NFWG’s Strategy – The End Of The DOE’s Bartering Of Uranium

Brandon Munro, Bannerman Resources CEO.

In the wake of the NFWG outcome, uranium commentators have been sent into a furore. There is a lack of specifics within the report, and this had led to speculation amongst uranium investors becoming rife and interpretation has been varied.

Green uranium reacting in a glass vial with a uranium symbol and a nuclear symbol next to it

To cut through any possible misapprehensions, Crux Investor recently spoke with Bannerman Resources (ASX: BMN) CEO, and uranium expert, Brandon Munro. He was able to help to clarify some confusion around the definitions for investors. In order to make intelligent investment decisions, investors need to be informed.

One of the report’s topics that has resulted in a lot of frantic chatter is the conclusion of the US Department of Energy’s bartering of uranium. The Department of Energy has on a variety of occasions engaged in transactions under which it bartered uranium to which it has title for goods or services. This policy has now ended, but what exactly does this mean for the uranium market?

Munro Responds

Munro acknowledges this is an important issue.

Some investors may already be confused about what exactly the barter entails, and Munro was keen to clear this up before moving on. He stated that the barter has essentially been derived from problems in the US Congress regarding funding the clean-up of the Portsmouth Gaseous Diffusion Plant (PORTS) located in Pike County, Ohio. This was an industrial site, not a nuclear weapon testing site, and the appropriations were blocked, rendering funding unachievable.

The solution the DoE came up with was bartering uranium. The DoE took the uranium it had the responsibility of cleaning up and sold it in to the open market, using the proceeds to pay off the contractors who were carrying out the clean-up operation. For investors who understand why the uranium price crashed like it did in the first place, alarm bells will be ringing…

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.

This decision, in a market that was already very fragile at the time, was very destructive for the uranium space. The more pounds that were sold into the market, the lower the uranium price was driven. This lead to the DoE having to sell even more to bankroll the static clean-up bills, and there was still plenty of uranium to off-load. The pounds were priced inelastic: another problem.

At one point, the DoE’s sale of uranium was hitting as much as 5Mlbs pa. This secondary supply was clearly very unhelpful for uranium companies and investors hoping for price discovery and was potential a damaging move.

Whatever your views on the Trump administration, it appears the dying domestic uranium space is one issue they are addressing. The Trump administration suspended the bartering mid-fiscal year and then extended it for the next fiscal year. There were concerns from those within the uranium space that this bartering behaviour could make a comeback in the next fiscal year, but this is now completely off the table. Uranium investors may well be breathing a sigh of relief. Things could have looked much different under a potential Bernie Sanders presidency…

Munro claims the mechanisms to deploy this strategic shift are now insignificant, given that the DoE itself has put forward this policy in the document. He thinks this is a good thing and should avoid any complications bringing an end to uranium bartering. The secondary supply source will not come back, and the market has been provided with invaluable certainty. Uranium investors can now operate more confidently. Bartering will no longer cause millions of pounds of uranium oversupply.

We hope you enjoyed this first exploration of the details behind the NFWG report. We’ll be releasing several articles over the course of the next week that will cover other intricacies and definitions that uranium investors need to fully understand in order to make educated investment decisions. Until then, make sure you keep your Geiger counters switched on.

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.

Brandon Munro, Bannerman Resources CEO.

NFWG’s Strategy – Levelling The Playing Field Between Nuclear Energy & Renewables

Brandon Munro, Bannerman Resources CEO.

I recently released an article regarding the NFWG report. The report sets out a list of ideas that are intended to help restore America’s competitive nuclear energy advantage. Uranium investors had been waiting for for the report for what seemed like an eternity, but now it has finally arrived, confusion has been spreading through the ranks. This is indeed a policy document, but the lack of details and clarity in certain areas needs to be rectified.

Green uranium reacting in a glass vial with a uranium symbol and a nuclear symbol next to it

That’s why we recently interviewed uranium expert and Bannerman Resources (ASX: BMN) CEO, Brandon Munro. He has provided us with insights throughout the recent bearish noises in the market and these have been incredibly helpful. In the second part of this series of articles exploring the U.S. Department of Energy’s recent announcement, we ask Munro to shine a light on definitions within the NFWG report that many investors have found confusing. In this article, we’re talking about the U.S. government’s stated intention to level the playing field between nuclear energy and the renewable energy industry. What exactly could this mean for the uranium space?

Levelling The Playing Field Between Nuclear Energy & Renewables

The implications would seem to fall into one of two possibilities: either renewables are going to receive fewer subsidies, or nuclear subsidies are going to be increased. How does Munro see this playing out?

Munro Responds

Munro feels the “easiest” mechanisms to level the playing field between nuclear energy and renewable energy fall into several categories.

1.)

Reward the nuclear industry’s capacity to produce zero-emission energy. This has been the approach in New York state. Nuclear energy has had its reputation damaged in the past, but has this stopped nuclear energy being rewarded for its green credentials, especially given renewable energy has been?

2.)

Reward nuclear energy for its resilience. The government needs to recognise that in times of obscurity, only nuclear energy comes out on top. In hurricanes, polar vortexes and other similar incidents, nuclear energy is still able to provide a fuel source for energy-hungry nations. For example, during a polar vortex, coal and gas are unable to continue providing energy. The administration must acknowledge the strategic importance of this resilience.

Is there another side to this definition?

Away from the increase in subsidies for nuclear energy, there are issues with an excess of subsidies on the side of renewables.

Munro refers to these as “serious distortions.” One noteworthy example is in wind energy subsidies. In the wind sector, there are certain instances when subsidies continue to be paid even when the grid doesn’t need the energy. This clearly doesn’t make sense.

This imbalance in subsidies has created a situation where grid operators are imposing congestion charges on all of the players. Gas, for example, can turn off very quickly. However, nuclear power can’t turn online and offline that quickly, so they pay much more in the shape of congestion charges. This comes despite nuclear energy being crucial when the wind stops blowing. Nuclear energy companies no longer want to be paying in order to provide energy. This appears to have been an unusual, unsustainable approach.

The serious distortions find themselves at their most prevalent when wind power operators continue to be paid subsidies, even when they’re paying a congestion charge, so they are able to continue feeding “unneeded” and “destructive” power into the grid, right up until the congestion charge is equal to the subsidy. This mean that renewables find themselves in a privileged situation, while the taxpayer foots the bill by paying for the unnecessary subsidies. The nuclear power operators also suffer the ramifications, because they have to remain on, so they aren’t brownouts or blackouts during interrupted wind activity.

When these issues conglomerate, they create a dramatic impact on a number of US utility companies and their ability to remain competitive in a generalised market. Munro thinks it’s about time the government is finally interfering, and now these “unfortunate structures” can finally be addressed to redress the balance between nuclear and renewables.

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.

Brandon Munro, Bannerman Resources CEO.

Uranium Conversion & Enrichment and its Impact on Uranium Equities (Transcript)

A photo of Bannerman Resources CEO, Brandon Munro.
Bannerman Resources
  • ASX: BMN
  • Shares Outstanding: 1.06B
  • Share price: A$0.04 (20.04.2020)
  • Market Cap: A$43M

Crux Investor recently interviewed Brandon Munro. He’s an Association Committee Member and contributor for the WNA Bi-Annual Nuclear Fuel Report, Market insider and CEO of Bannerman Resources (ASX: BMN).

We have interviewed Munro on a number of occasions, and he has always given us great access to his expertise in the uranium space.

The relatively technical topic of uranium conversion and enrichment explained simply in terms of process, buying and users. It partly explains the delay in price recovery in the market.

We discuss:

  1. COVID-19 Affecting Uranium Supply: The Impact and Measures Taken in Australia, Namibia and Other Countries
  2. Kazatomprom: What’s Happening in Kazakhstan?
  3. Conversion and Enrichment: An In-depth Look
  4. UF6 Supply: How Much Have We Got Left?
  5. State of EUP and Its Indications
  6. LTC Pricing: What’s the Process that Leads to Publication?
  7. Green Lights for Investors: What Signs to be Aware of When Investing in Uranium and Why are They Difficult to Figure Out?

CLICK HERE to watch the full interview.

Matthew Gordon: Good morning Brandon. How are you sir? 

Brandon Munro: I’m pretty well, all things considered, Matt, how are you? 

Matthew Gordon: Not bad. Not bad. Yes. Well we spoke last week, but a lot of things have changed in only a week. I think Uranium’s quite a hot topic at the moment. I think a lot of generalists are looking at it. A lot of press coverage and a lot of conflicting information. So we’re checking in with you and get your view. So we spoke last week, we talked about closure, the temporary closure, or standing down of the workforce at Cigar Lake by Cameco. I think there’s a lot of talk about the impact elsewhere in the world with other Uranium producers, can you give us a little bit of insight and maybe start with your home territory Australia? What has the impact been there? 

Brandon Munro: Yes. So for, for everyone in your audience, Australia is the third largest producer of Uranium, predominantly from the giant Olympic Dam, which is a Copper then Gold mine. So Uranium is a little bit of a by-product there, but because of the pure sheer scale of that operation, it still pushes a large number of pounds into the sector.

We haven’t seen disruption there yet. But what we are starting to see is border closures. So initially soft border closures by South Australia where that project is located, also Northern territory where the Ranger mine is located. And now in Western Australia we’ve seen a hard border closure, so as of next Sunday even fly-in fly-out workers from Western Australia’s mining industry can’t just simply come in and out, even with all of the mitigations that the mines had in place with charter flights, et cetera, et cetera.  So, I think that’s to a large extent setting the standard and I would expect it’s likely that South Australia would follow suit.

So, we are seeing a level of disruption already. Olympic Dam relies on a large component of fly-in fly-out workers, no signs yet of a closure, but as I said in the article, I think COVID-19 is going to nibble at the edges of efficiency for all mines, including Olympic Dam. So, I’d expect them to be below production guidance there. And the question is, is that 5% or 10% below production guidance, or will they have to close down for a period of time? And we’re not seeing the indications of that yet.

Matthew Gordon: Okay, well that is interesting. So, what is happening with regards to COVID-19 elsewhere? You know, because most countries have identified key workers, and some countries, like if you look at Canada, the provinces have different views of what key workers are. Some of those are in mining personnel and in other provinces they’re not. What’s the story in Australia? Because you used the phrase, ‘nibble away at production’, and I get that it’s a by-product as such. I do want to talk about that specifically, but surely this is going to be a major disruption to BHP‘s operations?

Brandon Munro:  That’s important to understand, because if we’re going to try and game BHP’s decisions at Olympic Dam, what they are and aren’t prepared to do, what their risk tolerance is, you need to understand their main game plan, which is iron ore mining in Western Australia. Western Australia sees it very much as an essential industry, and closing its borders potentially for 6-months or more, I think government’s strategy there is to use the mining sector to power out of this, and manage to maintain revenues, particularly royalty revenues to the state. So, for both BHP and Rio Tinto, it is very important to keep those iron ore mines going.

There’s a good prospect that Vale will stumble in Brazil and that will lead to support in iron ore prices at a time when China will be implementing stimulus measures, which one would presume, with factories turning on and so forth, to maintain the demand for iron ore. So, for Western Australia it’s very important. South Australia is quite similar, and my take on it is that BHP at Olympic Dam and Rio Tinto at Ranger Mine in the Northern Territory will be very reluctant to do anything there that could endanger the broader iron ore operations and their continued stability in this crisis. 

