Bannerman Resources Ltd.
- ASX: BMN
- Shares Outstanding: 1.06B
- Share price A$0.035 (16.07.2020)
- Market Cap: A$37.06M
Uranium Market Commentator & Bannerman Resources (ASX: BMN) CEO, Brandon Munro, calls in for our weekly catch up about the world of Uranium and Uranium investing.
Based on questions that were sent in by viewers, it is clear that there are a lot of new investors coming into the uranium ecosystem. So Brandon and i cover a little bit of old ground but with new data. We start with the relationship between spot price and term-contract in today’s environment. We also look at the effect of supply and the effect on Russia v US tensions. Does Russia care about the Russian Suspension Agreement. Should they?
And we get his thoughts on the timing of the US utilities coming back in to the market to help drive equities. Are US uranium juniors without a cash buffer getting nervous.
- 3:22 – How is Spot Price Determined
- 6:49 – Relationship Between Term Contracts and Spot Price
- 10:43 – Importance of Kazakhstan: How Long Can They Withhold Production
- 14:57 – Utilities Globally: How Do They Work?
- 19:49 – RSA: Why Should Russia Care About the US Market?
CLICK HERE to watch the full interview.
Matthew Gordon: Brandon Munro – how are you doing, sir?
Brandon Munro: I’m well, how are you, Matt?
Matthew Gordon: All good, well actually, I am not all good; my 12-year-old took me swimming for non-stop lengths of the pool, then made me tread water for 5-minutes, then made me do pull ups and I can barely move. I am incapacitated like the old man that I am, and I can’t sleep. So that’s me. Woe is me.
Brandon Munro: Oh, geez. That’s tough. Were you able to do the pull ups all on your own or did you need to get pushed a little bit?
Matthew Gordon: the problem was I did do them on my own and I’ve literally just ruined my back. That was 3-days ago. Too old. I’m too old. Let’s get into something I can manage, which is asking questions. It’s another week in the world of Uranium and this week we would change it up a bit. We have got loads questions coming in every week, which people want to put to you. We have put some down on paper at some broad headings. we might do some more next week because there’s a lot, even if we do consolidate them to broad headings. You’re ready for this? You’re okay?
Brandon Munro: Yes. Sounds exciting to me.
Matthew Gordon: I’m going to start with an easy one, which we have covered off in the early days, but there’s some people who don’t necessarily have time to go back through the series, but let’s just talk about an easy amuse-bouche for you, which is, ‘how is spot price determined?’
Brandon Munro: Okay, well that is a nice warmup one, isn’t it? The first thing to understand is that it is not like a clearing house spot price that we see in certain other metals. It is a reported spot price. So there’s a handful of reporters, and the best known of them are TradeTech and UX Consulting, and what they do is they basically keep their finger on the pulse in the best way that they can to understand who is buying what, in what volumes at what price. The first limitation is it’s not going through a clearing house or an exchange. There is some capacity for partial accuracy. And that has been improved. It’s been improved first of all, because there is a quoted futures exchange, which gives, a more accessible level of information to investors. And that’s a NYMEX futures exchange, which you can look up, say on bar chart.com.
And then the other thing is we have seen the emergence of traders who are very transparent, such as Numerco. So well-worth looking up Numerco, following them on Twitter, and they have really had a positive impact on that level of transparency.
The second thing to understand about the spot market is it’s not an immediate delivery market. In fact, spot can be anything up to 12-months delivery and it’s still categorised that way. So that is much to the irritation of some of the larger producers, the Cameco’s, KazAtomProm’s, for example, who want to move this market to a more realistic, immediate delivery or short-term delivery market. The other thing to understand is, as investors we see the price, but it does differ depending on the delivery point. The spot, or the price that’s quoted for say two-week delivery at Cameco might be different to the price that’s quoted for 2-week delivery at COMERX, for example, or in the US. And we have seen that play a big role just recently because of a disruption in both conversion and Uranium coming out of COVID, we have seen a lack of storage capacity at COMMEREX in France, and so a very big swing between what is being paid for delivery in Cameco, the Blind River and COMEREX in France. Normally the location swaps in this sector have been very, very fine, but that’s now changed, temporarily, no doubt, but that’s a big swing and a big arbitrage if people are able to move material, move in the sense of the location swap at the moment. They are the key downsides of what we have got at the moment we spot. It’s lack of accurate transparency. It’s a multitude of different delivery forms and locations.
Matthew Gordon: For people coming into Uranium, investors coming into the Uranium space and looking at it as a potential investment, that’s the first thing they look at. They think of, like other commodities, you look at the spot price and that determines the market. Once you move slightly further up that knowledge curve, you start to appreciate that. And in fact, term contracting with long-term contracts have a more significant role to play. Let’s just try and understand, if you may, the relationship between spot and term-contracts.
