Brandon Munro #17 – US Utilities Want Russian Uranium (Transcript)

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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.

We Discuss:

  1. 3:22 – How is Spot Price Determined
  2. 6:49 – Relationship Between Term Contracts and Spot Price
  3. 10:43 – Importance of Kazakhstan: How Long Can They Withhold Production
  4. 14:57 – Utilities Globally: How Do They Work?
  5. 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

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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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.

Dustin Garrow #05 – Mid 2021 before Term-Contracts Start Being Signed

Interview with Dustin Garrow, uranium market commentator.

What did uranium-expert Garrow have to tell us about the world of uranium this week? The US House Appropriations Committee has stated that it will not approve the funding of the $150M uranium reserve, though some uranium bulls think this judgement will be revised once the DoE can answer some of the committee’s pressing questions about how exactly the reserve will be implemented. While there have been meetings between uranium producers and the government representatives for years, they’ve not been able to push this over the line. It’s clear the government was already aware of many of the issues plaguing the uranium sector, so this decision isn’t impulsive or surprising, though it is very disappointing for uranium juniors who are crying out for a light at the end of the tunnel.

A red flag on May 11th should have been a clear indication for uranium investors that this was how things would pan out: the Nuclear Energy Department at the DoE stated that “within a year they hope to have (their) procurement process clearly delineated.” It was clear the conversations were taking the judgement well into 2021.

Has technology and R&D been a distraction? The US government has been focussing a lot on research, SMRs, and funding export reactors of late, and this has potentially taken much-needed attention away from a potential uranium reserve. Garrow thinks a lot of these issues are geopolitical, with the US “diligently” trying to fund its reactor sales outside of the country and penetrate the export reactor market. Expect some more challenges yet from China and Russia. And a lot of under-cutting. Not sure too many commercial companies are willing to take the risk.

The uranium producers are absolutely down to their barebones, and while Energy Fuels has stated it will ‘produce’ c.200,000lbs of uranium this year (via recycling, alternate feeds, by-products, spot purchases, etc,) this comes from the reclamation services and not mining.

Matthew Gordon talks to Dustin Garrow, July 2020

The Senate version of the appropriations bill continues to provide hope to North American uranium players. There is optimism that this version of the bill still contains the US$150M reserve. He thinks this may well be retained come the end of the process.

The decision regarding the Russian Suspension Agreement (RSA) has been pushed down the road to December 2020, until after the US elections, at which point it is likely to be extended. Is this the utilities’ lobbyists at work? Nice cheap Russian uranium is the prize. But it will come at a cost to US uranium producers if not resolved. The election is just that: an election. Garrow doesn’t think it will make too much difference to the uranium sector whether the Democrats or Republicans claw their way into the Oval Office. Bringing back manufacturing into the US has been a Trump doctrine since day 1, but Biden is now onboard too.

There is a broad spectrum of opinions around the RSA. Through the Ad Hoc committee, the US producers are pushing hard to have the agreement expired so that the limits would be lowered albeit in a staggered manner. Utilities would argue that the current levels are ideal. Enrichment contracts have been signed recently for post-2020, and some of them have been contracted for more than the 20% in anticipation of the limit on Russian enrichment going away. These have been “price suppressive” according to the Department of Commerce. They have recommended the agreement should be lifted and the underlying antidumping investigation from the 90s should be reinstated, placing very high tariffs on Russian enrichment. On the other hand, the Russians might not want to put up with another 10-15 years of paperwork and auditing for what is, essentially, a very small part of the global enrichment market (3Mlbs/yr in America, c. 53Mlbs/yr globally). The Russians have been held at the 20% level since conception, and they have publicly sought a rise to 30-40%. If it doubles to 40% and 6Mlbs, Russia might start being interested again. At some level, commercially, it would make sense that the Russians walk away, especially considering the anti-Russian sentiment that is currently rife in the U.S. administration. On another level, they would lose a relatively cheap lever in off-book negotiations with the US govt.

There is not enough inventory in the market right now because the more mobile, lower-priced inventory is being depleted, and COVID-19 has massively impaired production, especially for KazAtomProm’s partners. The volumes are down but the price has held relatively stable, which Garrow thinks is a positive sign. What a lot of uranium investors don’t realise is how long a process restarting production is; it is not just a case of flipping a switch. For example, KazAtomProm has completely halted its well-field development programme. Its production is coming from existing well-fields. Once it is safe to go out and mine uranium, Garrow expects it to be into the middle of 2021, even if the ramp-up starts before the end of 2020, until we are back to some semblance of supply normality.

In order to press the restart button, long-term contracts will be needed. Which makes Cameco’s decision to restart Cigar Lake intriguing. Have they negotiated term-contracts with utilities? If so what are the terms and when will the market find out. That would set the cat amongst the pigeons. For everyone else though, everything appears to be contingent on contracts next yet signed, and the solution could eventually take a phased approach: if KazAtomProm and Cameco are satisfied and start ramping up, then the producers that are one step down the ladder. We could be well into 2022 before some of the newer want to be producers get a shot; even if their projects are close to shovel-ready, there is plenty of work to do regarding financing the CAPEX, the multitude of licences and operational to knowhow put in to action.

There is only one nuclear conference this year which is “hanging by its claws” in Las Vegas at the end of October 2020, and while 2020 had originally looked like a year when utilities would be much more active, it could well take until well into next year for any kind of meaningful market engagement. Very few people are travelling to visit the utilities right now, and these sorts of deals simply aren’t going to be carved out over the phone. It doesn’t look like there is going to be a rapid take up in term-contracts. It could be very gradual, and Q3/21 is the date we’ve heard be earmarked by many experts. Uranium price discovery may start slowly this year but getting to levels which uranium juniors need for commercial decision making is some way off yet.

There has been a surge of M&A in the space recently, as North American uranium miners target Energy Fuels’ White Mesa Mill to toll their uranium. Garrow states that uranium companies need multiple mines to get anywhere near the volume needed to be a player that interests the utilities. And as for the assets that are being bought up, Garrow just sighs. And when Garrow sighs, investors should too!

What did you make of Dustin Garrow? What questions would you like us to ask him in the future?

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.

Energy Fuels (NYSE: UUUU) – Old Timers said, “You Own the Mill, You Own the District”

Energy Fuels Inc.
  • Shares Outstanding: 118M
  • Share price US$1.50 (01.05.2020)
  • Market Cap: US$176M

Energy Fuels is America’s leading producer of uranium. The company’s portfolio is unique within the North American uranium space, with more production capacity, licensed mines, licensed processing facilities, and in-ground uranium resources than any other US uranium producer. While it is small on a global scale compared to other companies, it remains a significant player.

Chalmers is quick to point out that they are focussed on uranium. That said, the cash flow opportunities available to them are not reliant on mining uranium. The company offers up some diversity of revenue in the form of vanadium production, uranium recycling/clean-up operations and REE processing (rare earths); more on that later.

We’ve spoken with Chalmers on many occasions and the uranium picture has become more and more bullish each time. There have been numerous catalyst moments in recent months, predominantly revolving around the destruction of uranium inventories and the tightening of production generated by COVID-19 lockdowns the world over. We were interested to hear what Energy Fuels’ latest update would entail.

Matthew Gordon talks to Mark Chalmers, July 2020

Let’s start with the commercial side of things. After a year spent strengthening its balance sheet, Energy Fuels has told holders of its floating rate convertible unsecured subordinated debentures that it will be redeeming 50% of the C$20.86M total. The remainder is due at the end of this year and the company will need to address this. Chalmers discusses the options available to them in the interview. This is a smart, decisive move that will allow the company to avoid c. US$350,000 in interest payments for the rest of 2020. This decision sets Energy Fuels apart massively from most other uranium juniors who are currently running up debts to fund exploration programmes or to keep the lights on whilst the market lurches from one catalyst to the next. Instead, Energy Fuels is on the front foot, logically and systemically managing its cash position as it prepares for the uranium renaissance, whenever that may begin.

The US House of Appropriations Committee recently took the decision to block the funding of a US$150M US uranium reserve. This is a setback for North American uranium bulls after several months of positive news, but Chalmers is pragmatic; he is anything but surprised. Moreover, he doesn’t see this decision as definitive. It seems likely that the topic will be revisited once the US Department of Energy can provide more clarity about how exactly the reserve would be implemented at some point in the next 180 days, about 90 days after the US Elections take place. Chalmers is under the impression that the DoE is hard at work to address these questions right now.

Let’s get back to what I mentioned earlier: vanadium and rare earths. This is when the White Mesa Mill, Utah, serves as a real trump card. The only remaining fully-operational conventional uranium mill in the US is the subject of much discussion, but some investors may not yet have recognised the full extent of its capabilities. It is licensed to process uranium, but it is also able to process vanadium and rare earths. Uranium, vanadium and rare earths are all potentially strategic commodities on the critical minerals list for the United States, and this can only be a good thing. Now, the question is can the US govt help? If the Section 232 fiasco is anything to go off, advancing their own agenda through partnerships would see them retain control of their own destiny.

In fact, based on what we are hearing, America is aiming to build a new US-based global REE hub to rival the status quote of Chinese dominance. Supporting a cause that could rival a monopoly is usually something to be quite excited about… Energy Fuels has recently been actively pursuing the rare earths processing capabilities of the business as it looks to further monetise the White Mesa Mill, driving capital into the company’s bottom line. What partnerships with Constantine Karayannopoulos and Neo Performance materials do for them? It feels like a new Mountain Pass in the making.

A total of 5 uranium juniors have told us in recent interviews that they will be using White Mesa Mill to process their uranium. However, Chalmers hasn’t heard even the faintest whisper from any of them, and he’d quite like them to stop making such claims. This exemplifies exactly what we have been saying about the White Mesa Mill all along: it gives Energy Fuels a monopoly over other North American uranium juniors. Uranium juniors face the choice to pay a toll fee, at Energy Fuels’ leisure, or ship ore more expensively to South America. It’s an incredibly competitive situation and it is clear that Energy Fuels holds all of the cards.

We recently discussed an intriguing topic with Brandon Munro and John Borshoff. As this deep uranium bear market has dragged on year after year, expertise has been attracted away from the industry. This means there is a shortage of technically-proficient, experienced uranium minds out there. Projects will struggle to get into this production without expertise. Moreover, with a flood of new entrants, there are currently too many uranium companies for too few high-quality projects. As a consequence, the utilities aren’t taking uranium producers seriously yet. Consolidation is absolutely necessary to swing the struggle back in favour of the producers, and Energy Fuels could be an excellent candidate for this. It has a dominant position and is surrounded by many uranium minnows. It could well look at M&A in the future and appears to be the best-positioned North American uranium junior to hoover up some smaller players.

What did you make of Energy Fuels and Mark Chalmers? Comment beow and we will respond.

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Dustin Garrow #05 – Investors Want to Know When US Utilities buy Uranium (Transcript)

Conversation with Dustin Garrow, Uranium Market Commentator

The most insightful commentary for uranium investors. Garrow tells us when he thinks US utilities will be making decisions to buy uranium. He tells why. What precisely are they focused on? And what is the DoE focused on with its Nuclear Fuel Working Group report. What has been trying to distract them? And are politicians qualified to make decisions needed?

Old news of the week is that the US House Appropriations Committee has said that they will not approve the funding of the $150M uranium reserve. Also the delay in the decision on the Russian Suspension Agreement (RSA) seems to be holding up utilities decision making. What does this mean for relations with Russia? And does Russia care? Should it care? We discuss China and Russia want to control the market. Can the US compete and what are the barriers?

Wonderfully no holes barred conversation about the state of the uranium market. We discuss what it means for certain companies, both positive and negative. If you are a uranium investor you will be interested about what it could be mean for your equities investments.