Matthew Gordon: Okay, well, let me understand that, let me understand the practicalities of that. So, they want to encourage people to continue mining there and so it’s important for revenues, but with staff flying in and out, obviously that will cause problems, or their lack of ability to fly in and out, it will cause problems. So, what you do? Do you keep your staff onsite and say, right, you’re not allowed to leave? Or do you have to rely on local staff, or is it testing? I mean we have had CEOs come on talk about, Oh, we do, we test people’s temperature before they walk in. But obviously I think that’s fairly debunked as a control method to understand whether someone’s a carrier or not. 

Brandon Munro: So they’re doing all of the above pretty much. What we are seeing is a scramble to relocate fly-in, fly-out workers and their families into Western Australia. And the hard border closure is from Sunday, and they’ll need to go into 14-day quarantine, but then they’ll be inside the state. They’re obviously doing mitigations on site to the extent that they can. The advantage that we’ve got in Western Australia is we still haven’t seen any level of community transmission. So, transmissivity here has all been from overseas travel, cruise ships and direct contact with people in that situation. So, it’s reasonable to expect that once the borders are closed and you see continued evidence of that lack of community transmission, the mitigations on site will be reasonable.

So, then that brings us to South Australia and they don’t have quite the same sort of emphasis on a large, pure based iron ore industry. Olympic Dam is important to South Australia. There’s no question about that. So there will be pressure to maintain Olympic Dam, but again, going to BHP’s risk profile, if they have an outbreak at Olympic Dam, it’s hard to see them just isolating the particular crew that had contact, and carrying on as business as usual, you’d see some level of disruption there. 

Matthew Gordon: Okay. That makes sense to me, and I think for viewers watching this, it’s trying to understand how different countries are approaching this and the seriousness to which they’re obviously attributing this is really important.

Can we talk about that by-product, which is Uranium? That’s why we’re here. We want to understand, do you think there is going to be a major disruption to the Uranium supply from Australia as a result of this? Or do you think, to use your phrase, the margins may be nibbled away at, but it should be able to continue to supply into the market? 

Brandon Munro: I think it will be annualised disruption from Australian production in the order of 5% to 10%.

Matthew Gordon: Okay.

Brandon Munro: So, not enormous. They are pounds that count though, because Olympic Dam does not manage their marketing of Uranium, they sell into the spot market, and quite often from a lot of criticism from other producers that they just simply, effectively dumped them into the spot market. So any reduction in Olympic Dam’s output will be disproportionately helpful to the market rather than another producer like Cameco who are very, very careful as to how they release their pounds and they’re all into long-term contracts anyway. But I’m working on, say 4-weeks total production, or 8% disruption annualised for 2020 as a realistic scenario from Olympic Dam. 

Matthew Gordon: Well let’s come on to that in a minute because I do want to talk to you about maybe you know, as an aggregate what that number could look like. So we’ll come back to that. So let’s talk about your second home, which is Namibia, and there’s reports that have come out this week and last about the Namibian government’s actions as it affects miners. So what have you seen? What have you heard? Is that going to be cause for concern? 

Brandon Munro: So firstly, the reports that came out from Bloomberg, Reuters, etc, they were then reproduced quite widely. It took a, let’s say a slightly simplistic view of the situation, and I don’t blame them for that. There was quite a lot of confusion on the ground. I spent a fair proportion of this week on Chamber of Mines, conference calls and all that type of thing. And that was one of the issues that some of the other miners were facing in other commodities: the perception and what it was doing to share prices.

What the government asked the mines to do was to operate on minimal operations and or care and maintenance. And after a flurry of clarifications, it seems to be that means minimal operations to maintain the viability of the mine so that when the initial 21-day shutdown period comes to an end, they can then, we hope, power out of the situation and continue to provide revenue to the economy. 

Again, if you look at the backdrop in Namibia, mining is incredibly important to Namibia and it’s very difficult to see where else Namibia will be able to get near term revenue flows to fund their medical facilities and fund everything else that they’re going to need to do both in the short and the medium term as they come out. So I think what we’ll see is a very big push from the mining sector and certain segments of government to find a way where they can legitimately trade off the economic benefits from mining with the health risks of further transmissivity and so on.

Now, if we bring that back to Uranium, what’s interesting though is both of the Uranium operations giants: Rossing and Husab -they’re owned by state owned enterprises, Chinese state-owned enterprises. So CGN in the case of who Husab and CNNC in the case of Rossing. So, first of all, they’re not as acutely financially driven as other mining operations so there isn’t the question of bankruptcy. And secondly, they will be far more likely to do what government asks them to do, the Namibian government asks them to do. I would expect to see perhaps a more cautious approach from both of those operations. And I will say in all certainty we will see a level of disruption there: if it’s not partial closure, if it’s not reduction in mining and running a processing plant, it’ll be difficulty getting diesel across the border from South Africa, et cetera, et cetera. There’s a whole range of things that are making it difficult to mine productively in Namibia at the moment. 

Matthew Gordon: Right. And again, using the Australian analogy, it will slightly nibble away at their ability to work effectively, efficiently. But we’re starting to build up a whole bunch of numbers here. So, but again, before we do that, let’s talk about some of the other big players; the Kazakhs. KazAtomProm is, you know, obviously the listed, well, 10% listed in London here, so there is a bit more clarity, but generally I think that the perception, certainly from outsiders, you may have a different view, is that it’s hard to know what they’re up to. Obviously, they produced over their quota at the end of last year. You know, that sent a few puzzled looks their way. Let’s be polite about how people received that. So, what’s your take on what’s going on with the KazAtomProm production? 

Brandon Munro: The first thing to understand is that in situ recovery is a little bit more resilient to this type of disruption than say an underground mine. You don’t have workers going deep underground in close confines to each other, et cetera, et cetera. And so, it’s not appropriate to apply the Southern African experience to Kazakhstan where they’ve had to entirely closed down their underground mines and other mining operations. And it’s also got some capacity to operate on minimal staff as well because once the well configurations have been put in place to a degree, it’s a case of flicking a switch and it just continues to pump. So, they’ve got that inbuilt resiliency.

What we’re seeing on the ground in Kazakhstan, it’s not easy to understand right now. They’ve got very low levels of infection: it’s in the four hundreds and, they might just be really lucky because they’re a sparsely populated country and so forth, or it might be another explanation. They do share a border with China that has been relatively porous and it could be through simply not doing enough testing that they don’t fully understand the extent of the transmissions.

Regardless of that, they’ve taken some very strong early steps, much like Russia has, to contain it either pre-emptively or reactively. And so Almaty is in shutdown, Nursaltan is in shutdown, and various measures throughout the regions are being implemented. So you can expect a nibble at the edges approach in Kazakhstan, I think. They might find that it’s difficult to expand wells, for example. It’s difficult to do some of the sustaining capex, but that’s not going to be an immediate effect. That’s more going to be a grinding effect as the year wears on. So I think that’s very much one to watch and wait.

The stock exchange listing has been helpful because KazAtomProm did issue a guidance warning, and they pointed to the fact that they still maintain eight months of inventory so we wouldn’t see necessarily an immediate market effect from this nibbling at the edges. But of course, if any of those major operations have to close then that’s going to have an effect on sentiment. 

Matthew Gordon: Okay, and this is going to feel like a bit of a segue, but I think, I promise everyone that’s coming back to being able to understand the supply side of this equation, and which is, I want to talk about conversion and enrichment. Okay. So why don’t we kick off with definitions? I think that’s always quite good. And then we’re going to talk about what that market has looked like over the last, say 10-years, and certainly five years. So if you don’t mind, give us a description of what each of those is.

Brandon Munro: So definitions: conversion is a service that is applied to U3O8, or yellow cake, or Uranium concentrate, to take it from a yellow cake powder into a refined gas, UF6 – Uranium hexafluoride. And the reason why you need it in that format is the enrichment process. And again, enrichment is a service that’s applied to the UF6 which is that the centrifugal enrichment technology takes that gas, spins it at an incredible speed, two times the speed of sound. And because of that, it slowly shakes out the heavier isotopes of Uranium towards the edges so the lighter isotopes of Uranium can be sucked from the middle of the centrifuge.

So the reason why you need to do that, and we’re going into a simple physics here, is Uranium is predominantly two isotopes: Uranium 238 and Uranium 235. Only Uranium 235 is fissile, in other words, it can be utilised as a chain reaction to release energy as it is in a controlled way in a nuclear power plant.

Uranium 235 is only present in a concentration of 0.7% in natural Uranium. And for a conventional nuclear power plant, it needs to be upgraded to somewhere between 3% and 5% depending on that technology. And that’s what the enrichment process does.

So what has happened in the last 10-years in particular, if we were to go back 10-years, we had a situation where those services of conversion and enrichment were applied to Uranium owned by utilities; so the utility would contract with a major producer, let’s say Rossing in Namibia, and they would own the U308, they then take it to the converter, pay the converter for the service of conversion, and then the utility would own the UF6. Then when they’re ready to, they’d take that UF6, deliver it to the enricher, pay the enrichment facility for the service of enrichment, and then they would be left with a certain quantity of the EUP, which is enriched Uranium product that’s appropriate to the type of technology that they need. So for particular reactor, they might need it to 3.7% and that’s what they would ask enrichment to provide.

Now, the way that that would work is the service of enrichment is called a SWU – separative work unit, not that anyone really needs to understand that for now. And SWU prices fluctuate in the same way that Uranium prices fluctuate, and the utility would try and optimise how much SWU they add to how much Uranium to produce the product. And they do that by comparing the Uranium price with the SWU price. Because if you’ve got very expensive Uranium and very cheap SWU, then what you’re going to do is you’re going to keep providing that SWU in those centrifuges until you’ve squeezed every last bit of Uranium out of it. Conversely, if the SWU is very expensive and the Uranium’s quite cheap, you’re going to give it more of a light touch with the SWU because you’d rather buy more Uranium and push more Uranium through and extract less efficiency from that Uranium. And what you end up with is this a trade-off that determines the tails assay, the optimum tails assay -I’ll come back to why this is important. Once you know a tails essay, then you know how much of this EUP enriched Uranium product you’re going to have as a utility at the end of it, and you can also then use that to calculate how much more Uranium you need to buy.

That was 10 years ago. Then we had Fukushima. Now, what Fukushima did is that in a matter of months, knocked out about 10% of the world’s demand for nuclear power, and therefore nuclear fuel. Conversion facilities can flex up a little bit and down, but an enrichment facility can’t flex down because these centrifuges; imagine an oversized scuba tank that’s spinning at these rates. I’ve been told that if you allowed it to stop and you had a speck of dust in it when you restarted it, they spin at such a rate that that speck of dust would cause it to lose balance and fire like a rocket through your entire plant. So you simply can’t turn them off until you’re ready to shut them down and say goodbye to that particular centrifuge. So they just had to run them. They had no choice.

So going back to the example that I gave or the explanation that I gave about optimum tails assays, the utilities were still saying, right, we’ve done our calculation and you quoted us on SWU and we know we bought our Uranium for that much and therefore we want an optimum tail assay of this. And that’s what the enricher would provide. But it had 10% or more of this excess capacity so they said, well, with what we’ve got left, we’ll just leave it in for a bit longer, and even though it’s really low grade Uranium by that point where we’re paying the electricity and the sunk capital cost to keep running the centrifuges anyway so we’ll leave it in there and we’ll squeeze every last little bit of useful Uranium that the technology allows and we get to keep that. And what they did is they kept that extra enriched Uranium product and they used that to try and offset some of their own costs. And that is the concept of underfeeding that today is responsible for almost 20 million pounds of Uranium supply into the marketplace. And so that’s where Uranium conversion and enrichment fit in.