Brandon Munro: Yes, very good question. Particularly for people coming new into the sector Traditionally, this business was done almost entirely on long-term contracts between the utilities and the big producers. And that situation continued well into 2004, 2005. And the spot market such as it was, was really used for settling, say, overproduction by a mine that couldn’t be delivered into contracts or sometimes buying back production if there was a disruption or for some reason they had oversold who got over called on the production limits in their contracts. Now what happened in the last Uranium boom is financial players came into the sector. There was a huge increase in volume generally, and that made the spot market fulfil a number of other functions, not just that form of settlement of overs & unders, under contracts.
Then what we saw after Fukushima was a sustained period of low contracting, relatively speaking, and much higher spot volumes. So, instead of spot accounting for say 5% to 10% of the movement of material in the market in some years it’s been as high as 50%. We have seen an increased role of traders; there’s the concept of churn in that spot market. It’s not necessarily one pound being pulled out of a mine and sold to a utility, but that pound can be churned many, many times to create additional volume. But what we have also seen is the emergence, in particular of Kazakh production, a fair of which went into the spot market until fairly recently. So that’s important to understand, as well as you’re taking a little bit of an introductory trip into this sector, the important news is Kazakhstan has stopped selling into spot. They haven’t sold into spot since, the beginning of 2018. So no longer is there that pressure. And if we now bring that right back to a contemporary setting, one of the impacts of the COVID disruption in Kazakhstan is that at least one of the, let’s call it major culprits who sell their mined material into the spot market, derive the majority of that material from their joint venture in Kazakhstan with KazAtomProm. So even though KazAtomProm, isn’t selling into spot, their joint venture partner was.
So what we’re likely to see coming out of COVID disruption is both an increased demand, particularly if KazAtomProm is forced into the spot market to compete with Cameco and other producers, but also a lot of the supply will be cut off at the needs because those parties who traditionally sold their joint venture material into the spot market can no longer do that.
So, term contracts, whilst there’s a low relative volume of term contracts at the moment, they are such an important part of the risk mitigation and supply security that utilities rely on in this business, that they will come back. Spot probably won’t go into the dormancy that it was in the 2000, but its relative position will reduce as the importance of term contracting increases.
Matthew Gordon: Let’s move further up that knowledge curve. We talked last week at length, and possibly the week before actually, about the importance of Kazakhstan and KazAtomProm to the Uranium market. Kazakhstan represents about 40% of production globally. KazAtomProm has 24% of that. They occupy almost the entire bottom quartile of the cost curve there. They are very, very important. People new coming into this, recognising that some of the questions we have had are how much longer can KazAtomProm hold off from getting into production; either forced or unforced, and how can they mitigate that?
Brandon Munro: Okay, so let’s be clear on what we’re talking about: KazAtomProm and Kazakh production is still continuing and that’s because before their 7th April announcement that they were needing to curtail activities, they’d already done wellhead development and acidified their in-situ recovery wells. The acid that they pumped in in January, February, March for example, is still producing Uranium today. It is starting to deplete. It’s becoming less potent, if we can put it that way, but nonetheless, they are still bringing solution up to the surface and extracting Uranium. What we’re really talking about here is not production per se, but their ability to start again with the drilling of these extraction wells and the pumping of the acid in so that they can allow it to acidify the ore and start bringing that solution up. And finally, the point to understand here is, there could be a gap where the current production from January, February, March acidification tapers off to such an extent that there is effectively a full, a significant or majority break in production.
To answer your question, you’re working in scenarios always with this type of thing. What cause KazAtomProm have said publicly is that they will start slowly to recommence wellhead development from the beginning of August. And now we are all waiting for their third August quarterly update, because in the meantime, and since they gave that guidance, the lockdowns in Kazakhstan have been extended and there’s an awful lot of commentary and news flow coming out of Kazakhstan that things will get extended again, but be that as it may let’s work with what’s in the public domain right now. That wellhead development will be slowly reinitiated from August. I read that, to me, that the most optimistic scenario we’re dealing with here is that they would spend, let’s say 4 to 6-weeks slowly mobilising, and the wellhead development itself, in the most optimistic scenario, would be running at full steam by, let’s say mid-September. That will then take some time, several weeks, and it’s not like they can play catch up across all of those different 13 mine sites. And then there’s a process of acidic acidification and in the optimistic scenario that would all take place before the winter sets in and then they would be back to normalised solution recovery by, let’s say November. And we would still see the dip in production because of that lag effect. And that dip would still carry on into 2021 to an extent. But you could probably realistically see them back to normal production levels by, let’s say the second quarter of 2021. That’s the most optimistic.
Matthew Gordon: Which answers the question that we were sent. That’s something that people are going to watch very, very closely: what will KazAtomProm do? What will Cameco do? The 2 big players in the marketplace.