We Discuss:

  1. 2:49 – US House of Appropriation News: Inevitable Situation?
  2. 10:30 – Problems and Distractions: What Could Have Been Done Differently?
  3. 15:29 – The Senate: Only Hope for Juniors?
  4. 17:02 – Utilities as Market Driving Force: Importance of US Elections and RSA
  5. 27:05 – Tell the Time: What Happens in 2021? When Are We to See Long-Term Contracts?
  6. 31:14 – Quickness of Price Discovery: Impact on Big Name Uranium Companies
  7. 36:44 – When Can We Expect to See Price Discovery Movement?
  8. 39:47 – Preparing for the Boom: Who’s Going to Struggle?
  9. 41:20 – Lots of M&A in the Uranium Space: Opinions and Implications
  10. 44:19 – On Energy Fuels’ Mill: Rare Earths, Company Involvement, and Implications

CLICK HERE to watch the full interview.

Matthew Gordon: Dustin Garrow, how are you, sir?

Dustin Garrow: Good, Matt. How are you these days?

Matthew Gordon: Yes, good. Holding up, holding up. Did a bit of gardening on the weekend. I can barely move if I’m honest.

Dustin Garrow: You got to fix things up around the house.

Matthew Gordon: You do. I get my Saturday morning list of things to do. Do you still get that?

Dustin Garrow: Pretty much every weekend and even maybe in the afternoon before it rains here in the mountains.

Matthew Gordon: Oh boy, that’s a tough list, isn’t it? I’m sure it is, I’m sure it is getting longer. But we won’t talk about my gardening tips because that would be a very short conversation, but we will talk about a few things that have gone on in the world of Uranium since we last spoke.  the most current of which was an announcement by the House Appropriations Committee not to fund the US Uranium reserve. There is USD$150M missing there. What was your take on that whole conversation, perhaps just remind people what exactly it involved?

Dustin Garrow: Well, when the Nuclear Fuel Working Group put the report out in April part of the focus certainly was to revitalise the US Uranium industry with a focus on the needs of the Department of Defence or unobligated Uranium. A lot of enthusiasm, the report was 5-months late. But they were talking about the USD$150M per year budget allocation or funding in order to set up a Uranium reserve. In other words, the government would step in. And they started to define it: they were saying to have at least two Uranium mines in operation, the USD$150M was in the physical 2021 budget, which is now being, let’s say, put together by the two houses of the Congress. And then there was in the next 10 years, another USD$150M a year for a planning document. In other words, it wouldn’t be approved, but it would be put in the 10-year forward projection. Now, that was to involve like 17Mlbs to 19Mlbs of procurement over that period. So close to 2Mlbs per year. The 2 houses of Congress, have their own versions of the budget. They start looking at all the requests, which the DOE had put a specific line item for the Uranium reserve in their budget request. But it was a little surprising when they put their quote report out, which is basically, the results of their review of the proposed budget. And they said, well, we are not going to fund that USD$150M because the DOE has failed to submit a plan on, well, what does this mean? How are you going to do it? How will the contracting be done?

They’re also talking that it would be put into the assured fuel area, so then if there’s an upset in the market, utilities could draw on this inventory, theoretically, that was just to make it a little more attractive. But after 4-months of the DOE not putting that plan together, and so that’s what they’re saying is, 180-days following the enactment of the budget, which may be before October 1st, because again, our fiscal year starts October 1st. They’re to submit that plan. How will this work? How is it going to be authorised? The whole gambit of procurement of Uranium. Now, if that’s true, I mean, they’re not saying we will not ever fund this. They are saying we want to see what it means. 

180-days from late September puts us into next spring. And one of the questions then becomes, if they then decide the plan is acceptable, will there be budget available somewhere? Within the DOE there are various increases in some of the budgets, would they be able to cobble together the USD$150m?

But there are still a lot of unanswered questions. One is long-term contracts; as…I can’t open my mouth without saying long-term contracts. And the producers have made it clear: a 1-year purchase, it would have to be like inventory. And then there is no assurance that the program would extend beyond the first year. So how do you go out? And the producers are saying it’s 12 to 24-month ramp-up, depends on which type of producer. Because another issue is, do they sign contracts with companies that maybe are in the permitting phase? They don’t have existing facilities. Well, 4 or 5-years from now and they could maybe have built those facilities, but that may not have happened.

So again, there’s just a lot of unanswered questions, but that, to me, it was a bit of a curve ball thrown back at the producers after they’ve been working on this for so long.

Matthew Gordon: Wasn’t there an inevitability about this? Because we had the conversation way back when, during a lot of this processes, and obviously after the report came out and it was unclear then. And the questions you and I were discussing and answering was: how can these politicians, who perhaps don’t understand the full cycle, all of the moving parts, possibly put together a coherent plan in that tight, short a space of time and allocate it to the right place and give guidance as to what they were going to do? They couldn’t then, and in 4-months were they likely to be able to do enough to get it passed the House Appropriations Committee? Well, the answer is no, but what do you think they should have done? Could they have done better?

Dustin Garrow: Keep in mind, there have been meetings between the producers and the government representatives now literally for years. And it’s not like the government wasn’t aware of the issues. They were aware of the need for multi-year contracts. They’d asked the producers; what levels do you think you would need? There has been a lot of preliminary work done, but then, as you say, sitting down with the whiteboard and say, okay, how do we get from here to here? I would like to think it could be done fairly quickly.

 one of the things that, that was a red flag was back on like May 11th: the director of the Nuclear Energy Department at DOE said, well, within a year, they hope to have that procurement process clearly delineated. To me, that was, so they’re talking well into calendar 2021. And as the producers are really down to bare bones now. Production is, there is some… Energy Fuels said they will produce almost 200,000lbs this year, which would equal all of the production for the industry last year, but it’s alternate feeds. It is not new mined or anything like that.

Matthew Gordon: Well, let’s come on to the utility component in a second. I just want to stick with the government element here, if I may, just so I can understand it better. Hopefully some of the people at home can understand it a bit better, which is there’s a superficiality to the way that this has been gone about for the last 2-years, in terms of having been involved with government on this side of the pond. They listened to the headlines, but not necessarily, as you say, the whiteboard of how it actually gets done. There’s a lot of that going on. But one thing that has happened is they have recognised, and there is an intent, to try and do something for the nuclear fuel working cycle: the whole thing, all the moving parts. But there in possibly lies the problem. That they may have got distracted with 1 or 2 other shiny objects in the room, such as some of the technology side of things, the SMRs or research and development components, and which may seem a little bit more exciting. But in reality are also quite small widgets in the mix. Do you think there has been a little bit of that?

Dustin Garrow: Yes, the conference call that was at the end of May where the Secretary of Energy participated. It had all the right people; it had the policy people. They made all comments about the need…the DOE needed abundant Uranium supplies in the future. We are going to be immediately working on this, but then they got off on the research side, the SMRs, and certainly the funding side for export reactors. They have recognised that Russia and China are utilising the export reactor market, maybe for geopolitical reasons. And, one of the problems with the US is we couldn’t fund our reactor sales outside of the United States. They are diligently working on getting that change, which would then allow GE and Westinghouse to penetrate the export reactor market.

A lot of challenges, as you point out, and the Chinese and Russians have been at this now for years and years. And they offer not only the units, but the financing with extended repayment terms, if you want to call it that. I don’t know what the US financing would look like. And things like fuel – they say, we will bring the fuel, we will oversee operations, and then we’ll take spent fuel away. I’m not sure the US reactor vendors will be able to offer that. They’re going to be at a pretty noticeable disadvantage. And, maybe just on the economics: if I’m the Russians and the Chinese, I say, ‘okay, I’ll just undercut their price’.  

Matthew Gordon:  That is a really important point which should not be missed by anyone watching; 1. It is a small market. 2. The 2 powerhouses at the moment are the Russian government and the Chinese government. And the US is trying to compete with 2, albeit very large companies, but they are companies with their own restrictions. They have got other things which they are probably focused on as well. And the cost of money to them would perhaps make things less attractive. These barriers to entry, I don’t really see why GE or Westinghouse would want to come in and compete in this space. And it comes back to something you and I talked about 3-months ago, which was, do politicians and commercial enterprise; do they work? Do they work in the US? The wishes of a politician – does that matter, what they wish for?

Dustin Garrow: I’m not overly optimistic this whole project would work very well because it is the Russian and the Chinese governments, and they have other parts of their agenda, of which the nuclear reactors are just one component. And that, yes, it’s a nice idea, but I’m not sure how it, and maybe they’ll say, well, it will be SMRs well, but those are a way off. So that you would just have to wait and see. But what I find a little bit ironic is the whole Nuclear Fuel Working Group concept was triggered by the 232, which the 2 Uranium producers, Energy fuels and UR-energy initiated in January of 2018. So we are two and a half years later, and it’s all of a sudden, it has not been steamrolled, but they’ve  been lost in the discussions with these things like export reactors and on and on and on, to where they are not getting, what I can see at this point, not a lot of attention to get what they need done.

Matthew Gordon: That’s what I mean; it feels like a Pandora’s box where they have opened the lid and then everything has spilled out of it. If you start looking for other things that you can do. We said months ago, it’s a really big fix. And these big fixes take a lot of planning, effort, time, et cetera. And I just think it was unrealistic to expect this, but it’s been a bit of a shock to Uranium juniors, that the House Appropriations Committee has so quickly shut this down. Is there any hope in here? What about the Senate Appropriations? What are they doing?

Dustin Garrow: I’m not directly involved in all of this, but there continues to be optimism that the Senate version of the Appropriations Bill, I was told recently, continues to have the $150M in it. And they’ll get together for eventual mark-up, and maybe it gets retained.

Again, Senator Barrasso has been very supportive from Wyoming. And that was always a problem though, even when Menuchin was involved. It is a smaller State, not a lot of political clout, it’s not like the big States are weighing in here. It’s not an issue that they may view, I guess is that important. Uranium in Wyoming is a pretty critical part of their economy. So, yes.

Matthew Gordon: But as with all things political, you have got all sorts of groups who are vying for capital and you think you’re the most important person in the room, but that isn’t necessarily always the case, not always the case. Well, then it must come back down to, let’s move to move away from the political and government. Although that’s quite a big topic, I’d love to spend more time on it, and talk about market forces. Which, and by that I’m not talking about supply-demand. I’m talking about utilities. We have got a couple of big factors that there: you have got a US election and you have got the RSA agreement still not settled. And those things aren’t probably, in any likelihood, likely to be agreed or decided on by until the end of the year. In either order, as you were, what do you think is most important to utilities?

Dustin Garrow: Right now, the election is the election. Apparently Mr. Biden’s new green plan has a nod toward nuclear. It doesn’t sound like that will be, Oh, well, let’s shut down all the plants. And the other thing, and you will have seen is reporting: there was a big article this morning or editorial in the Wall Street Journal about it: bring back manufacturing to the United States. And that’s part of the Biden platform as well as being Trump’s since day one. In order to do that, you need power. There will be a less of an emphasis on, let’s get rid of not only coal, which is, we think nuclear struggles a bit in the US, but coal was almost in the dumper. But yes, the utilities are probably not as focused on the election side as the Russian Suspension Agreement, because I’m hearing that there is a broad spectrum of opinions. The utilities, through AHUC, the ad hoc utility committee are pushing really hard to have it expire basically, to where they, the Russians, which was the intent that by the end of 2020, which when the amendment was put in place was a long way off, and the long way off tends to eventually show up at your door. And now they are debating, there has been legislation drafted that would lower the limits. And the big thing though, that happened there was the Department of Commerce, back in middle of June, put out a report and basically said it was to review the compliance of TENEX. And the now, Centrex, former USEC their compliance with the procedures. And they were found to be in compliance. Yes, they shuffle the right pieces of paper around, but they concluded that, and it’s  interesting; it gets back to long-term contracts, there have been enrichment contracts being done for delivery post December of 2020 because they signed long-term enrichment contracts and they say those have been priced suppressive. So basically, Commerce took the position that unless the Russians are more aware of the effect they are having on the market, let’s put it that way, they said we should terminate the agreement and reinstate the underlying anti-dumping investigation, which is from back in the nineties, which would then put very high tariffs on Russian enrichment. Let’s just say there’s a whole…

And I’ve also heard that the Russians may say, hey, at 20% of the US, that’s about 3M SWU p/a, the global demand is like 52M, 53M, this is a very small part of the global enrichment market. Do we really want to put up with more, another 10 to 15-years of paperwork and auditing and on and on? Or maybe they’ll just say, Hey, okay, have at it, you guys keep us out of the market, buy from the Western enrichers at probably higher prices, and we will go and sell somewhere else. I’ve heard everything from, well, the extension of the existing agreement down to modifying it to all over the place.