And then one last comment about the enrichment side of things and underfeeding, we are seeing underfeeding decrease relatively quickly because number one, we’ve got increasing demand for nuclear fuel. There’s now more reactors operating today and a greater nuclear power output than there was before Fukushima. So we’ve closed up that demand gap. And also the enrichment facilities have been under a lot of economic stress since those days. And as they start to decommission these centrifuges in their cascades, they’re not replacing them. So there’s been some natural attrition in their centrifuge cascades that’s led to reduced capacity. So those two factors result in a stark reduction in underfeeding by 2025 and almost elimination of underfeeding by 2035, at a time when nuclear power is still growing at a couple of percent compound average growth rate. 

Matthew Gordon: Thanks for that. That’s a wonderful breakdown. So let’s just stay with the supply side of things just a little bit longer if you can, and we have talked in the past, and on other conversations we’ve had with regards to, you know, how much UF6 that was in the market, how much EUP was actually in their market, and because it’s a fairly small market but fairly opaque market, I think there’s been, there was a severe underestimation about the impact of both of those components in the marketplace. And it’s perhaps the reason why some of these estimates have been long drawn out or long mis-estimated, where are they now? UF6 today, are supplies dwindling? Are they nearing the bottom? How long can we expect to see this thing carry on?

Brandon Munro: Great question, and maybe I’ll go back a little bit in time to contextualize my answer, and the other effect apart from the creation of underfeeding after Fukushima, the other effect is that the excess capacity applied in conversion as well and we saw utilities that had already paid for Uranium and conversion fulfilling those obligations and producing UF6 that they didn’t really need, particularly Japanese utilities. So we saw the build-up of inventory in UF6 as well as EUP, the enriched Uranium product. So previously, where conversion was simply a service and enrichment was simply a service applied to the Uranium owned by the utilities, now we started to see fresh Uranium, inventory Uranium, free and inventory UF6 as well as the untreated EUP. And as you just explained, that’s created a great degree of opaqueness in understanding inventories. And it’s also enabled utilities until very recently to be able to arbitrage between those three forms of fuel. So if you didn’t like the Uranium price, you could go and buy UF6, or if you didn’t like the UF6 price, you could buy EUP or Uranium. So to answer your question, what we’ve seen in UF6 is a dramatic reduction in the available and mobile inventory. So the inventory of UF6 that isn’t already owned by people who need it is very, very low. And the reason for that is in November 2017, Converdyn, a large provider of conversion services, put onto Care & Maintenance, the Metropolis works facility, which is the only facility in the US, and very cleverly and very stealthily, they mopped up pretty much all of the available UF6 in the market at that point in time. And they did that because they had contracts of conversion. So by buying the UF6 in advance, they could, instead of providing the service of conversion, they could just slowly deliver that UF6 to their counter parties. 

Now we fast forward by a couple of years, 2.5-years, and we’ve got a situation where that UF6 has been absorbed. There’s been a deficit in conversion since that facility was closed and as a result that inventory’s been soaked up in UF6. We’ve seen a sky-rocketing conversion price. So the price of that service has gone from roughly USD$4 to $20 a kilogram; a tremendous rise, which has obviously had an effect on the UF6 price, but also reminded utilities that we are in an awfully volatile market and exactly the same thing can happen to Uranium. And the knock-on effects are already becoming clear. It hasn’t hit Uranium yet, but it has hit enrichment. So the SWU price has gone from low thirties to about USD$50 per SWU, so a good healthy increase in more recent times, that again, is just putting pressure on the utilities decision making when it comes to Uranium. 

Matthew Gordon: So then you said that, you know, Converdyn went about the process of soaking up as much as they could, but who were the other players who would have been doing the same thing? Because again, I would say for investors who are looking at the Uranium space, whether they’re old hands or looking at it new as having been generalists, or involved in other commodities, the key to this is the supply side. It seems to be. The story in the market seems to be, okay, MacArthur closed down a few years ago, then we’ve got Cigar Lake recently, we’re going to have some effect on supply because of Covid-19 to some of the other major suppliers, except maybe with the exception of Kazakhstan. With supply restrictions comes opportunity because it’s going to force, potentially, force utility buyers to try to fix a price, and get a price today, and obviously at USD$27.50 or whatever it is today, there or thereabouts, that doesn’t work for most people, except maybe the Kazakhs. So what is your view on this opaque market? Do you think there’s more UF6 that we don’t know about? Do the utility buyers know about more UF6 or EUP that we don’t? Because that knowledge seems to be pretty scarce on the ground. I don’t know anyone who’s been able to assimilate that information in one place and call it right. Certainly not the people we’ve spoken to in the last year. What’s your take?

Brandon Munro: There’s no question that there is still UF6 out there, but it’s not held in the mobile forms.

Matthew Gordon: Right. And how do you know that?

Brandon Munro: I have a fair idea of what Converdyns position is through knowing the people personally. With Orano, they’re a bit more of a closed shop. They’re a much bigger organisation, but not long ago, last year what they did is they had their own problems in conversion when they turned off an older conversion facility, replaced it with a new one and they had almost a three month supply stoppage there, and so the understanding within the industry is they had to scramble at that point because they’d been operating without significant inventories. They had right sized their conversion facility for their own needs inside France. So that also put a bit of pressure and contributed to that incline on the conversion price. 

And in fact, what we’ve seen is the opposite of what we’ve described. So Uranium Participation Corp, they held both U308 and UF6. They sold half of their UF6 holdings to Converdyn at the time when Converdyn was mopping up excess supply. And then they sold the other half more recently where they basically did a trade of UF6 for U308; so cleverly increased their U308 leverage by taking advantage of that conversion price spike.

So we’re seeing rather a disgorging of mobile inventory. And to turn to your question about how much we know about it, US and EU utilities do need to report on this and it is reported. So come May, we will understand how much inventory the US utilities have got as a whole. There’ll be global numbers released, and the form in which that’s held, and we’ll also understand that later in the year for the EU. Now, that doesn’t help answer the question about China, but for everyone who is looking at this sector, I think the easiest way to think about China is they are building their own fuel cycle. So they aim to have enough conversion for their own requirements and they aim to have enough enrichment for their own requirements. So you can kind of treat them as like a closed cell for everything except U308 because they produce very little U308 domestically. And even with their big mines in Namibia, they still won’t have enough U308 within a couple of years. But the fuel cycle, they’ve got themselves.

So once you’ve taken the US and the EU and the Chinese utilities out of that, you’ve got a few in North Asia, a couple of other places around the world, South Africa and elsewhere, but they aren’t particularly material. 

Matthew Gordon: Okay, thanks a lot for that. But tell me little bit more about EUP; I mean what’s the state of play there? Because it’s obviously a big part of this.

Brandon Munro: So what we’ve seen in the last couple of years is first of all, that EUP that’s produced from underfeeding is partly produced in Russia and partly produced in the rest of the world. The rest of the world is almost entirely releasing that now on long-term contracts, which is a healthier situation for the market. In Russia, the word is, and this is a difficult opaque part of a difficult and opaque market because it’s Russia, and a lot of it is state secrets, et cetera, et cetera. But what the belief is in the industry, and according to some of my colleagues in Russia, is that they aren’t releasing any of that material externally. So Rosatom as I understand it, does not sell any of their underfeeding generated EUP or tails re-enriched EUP into the broader market. They need all of that to complement their domestic mining of Uranium for their own requirements.

And that makes an awful lot of sense because as you know, and as your listeners might know, Russia and Rosatom has been extremely successful with a build, own, operate supply type model with its nuclear power plants, and they’re going to need all of that EUP, UF6, U308 that they can find. So the effective inventory of EUP from underfeeding is a lot more contained and rational than it was a couple of years ago. And what we’ve also seen is utilities proffering to absorb EUP over U308 where it is mobile. So where some of that EUP is held by sources that can sell it to each other, the utilities have gone for that.

Now the reason they’ve done that is they’ve, as Section 232 has sort of ground on for the last couple of years, the utilities have wanted to buy time, they’ve, they’ve wanted to defer contracting their Uranium until they can really see how this thing plays out. And now that we’re in a COVID-19 world, I think that will probably continue to provide some inertia to them entering into long-term contracts in the very short term.

Now the way that they can do that, and if I go back to my little explanation about conversion and enrichment; in the old days when the utility would buy the U308, it would buy it about two years minimum before it needed to put it into fuel bundles that would then sit ready for loading into their reactor, and that would allow enough time to transport it from the mine to the conversion facility. There’s only a handful of them in the world. And then from the conversion facility, get it converted into canisters, transferred to the enrichment facility, and there’s only a handful of them around the world and then off to the fabricator and then back to the nuclear power plant and then sitting there ready to go for the next reload. Now, that’s about two years. The thing is if they buy UF6, they can delay that purchasing decision by six months. And if they buy EUP, they can delay it by a bit more. So that’s been the short-term method that the utilities are by and large using so that they can kick the can down the road, see more clarity, particularly on the geopolitical side of things in the US before they get forced to commit to long-term contracts. Good to understand, but also important to monitor because if we see that type of inventory absorption in EUP that we’ve seen in conversion, that’s going to create an instant headache for any of those utilities who are a little bit on the light side when it comes to their inventory and they’ll have to very quickly adapt by securing UF6. But remember, they can’t get any of that because there isn’t any of that around, then they’ll quickly have to adapt and buy U308.

So I see EUP as a very important leading indicator for when utilities will need to get on their bikes and start securing Uranium. And I see SWU prices as a good indicator of the availability of EUP. And so as we see SWU prices continue to rise, any large volatility in SWU prices is probably a pretty good clue that what we suspect about EUP and there not being much inventory sloshing around is, is in fact the case. 

Matthew Gordon: Okay. So the magic question is, if they’re get indicators, what are they indicating to you in terms of timing?

Brandon Munro: In EUP it’s indicating a tightening because as I say, we’ve seen SWU go back to USD$50/lbs in conversion. We’ve seen conversion go 400% to 500% up, which is confirming what we pretty much know that there there’s very little, if any, available mobile inventory in UF6 form.

Matthew Gordon: Right. Okay. As I said, thanks for that. I think that is actually quite important for people who are new to this to understand the way that the utilities were stringing this out, as it were, or able to string it out, as it were. A question for you and it’s been sent in by one of the members, which is, could you touch upon the process that leads to the publication of LTC pricing? Miners must have an interest. So tell us a bit about that. 

Brandon Munro: Yes, it’s a really good question because we aren’t seeing much long-term contract and I’ve got a bit of a bug bear when it comes to the way it’s being reported at the moment. So let me explain two basic concepts, if you can indulge me a little bit here. So the first one is, although there’s seem to be a spot price, it isn’t a spot price. It’s not an exchange price, it’s a reported price, and the same is the case for the long-term contract price. You’ve got two now, three different price reporters and they rely on the strength of their relationships throughout the industry and the motivations of the players in the industry to report to them the deal that they’ve done. And then what they do is they make it anonymous and they, if there’s enough volume, they aggregate it and blind it and then report it as what’s happened. So you could see a single deal being reported and that would be that week’s long-term contract price.

And the other thing I want to explain is how long-term contract works with its timeframe. And so in very basic terms, and we can come back to this maybe next time I’m on, if there’s interest from your listeners, but basically a long-term contract; typically they’ll go out for a request for proposal, they’ll get those proposals back, they’ll have a look at them, they might negotiate a little bit with their preferred responders then they will enter into contracts or negotiations. Then they will sign a deal. And typically, it’s only a couple of months later that that deal will filter out into the reporters who report it, if at all. There are many instances where somebody, either counter parties very keen to report or leak it, and there are instances where a counter party is actually insistent on maintaining the confidentiality of that, and as you can imagine, there’s a whole lot of reasons that might drive that.

