- ASX: BMN
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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.
- COVID-19 Affecting Uranium Supply: The Impact and Measures Taken in Australia, Namibia and Other Countries
- Kazatomprom: What’s Happening in Kazakhstan?
- Conversion and Enrichment: An In-depth Look
- UF6 Supply: How Much Have We Got Left?
- State of EUP and Its Indications
- LTC Pricing: What’s the Process that Leads to Publication?
- 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.
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