Matthew Gordon: That was literally my next question: why the heck should the Russians care? It’s just nothing in dollar terms. So why bother?

Dustin Garrow: It is just the ability to penetrate the market. In other words, they’ve been held at that 20% level now for the last few years, and that was to go away. And they said, we want 30% or 40%, apparently publicly of the US market. Well then, all of a sudden, 40% of 15M SWU, 6 million, then it starts to get to be much bigger.

Matthew Gordon: But with the rest of the world opening up and developing and nuclear is to become such a big thing, the market is much bigger than back in the 1990s. There are more buyers. It gets the point, well, why fight this battle? Why bother? And let the market forces decide.

Dustin Garrow: When we are having a very anti-Russian view in the government here, as well as certainly anti-Chinese. So that they will look at all that and go, at some point we’ll walk. So, I would.

The point is, the utilities, just to get back to them, some of them have contracted forward for apparently more than the 20% in anticipation of that going away – the limit. They are then in a bit of a difficult position where say, as an individual utility, maybe you have committed to 40% of your enrichment from the Russians, well, what if that goes to zero? Then you have got to get in the queue with Urenco and Orano, basically the Western SWU providers. And if I’m a marketer at Urenco, I probably am not going to sell at a very low SWU price, particularly for new long-term contracts. So then when people say, well, why aren’t they looking at Uranium? Well, they’ve got that the SWU situation is really much more urgent, potentially.

Matthew Gordon: Let’s look at a few other things. A few data points. Because people like UXC, TradeTech, people like that, they have been putting out numbers every year. That gives a sense of where the utilities are at with their inventory levels. The US did it about 1-month ago. The Europeans have put out a summary report. They are fine for 2.5, 3-years, all of them. The utilities are in no rush to buy. At some point they will be, but do you feel they are in any rush to buy? Is it just, ‘oh, let’s just see where the RSA gets to, and then we’ll start making some decisions’, or actually, do they have a little bit more time on their hands?

Dustin Garrow: Like everyone, they have a list and here is my to do list and up top is Russian SWU and maybe in the middle somewhere is term Uranium contracts, who knows? So again, they’ve got somewhat limited staffing. I mean, the utility fuel groups are smaller than they were in the past. They say, well, and this is more immediate. I can’t just let this slide, the Russian SWU issue, but I can’t on Uranium. And  what they’re doing is they’re hearing from, Cameco, probably from KazAtomProm, maybe from Uranium One, and as you have probably seen, some of the smaller producers: Paladin made it clear that they’re going to be out talking term contracts, Vimy, a number of them. They are beginning to hear from a number of supply sources of Uranium.

NexGen, you throw everybody in the pot and they go, well, there are diverse sources. We can debate when those sources are available, but if you are a fuel manager, you go, ‘hey, I can push that off until probably next year, but I can’t push off the Russian Suspension Agreement. I have to focus on that because management is going to be called every morning my phone is going to ring from upstairs. So that is what I have to focus on’. They’re not ignoring it totally, but  they are less concerned. They’ve got inventories. They don’t tend to hold inventories of enrichment because it is expensive as you get further down the fuel cycle. So yes, U308, UF6, we have got, as you say, the next 2, 3-years. The Europeans are pretty well covered to the mid-2020s. But I see by around 2025, 2026, their coverage starts to drop off significantly, but it’s like, well, it’s over the horizon of a bit so I’ll focus on the immediate.

Matthew Gordon: It’s the things that are happening in the market. Obviously, we heard a lot about Kazakhstan. The lockdown is affecting KazAtomProm, and they were on the show just over a week ago. And they were saying that they may have to come into the market. Cameco said, we may have to come into the market to top things up to fulfil our contracts. And they can do that until the end of this year. There’s another end of year moment. What happens next year? What happens in Q1/21 and Q2/21 for these companies? There’s not enough inventory on the market. Is there?

Dustin Garrow: Well, like you said, UXC said recently that during March, April when there was what, 36Mlbs transacted, the more mobile, lower-priced inventory was taken out of the market. And that is what we are seeing now; the volumes are down a bit, certainly. The price has held relatively stable. So to me, that’s a positive sign that all of a sudden the price didn’t go USD$34/lbs, $32/lbs, $30/lbs, dropping like the proverbial rock. And the other is the start-ups: people think like Cigar, well, they’d say, okay, we are going to start up Cigar, they flip a switch in Saskatoon, everybody is there, the mine…it’s going to take months and months and months.

And even in Kazakhstan, it was interesting; the head of KazAtomProm was interviewed by the local newspaper, Kazakhstan Pravda, which I thought was interesting. And he said, keep in mind, we have stopped all wellfield development. Our production is coming from existing wellfields. When they say it’s safe to go out and start ramping up, they have to start drilling wells. I mean, it’s going to take, so when you say, end of the year, is it a magic date? And then all of a sudden, January 2nd, everything is back to normal.  we are well into the middle of next year, even if the ramp up starts before the end of this year, until we are back to some semblance of normal in the production side. And that’s probably optimistic.

Matthew Gordon: That’s the production side, but to get people at Cameco, KazAtomProm and elsewhere, to press the go button, they need these long-term contracts. Now I’m saying it – long-term contracts. I know. I’m a convert. So yes. What does that mean? When does that need to happen? And when do you think it will happen?

Dustin Garrow:  To some degree, the restart of Cigar is not totally independent of that, but more so than McArthur. And we don’t even hear McArthur River anymore. It’s like, ‘he whose name we shall not…whatever.’ It’s just sitting there on idle, slow idle, off in the background. But yes, it is the term contracts.

Paladin and came out with a restart: page after page, the technical operational side. And then it said, and oh, by the way, this is all contingent on sufficiently priced quantity-wise term contracts. When do they start doing that? I mean, I could see that again, as we have talked, there’s a phase; we get Cameco and KazAtomProm, they are satisfied. They move aside. The next group comes in. We could be well into 2022 before some of the, particularly the newer producers, because utilities say, wait a minute. We have talked about the size of the contracts each year. And if you are a new producer and you need to go get the financing, turn dirt, build this, do that, they’ll say, well, we will take a chance, but we are not going to sign for 500,000lbs. There’s that ramp-up that they’re going to need.  it could be a long March for some of, even if they’re relatively close to being shovel ready.

Matthew Gordon: I agree with you. I’m in violent agreement with you and have been for several months, over how long it’s going to take some of these juniors to be in a position where they can get financed, let alone the process of getting into building a producing mine and all the other issues. But what does it mean for the big boys? What does it mean for the KazAtomProm who tell me that they’re always contracting? What does it mean for the Camecos of this world in terms of having those conversations? And Paladin, I guess. If they are setting a price, which is mid-fifties, mid-sixties, who knows? You wouldn’t want to be the utility buyer that goes first, when everyone else around you is buying in the mid-thirties or forties, you’ve pressed the button at $55. It is difficult scenario, isn’t it?

Dustin Garrow: And it has been, having talked to several of the fuel managers, it depends on what their coverage is, what their risk tolerance is, how diverse do they want their supply to be? Because let’s face it, right now the reliable long-term suppliers that have a proven record – that’s a pretty short list. So you have to put them in your portfolio and then say, okay, then as I get further up the curve, who do I contract with that is going to deliver. As we have talked, the utilities don’t care too much about your share price, your whatever, they need yellow cake in a can, the rest of it’s all interesting. Then they start looking at, can these guys get this done?

Look at the risks now in sub-Saharan Africa -I mean, there was just a big article I read somewhere that this is the easiest place to work, not to say, Niger – they can’t move forward, but it’s just another factor  the utilities have to take into account. So, you start whittling down that list and yes, who steps out and signs that first USD$50?  we are close.  some of the discussions are in the mid-40s. They’re not below USD$40/lbs. Looking at the TradeTech production costs indicator number at $44/lbs, that’s probably not a bad number, particularly for restarts.

Matthew Gordon: But is it enough for the Paladins of this world? Your Camecos, KazAtomProm – fine, because they are low-cost producers, but for everyone else?

Dustin Garrow: And looking at the market, I do advise some other production companies. There is that first tier of the Camecos and the Kazatomproms that will eat their fill. And then it’s the next tier. And who’s in that tier? Well, we could name the 5 or 6 companies that either have care & maintenance or are close to hopefully moving forward with financing, and then there’s the next tier. But as a utility, do you want to be the first guy at USD$50/lbs or the last guy at USD$70/lbs? That’s why they stampede. If we were to see the price go from reportedly, USD$38/lbs to $45/lbs to $50/lbs, they’ll go, uh-oh, I better get out there.

Matthew Gordon: But they have a threshold. What I am interested in is how the math works. Because your Tier-1, collectively your Tier-1 produce 60% of the market. Right?

Dustin Garrow:  Right.

Matthew Gordon: So that’s a big number. There’s also a very big number that’s not being supplied; your Tier-2 who need more than your mid-$40s are going to need to be incentivised. And then even they can’t fulfil 100% of the balance market. Some of the Tier-3 who are the near-term or potential near-term producers, are going to need to be incentivised. It must be a very quick run to that price discovery to allow the Tier-3 to actually get into some… at least be able to get funded, to be able to get into building their mine, to be able to get into production, et cetera. So that’s the interesting bit. I can see why Cameco and KazAtomProm might go early. They might say, ‘okay, well, we will contract some of this out at mid-forties, because they are making a lot of money at that rate, more than most would at $65’. And the Tier-2, I can see why they would maybe want $55 or $60. That’s what they’re telling us. What does that timeframe look like? How do we work out what we are looking at here?

Dustin Garrow: There is a presumption that the utilities just start filling up their portfolios to 100% of what they need, that isn’t going to be the case. They’ll get up and maybe they’ll swallow hard and sign that USD$60 final contract. And it leaves somewhat of a gap and they go, ‘I’ll take the risk’. There’s going to be enough production. These guys are going to come on. I’m going to not fill my book up out in the future. In other words, I’m okay. Like they are today. 2 to 3-years, then it’s a bit lower coverage. And then all of that needs to be taken into account when one looks at how do you put together your term contracts? So, yes, it’s not just going to be one day, but he’s ready to sign 100% of their needs for the next 20-years – it doesn’t work that way.

Matthew Gordon: That is fascinating, it will be a fascinating and very accelerated timeframe. But I don’t know when it starts. I know that when it starts it’s going to be good. Very exciting. But I don’t know when it starts. Do you?

Dustin Garrow: It is always about timing. Early this year, prior to COVID-19, this year looked like a year that the US utility were going to become quite a bit more accurate. People thought, well then, now 4th quarter. We are already middle of July, so is it 4th quarter? Do they just go – ‘this has been a horrible year. I’m going to work in the garden, and I’ll come out next year?’

There are no conferences. The only one that’s still hanging by its claws is Las Vegas. End of October. And I’m hearing the utilities are going, no, if you have a one-day deal, maybe in Washington, maybe I’ll come to it. It’s really at risk. Then you’re into well into next year before there’s even a chance to where the industry gets together. You’ve just participated in a virtual conference, and those are fine in the interim, but it doesn’t…

Matthew Gordon: It is not the same. When is that scheduled for, Las Vegas?

Dustin Garrow: It’s like right at the end of October, the 28th, 29th, something like that. It’s the NEI, the last day of the year thing.

Matthew Gordon: You’re saying that’s 2021? Just to be clear.