So the reporting is done on that basis. It is relatively unreliable, particularly where we aren’t seeing a lot of volume. The reporters and you know, I know them, they do their best to understand if they’re being manipulated and to remove those sorts of things. So that’s why sometimes you see a discrepancy between trade tech numbers and UXC numbers, because one or the other has said no; I am either being manipulated or I’m not getting the full story, or you know, they’re telling me that side but not that side. So there is a little bit of judgment used.

My bugbear at the moment is we’re seeing long-term contracts reported at say USD$32. A long-term contract comes in many different forms. It’s not a standardised agreement like we see in a true spot markets or other industries. It’s a negotiated agreement that in its simplest form, it’s a fixed price that is either escalated or predetermined for 2022, 2023, 2024, and you can just go to the schedule of the contract and you can see this is how much we’re going to pay. But more often than not, it’s a blend. So it might say, right, we are 60% fixed according to this price that is then escalated, but the other 40% we’re going to say it’s spot plus 10% at the time of delivery subject to a collar and subject to a cuff. 

Matthew Gordon: Sounds like structured finance.

Brandon Munro: Yes, yes. And if you listen to, you know, if you hear Tim Gitzel talking about his contract book, they talk about it as a whole portfolio, but he’ll talk about how much of it is fixed price escalated, how much of it is market sensitive, et cetera, et cetera. They never talk about the collars and the cuffs, but they’ve built into their contract portfolio where they are exposed to markets, they obviously have the cuff and in return they provide a collar.

So my bugbear is that the contracts that have been done at the moment, many of them are simply spot reference contracts. So they are, we’ll provide you in 2023 but you’re going to pay the spot price, or the spot price minus five, or the spot price plus 10% or whatever it is. And Tim Gitzel said that they’re the only contracts that they’re writing unless they see a four handle in front of a fixed-term escalated. The contract, the price reporters, what are they going to do with the contract except take an assumed spot price at that point in the future and report that as a price. So they’ll take today’s spot price. They escalate it from now to 2023 and they say, well, the long-term contract for 2023 deliveries is therefore USD$32. It does not give a realistic picture of what utilities would need to pay when we see true price discovery because of the volume of contracts. 

Matthew Gordon: But why can’t someone like a TradeTech or a CE calculate these things? Like you’re involved with the WNA, right? Which is the World Nuclear Association, and you have helped them write a number of papers and the nuclear fuel report, which came out September last year, or was published in September last year, the utilities buy those. They buy the WNA report. They buy from the trade players. They must be able to estimate what’s going on in terms of production in the world. Obviously, the last few weeks are an exception, but typically like last year for instance, they will know exactly who is going to produce what in the market and they’re going to make a call. These are smart guys who doing the maths. I mean quite simply that they’re doing the maths on this thing and the price hadn’t moved. It hasn’t moved for years. And obviously, last week, this week, we’ve seen a little uptick and we’ve seen a little V shape in some Uranium companies’ share price. But that was the last two weeks, I’m more concerned that again, the opaque nature of this market means that it’s difficult for people outside to read it and make a call.

The utility buyers, and I guess to some degree, the fund managers should be able to have a better view of the market, but it’s hard for us to read. I’m an investor.  I want to be able to work out, and I guess everyone watching this wants to be able to work out what are the signals? What should I be looking for? What’s real, what’s not? Why is it so difficult? 

Brandon Munro: So, the utilities in very simple terms fall into two camps: the first camp, the larger ones who do their own analysis, who have got, you know, analyst in there who will crunch the numbers and form a view. And then the smaller ones, and this might be a power company that’s a diversified power company. With nuclear, they’ve got two or three reactors in their portfolio: things like solar and wind, and getting subsidies for those power sources are far more important. And if there’s a, like I’ve had conversations with these types where they say, well, technically we’ve got one quarter of an analyst, but we haven’t had much time of his lately because he’s crunching the numbers on a new vehicle fleet for our employees or something like that. So what they tend to do is they tend to make sure that they stay in step with the crowd.  Because as a fuel buyer, you’re not paid to take chances and you’re not paid to make big calls and take risks, particularly in an organisation like that. You are paid to make sure that you do your job, which means stay in step. And what that really means is follow the advice of the consultants; your UXCs and your TradeTechs of this world, and what they’re saying about it.

 So if we go to the bigger ones who do their analysis, some of them, I will have a closed door conversation with and they’ll say, yes, absolutely we’re preparing for the scenario of USD$70 a pound. And we saw what happened last time and it can go up and they, that’s part of their risk mitigation. In the meantime, they don’t have to pay that so they won’t. So they’ll nibble at the edges and they’ll pick up what they can on spot and they will max out on their exposure to say Uranium 1, the Russian producer, and they’ll max out on their exposure to say Kazatomprom, and then they’ll just wait and see, knowing that they’re working in that scenario. Their job is not particularly easy because they’re not miners. The bigger guys do have advisors, they need to make a call on what is going to be the marginal cost of production and how much ahead of the crowd do they need to be so that they aren’t forced to be paying that marginal cost of production. And depending on their view on demand, they then need to make a decision of how many new projects are going to come in and what will their marginal costs of production be when they’ve got  quite a number of promoters of say less advanced Uranium projects telling the world at large that they can produce on some very realistic numbers, very optimistic numbers on some very optimistic timeframes.

It’s hard enough as a savvy, hardened, sort of bruised and scarred investor to make calls on who’s bullshitting you and who’s not, let alone a utility who’s in the business of producing power, not mining and doesn’t have the benefit of listening to 10 company promoters a day sort of file through their office and pick the lies from the truths. So that’s some of the difficulties that they face.

Matthew Gordon: Okay, but likewise, retail investors, family offices, investors who aren’t as exposed to this all day, every day. I mean, there’s different levels of sophistication in terms of the people watching the show. Some are very, very smart; much smarter than me. They live for the Uranium space, and there are other generalists who are looking at this thing going, Oh boy, that’s way too confused to get involved with, I’m just looking for, give me one signal to look for, three things that need to happen before I move my money or place a bet on a Uranium equity. Right.

So the big question in all of this, so you have done a fantastic job describing the complexity technically and why utilities have able to string this out. You have done a great job describing what some of the main producers, the state of play is, and certainly within the countries and the companies themselves. But when you bring all that together, when you pull that information together, what is it telling you with regards to, still on supply here, what is it telling you in regards to supply? Because is this the white swan event that people think it is? Is this why there’s been an uptick in price in the last week? Or do you think the utility players have still got another card up their sleeves? 

Brandon Munro: Yes, so I mean we’ve been really in the weeds so far talking about some difficult concepts and I think that’s because you’ve got a passion for educating your subscribers and your club, but we shouldn’t lose sight of the fact that Uranium is, it’s a really fascinating paradigm, because on the one hand, if you’re trying to pick timing in the Uranium sector, you need to be in the weeds and you really need to be following the insights and really understanding it. If you can be just a little bit flexible, or preferably a bit more flexible on timing, it becomes really simple. It becomes really simple because the spot price at USD$27, and the contract price of anything less than USD$50 means that there is a large, large proportion of existing and future supply that cannot make money in this sector. And you can’t turn nuclear power plants off simply because you can’t get the Uranium. There is no substitute – they are 11% of the world’s electricity. They’re vital to the go-forward for China, for Russia, for India, for the Middle East. It is a crucial, absolutely vital part of the world’s industrial commerce. And if you can’t make mines money, they won’t pull the stuff out of the ground. So when you get down to that level, it is the simplest, most assured bet that you’ve ever seen in a commodities market. But is it going to happen next week, in three weeks-time, in three months-time or mid next year? That’s where the finesse and the complexity comes in. 

Matthew Gordon: But your investment thesis comes to play here, which is this isn’t going to make you money tomorrow. It may not make you money in six months, but if you’re prepared to sit and wait on it, it’s a nice bet, based on the macro, which will see you return, but don’t get too excited about anything happening anytime soon. I mean, that is worth saying at the end of all of this. 

Brandon Munro: Yes, well, absolutely.  I’ll give you an example. So, when I came into Bannerman, the Uranium was USD$33 and the share price was USD$0.03c. We had really difficult times back in 2016. I mean, trying to even get someone to take a call on Uranium was just about impossible. But by the end of the year we needed to raise, and we did manage to raise it that USD$0.03c, that was in November. By February, the next year, our share price had touched USD$0.10c and then came down again. And because of what we’re seeing at the moment, we’re even below that original 3 cents for the first time in a very long time in our company’s history. And so there are volatility moments inside of that overall investment strategy. And that’s a real opportunity. But if you were to say, right, what sector in the world could I buy today? And forget about it, not look at my screen, not do anything, not follow the news for a couple of years and know that I’ll be waking up with a smile on my face, it has to be Uranium. It has to be Uranium, and it’s only got better because of COVID-19, as much as it’s a virus that’s causing mayhem and enormous amount of tragedy for people, but for someone who is in a position to either commence or increase their exposure to Uranium equities, it’s an astonishingly good opportunity.

All of these equities are on their knees at the moment. The demand side is where it’s always been and the supply side, it’s at risk as we’ve been talking about. The only thing you have just got to be careful about, and I’m sure you’ll be talking to your subscribers a bit about this, is making sure that the equity that you’re looking at is robust enough to come out the other side and preferably come out in better shape, not just limping along. 

Matthew Gordon:  And I think that is a discussion for another day as part of the education process to try and understand what good looks like and what not so good looks like. Our red flags and green lights series, educational series. So yes, we would love to talk to you about that and get your views on some of those moving parts. But Brandon, thanks so much for today. I mean that’s immense in terms of, as you say, getting into the weeds, understanding the detail, the technology behind those components, it certainly helped me learn something today, which I always enjoy; see it can happen. It can happen. 

Brandon Munro: And I was laughing because I wondered that there was anything more for you to learn in Uranium, Matt, you’ve picked it up so quickly.

Matthew Gordon: Yes, it’s been fascinating. I think there’s got to be a Netflix show; this is the next Tiger King, isn’t it? 

Brandon Munro: Oh right. Yes. Okay. I’m up for it. Yes. I think I need to be behind the camera if we’re doing it on Netflix though.

Matthew Gordon: True, true. And I’ll need a mullet, apparently. Right, Brandon, thanks so much. I know it’s a Friday night there in Perth, go and enjoy what’s left of the day there, maybe a glass of wine and the kids. And we will catch up with you very soon. Thank you very much for doing this, especially for, and exclusively for the Crux Club members. We hope to see you on here again real soon. And if they have questions, we will direct them towards you. 

Brandon Munro: Great. Thanks for having me on, Matt.

If you are a uranium market spectator, feel free to check out some of the recent uranium articles on our platform as well as one of our most recent interviews with a uranium mining company.

Company Page: 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.

A photo of Bannerman Resources CEO, Brandon Munro.

Red Cloud Securities – Investment Tips From An Industry Insider

The Red Cloud Securities company logo

A conversation with Chad Williams, Chairman and Founder of Red Cloud Securities Inc. 

Sure he is not as good looking as Kate Hudson, but he is in as much demand. Red Cloud Securities offers capital markets services to mining companies. All the company does is “help mining companies.” While there are around 100 services that Red Cloud Securities provide, they can be grouped into categories. These include: capital raising, M&A, marketing, strategic advisory work and equities research. There is no other group in Canada that does everything Red Cloud Securities does and has enabled them to grow to be one of the go-to companies for junior looking for capital. But woe betide a company that doesn’t match up to Williams stringent assessment criteria. We think Retail Investors will find these useful too.

Marketing is particularly difficult, given current COVID-19 restrictions, but Red Cloud Securities is pushing online webinars amongst other things as potential solutions. Its team of analysts provides expert research and advice, and Red Cloud Securities has raised hundreds of millions in capital for 500 different mining companies over the last 10 years.

