assets and, as is always the case in mining, luck. We expect Equinox Gold to keep delivering on its promises for shareholders; the team has shown us nothing to make us believe otherwise. No, they don’t pay us and no we don’t own any shares. In an industry of over claiming and under delivering, we see Equinox Gold as company that does what it says.

Company Website: https://www.equinoxgold.com/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

A graph of rising gold bars with a red arrow curving up them.

Energy Fuels US$16.6M Deal – What Does It Mean?

A wide photo of U.S President, Donald Trump, in a suit and red tie, making a speech.

Yesterday (February 13th 2020), Energy Fuels, the leading U.S. producer of uranium and potential producer of vanadium, announced an agreement with Cantor Fitzgerald & Co; the ‘innovative global financial services firm‘ has agreed to purchase, on a bought deal basis, US$16.6 million of common shares of the Company at a price of US$1.47 per share. We’ve studied the business model of Energy Fuels before, but what does this latest development mean for Energy Fuels investors and the uranium space as a whole?

Price Discovery On The Horizon?

A man we’ve sat down a lot with recently is Energy Fuels CEO, Mark Chalmers. He has found himself in the Crux hot seat in January 2020, December 2019 and October 2019, and this is just some of our encounters with the uranium veteran. He’s been very transparent with us throughout this bear market and we hope to talk with him next week to get the inside take on this agreement. So, in the meantime, we only postulate as to why Energy Fuels has done this now; what could this mean for the company?

President Trump’s apparent commitment to replenishing uranium reserves and adjusting the American military’s uranium purchasing habits towards full coverage in 2021 has got commentators excited. It proposes a budget of US$150M per annum for the creation of a US uranium reserve, as the administration seeks to help struggling producers of the fuel for nuclear power reactors. What this means precisely in terms of who and where the uranium will be purchase is still unclear. Given the security argument has been used as the main thrust of most discussions, the US uranium producers hope that the entire budget is US only and would not include Canada, Australia, European and African uranium producers and other US-friendly jurisdictions. The one certainty is that it is eventually unlikely to include Kazakhstan and Russia.

In a recent interview with us, Bannerman Resources CEO, Brandon Munro, explained that a behavioral switch by the U.S government could be a catalyst for a uranium market sentiment switch and, therefore, price discovery. So, is Energy Fuels getting into position early and readying itself for action in the near future? The press release seems to suggest so, but we will need to dig deeper than that. Why a bought deal? Who is at the table? Why not use their current cash drawdown facility?

Is this US$150M budget for the creation of a uranium reserve the beginning of uranium price discovery? Do they see a 2-tier system being created? What have they heard that has made them pull the trigger now?

Our Maths:

Munro stated in our interview that the U₃O₈ sector has operated a 20Mlbs deficit in the last few years. His logic went something like this:

  1. The United States military fleet consumes c. 50Mlbs of uranium per annum.
  2. It has been underbuying for the last few years by around 20%, or 10Mlbs.
  3. If it chooses to change its policy from underbuying to full coverage, 10Mlbs of extra demand for U3O8 will result in the current U3O8 deficit being halved.

In all our previous interviews, the absolute minimum spot price uranium CEOs have stated they could produce at (with a very small margin, if any) would be US$50/lb.

Based on this figure, US$150M of investment equates to 3Mlbs total of U₃O₈; not exactly a lot, but it’s a start.

While this clearly won’t be as significant a deficit reduction as Munro speculated, could this decision create momentum and a sentiment shift as we edge towards the next uranium bull market? Could it combine with other industry movers to create great change? We look forward to asking Chalmers. If you have any questions or thoughts, leave them below in the comments, DM us on Twitter (@CruxInvestor) or leave us a message on one of our uranium video interviews on YouTube.

The Early Bird Catches The Worm?

The announcement has certainly caught the market by surprise. It would appear that Energy Fuels may be positioning itself to get producing as quickly as possible. Will it have caught some of its peers out, and will it be able to close the deal? It could be a really valuable weathervane as to what the generalist market is thinking.

In the press release, Energy Fuels states the US$16.6M deal will be used to fund various activities required to increase uranium and/or vanadium production in response to the President of the United States’ budget for the fiscal year of 2021. How does the use of proceeds differ from what was originally planned?

Energy Fuels appears to think this announcement is a big moment. What will Chalmers have to say?

What do you make of all this? Comment below! We want to hear your take.

Company Page: https://www.energyfuels.com/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

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