Dustin Garrow: No – this year. We get into 2021 and you are in the spring before the combined WNA NEI conference, April. So, we are probably 9-months before the industry ‘gets together’, if they do it then. Yes.

Matthew Gordon: And just remind people why that’s important. Why can’t they be picking up the phone with each other between now and then?

Dustin Garrow: Yes. I mean it’s not a crucial, but it is the place where as they say the coffee talk and the lunches and the…Very few people are traveling to visit the utilities now,  certainly Cameco must be, probably KazAtomProm, but to get on a plane, and some of them don’t have, say, US-based representation. Paladin’s representative is in the UK, so you’ve got to come across the Atlantic to meet with utilities. And we’ll just have to see. But none of it suggests a rapid ramp-up in term contracts. We could have more people in the market, but it’s still going to take a while.

Matthew Gordon: Well, that’s interesting. It’s in line with certainly where our conclusions have finished up, and we are thinking it is possibly Q3/21 next year.

Dustin Garrow: Well, as Grant Isaac of Cameco said on their last call, things have started to slow down. And he said, well, the market is strengthening, so that’s in their favour. So that’s okay. Then you’ve got, the first, the lower quartile guys are…

Matthew Gordon: Well, I guess that comes back to, if you don’t have the cash, you’re going to struggle. If you don’t have the ability to have a meaningful conversation with utilities when they are ready to have it, whether it be, say April, May next year, you are in trouble. And if you don’t know what you’re talking about, when you do talk to them, you’re in trouble. And if you have never produced before, you’re in a lot of trouble. It is an interesting time for some of the juniors who have been getting little bits of money in here and there but perhaps that may not be enough. But I keep beating that drum because it seems apparent to me, but perhaps I am wrong.

Dustin Garrow: And the other thing, Matt, and we have talked about it: you’ve got to be ready when the utility could come in the term market, because they sign these, it covers their needs out for maybe 5, 6, 7-years. You don’t start for a couple base of a, maybe 3, 4-years, whatever. If you’re not there, you’re not at the table. They don’t come out every year and do that. They tend to cover off and then they go off and do other things. They do their long-term contracting and then it might be 2, 3, 4-years before they’re back in the month.

Matthew Gordon: Last question. Are you ready for this? I know you advise a few companies. Are you at all nervous about some of these Australian companies coming and buying assets in Canada and the US?

Dustin Garrow: I thought it’s an interesting phenomenon. We are seeing a rush into the US market by at least 4 or 5-juniors out of Australia. And they are doing due diligence on properties and deposits primarily in the Colorado Plateau. It’s Colorado, Utah, and it’s traditional hard rock. With all of them saying they want a toll process at the one remaining operating mill, which is White Mesa. And, oh, we also want to participate in the Uranium reserve program. So apparently, they’ve had a really nice run-up in their share prices and caught, some of the US guys, maybe a little on their back foot a bit. And it’s like, oh, well, we’ll see what happens. But I’ve been surprised how many of them are around Utah, Colorado looking at properties. And, why not?  they are cheap.

Matthew Gordon: Why not? If you can do it dirt cheap, but  the questions we have been asking ourselves is, what are they buying? What are the assets? Because they will have been around for a long time, there will be some data on them and yet no one else has deigned them important enough to pick up. They are straight in, going to the US. And is this just a promote story back home? Or have these companies got a realistic chance of actually building mines?

Dustin Garrow: Well, keep in mind, we have, probably a derogatory term that’s mostly in the coal industry – ‘the dog hole’. And that’s what they are looking at. None of these mines, they’ve been around, like you say, back in the 1950s and 1960s, they were part of it; ore buying for whatever. And you go in and you dust them off. You are never going to produce more than a couple of hundred thousand pounds. That’s why, say, Energy Fuels has always had that cobbled together, a number of mines in the Colorado Plateau. It isn’t one big underground mine. Cigar Lake, that they’re producing, millions and millions of pounds. You’ve got to have a bunch of little mines operating in order to get the volume up. If you come in and get 2 or 3 of these things, I’m not sure the economics of it, how do you set up a US subsidiary to oversee your fairly minor holdings in the United States? Maybe they come and go; they come in and they look, yes, okay. Take it over a little bit. And 2, 3-years from now. White Mesa is processing rare earths, and there is no place to go.

Matthew Gordon: Well, let me ask about that: White Mesa Mill is obviously a huge facility and it is owned by Energy Fuels. And we are speaking to the CEO, Mark Chalmers this week, later this week anyway. Rare earths; it’s fairly up and down, fairly erratic sector. Extremely high margin if you time it right and if you capture a lot of the value. What do you think of that move by them?

Dustin Garrow: Stepping back, they are waiting and waiting on the Uranium market. Be it the government, be it the fundamentals, and to say, hey, we have got this facility and it’s in good condition. And if we can process the rare earth, which are now front burner in the US, then why not? Now, do they then turn their back on Uranium? I don’t think so, but it’s, hey, we are not just going to sit there and go down the road and atrophy down and shut the lights off. Rare earths are now…that mill is unbelievable. I’ve dealt with it since, basically since it was built a little after and they’ve used it, as up and down and Arizona high-grade ore, Colorado Plateau, alternate feeds. They’ve really looked at it as a flexible processing facility. And it’s.. thank God they have, because there would be no operating mills left.

Matthew Gordon: It is interesting. When we’d looked at it… and what people  think of when they hear that word mill is some old dusty thing in the middle of the desert somewhere. But this has got a very high-tech lab associated with it, you’ve got radioactive material going through there. It’s a fairly sophisticated thing. And yet it can be upgraded and updated, and it’s got 17 lines and so forth. So it has a lot of potential. One of the other amusing things to me is the number of CEOs who come on the show and say, ‘we are putting all our stuff through the White Mesa mill’, but according to the CEO, that’s news to him.

Dustin Garrow: Yes. Usually. Well, there you go – good luck.

Matthew Gordon: I will have to let Mark know on Wednesday that there’s some good news. You’ve got all these companies that are going to feed through.

Dustin Garrow: Yes, that’s right. He’s already aware of it.

Matthew Gordon: He’s aware of it. And he’s aware of the conversations or he’s signing contracts? What do ?

Dustin Garrow: They all put it out; if you read their literature, their PowerPoint slides it’s well, we are 100km from the only licensed mill and they do toll milling. Well, they don’t do a lot of toll milling…

Matthew Gordon: Are any contracts signed? Do people actually have agreements in place?

Dustin Garrow: No. I can’t imagine. They have had some toll milling agreements, but most.. all expired. So, because they never got the mines operating to do the toll milling.

Matthew Gordon: I’ll ask him later this week. Dustin, thanks so much. What a run through. As ever, crazy market. It is going to make a great movie or a film one day.

Dustin Garrow:  Yes, one of these days.

Matthew Gordon: Yes. It won’t be me writing it. Thank you again. We’ll speak to you again soon. I’m sure there will be more news next week or the week after.

Dustin Garrow: That’s right – once we get out of the summer, we’ll see.

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Brandon Munro #16 – No to US Uranium Reserve Fund (Transcript)

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.

It’s been a big week for uranium investors. The US House of Appropriation has blocked the idea of funding of the ‘US uranium reserve.’ What is the right of reply? What does this mean for US uranium equities? How should uranium investors interpret this information? We will be asking some of the main players this week how they intend to respond. Brandon gives us a precursor to what happens next.

We then take a look at the supply market in general, with news of the latest lockdown extension in Kazakhstan, with the world’s largest uranium producer, KazAtomProm, extending its initial 3-month production reduction by a further month. Cameco and the other uranium majors are following suit.

We Discuss:

  1. 3:05 – US House of Appropriation News: What Happens Next?
  2. 10:50 – Geopolitics of Nuclear Energy: Should Politicians Be Involved?
  3. 13:18 – Impact on Retail Investors: Looking for Catalysts and Getting Deflated
  4. 15:34 – Kazakhstan’s Extension of Lock-down Continues: The Impact on Market
  5. 18:12 – Your Questions Asked: What if COVID-19 Continues for Another Year, What Could the Impact Be?
  6. 24:24 – COVID-19’s Impact on Investors: Blue Sky Opportunities
  7. 27:29 – US & Russian Suspension Agreement Debates and Potential Results

CLICK HERE to watch the full interview.

Matthew Gordan: Brandon Munro. How are you, sir?

Brandon Munro: I’m well, how are you, Matt?

Matthew Gordon: Good. Feels like a long week if I’m honest. But we have got to get on with this. We have got another exciting week of Uranium conversation, we discussed some pretty big things this week. We are going to discuss some of them in this forum, and then we’re going to go and talk about some quite interesting stuff in the Crux Club for a moment, won’t we? Looking forward to it.

Brandon Munro: Looking forward to it.

Matthew Gordon: Let’s start off with the big one. People started talking about it last night, but they haven’t really got into the detail of it. The US House of Appropriations Committee have come up with something which is probably not too good news for the Uranium juniors in the US. What did you make of it?

Brandon Munro: Yes, I think it could be pretty discouraging for some of those companies that have really pushed the Section 232 process, and were hoping to obtain shorter term benefits. For the viewers out there, the House Appropriations Committee, whose job it is to take the recommended budget proposals, mark them up, and then submit them to Congress for approval. And that’s for the budget commencing in October 2020. They jettisoned, really, the proposed US Uranium fund. So if we go back for a moment to the report that came out of the Nuclear Fuel Working Group, which came out of the Section 232 investigation all those months ago, the report recommended a USD$150M per annum Uranium reserves that would acquire between 17Mlbs and 19Mlbs over about 10-years, and also convert a proportion of those so that the US could improve and enhance its stockpiling capability.

At the moment, the US Department of Energy maintains only enough strategic reserves for about seven reactor refills reloads. And that was seen as not enough. Now what has happened is that the House Appropriations Committee said, nope, we’re not going to fund that. We’re not going to approve that. And they cited a lack of detail, in fact, from the Department of Energy over that. They basically said, we’re not too sure about the justification for this Uranium reserve. And in fact, we didn’t really get our questions answered on how it would be implemented, et cetera, et cetera. So, a bit of a discouraging setback for many of those US producers, but of course, for the broader market it is just really a blip.

Matthew Gordon: Does it surprise you? Was this a shock to you?

Brandon Munro: No, and in fact, you and I were talking about it, if it wasn’t last week, it was the week before, where we were saying the DOE really seems to have its head space in nuclear technologies, particularly SMRs and advanced reactor technology. When you look at where the money is going, most of the funding has gone to R&D for those different technologies. They can see how it can more directly benefit the US industrial complex. They did appear to be quite slow in getting their head around the nuclear fuel cycle during Section 232. And my impression, and we talked about this as well, was that the reserve looked a little bit like throwing a bone to the US mining industry. Quite an attractive bone if it had come off, of course, and if that had been spread amongst only two or three of the miners, so it doesn’t really surprise me to see this, given how distracted DOE has been and where its focus has been.

Matthew Gordon: Given that, what’s the timing on all of this? What happens next?

Brandon Munro: The Committee itself basically told DOE to go home and do its homework. What they asked for was they directed that the Department of Energy needs to come back with a plan, including costings, within 180-days of the Act passing. They want them to tell the House Committee how they are going to go about procuring, converting, storing. They want information on the legal processes that allow them to do this type of thing, and all of the associated costings to that within 180-days. Now, that is obviously half a year from now. And presumably what would happen from there is that that then gets tipped into next year’s budget appropriations process. My take on this and my read is that unless the Republicans pull a rabbit out of the hat in the Senate during this appropriations process, we’re now looking at that money potentially being available from October 2021. It is a long way off, and there is a long period of lobbying that is going to be required to see this one through from here.

Matthew Gordon: If I’m a US Uranium junior I’m going to be pretty pissed, because someone has dropped the ball here. They haven’t done the homework. They haven’t put in the hard yards to actually provide the information which was asked for. And, quite rightly, the Committee has said, no.