Williams is a mining engineer with an MBA. He has been in mining “since he was a kid,” and was a top-ranked gold mining analyst at some of the world’s major banks and brokerage firms. He managed mining equities and even ran a mining company: Victoria Gold Corp. He has seen the mining space from all angles.

Marketing is crucial for mining companies. How else would they manage to raise capital and fund their projects? Williams explains just how crucial telling a compelling story to investors is for mining companies the world over. When times are tough, mining companies really struggle to raise capital, and this is where Red Cloud Securities steps in.

Williams then gives some extremely useful information to investors: what criteria does Red Cloud Securities look for before funding a mining company? Williams states that he can sometimes tell within 15 seconds (YES, ONE-FIVE) whether a company will receive his investment or not. He states that he can tell by how the person is dressed, if they show up late, who is marketing with them, their age and their demographic. Essentially, “give me as few reasons to dislike you as possible.” Over 30 years of extensive experience can clearly make your gut instinct a powerful thing indeed! Investors will find the human/visual side of judging potential investments very interesting.

We Discuss:

  • 2:36 – Company Overview and Chad’s Background
  • 5:27 – The Importance of Marketing for Mining Companies
  • 11:50, 21:23 – “I Need Your Money”: A List of What You Need to Look Into Before Investing in Companies
  • 20:13 – From Us to You: Don’t Be Lazy, Do Your Homework
  • 24:58 – Promoters and Their Games: Getting Caught Out as an Investor
  • 27:28, 42:07 – Business Plans and Preparation for Success: How Will the Company Make You Money?
  • 37:30 – Timings, Urgency and Political Events: Uncontrollable Circumstances Affecting Investments
  • 45:54 – What Should You Question as an Investor?
  • 50:26 – Chad Williams On Joining RNC’s Board: A View on the Company

CLICK HERE to watch the full interview.

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

Matthew Gordon: Hey Chad, how are you sir?

Chad Williams: I’m very good thank you. Thanks for asking. How are you doing?

Matthew Gordon: Well, we are surviving. We are surviving. We’re all self-isolating in our little cabins. Now, you’re up in Quebec, you mentioned earlier?

Chad Williams: No, I’m actually North of Toronto, we call them cottages in Canada, but cabins or a lake house. And yes, so sorry for the beard and the casual look – but that’s me these days. And I think we’ll look back, maybe even next week or in a few months on this as truly extraordinary circumstances. But we’ll get through this, humanity has gotten through this and this too shall pass, as they say.

Matthew Gordon: We will endure and we will survive. There we go. Yes, it’s interesting times for sure. Hey look, Chad, we caught up a few weeks ago, before you went to PDAC, so I guess a few things have happened since then. But I know today we’re going to talk about serious business matters. So let’s kick off with a one minute summary for people who perhaps haven’t heard of Red Cloud Securities, and give us a little background on yourself if you don’t mind.

Chad Williams: Sure. Yes, so little bit on me: I’m a mining engineer with an MBA and I’ve been in mining really since I was a kid, as far as I can remember. But of note, I was a top-ranked mining analyst, a gold mining analysts at some of the bigger banks and brokerage firms. I managed mining equities. I even ran a mining company called Victoria Gold, which is still around. Of course they’re building a mine in the Yukon. So I’ve worn a lot of hats, so many hats that it’s cost me my hair, but you know, mining is my calling.

And what happened is about 10-years ago, maybe a little less than that, I had the idea to create a new type of company. It’s called Red Cloud and Red Cloud offers capital markets services to mining companies. That’s all we do is help mining companies. And literally, there are about, or there is about 100 different things that we do, but generally they can be grouped into different categories such as capital raising. We raised you know, lots of money, hundreds of millions of dollars for dozens and dozens of companies. We do M&A, we do marketing, which is interesting in this context because we can’t have human interaction anymore so we’re really pushing video and webinars and let’s call it virtual marketing. So we do marketing. We do also strategic advisory work. I remember when I was with the CEO of Victoria Gold; you know the old cliche, it’s lonely at the top – well I had no one to talk to really, so we provide strategic advisory services to mining companies and we provide equities research. We have a team of analysts as well.

So you know, that gives you a sense of what we do. There is no other group that does everything that we do. And there are groups that do various parts of it, but we’ve been a big success. If I could say that; I don’t think it’s an exaggeration. We have over 30 employees. We’ve helped hundreds of mining companies, I think it’s at last count 500 different mining companies over the last 10-years. So we’ve been very, very busy and things are actually going quite well right now because our clients, the mining companies are looking for alternatives for ideas and we’re able to offer some different ways to market and raise money.

Matthew Gordon: Brilliant, brilliant. Sorry I cut in; there are so many different components that, I mean we’re going to talk today about raising capital or the way that companies approach you and engage you to help them raise capital. But you touched upon something there: as an ex-banker it fascinated me – you talked about marketing. The importance of marketing must be significant if you have created internally a marketing function because normally you think, hey, give us the money. That’s all we need, you know, and then we’ll go off. We know how to mine, we are geologists, we know how to mine, we will go off and do that and that’s all there was to it. But it strikes me, having sort of come down from sort of, you know, the material big cap type of stuff down to the junior space, they don’t all have the necessary skills in-house to, you know, as a reasonable quality or reasonable experience to deliver everything that it’s union needs to deliver. So, you know, Red Cloud, being able to offer all of those things: not just the finance, the advisory, the fundraising, but the marketing as well, I can see why that may have been quite attractive. Were there certain times where that was more in need than others? You know, when times are good to people, they ignore marketing?

Chad Williams: It’s a funny thing because I mean, to be honest, we haven’t had really good markets since I started the company. I mean, we’ve had a few bright spots, but generally it’s been very, very tough. And what we’ve found is when times are really tough, mining companies really struggle to raise capital. So they need help and that’s when they reach out to us. And then when markets are very strong you know, they still reach out to us because they know we’ve got a big network and they want to tap that network, and so we boost their efforts. So some people call it ‘the Red Cloud miracle’ because we’ve been able to not only survive but thrive in mining finance in very, very difficult times. And the reason is because we’ve got this nice niche, we’re part of this, we’ve created a new niche in this, in the mining ecosystem, if you will, that nobody else can satisfy in aggregate. Okay, brokers can raise money at certain times and marketing firms do marketing at certain times, but because we offer so many different services, there seems to be a need for what we do all the time.

Matthew Gordon: Yes. It’s interesting actually because when I kind of stepped down to the junior space, like I said, it’s probably about three years ago, and like I said in a previous conversation with you, I promptly had my ass handed to me by a bunch of promoters and brokers. There’s a game, there’s a definite game, right? And I didn’t know what the game was and we learned a lesson along the way, and that’s what happens. But because of your ability to do diligence; when companies come to you, you go, ‘hey, one is this a company we believe in? And two, could we tell this story to wherever we go to raise our money from, whether it be institutions or you know, wherever you go to?’

So there’s a kind of, would you say those are kind of a stamp of an endorsement from you if you’re going to the market and asking, rather than this promoter route? Because I’ve just seen it too many times; there’s quite a few well-known groups who if they’re involved, we walk away, we definitely avoid.

Chad Williams: Well you know, we do pride ourselves on quality, and when I started Red Cloud I said at the very beginning that we’ll do business with about only 1% of all the mining companies, and that’s sufficient. There are so many mining companies, we don’t need to do business with more than that. We’re certainly not perfect. We’re misled too: people are at times very convincing, and I’m being polite, at other times they’re deliberately misleading. But you know, we’re not perfect but I would say our track record is very, very good. I would say out of the 400 or 500 companies, I’ve lost track, there’s only like four or five that haven’t worked out at all. Which isn’t bad at all in a very, very volatile industry with, you know, start-ups; because a lot of these companies are start-ups. And we have a team of technical people: we have metallurgists, mining engineers, geologists, fund managers, and we protect our franchise very carefully to the point where certain institutions will take meetings with our mining clients site unseen. As long as they’re a Red Cloud client, they will take a meeting.

That’s not easy to keep that reputation up. And you know, as you can imagine as we grow and times are good or times are bad and you know, there are always different agendas and problems really to keeping a good franchise. But we certainly think that’s very important.

Matthew Gordon: Okay. Let’s take that as a yes – a stamp of endorsement from Red Cloud works. If you can get through doors, then it’s got to help these companies, right? Because that’s the trouble.

Chad Williams: We do have an investment committee, it’s called the New Names Committee where there’s 10 people that vote and it’s got to be unanimous. And anyway, long story short; we do have processes and you know, the truth is as well is we’re a regulated broker, in Canada, it’s called an IRAK dealer. The equivalent in the US is FINRA. So we have the very highest level of designation possible as a broker dealer. So, you know, we are regulated and so we have to be careful. Plus, I was a top-ranked analyst for many years and so, you know, I’ve got a reputation and the people in my company have a reputation to maintain as well.

Matthew Gordon: Yes, but you know what I mean? I’ve been a banker myself and it’s difficult to, you know…there’s good and bad out there. And if you find some good ones, stick with them because the reputation clearly matters to them, and longevity is earned, you know? You can’t kid your way through that. So it’s been a learning experience for us and I, you know, I’m just conscious for our audience, which is retail investors, high net worth, family officers who don’t spend all day thinking about mining investment. It’s just when it comes across the table and and we’re keen to help them understand who’s who at the zoo, who’s good, who’s not so good, you know, what companies are good or not so good. So we talk about red flags and green lights, but that’s a conversation for another day.

Today we’re going to be talking about raising capital; so companies come to you, you’ve just explained the whole infrastructure behind Red Cloud, but companies come to you and they pitch. They pitch their companies and their assets and the management team. And they say, right now you’ve heard this story, give me some money. And some are better than others. Right? So what are the things that you need to hear? Because we need to be cognizant that this is a retail audience; slightly less sophisticated than you, so we need to put it in a language and position it in a way that they would understand how they could translate that into what they should be looking for in companies too. So if you don’t mind?

Chad Williams: Sure. And you know, I believe I’ve got a lot of credibility on that front because I’ve been doing it for over 30-years and I’ve financed, literally there must be 20 companies that get more than that, that come to see us every week at Red Cloud, raising money. They are looking to raise capital. So trust me, I’ve seen, you know, I can tell within probably 15 seconds whether this person is going to get money, right?

Matthew Gordon: Really?

Chad Williams: Oh, I can see it. I can see, I can tell by, you know, it’s kind of an odd thing, and this is the kind of advice we give to our clients as well. Right? Because not all of them come in prepped, but you know, I can tell by how they’re dressed, if they show up late, who is marketing with them. I mean, even before they say anything, I have a good sense you know, by their age, their demographic and all kinds of things.

Matthew Gordon: It’s a funny thing that, because my old man, we run a family business and my old man is like; if their shoes aren’t clean, they’re not getting my money. If they’re not presentable – you know, it’s all that kind of human personal traits where you are going, he said, ‘Give me as few reasons to dislike you as possible. It’s a funny thing that’s a very visual part of the decision-making. So I’m fascinated that you said that. Interesting.