Let’s move it forward. So, again, for all levels of ability watching this show, it is quite clear from the questions that are sent in, and we need to make sure that everyone is comfortable and learns with us. We’re all moving forward towards the same place. And the next question is around, now that we understand some of the players a lot of people are recognizing that US utilities are very important. They are important because they represent 25% of the world’s global demand for Uranium. And the question is: do different utilities from different countries have a propensity or a favouritism to go to certain countries. So, do the French utilities always look in Africa? Do the US utilities always favour Canada, for instance? How does it work when you are a utility buyer?
Brandon Munro: Well, the answer to that is one of those classic yes, and no answers: if we talk about the French, for example, Électricité de France is the world’s largest utility because it is responsible for a 75% of France’s total electricity demand. And so EDF have had a long-standing relationship in Niger, which has been effectively backed by the French government. It’s a bilateral relationship, not purely a commercial one. They have derived a large proportion of their Uranium from Niger, but they’re also in a joint venture in Kazakhstan. They have production coming of Canada in joint venture with Cameco. And because of their comfort in Niger, they have also been happy doing exploration and development work in Namibia, for example, as well as Australia and elsewhere.
And they have been rationalising in recent times, trying to reduce the expense of their Uranium business. And there were a couple of spectacular examples of that, but that’s a story to tell another day. Now, they do also have trading businesses. They do also buy and sell in the spot market and to contractors and with others and so on, but they are something of an outlier.
Then let’s look at China: the Chinese model is a lot closer to the Orano/EDF model. They are buying heavily in the market and they have been for quite a number of years, back all the way to 2006. They also have a strong preference to deal in Namibia, and that’s for a range of reasons that would include the preference that Western companies would have in Namibia. And also the fact that because of the extent of their investments in Namibia, they are obviously able to have a relationship with the local Namibian community and the Namibian government that gives them a lot of comfort.
And one Chinese utility, CNC has the Rossing Uranium mine, and a 25% interest in Langer-Heinrich, which is the Paladin energy mine that’s on care and maintenance, and the other Chinese utility CGN owns the Husab mine, that they paid USD$2.4Bn for from extract resources back in 2012. The 3rd Chinese nuclear utility, SPIC has not yet acquired a mine in Namibia, Africa or anywhere in the world.
They’re the 2 major outliers. Then you’ve got the US industry. And as you’ve said, they are important. They still comprise roughly 25% of Uranium demand around the world. What happened is back in the late seventies, early eighties, a few utilities clubbed together to buy mines and got their noses bruised and broken, doing that. US utilities buying mines and operating mines is not a very popular thing at the moment and it is a bit frowned upon. It’s all commercial relationships and they buy across the board. And that’s all publicly available. You can go to the EIA report that came out a couple of months ago. You can see that the US utilities buy from Canada. They buy from Australia, they buy from Namibia, they buy from Kazakhstan and they buy from Russia. And there is a propensity to buy it from closer allies, such as Canada and Australia, but there aren’t any explicit limits other than the Russian Suspension Agreement on how much Uranium they can buy from anyone else.
Matthew Gordon: Well, that leads nicely onto a topic we discussed last week and a few weeks ago as well, which is the RSA (Russian Suspension Agreement). We had Dustin Garrow on earlier this week. Very well-known character, a Uranium consultant to many in the industry. And he’s been around the block a few times and seen the highs and the lows. He was talking to us about the RSA agreement, that Russian Suspension agreement. And it’s a very important topic, which the US government is in the process of making some decisions on. And the expectation is that, well, you talked about this last week; the decision needs to be made before the end of the year because we’re not quite sure what will happen if they don’t.
He put a very interesting thought forward, which is, at the time that the Russian Suspension Agreement was put together, back in the 1990’s, it was a very different world. There were very different demands in terms of the volume of Uranium used. And that Russia felt the US market was a very important to get into, and obviously the US didn’t want them flooding the market either for a variety of reasons, national security being one of them. Dustin thought, or he put this forward, which was, why should Russia care now, in today’s environment, when there is a much bigger demand story, there are new markets why keep banging down the door of the US market?