Brandon Munro: Well, I don’t know where the breakdown has occurred. I honestly, I’ve got no idea. And there’s a number of people who come on your show who probably would have some good insights as to that. It would definitely be disappointing for Uranium juniors or Uranium producers who are eyeing off this potential source of demand. The opportunity to contract directly with the US government would be very attractive to them. I would look at it a bit more holistically though; which is the market is going to do the heavy lifting here anyway. By the time this all gets sorted out the numbers that they told the DOE that they would need in order to effectively resume production, the market is going to navigate and gravitate to those numbers anyway. I will be astonished if in 2 or 3-years’ time, we are not above USD$60/lbs, USD$65/lbs on a term contracting basis. It might be that when we finally get there, and the US finally starts procuring this material from US production, the market has solved the problem for them in any case. And we now look back at all of these delays and this great long process that has certainly put a wet blanket and a damper on a lot of the utility activity, we will look back at all of this and say, well, what was that for?

Matthew Gordon: I agree with you, but we have had conversations, probably back in the early days, where we were trying to explain to people the importance of US utilities, because it is such a big market. But the reality is that it is 25% of the market. And, the market will, well, we said at the time, it will have to sort itself out. It looks like it is probably is going to have to do that. It is going to have to find its own pricing in the market because it is not getting much help from the US politicians at the moment.

Brandon Munro: Yes, and look, I think some would justifiably ask the question, whether it is the US politician’s role to be helping in that instance. And that is a whole different discussion that really comes into what, philosophically, is the right level of government intervention and so forth. And there is a broad range of views on that, of course. But you’re quite right: we know what supply and demand needs to do, and if utilities want to buy diverse supply from anyone except, say, the Kazakhs and the Russians, for example, well, they are going to have to be prepared to spend a proportion of their portfolio of contracts at those prices and above over the coming years.

Matthew Gordon: But it does come back to this whole geopolitical component around energy, around Uranium and nuclear energy. We are going to chat in the Club member’s club about Nord Stream 2, but it is just a real reminder that, , whether politicians should or should not get involved with decision-making like this, they are because we have got various sanctions: Russian sanctions, we have got Iran sanctions. And, the US’s allies are even feeling a little bit ostracised about the way that the American politicians are approaching this at the moment, especially around Iran, for sure. It is hard to separate the politics, politicians’ activities, and the utilities decision-making in this environment, and in an election year too, so it is as complicated as ever. But, coming back to my point, the US junior Uranium companies are going to find this a little bit hard to swallow.

Brandon Munro: Well, you are absolutely right on the political and geopolitical implications. And this is in the counter argument to the one that I referred to a moment ago, which is that nuclear energy is inextricably linked to geopolitics. And even in the US free-market environment. In Russia and China, it is entirely absorbed into the political apparatus and the political industrial geopolitical apparatus in those countries. And as came through really clearly in the Working Group report from the Department of Energy is that the US has dropped the ball on that. The counter argument is this is a special form of energy, as we’ve always said, it is so closely integrated into geopolitical ambitions of the world’s major players, that it should be integrated into the political process as well. So that’s the counter argument, and the one that incidentally I favour. And we have talked so much about the role of geopolitics, and you can’t really understand the Uranium sector unless you have got a reasonable grasp of geopolitics. And as we have talked many times on the show, that is where we tend to navigate when we’re looking at the bigger picture of this.

Matthew Gordon: What is interesting to me about what you have said earlier is that this announcement, and obviously it is not going to faze utilities, but for investors, retail investors particularly, looking forward to these large catalyst moments over and over for the last couple of years, since Section 232 started, this will be a huge disappointment because it is a huge inertia yet again when they are looking for salvation in spot price and rising support from the US government. And to see that the short-term impacts won’t be there. There won’t be any movement in Uranium equities off the back of this, but your view is that it doesn’t matter. The market will sort itself out.

Brandon Munro: It doesn’t matter for most of the sector. So, when I look at my Twitter account, and some of the responses that I’ve had to this news, it has largely been comments like, ‘Oh my God, the whole sector is going to be done down’. And it is like, no, it won’t be the whole sector. It is a handful of companies who stood to benefit from this. We need to be really clear that for 90% of Uranium juniors out there, those exposed to Africa, those exposed to Canada, those exposed to Australia and elsewhere, this makes very little difference. Sure, it would have been nice to have another source of demand coming in there, it is always nice to have a government buying material out there that others can’t buy. But it is not even the same as the effect that, take the Ranger mine coming off stream that ERA is closing – that is far more impactful on the market than what the source of demand is. We just need to put that in perspective. I don’t want to downplay the disappointment for the key players here. But by the same token it doesn’t really make much difference to the broader industry here.

Matthew Gordon: That is true in terms of pounds out of the ground. It doesn’t really add up to a lot in the scheme of things; That is what you are saying. Let’s talk about Kazakhstan. Kazakhstan, we heard last week, and we interviewed KazAtomProm last week and we heard from the horse’s mouth, but this extension to the lockdown period, it really is big. They are handling things really well. They are handling things, as per Cameco… they are doing the right things for the right reasons, but the impact on that could be significant because there is no end in sight.

Brandon Munro: That’s right. We have seen the 2-week extension extended by another 2-weeks. And to us, and we talked about this on the show 2-weeks ago, I think it was, that was very apparent that that was going to be the case. The Ministry of Health’s own numbers in terms of the number of daily pneumonias by the end of August, the number of beds that would be required, they pointed very, very directly at 4-weeks of necessary lockdown, assuming an improving trajectory. Now, we haven’t seen that improving trajectory and yet there were those numbers that were still presumably valid projections. So that’s now been extended, I think KazAtomProm would have been forming a very similar view to what you and I formed a couple of weeks ago. They would have expected those lockdown restrictions to carry on.

Now, how much longer do they carry on? Well, that is anyone’s guess. I mean, in Australia at the moment in Victoria, they had 100 cases a day and they slapped a six-week lockdown onto the city of Melbourne, which is 5M people. And we’ve seen a far escalating problem compared to that in Kazakhstan and its neighbours. There is no end in sight. Obviously, there will have to be an end at some point, but is it 2 more weeks? Is it 4 more weeks? Is it 6 more weeks? Very hard to judge, and I think it’ll be very interesting now to tune in on the 3rd August when KazAtomProm has their quarterly results, because now they are obviously under some pressure to address production guidance. But equally they’ve also got now a change in circumstances; they have got this extension of two weeks, so they have the justification now to address production guidance in a different way. I’m very interested to see what they come out with on 3rd August,

Matthew Gordon: Someone sent in a question, which was (I had absolutely no idea, I couldn’t even begin to come up with an answer for), which was: what happens if this COVID situation carries on for another year? And before we get some vaccination solution here, what does that do for these producers? Because obviously, utilities have between 2 to 3-years’ worth of inventory in reserve for situations like this. They don’t want to run out. But these companies, the longer they are offline, the longer it is going to take to get online. The question was this: can those companies come up with a protocol which allows workers to get back in? And given the size of some of these, like KazAtomProm has about 20,000 workers, obviously not all of them are essential workers, they are not all in the field as it were, but how do we, as the world, how do we get back into production on these Uranium sites, these Uranium assets without endangering lives?

Brandon Munro: It is an interesting question, isn’t it? Because the scenario in which the world is still grappling with COVID in a year’s time without a vaccine; that’s a very realistic scenario. Most of the medical information that I’ve seen on a vaccine, is that we are looking at least that timeframe before a vaccine is developed and is safe and available to the public. And then there’s a whole lot of questions about affordability. There are questions about what are the attendant risks with the vaccine. This is a scenario that I have very firmly in front of my planning from the Bannerman point of view and so forth. But having said that, I don’t think it is realistic to expect that these big production centres will remain offline for that long, even if we’re seeing an escalated issue at a societal level. And there’s a few reasons why I’d say that. The first one is that we learn, we get better. The mining industry is incredibly adaptable. It probably adapts as well as any other industry, perhaps including military. It comes up with various techniques. Now that doesn’t mean that, if we’re talking about Kazakhstan, just for argument’s sake, it doesn’t mean that they’re going to be back at 100% production necessarily, but over time they would work out how they can do that.

The other thing is that, let’s say, again with Kazakhstan, that it continues to really battle COVID over that period of time, there is going to become a proportion of the workforce that develops immunity through having recovered from COVID. So, in addition to whatever other mitigating workforce steps implemented by KazAtomProm, they are going to be able to draw on people who won’t get sick. But the other thing is, what we’re talking about here is, both in KazAtomProm and Cameco situation, and some of the other companies that have been affected in other commodities, we are largely talking about preventative measures. Companies that are making tough, difficult decisions to prevent adverse circumstance answers, not only for their own workers and their families, but for the society at large, particularly in Cameco’s situation who are very keen to preserve or to avoid any contribution to the difficulties in Northern Saskatchewan. The society’s tolerance for those preventative measures will wane over time. We are seeing it wane already in the US in many different ways at a societal level. So over time, the balance will move more towards getting production and getting dollars in the door. The question becomes, in that scenario, while we’re playing this one out and role playing it out, where does that balance kick in? Because for a country like Kazakhstan, we have said it before: Kazakhstan is incredibly important to Uranium, but Uranium isn’t that important to Kazakhstan. , 20,000 employees across the country there isn’t massive compared to other hard rock commodities, such as Copper and Gold, and it is very, very small compared to oil and gas. The government, the society, the communities, we will see them accept that risk sooner, particularly in hydrocarbons and other forms of industry, than they will with Uranium. Would that be six months would have been nine months? That’s very hard to guess, but I think the idea that Uranium could be shut down for a year is unrealistic.

Matthew Gordon:  It is also quite interesting in terms of the supply story. Again, we’re going to have some old ground here, but this new data allows us to do that. The longer the current situation goes on, the less supply there is in the market, the less pounds there are on the market, and there is this undertone we’re getting from Cameco and KazAtomProm about sweeping up pounds in the spot market. It is really good news. I have got to bring this back to investors; it is good news for investors in Uranium companies. And the longer this goes on, the better is for the Tier-3, I’m calling them. I’ve got my Tier-1 producers like KazAtomProm and Cameco and the like, and then the Tier-2 are people that have formerly produced, and the Tier-3 is coming through. The longer this goes on, it is better for those Tier-3s, and lower, in terms of, there will be more need for them. There will be huge pressure on price the longer this goes on. And that can only be good for investors too. What’s your take on it from that angle? Because we talked in the past about the possibility of, if this goes on for a long time, people without cash are going to struggle, but at the same time, it is fantastic news for the supply side of the market. So how do you weigh those things up as an investor?

Brandon Munro: I absolutely agree. What we’re seeing here is the drawdown of inventory, necessarily by utilities and others, while the supply deficit widens. And that will carry on to the end of the year and even into next year because of the existing structural supply deficit, but also the guidance that’s coming out of KazAtomProm now seems pretty clear, to me, that it is going to affect 2021 production as well as 2020, as it takes time for them to reassess their wells and develop new wellheads and so forth. But here’s the rub: the more disruption that we see and the longer we take for a market to rebalance, the more volatile it is going to be. So if, for example, at the end of 2018 we had seen a market rebalance, we had seen a series of term contracts written, we had seen price discovery, and we had seen the utilities meet their requirements out to 2026, 2027, 2028, and so forth. We would have seen prices go up, no question. That was absolutely necessary to preserve existing production, let alone to incentivise new production.

But if the steps had been taken back then, it probably would have brought on enough new production at that price to avoid serious supply scarcity. But here we are two years later and that hasn’t happened, and the deficit has only got worse. And now we’ve got a serious supply disruption taking place right now. So that means upward volatility. That is great news for all producers, really, particularly good news for some of the, you used the term Tier-3 and Tier-4 producers, who can get into business. But it also becomes very important to understand as an investor; are you investing in a company that can produce producible pounds during that volatility period? Because if we go through a huge amount of volatility, like we did in 2006, 2007, and then the market settles down again by 2030, and your investment is only looking at that timeframe to get back into production, it will see some benefit, no question. Its cost of capital will go down, but it won’t be putting money in the bank as a result of selling pounds into those volatile price events.