Chad Williams:  Yes. I’ve been doing it for so long, but what I did Matt is I was asked by the PDAC, which is the largest mining conference in the world. They asked me to give a presentation on some advice for mining companies: how to raise money. And I came up with 10 different things, 10 different lessons, if you will. And these lessons come out of necessity and agony in the sense that I’ve seen so many bad pitches and so many people do things wrong that I figured it’s my duty to fix things. So the 10 lessons, the presentation I think is probably on the Red Cloud website and if it’s not, we’ll get it up there. But the first one is very basic, and how I came up with this in fact, I didn’t come up with any of this really; it’s only through trial and error, but I met a very wealthy air conditioning salesman, sold air conditioner; the guy had like a Ferrari collection and a 30,000ft home in Toronto. And I said, ‘Shit, you must be a really good sales guy.’ And he said, ‘Actually, I’m terrible at sales, but I’m really good at listening.’ And I try to figure out what people need and want and then I give them what they need and want. So it’s a very basic thing. You can never get someone to, you know, especially adults, maybe kids you can convince, but adults, you can’t convince them to do something they wouldn’t normally do. But if you figure out, you probe and you figure out what their needs are, then you might be able to give them what they need.

So the first one, the first lesson is: it’s never about you. As a mining promoter, it’s never about you, it’s always about the investor. Figure out what the investor needs, what their risk tolerance is. What commodities may be of interest, what stage, that kind of a thing. One thing that is constant for every investor is they want to make money. So they have to figure out how they make money and they all have risk tolerances and you know, what could be appealing, what could be too risky for them, that kind of a thing. So try to figure out what the investor wants. It’s always about them, never about you as a promoter.

And the next one is, this is a big pet peeve: most mining folks, most promoters or mining executives are all tech: they’re technical, they’re geologists, mining engineers, that kind of thing. So they have been trained and they think that to get someone to part with their money, they’re going to bamboozle them with technical terms and alteration, and 40-page or 80-page presentations. That can only go the wrong way. It has to be presented in a very clear manner. And the analogy I use is; pretend that you’re presenting to a 14-year old male, okay? So 14-year old males have a very short attention span. They’re thinking about partying and thinking about a million other things. For a very brief period, they may actually be thinking about you, but don’t take it for granted. So a very short window and make it super simple and present. And it takes a long time. And that’s where I’m pretty good and other people at Red Cloud are good at is, is after listening to a pitch, a presentation, we come up with the magic ingredient, what will be the pitch that will work? And then we reinforce that.

Matthew Gordon: It’s interesting you say that because we’ve interviewed like 250 CEOs in the last year, and we’ve had a few quite capable, articulate CEOs and they’ve been able to tell the story well and they make sure you understand it. And then we’ve had others at the other end of the spectrum, I think you’re indicating perhaps more geologically technical competent individuals and their view is, if you’re not bright enough to understand this, that’s not my fault. And I would go, I would counter that and say; it’s not my job to understand it as an investor, it’s your job to make it clear to me because it’s my money that you want, right? But how many times do you come across the CEO who’s just, they just want to show you how clever they are, rather than get what they need, which is your money.

Chad Williams: And it comes from insecurity. But you know, arguably the brightest guy in the history of mankind is Albert Einstein, and he could explain his very complex theories very simply so that anybody can understand. And if you’re trying to confuse me or use big words, then I’m going to be sceptical and I’m going to be immediately nervous. And it takes really, really smart, sophisticated people to dumb things down, but some people are so insecure that that they’re uncomfortable with that. But anyway, it is what it is.

The other, and I made a list here; the other one is, you have to define a clear use of proceeds. If you want my money, I need to know where my money is going because I am going to believe right off the bat that you’re going to be buying Ferrari’s with my money. Right? And I don’t trust you. I don’t trust your providing guy. I don’t trust anybody, quite frankly. But if you have a clear use of proceeds, and you spend the money wisely and then you’re probably going to get my money now and you might even get my money later.

Matthew Gordon: No, I think that’s right, but that seems a very normal, everyday question. If you’re lending someone $10, you’d be saying, well, what’s it for? Right? You’d be asking that simple question, but some people hand over USD$50,000, USD$100,000, and they don’t ask the question. Or even more bizarre to me is, they don’t read the prospectus which they’re signing up to. They’ll read the summary and go, ‘Oh, that seems reasonable.’ But in the detail, and it’s particularly prevalent when things go wrong, right? Further down the line, like say the market turns, there has to be some sort of, you know, merger or takeover, or quite frankly, you know, write down, and the management team get handed X million bucks even though the company’s lost money and the shareholder are in uproar. It’s like – well, that was in the prospectus. If that was ever going to be a problem for you, you should never put your money in. And again, that’s not a savoury example, but it is a good example of; read the detail.

Chad Williams: And you’re absolutely right. That being said, you know, we’re all very busy and if you’re going to hide stuff in a prospectus, that to me, that’s, not the kind of people that I want to invest in in the first place.

Matthew Gordon: That’s true as well.

Chad Williams: You’re right: you can go back and say, okay, well, okay, I was a dummy, I should have read page 800 of the prospectus, so shame on me. But nevertheless, that’s a little bit…it could be more obvious. But other things, and we don’t have to go through all of them, but the key one is, is you have to develop trust. At the end of the day businesses, it’s like a roller coaster; things go up, things go down, things go well, things go badly. But if you trust management, if you really have conviction that these people are going to spend your money wisely, especially with exploration; exploration by definition is risky, and you may find something or you may not find something, but if you’re spending the money wisely, and people are managing your money properly, that’s a good use of funds, in my opinion. And that’s the first advice I give to executives is; build trust. And trust doesn’t occur overnight. It takes years in some instances.

Matthew Gordon: Well, there you go. I mean, we would no sooner invest in a company we’ve just met than fly to the moon. We look at the company over time, we read the quarterly, have they consistently delivered everything that they said that they were going to deliver? Or if not, have there been mitigating circumstance?  And then there’s always deals, right? Your money is your money. You have got one go at this. If you get it wrong, you don’t got any money anymore. But there’s always deals, there’s more deals looking for money than there is money – that’s is my view.

Chad Williams: Yes, yes.

Matthew Gordon: So just take it easy. It’ll be fine.

Chad Williams: You’re right. As an investor as well, and I, you know, I’m guilty of that myself; I tend to fall in love with the geology and the prospects, and it serves me well. I’ve made a lot of money on mining stocks, but the reality is most of the time, exploration does not work. And you know, I’m actually very conservative; I don’t gamble. I go to Las Vegas, I don’t even touch the casinos. But nevertheless, I do see the merit in a lot of these stories, but nevertheless, it’s a very, very, very, very risky business. And the promoter won’t accurately portray the risk to you because he or she has the incentive of grabbing your money. And you’ve seen it, you know, you’ve been misled so many times.

Oh, the other thing too is, really one of my tops irritants is that the mining companies come in and they say, well, you know, I need let’s say USD$1M or 10M or $100M, and I need it by next week. And I’m thinking, why do you think that’s reasonable? Like, do you actually run your company with such a lack of foresight and planning that you think I’m going to come up with any amount of money within a week? I don’t have, you know, a bunch of cash laying around ready to deploy at any moment here. Right? And so it really takes about six months from the moment you think you need money to closing on a financing budget – six months.

Matthew Gordon: Oh, when someone says, ‘Have I got a deal for you, Matt? The returns are astronomical but we need to close it within two weeks.’ That’s the only, like I literally shut up shop at that moment. It’s like the doors are closed. There you go. Because that smells of, as you say, at best mis-planning, bad planning. At worst, it sounds just almost a little bit corrupt. It’s like one of those sort of pressure sales, scarcity sales, which again, there’s too many deals out there for us to worry about something like that. But yes, I know what you mean. I have some sympathy.

Chad Williams: And we get caught up as investors. Because I’m an investor too; I buy, you know, almost all, if not all of the deals that we work on, but, you know, you get caught up in the moment. Cobalt is up – I need a Cobalt name, or Silver is up, I need a Silver name.

Matthew Gordon: Well that’s the promotional world isn’t it? Again, we did see that with brokers: they’re going, oh, the next thing we’re going to push is Cobalt, and then actually, Cobalt’s no good anymore. Every quarter there was a new thing to push and they needed them, but it was just a case of, find me anything. It didn’t need to be good. Just buy me anything which has the word Cobalt in it, or you know, obviously you guys have had a big kind of cannabis run and up until recently.

Chad Williams: Yes. Not us at Red Club, but yes, generally in Canada. We didn’t touch the cannabis thing at all.

Matthew Gordon: Well, that was the kind of thing which made me just stop and have a look about. Again, 3-years ago, a buddy of mine who runs a brokerage in Canada, he was trying to get me in cannabis and I thought, great, and it’s all going well. And he came to me in the September before things went wrong and he said, ‘Time to get out.’ I said, ‘What are you talking about this? This thing’s still flying?’’ He said, ‘Yes, but we’re taking our clients, our good clients, out of this now. We’ll continue to sell it but we’re going to take our clients out of it now because we’re going to start dumping it after Christmas.’ I’m like, ‘Okay. I said, what happened?’ He said, ‘Well, the retail guys are going to be left holding the baby.’ And you’re like, ‘What do you mean?  Your retail guys?’ ‘Yes, that’s just the way it always works.’ I’m like, ‘Oh, that’s the game. That’s the game. Right?’ And I just felt that just left a bad taste in my mouth. And I was thinking it’s stacked against retail most of the time. And I just, you know, it was a real eyeopener, but I won’t talk too much more about that one for a fear of getting into trouble. But that was the genesis of doing what we do now, which is to say, Hey, the little guy matters here, especially in the junior space where, especially in mining where institutions kind of stepped out on mass, you know, and for all the reasons you know.

The next slide I’m looking at here, which always interests me is, ‘how will I get rich?’

Chad Williams: That’s all I need to know. I don’t really need to know what you’re doing or what the name of your property is. I just need to know how I’m going to make money because as the cliché goes, there’s only one reason to buy a stock, and that’s to make money. You can sell a stock for a multitude of reasons: your daughter’s wedding, you need the mortgage payments, you’re up, you want to lock in profit, but you need to explain to me in the next little while how I’m going to get rich. And that’s a very difficult and quite frankly, non-intuitive thing for technical people to do. You know they’re good at describing alteration or some sort of rock type or how your mind’s working, but I don’t really care. I need to know how you’re going to make me rich.

Matthew Gordon: Yes. I agree with this. Again, the amount of companies that come in to us now, or CEO’s that we talked to and I say, well, so what’s the business? Have you got a business plan in writing? I can count on two hands the number of companies who have given me a written business plan, right? Well, can you at least articulate your plan and the strategy for delivering it? Who’s going to deliver it? When are they going to do that? How much is it going to cost you? And when do I get my money? Your question? When do I get rich? Right. Again, I would say less than 5% of the management teams we’ve talked to are able to do that coherently. And it may be a factor of –

Chad Williams: You are being generous. You’re generous.

Matthew Gordon: I’m a generous guy.

Chad Williams: Yes. Like honestly, 5% is a big number.

Matthew Gordon: Yes, but don’t you as an investor, as a personal investor and all sorts of with Red Cloud, you need that. That tells me where, how I’m going to make my money, and if you’re unable to tell me that, I don’t know why retail guys should buy into this either. You know, ‘we’re going to drill’, is not a business plan. That’s not a monetization event.

Chad Williams: And you know, I’m able to see, I listen to these presentations and I’m able to see through them to come up with the magic that if this works, you know, if we get a, then the outcome is be in terms of share price, because I’ve been doing it for very long. But I can’t imagine retail, let’s call it, folks that aren’t as familiar with mining, I can’t imagine how they would ever be able to do that. You know, they’re thinking, why did you buy these claims? Why are you drilling? Why are you building a mine? What’s the value proposition? Again, I’ve done it for so long that I know, but I have to explain it sometimes to the mining teams. You know, this is why you’re doing it, you know? They don’t even know why they’re doing it.  And I know that seems odd, but they just know that, okay, I’m supposed to, you know, drill it – that’s the next step. I’m supposed to drill it. Okay, well, what happens if you find something, have you ever thought of that? What happens if you get lucky? Then what? Wow, okay, that’s going to be a good thing. But you know, at the end of the day, where are you going to process it? Who’s going to buy this from you? Are you going to build the mine? You need to prepare for these eventualities now.