Brandon Munro: Well, that is an interesting question. And Dustin is certainly the guy to come up with those questions, with have such a vast amount of experience in the industry, including back in the old days when there was a bifurcated market with Russian material and non-Russian material and what was allowed into the US and so on. He’s got some insights from those days that not many people have got anymore. Here’s the thing; first of all, the Rosatom group of companies are extremely effective in this industry. They build plants on time, on budget, all of the time. They are in every aspect of the nuclear fuel supply chain, and they do it well. And they pride themselves on their delivery. They would not want to be the instigators of any breach of supply. They wouldn’t call force majeure. They wouldn’t withdraw unilaterally or voluntarily, but Dustin’s question and comment probably goes more to the situation where they are not allowed into the market by US government or by negotiations between the US and Russia, and how would they react? And Dustin does make a good point in that for Rosatom to lose their access to the US market with their enrichment in particular, sure, it would be a shame for them, and it would affect them, but it wouldn’t be a disaster. Russia has got very significant demands on Uranium for both its domestic requirements, but also its export program. And if they were left in a hole with their capacity for enrichment or SWU, they could redirect that capacity at re-enriching tails and other forms of secondary supply that would still have a happy home in their Uranium requirements now and going forward. It wouldn’t be a disaster for them. It would have an impact, however, on US utilities and depending on how far you want to go down this in terms of geopolitical posturing and how much of a conspiratorial approach you want to take to this, it would have the effect of putting a splinter in the finger of the US nuclear fleet, because it would make their enrichment quite a bit more expensive. The utilities would then have to very quickly recover that enrichment from non-Russian sources and non-Chinese sources, and there isn’t an awful lot of that. It would have two effects on the Uranium market as well as increasing the utilities fuel costs and their efficiency of producing energy.
The first effect on the Uranium market is it would quite quickly absorb the excess capacity in the non-Russian enrichment sector, which means less underfeeding, which means less secondary supply of Uranium that can make it into the market. Now, the second effect that it would have is, let’s say that we saw spiralling SWU prices. SWU is a separative work unit, which is the way that enrichment is priced. A spiralling SWU price would create an incentive for not only underfeeding to stop, but if Uranium is still relatively cheap, what the US utilities could do is they could overfeed. In other words, they pay a lot less SWU and they buy a lot more U308 so that they can push a lot of U308 through at higher tails assays. And for people new to this, probably the best thing to do is to go back to some of our discussions where we really talk about the nuclear fuel process and the whole cycle as it relates to conversion and enrichment. But for everyone who’s not coming here for the first time, that could create a situation where we see increased demand from the US utilities, and in the timeframe that we’d be talking about, what that probably means is very accelerated draw down on existing inventory of U308 and UF6 to fill that gap. That will affect different utilities in different ways: the utilities who counting more heavily on Russian enrichment would find themselves needing to act more quickly and more decisively. And of course, for someone who might not have been concentrating as much, this is a speculative scenario that we are answering. This is a scenario where there isn’t an agreement reached. There isn’t an act of Congress that comes to a resolution where there is a limitation, and the existing currently suspended dumping investigation resumes with the imposition of some very serious tariffs onto the Russian industry, and they decide, look, that’s just not worth it. We’re going to withdraw
Matthew Gordon: That’s a very interesting scenario that you’ve described, because it would suggest it, one could argue that the US can’t do without some Russian supply. And if that is the case, , what is the number? Is that 20% number reasonable? Because, obviously, if the price goes up for utilities, it’s not significant in the scheme of the total investment in terms of a reactor, but it’s significant in terms of ongoing costs, given that the capital expenditure is a sunk cost now. And when they’re competing against gas and renewables, it’s meaningful to them. But the problem has been that some utilities are not sticking to that 20% number. Isn’t that just a case of, so why are we focusing on the Russians and not on the utility buyers who are not regulated or not sticking to that 20% number?
Brandon Munro: Well, it’s a global number. So, presumably, those utilities were looking to get out ahead of each other and speculatively scoop the cheap material away from each other. And I guess they’re just taking their chances on the extension of the Russian Suspension Agreement and their material being available to them.
Matthew Gordon: Can I just clarify the terminology: when you say global, you mean a global US utility number?
Brandon Munro: I beg your pardon. Yes. It’s an aggregate number amongst –
Matthew Gordon: So, first come first served is the attitude?
Brandon Munro: Yes. But your point, what I take from that point that you make is, it’s not going to be a total disaster for the US utilities, but it will increase their costs and it will increase their cost quite significantly. They pay about 20% of their operating costs as the total nuclear fuel. Now, that’s your U308 through to your conversion, through to your enrichment, your fabrication and storage and so on. But enrichment at the moment is a relatively minor component of that. But if you saw a market suddenly rebalance because all of the Western enrichment capacity is removed by US utilities filling the gap and putting their finger in the dyke, well, then you’ll see proper price discovery and probably market prices in SWU, which will increase that little component that’s enrichment and possibly have a 3% or 4% increase in the cost of electricity delivery for many of those utilities.
Matthew Gordon: Brandon, we are going to switch over to the Crux Investor Club section for Crux Investor Club members. We have got 2 quite good stories, this week; quite insightful, and impactful in terms of investment decision-making. I’m going to do that. Thank you very much, everyone for watching the show this week.
Brandon Munro: It was quite fun answering all of those random questions. Normally with our weekly chat, we have got like a nice thread and I’ve had a bit of chance to think about it and so on. And so, yes, that’s fun.
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