Matthew Gordon: I think it needs some careful thinking about where you place your bets, depending on what your strategy. We have talked about it a lot before. We will talk about it again. But for the sake of today’s conversation, I do want to talk about utilities. We understand from last week’s conversation why utilities are inactive. You explained that. You articulated that last week. In terms of this Russian suspension agreement, it is just worth getting into in a bit detail about what the debate is. What is the US wrestling with. What are these politicians who are affecting the price of Uranium and the nuclear industry? What are they wrestling with?

Brandon Munro: I think we need to remember that there is a debate – sure. And there’s a lot of grandstanding and there’s a lot of political posturing and that’s what we read about because it comes out in the media. But what we’re actually talking about here is a negotiation; this is a negotiation between the US and Russia, where the US is seeking to get Russia to agree to the restrictions, and in return, Russia is seeking to get the US to agree, to allow it, to sell its Uranium, but in particular it is enrichment services, without forms of trade restrictions such as tariffs. I saw some commentary out of, it was Energy Fuels, and their view is that if there isn’t an agreement, that the resulting position will be the suspension of the trade action falls away, which we’ve said before. And they are saying that the result would be that tariffs would come in at 115%. So very, very significant tariff on Russian enrichment and Russian Uranium supply until the trade action can be re-established and resolved.

I am just repeating what I’ve seen there. I haven’t gone into the detail to understand that, and it might be that they have got access that I don’t. But of course, if that is the result, you can imagine why the utilities are just so nervous about this; because they could see those tariffs imposed on their existing contractual obligations with Russia, and unless they’ve got some a force majeure or other option to get out of it, that is going to make them pretty nervous about the cost that they will be paying for their nuclear fuel. So that is what is at stake. And there are various provisions where, for example, the US could unilaterally withdraw, giving a certain amount of notice. We’re hearing that perhaps they are playing tough with Russia, or attempting to, let’s just see how all of that plays out. But the word coming out from the US that I’m hearing is that this thing is still a long way from being resolved. We are likely to have a resolution in December, perhaps even late December. And so that gives viewers an idea of why the utilities are so distracted from what we are seeing.

Matthew Gordon: What happens if we don’t come up with something in December? Can they extend the negotiations, or does the resolution come into effect?

Brandon Munro: The resolution comes into effect. There’s no automatic extension. Effectively, what happens is that the 1998, I think it was, when the initial action, the trade action was brought, it was a dumping action that was brought, that’s the action that was suspended and why this whole thing is called the Russian suspension agreement -so that suspends that action. The status quo at that time of that action would then kick in. I’ve read from commentary from Energy Fuels that that involves 115% tariff that would be automatically applied on anything caught by that action, which is Russian Uranium and Russian enrichment services.

Matthew Gordon: We are now going to switch to the Crux investor Club. So thank you very much, everyone for watching this. I hope you enjoyed this week’s show with Brandon. We are now going to segue over to the Crux Investor Club members where we are going to talk a little bit more about the geopolitical component and the impact on investors. So for instance, what’s happening in Iran; there has been an explosion. We’re going to talk about what’s going on, and should we be worried? We are going to talk about Russia a little bit more, with Nord Stream 2. And, how that potentially influences what is going on in the nuclear Uranium space, especially for investors. Thanks very much for watching.

Brandon Munro: Thanks to everyone out there who is supporting us.

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KazAtomProm (KAP) – Perceptions, Misconceptions and Price Discovery (Transcript)

NAC Kazatomprom JSC
  • Shares Outstanding: 259M
  • Share price US$13.9 (10.07.2020)
  • Market Cap: US$3.6B

Interview with Riaz Rizvi, Chief Commercial Officer of JSC NAC Kazatomprom (LSE: KAP)


Rizvi spends time talking about perception in the market and how they wish to be perceived and adversarial narrative in the market between US commentators and Russia and its nuclear and uranium partners.

We discuss production issues and playing catch up, whilst dealing with the growing concerns of COVID-19 within Kazakhstan. Why have they managed to maintain guidance even with the extension to the lockdown period and when will they have to dip into the market? We discuss partners, partnerships, dividends, target prices, term-contract market, and the supply-demand picture in the market.

We Discuss:

  1. 1:52 – Company Overview
  2. 4:25 – Pre and Post 2018: Company History and Development of the Business Model
  3. 8:09 – Perceptions of Kazatomprom: Adversarial Language, Russia Ties and Effect of the 232 Petition
  4. 15:51 – Rumours Addressed: Forcing Higher-Cost Producers out of the Market to Fuel Growth?
  5. 17:34 – US Rhetoric and Impact on Company Growth
  6. 19:21 – JV Partners and M&A Possibilities Outside of Kazakhstan
  7. 23:06 – Delivering on Contracts and Continuing to Pay Dividends: How and Why?
  8. 26:47 – Lags in Production and Wellhead Development: When Should We Expect More Guidance on Timing?
  9. 30:50 – The Mysterious Utilities: When Will They Start Impacting Price?
  10. 35:22 – Lack of Quick Price Growth and its Impact on the Market
  11. 40:08 – US Government’s Involvement in Nuclear and its Effect on US Producers
  12. 43:42 – Resumption of Production: Process of Getting Back into Normality

CLICK HERE to watch the full interview.

Matthew Gordon: Riaz, how are you doing, sir?

Riaz Rizvi: Very well. Good to see you.

Matthew Gordon: Thanks for joining us. Fantastic. First time on the show, everyone is excited, and obviously, a lot going on at the moment, but I always ask people to kind of kick off and give us a 1-minute overview.

Riaz Rizvi: KazAtomProm is the national operator for Kazakhstan in the nuclear sector. We occupy the whole front end of the fuel cycle. We are the largest producer in the world. We have the largest reserves in the world. And just to put it in perspective, Kazakhstan produces 40% of the world’s primary Uranium production. KazAtomProm is about 24% and then the rest is attributable to our joint venture partners. We are also one of the lowest in terms of our environmental footprint, because of the way that we mine. All of our deposits are ISR amenable – which we will come on to I’m sure, in a few minutes, but it means that we have the smallest environmental footprint relative to our production size.

We have been public since end of 2018. We IPO’d on the London stock exchange and on the Astana exchange. And, as far as the company is concerned, being the lowest-cost producer, we pretty much occupied the bottom tier of the cost curve. It makes us very resilient, very financially sound, low debt leverage ratios. And I would say, it seems maybe somewhat contradictory, but having been the largest producer in the world since 2012 we are now also the largest seller of Uranium in the world. So it is a combination that you don’t often see, I would say in commodities, to have all of those factors: largest, lowest-cost, least environmental footprint with the biggest reserves and the largest sales, but it’s a fairly unique business from that respect.

Matthew Gordon: Well, it is. It’s a very unique business because you have come from a culture of, well, a business model and a culture of being a state-owned enterprise, where typically, and I’ve worked on the oil side of this equation, where the focus is on production, not commerciality. With the listing 2-years ago, you were having to change things. So, what is the difference between pre-2018 versus post-2018?

Riaz Rizvi: Yes, it’s night and day really. You know, when you go back to the inception of KazAtomProm back in 1997, the country produced less than 1,000t of Uranium, so it was not even a player in the market and put a very strong emphasis on growth. And I think a lot of mining companies do assume that the more you produce, the more money you make, because you’re driving down your costs. And that was really the mindset up until 2016. But we saw over that period a huge destruction in value in terms of a collapse in the Uranium price: from a peak of about USD$138 in 2007, you know, certainly post-Fukushima, a lot of demand came out of the market and Uranium prices collapsed to around USD$18 in 2016. It became clear to everyone that we needed to rethink our business model, and early 2017, which is when I got involved with KazAtomProm, we started looking at this value over volume model.

It’s not rocket science. It is something that a lot of companies have adopted, but I think we were fairly uniquely placed; one because of the significant size that we occupied within the market space, really taking a leadership role and emphasising the responsibility that we have to look at the market and produce in relation to the market rather than chasing this objective of growth for its own sake. But also the unique ability that we have with our in situ recovery mining to basically flex up and flex down our production without it actually impacting on our unit cost of production, this is a very important factor and really drives our strategy now, which is much more market-centric. So from that perspective, we design our medium and long-term production and sales plans based on our fundamental view of the market, which means that in 2017, for the first time KazAtomProm announced that it was cutting production, and then we extended essentially a reduction in our planned production for the period of 2018 to 2020. And most recently we’ve extended that to 2021. And that’s made a big difference. We were not the only ones to cut within the Uranium space. We obviously saw Cameco, Orano, the Russians – RosAtom, also taking assets offline. We saw Paladin disappear and a number of other smaller companies basically go into care and maintenance.

There’s been a rationalisation of the industry which really kicked off in 2017. And I think it has really gone a long way to bringing the market back into balance. Apart from that, there’s a lot of other things that we did internally, which I’m happy to talk about.

Matthew Gordon: I do want to want to talk about those, Riaz. Let me, if I may, because there are a few things that you touched upon there; the thing I want to start with before we get into assets and contracts and everything else that is exciting the market at the moment, is perception. So they brought you in 2017, you’re an ex-trader with Constellation, I think. You have worked in finance. You’ve also got Russell Bannerman and Neil Longfellow in there on the board to show some degree of independence, not independence – maybe that’s the wrong word, some sort of unbiased governance, I think, right? Which, coming back to the state-owned components, there’s a very strong adversarial language used by North American companies when they’re talking about KazAtomProm and Russia. And we saw that in the Section 232 petition, some of that language. And do you think that is weighing heavily on the mind of the board? Do you think it affects decision making, or do you have to just get on with business?

Riaz Rizvi:  Well, I would start even earlier than the IPO in looking at what KazAtomProm has been doing. I mean, our former chairman of the board, John Dudas, who is an ex-BHP Metals and Mining Executive, he came on board, I think about 3-years before our IPO. I think very early on there was a realisation that trying to bring about a governance structure and an independence was very important. And in fact, if we go back to the creation of Samruk-Kazyna, which is the Sovereign Wealth Fund of Kazakhstan, all the major national companies are all housed under this umbrella of Samruk-Kazyna. So, the national oil company, telecoms, postal service, rail, it all caused them problems. They were our 100% shareholder, and the mandate for Samruk was very simple, which is to create long-term sustainable value.

There was already a degree of separation between our company, KazAtomProm, and the government. And that was very deliberate. And the second part of that kind of long-term government thinking was trying to get as close to OACD standards as possible in pretty much everything that it does; from economy, healthcare education. A big part of that was reducing the role of government in the economy, and the privatisation really came from that. So KazAtomProm was the first company to IPO within the Samruk-Kazyna portfolio and obviously, Samruk have very ambitious plans to privatise many of the other companies within the portfolio and it’s a very deliberate government policy to reduce its role. So now, essentially, Samruk-Kazyna has gone from being a 100% shareholder to being 75% shareholder. And really the governance structure very much predated even the discussions around the IPO, which is atypical. Very often when you’re getting a government company ready for IPO, you know, suddenly you’ve got a ‘rent a board’ that pops out of nowhere. But the guys on our board, the independent non-executive directors are all industry guys. They have really strong track records in our sector, or in governance around accounting and finance and so on. And they brought a huge amount.

I would say there is a clear distinction, and I think it is evident in the relationship that we have with our other investors that really we cannot give priority to our major shareholder, and our investors are very comfortable with that.

In terms of the role and the relationship with Russia; look, I think you know, Rosatom is a partner of ours, a JV partner of ours. If you look at our production, we have 13 mining companies. Three are 100%-owned and subsidiaries. The other 10 are joint ventures. We have a joint venture with the Canadians, with Cameco, with the French – Orano. We have 2 joint ventures with Japanese Consortium, which include a number of utilities, one led by Sumitomo the other one by Marubeni. We have a joint venture with the Chinese CGN. So Rosatom is clearly an important joint venture partner for us. But we, we have a strategy which is very focused on KazAtomProm and Kazakhstan’s interests and looking at some the supply-demand picture in the market. And I think the scaremongering that some people have been trying to associate Kazakhstan, or put it within the sphere of influence of Russia, I think is kind of a naive approach.