Matthew Gordon: It’s interesting, I had a chat with a CEO this morning. I was on the motorway in the car and we were sort of talking about an exploration play in South America, and talking about moving from exploration, and next year we’re moving straight into development. And I was asking him, well that’s great, but where’s the evaluation phase? You know, at what point do you evaluate what it is that you’ve got? You know, rather than this rather broad categories of exploration, development, production. It’s not as easy as that. You know, you need to be able to assess what it is that you’ve got and how the hell you monetize this at a point down the line. And whether or not you stay for the entire journey or you bog out at a certain point.

So please tell us again, I’m talking about our viewers here, if the company can explain what they are – so we are a project development, product finder – great. Project developer – fine. We will need the help of a strategic at points A, B, and C. We will need a financial partner. If you can sort of articulate where you sit in this, you know, large, mass of mining companies, people can then get a sense of the risk profile that they’re looking at here, right? And that I think that’s really interesting; that these senior managers who’ve made money all their lives being employed in mining companies, start up these companies without necessarily knowing what all these missing pieces are, and being able to actually manage that process.

Chad Williams: And to me, the worst crime, if I could use the word crime, is when folks with a certain skillset, whether it’s geologists, I’ll give you an example; a good geologic team, they make a discovery and then they make the mistake of trying to build the mine. I can build a business, in fact, I can almost say Red Cloud was built on the back of bailing out, trying to fix mines that did not deliver what they were supposed to deliver because of overestimated assumptions or poor execution. You cannot count on a geologist to build a mine and you can’t count on a mine builder to find a mine. These are very different skillsets. And you’ve got some high net worth and family officers as clients, and honestly, there’s so many wealthy people, billionaires that have this dream of having a gold mine. It seems to be this bucket list thing, you know. I’ve got to check off this box. I need to own a Silver miner or a Gold mine, and then some promoter lies to them, and I literally, I could have a full-time job trying to fix these messes. And the bad news I can tell you is, they’re almost all non-fixable, or if they are fixable, the dilution, the equity dilution is incredibly devastating. Or you know, the continued capital injection, or I need to bring a team of superstars to fix it. And that isn’t cheap either. It’s almost like somebody saying, ‘Shit, I’ve got a dream of building my own house. It looks easy, right? I’ll go to the hardware store and I’ll buy some wood. I’ll build my own house.’ Until you realise that that’s a very different thing than you’re trained. And building a mine is outrageous-it looks simple. You know that it’s outrageously difficult. Leave it to the pros.

Matthew Gordon: Yes, I know. We had a lovely story: we belonged to a sort of family office network here in Europe and one of the guys, one of the big German family guys stood up in front of the room and said, guys – I won’t do the accent – he stood up and said, ‘Guys, I have discovered this new category of investment, which I think, I don’t know if anyone here has heard of it, I think it’s revolutionary. It’s very green and we’re going to, I think we can change the face of this industry. And it’s called tailings’.

Chad Williams: Yes, tailings and recovery: I run, man. If somebody says tailings – I run.

Matthew Gordon: I know, but this guy thought he’d discovered sliced bread, okay? He literally was. And I think the point here is that you know what you know, but ‘you don’t know what you don’t know’. And putting your money into things that you don’t know is always risky. It comes back to my thing; you know, you’ve got to do your homework, you’ve got to trust the team. You’ve got to believe that the team can deliver this because otherwise you’re out of control. You’re totally out of control here. And I think it’s the same for retail guys -you know, you have got to know what you’re getting into is what I’m saying.

Chad Williams: Yes. And you know, the good part though, because we’ve been negative really, a good part is, you know, in Toronto – arguably the mining capital of the world, certainly for smaller mining companies or certain size companies, long story short, there’s a major road called University, and on University there are lots of hospitals and these hospitals, they all carry the names of very successful mining promoters and investors: guys like Rob McEwen, Cheryl Assan, Seymour Schulich, Peter Monk, and so on. So the value creation in mining can be staggering. And you know, I’ve seen stocks go from a penny to USD$5 or 10 cents to USD$20. And so when you do get it right, you can create amazing amounts of wealth. And we’ve touched on certain things to look for, but you know, don’t give it up, there will be more discoveries. And I can’t tell you today which one it’s going to be. And even if I did know it, I probably wouldn’t recommend it because I don’t know the criteria of the investors on your show here, but long story short; they will be young, they’re old. That’s the good news – there are some good young entrepreneurs coming up in mining. There are some properties that appear to have merit. You know, there’s every reason to be optimistic that there will be some tremendous wealth creation.

Matthew Gordon: But what’s your view? I mean, on one of your slides here, it talks about the sense of urgency here. And I think that if you look at the past few weeks, obviously with the market reset and then Covid-19, and you know, there’s always something, right? There’s always something. And I think with mining, money costs, we spend a lot of money and invest in digging holes and drilling holes to find out what we’ve got in the ground. And you know, time is money. So you know,  what did you mean when you talk about no sense of urgency in your presentation?

Chad Williams: For mining companies, time is never on their side because for operating companies, companies that have mines, they’re depleting their asset all of the time. And it’s a finite resource, right? So they need to continue exploring. And for exploration companies that don’t generate cash, every day that they don’t make a discovery, they go through their cash reserves and they need to either replenish those. So it’s not sufficient to be doing studies. It’s not sufficient to be you know, there’s got to be a tremendous sense of urgency for these mining companies to create value. That’s what I meant.

Matthew Gordon: Okay. So you would encourage investors to look to management who have got a path to monetization and an accelerated timeline in which to do that. I mean, that’s always a winner. Okay. And I guess that kind of comes onto one of your other points, which was around planning, which is not about just walking into the room and asking you for money and how they do that, but in terms of their ability to demonstrate how they are planning to build out this business of theirs, right?  So what are the things that you look for there?

Chad Williams: Well you know, in terms of lack of planning, we talked about basically underestimating the time to raise capital. I look for budgets or use of proceeds. I look for a target. It’s okay to dream. It’s okay to have an objective. Sure. It’s okay to say I am doing this because if I am successful, I will find 1Moz. And if I find 1Moz, it will be worth USD$50M. And if I find 1Moz, somebody will buy me. It’s okay to walk me through your thought process. As you say, drilling is not a plan. Drilling on a certain property is not a plan. That is an activity or a tactic. A plan is having a grand vision of, if I do certain things, then those outcomes may happen and therefore that’s how we make a lot of money.

Matthew Gordon: I guess it comes back to that point we made when we talked about earlier, which is something about having a business planning in place and being able to describe the moving parts, but what is the helicopter view here? We are going to do M&A, we’re going to acquire these money assets and we’re going to divest them by being on different continents or whatever, whatever their thing is. But our exit point is very clear. It’s here. Now working back, here’s how we get there. You’re looking for that kind of clarity?

Chad Williams: Yes. And everything can be distilled into one thing. And I know it seems overly simplistic, but again, it’s taken me 30-years to figure this out: the recipe for success in mining is to increase your NAV per share – your net asset value per share. So it’s okay to issue shares as long as your asset value, your net asset value grows more quickly. Okay? And why companies get into trouble is they either destroy asset value or they, or they issue an incredible amount of shares and therefore they dilute the asset value. And I would say the follow on is, if you get the NAV per share thing right, you need to then make sure that people are awarethat you’re doing that. There is no award for modesty or bashfulness in mining. There are something like 2,000 mining companies. So it’s a very, very crowded field. So you could be doing all the right things in your basement -nobody will care. You need to get out there.

Matthew Gordon: So here’s a question for you: if a company’s got cash, do you want to see them do cash buybacks or do you want to see them creating multiple dollar returns for each dollar they have in the bank? And how would they go about doing that for you?

Chad Williams: Whatever, you know, I’m on a bunch of boards and whatever a management team proposes to me, whether it’s drilling or building a mine or doing nothing, or a share buyback, I don’t care what it is, I will simply respond to them and say, is it NAV per share accretive? So for example, if we’re trading at a fraction of NAV, then you should be buying your stock. If you’re trading at a multiple of NAV, and Franklin Nevada was famous, Seymour Schulich was famous for that. I mean, guy is a genius and you know, every time he used to watch a stock, and every time it got to over two times NAV, he would issue securities. He would issue shares. And I said, Seymour, you don’t need the money. He had USD$1Bn of cash. He said, I’m creating value by issuing securities.

Matthew Gordon: Interesting.

Chad Williams: So, you know, it all comes down to that – we don’t have to overcomplicate things.

Matthew Gordon: So you’re looking for that one thing – that’s fascinating. Okay. I think people watching this will note that loud and clear. And then of course, you know, not all companies are in a lucky position to be cash-producing, or half cash, but they all have one thing in common: they’re burning through it, doing whatever they did, they hunkered down or drilling the bejaysus out of their assets. They’re spending money. So they got to have an eye to the future. And as you say, and again we referred to it earlier, don’t come trotting up saying I need some money by the end of next week. That doesn’t work.

Chad Williams: No, it doesn’t work. But, when I was running Victoria Gold, I used to market, and investors would say, well, you’re here looking for money. I said, actually, no, I’m not. I’m here to tell you what I’m doing and then I’ll be back in six months looking for money or a year or whatever. But I’m planting seeds to build trust and credibility so that you know what I’m doing. And don’t forget – these Fund Managers like yourself, Matt, I’m sure, or any investor in general, we do get up in the morning and we say we need to make money. Like you cannot underestimate the pressure that these fund managers are under to generate returns. They are allocated pools of money and they need to generate returns. So they are desperate for ideas.

Your job as a mining executive is to help them out and to demonstrate to them how you’re going to create value for them. And you’re not going to be a troublemaker. You’re not going to be a basket case. You’re not going to be calling them constantly for more money, and you’re over budget or you’re just taking too long. You know, put yourself in their shoes; they need to manage money. Managing money is an extremely difficult job. I wouldn’t wish it on my worst enemy. I mean, I’ve done it. And your performance gets measured minute by minute, day by day, week by week. It is devastating, especially in these markets.

Matthew Gordon: Yes, there’s nothing soft about it. The numbers are there every hour of every day, and people are looking at you and they know and they know. It’s true. It’s true. It’s not a bad job, but it’s not an easy job for sure.

Chad Williams: It’s very stressful.

Matthew Gordon: Very stressful. Okay. So let me flip this on its head, Chad, which is, you know, for retail guys, they should be asking the same questions that you, as a big fund broker, M&A guy, institutional guy asks, they should be asking those questions too. And we’re at least expecting to be told those things by the management team. And if the company can’t articulate those things, you would say that’s a red flag?

Chad Williams: Pass. Yes. You don’t need to buy any particular stock, absolutely. You know, other things that I look for are, as an investor I look for, so we’ve talked about things:  planning, you know, trust, we talked about transparency, simplicity. There will be another hot thing, whether it’s Uranium or Cobalt or Lithium. So do some research on the macro economics as well so that you’re prepared and you can have a discussion with management. And trust some experts. I would say one of the things as well as is, you can ask management what is their track record of success? If a group has made money in the past, odds are they’ll do it again. It’s not a certainty, but you know, if this person is, say they’re 50-years old and they’ve never done anything in their life of any note, never won any awards, or if they’ve never been in the top of their class, or won the Olympics or whatever, you know, I’m making things up here, then odds are they’re going to have a mediocre performance, right?

Matthew Gordon: Yes. We see that a lot. We see that a lot. Okay, Chad, we should probably wrap it up there. I mean, we’ve trotted and skipped through a lot of things there and I’ve enjoyed that, but it sounds to me it’s like as you say, it’s taken years for you to kind of distil it down into those simple headlines. But these are very basic things that you need to, we need to understand, of any one, any group or any company to be able to say, here’s my hard-earned cash – I trust you. I’m going to give this to you because I know you’re going to make me rich and I know when by.

Chad Williams: Or at least you are going to give me the highest odds of me getting rich. I mean there’s no certainty; there’s hope. There’s no guarantee. And you know, if I lose money, I only get angry if people have misled me or have failed to execute on their plan, or you know, like stuff happens, you know; look at the current economic context. Can I be upset at a CEO because it’s stock is down 50%? It’s not his or her fault. But what are you doing to mitigate the risks? What are you doing to preserve cash? Or even, what I prefer is, what are you doing right now to be aggressive? What are you doing to use this as an opportunity? Because most people are in the foetal position right now. Very few of us are very aggressive.

Matthew Gordon: You’ve hit the nail on the head for me; we’re having these conversations this week and last week with companies; I think the companies who are getting out there, they’re getting on the front foot. You’re talking about getting on the front foot, right? You’re saying, I want the biggest share of voice in this marketplace because the companies which don’t have anything, have gone quiet, and they have gone quiet because they’ve got nothing. It’s very hard under this severe spotlight to say anything believable about your company. When there’s money sloshing around, it’s easy. Everyone thinks everything’s going to make money for everyone, right? And we’ve seen companies go into hiding, not just into the foetal position. They’ve gone to a foetal position hiding behind a wall in the dark. They have gone. And I’m interested in hearing from the companies who today are confident enough to say, look, the market is the market, but here’s what we  acknowledge that. Here’s what we know. Here’s what we’re going to do, and this is why we think we will eventually you know, when, or maybe when is a strong word, we will make it through this, so trust me and trust my team. Those are the guys I’m listening to in the next, you know, last week, this weekend and next week. The ones that have disappeared; that tells me something. It tells me a lot.

Chad Williams: Yes, yes.

Matthew Gordon: Now, I also heard that you are joining the board of RNC Minerals – is that true?

Chad Williams:  I did join the board on January 1st. Yes.

Matthew Gordon: Well done. Well done. How are things there?

Chad Williams: Things are, things are good. You know, talk about a group that’s active and I’ve been very, very pleased. I’m obviously on the board, so I’m preaching for my own company here but they’re doing well operationally. You know, they had the fires, which was a very difficult situation for them. So they dealt with that properly. Very well in fact. Now, with the virus, they’re dealing with that as well. They have a very good operating team in Australia. We have a lot of cash and the reason I joined RNC is that I was very close as an analyst to that company, in those days it was called Goldcorp. I mean, it’s morphed; Goldcorp had Red Lake, and Red Lake in those days it was the Arthur White mine. It was a very low quality mine in a camp, in an area that had very good quality mines, and nobody could figure out why Arthur White was such a dog. And then lo and behold, the geologist had a theory and he said, poke a hole here and you’re going to find some high-grade. And he found an amazing, a very small but amazingly high rich ore body.

And I find that Beta Hunt has many similarities, there is no guarantee of course, but it reminds me of the old Arthur White Mine where Beta Hunt was you know, a lower grade Nickel mine in fact, and had some Gold in it. And then all of a sudden we’re finding extremely high grades of gold, and it’s a different population of gold. And I don’t know what it means in the future, but I do find it very interesting. Yes. I want it to be associated with that.

Matthew Gordon: Well, we’re talking with Paul Hewitt next. Yes, the new guy. Well he’s not new anymore. It’s been 8, 9-months. But hell of a turnaround story as well. It’s been fascinating. We’ve been following it since the middle of last year. Great, great story.

Chad Williams: That’s a good example of, he’s done everything right. He’s added NAV per share and yet the stock is a quarter of what it was a year ago, you know? And so it’s frustrating for management teams when those kinds of things happen, but it’s not his fault. He’s done, in my opinion, he’s done everything right.

Matthew Gordon: It’ll get there. I think the good news for them is they don’t need to go to market for cash. They’re producing positive cash flow. And there’s a bunch of, I think, genuine catalyst about; you know, everyone talks, ‘oh, there’s a catalyst event’  and they come, they go; no one cares. But in their case, I think there’s a couple of biggies just around the corner. So yes, we’re going to catch up with them next week and talk about their end of year report.

Well, like say, Chad, thanks very much. I do appreciate that. I mean, it’d be lovely to talk to you again. If you ever get a moment from your busy schedule, and it gives you a view of the markets and what you think’s going on.

Chad Williams: And I’ll be I’ll be shaved and…

Matthew Gordon:  Oh, no way. Don’t do that. Well, hopefully you’re not still in your cabin there in 6-months, right? You’re going to go crazy.

Chad Williams: Come and rescue me.

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.

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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.

Nickel Class 1 & Class 2 – Why Does It Matter For Investors?

Nickel is a commodity that has got investors raising their eyebrows. Diverse properties like a high-melting point (1453°C), resistance to corrosion and oxidisation, ductility, usability in alloys and an increasing significance to the EV market have turned nickel into one of the most fashionable investment opportunities. Investors in the nickel space likely already know about the two classifications nickel can find itself falling into, especially given the massive amount of coverage it has had from investment news outlets and individual strategists. However, for those who haven’t had access to the right information yet, here’s a quick breakdown.

Class 1

Nickel products that fall into Class 1 comprise of electrolytic nickel, powders and briquettes, as well as carbonyl nickel. These products are typically LME deliverable and have a nickel purity of a minimum of 99.8% Roughly 55% of total nickel mining output relates to Class 1 products.

Class 2

Nickel Class 2 is a group that comprises of less ‘pure’ nickel products. Examples of these are nickel pig iron (NPI), a version of nickel created using low-grade laterite ores and blast/electric furnaces, ferronickel, nickel oxide, utility nickel, Toniment, mixed hydroxide  and other <99.8% products. Both have a reduced nickel content and are often utilised in stainless steel and alloy steel production, where a high content of iron becomes beneficial. Class 2 products contribute the remaining 45% of total nickel mining output.   These products are not LME deliverable and must be sold to an end customer

So, what’s the history?

SOURCE: Trading Economics

After looking at the behaviour of nickel’s spot price, it is not hard to see why it has been branded as a boom/bust metal that moves in giant super-cycles.

The reasons behind this were touched upon in a recent article by a Crux contributor, stating that a primary factor behind nickel’s ascension to a high of $54,000/t in May 2007 was the rapid expansion of Chinese demand in the 2000s. However, this soaring price, driven by the need to ration available supply to meet demand, resulted in nickel becoming a victim of its own success. As prices rose, China began seeking more affordable options, thus turning to 200-series stainless steel (1-2% nickel) rather than 300-series stainless steel (8%) nickel.  As well, it began to pursue alternative sources of supply leading to the widespread production of nickel pig iron (NPI) in China using ore imported from Indonesia and the Philippines.  With this compression of demand and new source of supply, spot prices fell through a trap door.

Class 2 nickel rose to prominence at a time nickel was performing well in the market, but the consequential oversupply generated by tonnes and tonnes of NPI flooding the market created a supply/demand imbalance, crippling the spot price for many years. Nickel ore export bans from Indonesia, and proposed bans from the Philippines, didn’t help in the price discovery department.

Nickel’s most recent low was in February 2006 (do you mean 2016 ?); (NTD: there was one in last 5 years that got pretty close to the price of US$8000/t left 80& of the industry in a negative cash flow.

There has been a reduction in supply of over 200,000tpa (primarily Chinese NPI) in the last 3 years, and an increase in worldwide demand, driven by the EV narrative, has aided the nickel market in its recovery.

What does all this mean for you NOW?

If you have already settled on nickel as a potential investment opportunity, you likely have a bounty of good reasons, be that a projected 782,000t per annum increase in total nickel demand by 2030, or LME forecasts placing nickel’s spot price at US$17,000/lb (in constant terms) by 2024.

I think it’s very important for investors to not get caught up in that [Class 1 Vs Class 2] particular discussion.

The truth of the matter is that Class 1 and Class 2 nickel, as concepts, are mere distractions for investors, because laws of supply and demand and the Chinese ability to quickly respond to any market arbitrage opportunities,  will render the chemical differences fairly irrelevant in an investment context. Instead, total tonnage of nickel should be what investors are looking at today. The division of Class 1 and Class 2 simply doesn’t matter that much to investors anymore.

It’s important for investors to understand why and how Class 1 and Class 2 nickel have found themselves conglomerating into a singular quantity of nickel supply. In a recent interview with Crux Investor, nickel market commentator, Mark Selby, weighed in.

Class 1 & Class 2 Debate. Should It Matter To Investors?

Mining

There are two primary types of nickel deposits:

Nickel Sulphide

Expensive to mine, cheap to process.

Historically, mining nickel sulphide required underground mining in increasingly deep (and more expensive) mining operations . Nowadays, even deeper underground mines are utilised, with only a handful of open pit operations , but these are typically expensive to construct and operate. In 2018, 2 new projects were commissioned – Glencore began construction on their Onaping Deep operation which will cost $US[800] million and won’t fully ramp up until 2023

However, producers then make a concentrate from the sulphide ore,  upgrading the material from anywhere from 0.3-3% nickel to 10-15+% nickel for relatively little additional cost. This process is relatively uncomplicated and inexpensive; it needs to be smelted, refined, and then the process is complete.

Nickel Laterite

Cheap to mine, expensive to process.

Laterite projects are much easier to mine because the material itself is rock that has been converted to dirt over time, and as part of the process nickel and cobalt becomes concentrated in the soil. All mining companies have to do is dig up dirt and ship it off; this is a ubiquitous practice in Indonesia, amongst other regions.

However, this is where the simplicity ends. The processing of a material with complicated mineralogy requires significantly more time, technology and money. Costs include the large amount of electricity to melt the laterite to create NPI, or energy in the form of acid to break bonds, liberate the nickel/cobalt and create a US$1Bn+ HPAL process.

Reality

Individual nickel classes aren’t the main thing investors should be focussed on.

  • Companies can take intermediates of nickel sulphide and create a wide range of products, such as NPI and ferronickel (exemplified by the roasting process at RNC Minerals’ Dumont asset).
  • Nickel sulphide can also create finished nickel products via a smelter and refinery
  • EXACTLY the same can be said of nickel laterite. While the majority of it is currently used for NPI, there is no reason the material can’t be processed, refined and used for a wide range of alternative purposes. Specifically, laterite can be converted into finished nickel and cobalt products that can be used for the battery sector. Several companies are doing this right now, and as the industry evolves, we only expect to see this cycle grow.

Therefore, it is crucial for investors to avoid allocating too much focus to this debate. Chinese companies will likely build many facilities to process intermediates, while junior mining companies may also go down the same route, by having their own processing facilities on location to process products.

As we continue down the road of the EV revolution and the quantity of nickel in batteries increases, the specification for the sulphate will continue to become stricter. Therefore, building a processing plant to create sulphates appears to make little sense, because it would require continual improvements in order to keep up with progressively restrictive customer requirements.

Instead, it is likely companies will focus primarily on making high-quality intermediates, because the market will exist in the future for such materials as the nickel processing infrastructure continues to develop. This is further evidenced by the value of nickel sulphate premiums falling from c.US$2,000 two years ago to zero today. There are always lots of moving parts to different investment classes and commodities, but the message from industry insiders appears to be clear. Investors need to keep their eyes on the prize and view the market holistically the majority of the time. Reviewing things in microscopic detail may sometimes become more obstructive to gaining an overall view of a situation.

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.