Matthew Gordon: There has been a lot of that narrative in the market because it also goes to, the same conversations go to ‘you are controlling price in the market, trying to put people out of business’. But I’m reading your literature and it says you are a commercial enterprise now, you are not a state-owned operation, although you are only partially listed. Is it the same answer? Is it a sort of naive outlook to think that you would want to operate at sub-optimal levels?

Riaz Rizvi: Yes, I think that the industry hasn’t done itself any kindness by ignoring market fundamentals and we have all paid the price of it. And it really talks to the sustainability of the industry overall that we would have allowed prices to fall to levels where, even the largest and lowest-cost producer is struggling to cover their costs. And if you look at the demand growth that we are seeing in the market over the next 10-years, it is absolutely critical not only that that some of the moth-balled production comes back into the market to fill that gap between supply and demand, but also the new production comes online. And right now, the price signals, unfortunately, aren’t there to incentivise that new build or even really bringing back very quality Tier 1 assets to the market. So, the risk is that, and we’ve seen it in many other commodities: in electricity and coal and iron ore, everybody knows that we need material in the future, but the price today doesn’t incentivise the investment that is required to get us there.

Matthew Gordon: I’m just going to keep on this thing, because there’s a few conversations going on out there and I just want to either knock them on their head or at least add some new data to them. Is there any truth to your desire to try and force some of the higher-cost producers out of the market so that you can maintain and grow, or even grow market share without necessarily growing the business?

Riaz Rizvi: No. I mean, if you look at everything that we have done over the last 3 to 4 years it is very apparent we are cutting production, we are reducing the amount that is going into the market, trying to bring the markets into balance. And we believe that a healthy Uranium market is really the right answer not just in terms of giving utilities a choice and a diversified portfolio of supply, which we think is really the right strategy for any utility that is looking for security of supply – we don’t want to be a hundred percent of anybody’s portfolio. But you know, also it’s important that the nuclear industry know that the Uranium will be there for them as they make these very large capital investments into new nuclear power plants, and putting that at risk, it really jeopardizes the industry. It’s absolutely not in our interest.

Matthew Gordon: A final one in terms of this area: I think Mr Pirmatov has stated that they want to grow their US production in terms of supply, market share. Sorry – market share. Currently it is at about 8%. Do you think the anti-Eastern European, Russian, Kazakh rhetoric will affect your ability to do that?

Riaz Rizvi: I don’t think so at all. It’s very interesting. I’m sure many of your viewers are aware of the Section 232 investigation, where 2 petitioners basically launched, and the Department of Commerce presented a view on. We consulted with a lot of US utilities at the time, and it was really very positive to see how supportive the US utilities were of KazAtomProm and of Kazakhstan. Kazakhstan is a very strong ally of Western Europe and the US. There is a huge amount of foreign direct investment: over USD$40Bn, just Chevron’s investments in Kazakhstan in oil, as I’m sure you know. So, in terms of where Kazakhstan’s economy is most closely tied, it’s I would say it’s very well balanced between all of its neighbours. So yes, I think the actions of the utilities who are our customers probably speak volume in terms of just don’t believe the hype of a couple of, you know, people.

Matthew Gordon: I feel a song coming on. No, don’t believe the hype. You mentioned a few of your joint venture partners there, and you’ve also said you need to keep developing mines, and I do want to get on to production in a second here. You have a number of joint venture partners. Was that a function of needing to buy-in the skills? And if you were to develop new mines going forward, would you need those partners anymore?

Riaz Rizvi: That’s a good question. You know, the short answer is those joint ventures were really created in the early days of KazAtomProm when there was a huge amount of infrastructure and not much access to capital. It was a new country. It had no experience in terms of marketing to the West. So, our joint venture partners brought a number of skills, not necessarily in mining, which I think is most people’s assumption because in fact, our expertise in in-situ recovery mining has really been there from the start and we are still very much the world leaders there. But in terms of access to markets, in terms of access to technologies. The Canadians brought us access to conversion IP. So, you know, we have the ability to build our own conversion facility in Kazakhstan, should the markets need that. With the Russians, it was access to SWU capacity, the enrichment capacity, all of which were essentially leading towards having a position within the whole front end of the fuel cycle; mining conversion enrichment, and then fabricating the fuel that goes into a nuclear power plant which is essentially a joint venture between ourselves and our Chinese partners that should be coming online shortly.

Matthew Gordon: You are 100% in Kazakhstan. There is a very difficult environment. You are ISR specialists, that’s your focus, but there is a lot of talk in the marketplace about the timing of when long-term contracts will start to be signed again. And that has been put out, and again, we’ll get onto utilities and long-term contracts in a second, but is there any part of your business plan which involves M&A activity outside of Kazakhstan?

Riaz Rizvi: It is very difficult to justify investing anywhere else. We have priority access to all Uranium deposits in Kazakhstan. So what that means is, and it is very different to, you know, some of the other commodities that you deal with; when the price runs up, suddenly you see 500 juniors pop up on the TSX and the ASX, all of whom claim to have the next big deposit. No foreign company can come and start exploring for Uranium or producing Uranium in Kazakhstan. That is embedded in the legislation and going forward we cannot sell down our holdings in those joint ventures below 51%. In all future joint ventures, we will be the majority shareholder. But I think the drivers that brought those partners into Kazakhstan, for them was very obvious – it’s access to the best resources in the world. For us at the time, it was very logical. But if you look at the amount of cash that we generate relative to the cost of bringing new deposits online it is absolutely the case that we don’t need a joint venture partners anymore. So where are we to bring partners in it would be for a much more strategic reason, if at all.

Matthew Gordon: And in recent announcements you have given guidance to the market that you have got to be able to deliver against contracts for 2020, even giving yourself the option of maybe dipping into the market if you need to, depending on how long COVID lockdown restricts your production capabilities. And in the same breath, you talk about continuing to issue dividends. So how does that work? Why is that not affected?

Riaz Rizvi: Well, you have got to basically separate production from sales – that’s the first thing. We have the lowest-cost production, and we’ve seen markets you know, really respond to the change in supply and demand dynamics in the short term. Uranium prices have gone from USD$25 pre-COVID to USD$33 today. In terms of revenues, our sales haven’t changed. We still expect, in fact, most of what we are selling in 2020 was already committed before we really started to see COVID impact production. Our inventory levels, which were a little bit higher than we wanted, or that we aimed for, give us something of a buffer. But virtually all of our sales are tied to the Uranium spot price. From that perspective, even if we do have to buy in the market to cover some of our sales our contracts will never really be out of the money, so to speak. We feel very good that even having reduced our production levels this year we will be able to meet our sales targets and our revenues are certainly going to be helped by a higher Uranium price. It allows us to pay out dividends going forward and we are very comfortable about it.

Matthew Gordon: I’m just trying to understand the logic and the mentality of it. Because obviously you have got contracts, you’ve got some production, but it’s been affected by this, we are at 4-months now of this lockdown period. You are eating into inventory off the balance sheet. I think the market would forgive you if he didn’t pay dividends, but does this come back to this perception issue that you’re having to work just a little bit harder?

Riaz Rizvi: No, it’s you know, it’s a business with cash costs of USD$11 to USD$12 selling Uranium at USD$33. You know, our All in Costs are somewhere in the region of USD$13.50 to USD$14, so it is a very cash generative business. And as a result, we have a very clear dividend policy in place, which is essentially that we pay out 75% of free cash flows as long as the adjusted EBITDA attributable to that stays below 1x. And we are well below that, as I mentioned, we are fairly unlevered business, so we can afford to pay out cash. And frankly, there’s nothing else really that we see generating the same types of returns for our investors as our Uranium mining business. When the time is right, we will be reinvesting into new deposits. But the market isn’t telling us to do that right now.

Matthew Gordon: Can we talk about lagging between production versus wellhead development? Because, obviously COVID has impacted activities in country, as it should do. You are doing all the right things for all the right reasons, but what is the lag there? And when is the next review point when you kind of come back to market and say, well, actually we are going to reassess things?

Riaz Rizvi: Yes. I guess there are 2 parts to your question; reassess in terms of you know, whether we need to go back into the market and buy in material – I think we are getting close to that point. Reassess in terms of what we do in relation to social distancing and in protecting our employees and their welfare, which is obviously our top priority. It’s a top priority of any mining company – that is an ongoing dialogue with the government, the local health authorities, as well as reviewing whether the preconditions are met to be able to start bringing people back on site. We took a view a week ago that that just wasn’t the case. And we will continue to re-evaluate as the situation unfolds. It is very, very difficult. Kazakhstan moved so early and they were so successful at closing down the growth of this pandemic in-country. And then as all countries are grappling with this question, they started to relax measures. And then we started to see a fairly significant increase in the number of cases, which has forced the government to basically reimpose some restrictions. And we have got to basically measure what we do relative to what is happening in the country and in the communities around our mines.

Matthew Gordon: But the longer this goes on, you run out of options. You were able to, in the last set of guidance, maintain guidance, which is good, but like you say, you had given yourself the option of going into market. But what’s the next point? What’s the next date that we should be looking for in terms of the next guidance issuance from you?

Riaz Rizvi: It is very difficult for us to say. I mean, take a step back; you asked about the time lag, we are not going to see really any material deviation in our production volumes for the first half. In spite of the fact that we said that mid-April, we were imposing social distancing, force measure was declared at all the mine sites, because there is at least a three to 4-month lag between when you are doing something on site and when the Uranium is being produced, it means that the steps that we took in April are only really going to affect the second half of the year. The longer that we continue to have to maintain the social distancing and you know, we can’t resume the drilling and the injection that is required, it may not necessarily impact on this year’s production, but we might start to see an impact on next year, but we are not guiding to 2021 yet.

Matthew Gordon: Because your inventory levels that I’ve read, are about 6-months, is that about right?

Riaz Rizvi: Going into this year they were around 8-months and our target is 6 to 7-months. We do need to stay at around those levels in order to operate properly.

Matthew Gordon: And then so what you’re saying in terms of when you will be able to inform the market about what the impact has been, it may roll over into next year. You are a calendar year, are you?

Riaz Rizvi: Yes.

Matthew Gordon: Interesting. Let’s talk about utilities then. Because the great mystery that is utilities; now, we have had a few conversations. We were involved with the AusIMM conference last week. I chaired a panel. Fantastic speakers and so forth. But the general mood seems positive because the macro story is positive. Obviously, the current situation we find ourselves in with COVID and reduced supply around the world is, as I said earlier, getting Uranium, bulls quite excited, but everyone is waiting for utilities to do something. And the feeling is that they can’t do anything until 2 things happen, and 1. that is when we get a sense of what’s happening with COVID, you know, because they’ve got their own issues, and 2. the US elections. Do you agree with those 2 reasons or do you think there is more to it than that? Why aren’t they making decisions now about long-term contracts?

Riaz Rizvi: Well, taking a step back and looking at how the market has been over the last six to seven years, it has really paid utilities to defer their buying decisions because the market has just continually fallen since 2012. I think that’s the basic mindset. And that mindset has been helped by the fact that in an oversupplied spot markets they’ve been able to defer long-term negotiations by buying one to three years out. And that’s a pattern that we’ve really seen with financial intermediaries, buying in the spot market and offering one to 3-year RFPs. We haven’t seen a huge amount of contracting longer term. But at the same time, and everybody recognises this market, you know, you look out to the end of the 2020s and you’ve got this gaping deficit between demand and supply. We all recognise that new production needs to come into the market and the price signals aren’t there. For those who are invested or are excited about Uranium, I think there is a lot to be excited about because we do see that prices need to rise to incentivise new supply, to fill that supply-demand gap. And, you know, Uranium is a non-substitutable good; you cannot put anything else into a power station. And price elasticity of demand is virtually zero because even when Uranium prices go up, that is such a small part of the cost of a megawatt hour. And in most jurisdictions the nuclear generator is the base load lowest cost producer of electricity, that essentially, utilities are more focused on security of supply and less focused on absolute price.

Now, having said that the last few years there’s been no issues around security of supply because you could always pick up material in the spot market. What COVID has done, I think is, was the market went into balance in 2018. The loss in production that we’ve seen this year, and not just ourselves, but in pretty much all major jurisdictions means that there is a much less material in the spot market. So why aren’t utilities doing something about that? You know, frankly I’ve been on the other side of that table as a utility trader looking at fuel procurement, and the short answer is they’ve got much more important things and much tougher things to deal with right now than their nuclear fuel procurement. And I think the decision making is really around, today, dealing with COVID, dealing with the other parts of the front end of the fuel cycle. You know, there are a lot of questions around enrichment and conversion. And yes, they will get to Uranium. Previously I would have said that is a discussion for next year or maybe the year after. But I think those discussions will happen sooner than later.

Matthew Gordon: When are you going to get back into contracting?

Riaz Rizvi: We are always contracting.

Matthew Gordon: But what I want to talk about is the price. The price had a little bit of a bump recently. It settled back down, but, it has really moved the needle for a lot of people. I get that you are the lowest-quartile producer. And that is great for you. You can still make money, but there has got to be an optimum price at which you want to contract. You want to drive the price higher, don’t you?

Riaz Rizvi: I don’t want to drive the price higher. That’s not our objective. But I recognise that the price does need to go higher for supply and demand to balance out this decade and beyond. In terms of a target price – we never give one. We can’t. But you know, I think we are still a way off a long-term sustainable price, and that price is well below a new-build incentive price. Because you have got to think of the billions of CAPEX that need to go into a new mine, you know, the 10-year lead time to bring new production into the market. And a return on that CAPEX with, by definition, probably any new projects coming on, not having the same economics that we are seeing from the tier one projects that we run and that some of our partners run as well.

So, long-term, I think you are right to be bullish about Uranium. Short term, there are still factors in the market, which means that buyers are not focused on buying Uranium right now. And you know, this big run-up that we’ve seen has really been driven by producers replacing pounds that they’re not producing this year from their own mines, due, largely to closing mines for economic reasons and COVID. So we haven’t seen any utilities, we haven’t seen any financial players in the market this year, which is a real difference from, let’s say, some of the run ups that we’ve seen in the previous few years, which have been more trader and speculation driven rather than fundamentally driven.

Matthew Gordon: Thank you for that. I appreciate that there are places you can’t go, which is fair enough. But what do you think that’s going to do to the marketplace? Because there’s a lot of companies, and I don’t necessarily want you to quote or talk about companies here, but just generically, there are a lot of companies that need prices in the $50s and the $60s to get back into commercial production. And that is where they want the market to go. But between now and then there’s a long, long road ahead. Do you think that the return to these higher prices are imminent, or do you think we are looking towards the middle of next year before we will allow the market to actually find its own feet? Because it seems like it is being held back at the moment by several factors, which again, we can go into later.

Riaz Rizvi:  I think when we see utilities and producers sitting down, is a tough question to answer because I do genuinely think that a lot of it is tied up around utilities really struggling to deal with their issues in the rest of their portfolio. I mean, nuclear is phenomenally resilient. You know, you reload once every 12 to 18-months and then you just kind of close the gate and run the plant-based load. But a lot of our customers have coal in their portfolio. They have gas in their portfolio. They’re struggling with a whole bunch of issues. Nuclear fuel isn’t necessarily one of them, but at the same time, I think when utilities start to go out for those 1 to 3 year RFPs, depending on how much material is available in the spot markets that is offered to them in the form of a carry, if those pounds aren’t there, I think that’s the point at which utilities and producers need to sit down and say, all right, we as producers, in order to ensure the next 5 or 10-years, we need a price level that allows us to make those investments. We are not going to lock in a 10-year loss. And therefore, if you need material in the next few years and beyond, let’s start to have the conversation about where we can make a fair return on our assets.

Matthew Gordon: Given that you want to get more of the market share in the US, do you see the actions of the current administration and the potential next administration in regard to their involvement with the Nuclear Fuel Working Group having any immediate effect? Because they seem to have made it into a very big puzzle that they’re trying to solve; which is the whole nuclear fuel cycle. What is that going to do for US Uranium producers, or wannabe producers?

Riaz Rizvi: Well, you know, keep in mind that KazAtomProm produces about 24% of global primary production. Only less than 10% of what we produce goes to the US, so it’s a very small part of our portfolio, but the US is by far the largest buyer in the world. They are buying 50M lbs a year. It makes sense for us to want to grow our market share in the US and in Europe, really to diversify our portfolio. But, you know, whether I think that there are policies that are going to make it more difficult for us to do that, first of all, no, I don’t really think that’s the case. I don’t think KazAtomProm is being targeted, and Kazakhstan is recognised by our customers as a key component within their security of supply strategies.

The Working Group has made some recommendations, which would see funds go towards supporting production of domestic us Uranium, which will then be used as a strategic stockpile. So that production doesn’t impact on global supply and demand. And I think that was an excellent decision, because the last thing we need is market forces that distort prices and slow down the recovery of the industry, which you know, quota or tariff or subsidies to US miners for material that gets sold to a utilities would have brought surplus material into the market. And that’s absolutely not what the market needs. I think the decision was the right one. I think further decisions will continue to be very mindful of the fact that US utilities produce 20% of US electricity through nuclear. And it’s one of the only countries really in the world where nuclear does struggle in certain markets with very low gas prices, but it is the most reliable baseload source of clean energy.

Matthew Gordon: I just wanted to ask you about Mr Pirmatov’s quote: ‘Current prices are not sustainable. We are looking at the market from a long-term prospect, and it is in our interests that the changes will be sustainable and not for the short term’. I think there is a desire by any commercial entity to see prices go up. And I appreciate that you can’t give me a number, that is fine, but because we are running out of time, I know you’ve got a hard stop, so the last question, if I may, is with regards to resumption of production; that’s not as easy as it sounds. You’re not just turning a tap on. You’ve got plus 20,000 people, who are dispersed currently, not where they need to be. And then from a technical perspective you have got ISR fields, and just the way that they operate, what is the process for getting back to normality in terms of production as you are targeting it?

Riaz Rizvi: Well, this is unprecedented in our history, that we would take essentially all wellfield development offline for this period of time. The short answer is, we don’t know what the final impact will on our production. It’s very difficult for us to gauge how quickly we can ramp up. I can certainly say it’s not a binary outcome. If we start to bring people back onto site, it will be slowly and cautiously, and it will be really a function of what is happening in terms of this pandemic. I don’t see us, you know, at the end of four months suddenly, fully staffed and back trying to achieve full production. It’s just not realistic. It’s going to take longer and it’s going to be more staged, I suspect, than if we were operating a single, conventional underground mine, where as soon as you hit go you start to produce. And then, of course, the time lag between when we start to re-drill, re-inject, and those deposits start to produce is anywhere three months plus.

Matthew Gordon: It is very challenging with an organisation of that size; it is like military precision required to get everyone back to where they need to be, but technically, the longer this goes on does it get harder to get back into those fields and be producing?

Riaz Rizvi: Yes, I mean, I would say nuclear precision rather than military precision.

Matthew Gordon: Probably a better phrase. I stand corrected.

Riaz Rizvi: Yes. It does. It certainly does get harder the longer we are not operating because we are moving into winter, and for anybody who has been to Kazakhstan, we are going to see minus 40º. And at those sorts of temperatures, we cannot continue to inject the low pH solution that will be producing Uranium in the spring. So we can continue to drill, but a certain point we actually run up against, essentially, a hard stop on the preparatory work that is necessary for next year’s production.

Matthew Gordon: Beautiful. Talking about hard stops. I’m informed by your very talented PR team that you have one now. I will say, thank you very much. We are absolutely delighted that you’ve come on the show to talk to our listeners and viewers. I appreciate your candour as well. You have got a tough road ahead. As you say, nuclear precision is needed to deliver. Looking forward to hearing how you get on. Thanks, Riaz.

Riaz Rizvi: It has been a pleasure. Thanks for having me on the show.

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#14 Uranium Sector Shutdown Excites Investors – Brandon Munro (Transcript)

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.

A “fantastic week” for uranium? We run through Kazatomprom’s possible shutdown extension and the huge impact this could have on the available pounds in the market.

Then, we look at the political side of things. With the Democrats no longer discriminating nuclear power from other forms of green energy, the November election no longer carries any uncertainty for uranium investors.

We Discuss:

  1. 3:34 – News from Kazakhstan: Implications for Kazatomprom and Uranium Investors
  2. 16:49 – Parallels with Cigar Lake Flooding: What’s to Expect from the Uranium Market?
  3. 23:43 – The Great Unknown of US Politics: Democrats to Support Nuclear?

CLICK HERE to watch the full interview.

Matthew Gordon: How are you, sir?

Brandon Munro: Well, thanks, Matt. How are you?

Matthew Gordon: Yes, good here. End of the week. Busy week in the world of Uranium this week. It started off by I did that AUSIMM conference, online conference on Monday. Finished at 4:30AM. I must admit, my thinking and functioning was not particularly good on Tuesday, but we got through it. And then a lot of news, which we’re going to talk about now. Shall we do it?

Brandon Munro: Let’s do it. It has been a great week for Uranium, actually.

Matthew Gordon: It’s been a fantastic week.

Brandon Munro: Nice for the conference organisers to come out with the online conference. It is a lot more accessible during a week like this.

Matthew Gordon: Yes, true. And we will talk about it in the Crux Club afterwards. We’ve got a few topics that we are going to talk about today. And a few topics which we are going to save for the Crux Club members at the end of this conversation. Let’s kick off with, I think, the news that people are talking about most online, which is what’s happening in Kazakhstan, and what are the implications? So, what are you hearing?

Brandon Munro: Yes, well, there is chatter online about Kazakh’s shutdowns and extensions, but, you know, I just don’t think this topic is getting the eyeballs and getting the chatter that it deserves. We’ve been talking about this every week, so anyone who’s been tuning in will be well across this issue. And I guess we have been talking about it and giving lots of bandwidth to this topic because it’s just so important. So here we are on the eve of KazAtomProm needing to announce an extension of their three-month shut down. And unless you are deep into a Uranium group on Twitter or talking to analysts who really cover the space, it’s just not out there. No one is really talking about it. So great opportunity for people who are well-informed and who are looking to coincide other events like Australian tax loss, selling coming to an end, et cetera.

What’s happened? Well, the Kazakh government has announced that from 5th July, they’ll be reinstituting a hard shutdown for initially two weeks. And the 2-week period was a midpoint of 3 scenarios that were put to the Kazakh cabinet. People who have been following this would know that on 29th June President Tokayev instructed the Ministry of Health to come up with a proposal. Now, the recommended path was in fact a four-week shutdown. And what the minister of health did is he laid down a few scenarios, or projections, as to what the daily hospital admissions would be by the end of August, according to either not taking any action, taking a two-week shutdown or taking a four-week shutdown. And he recommended the 4-week shutdown, which incidentally would have had 2,500 hospital admissions daily, and the requirement for 30,000 hospital beds capable of looking after people with severe COVID-related illness.

Now, the president announced a couple of days later that they would go down the 2-week path, but certainly reserved the possibility of either a two-week extension or further tightening, if they don’t see progress, basically. And that was a position that was reemphasised by the deputy prime minister who emphasised again, that extension would be reviewed. And I think the implication here is it’s quite likely unless they really see good news during those two weeks. And the rationale for the 2-weeks was a little bit… they attempted to base it in medical science; saying that that is the gestation period. It seems to me to be, here is a minimum amount of lockdown that they can take, and partway through that lockdown the Kazakh health authorities will look at where their case load is and then decide if it needs to be extended.

So when you apply lessons that have been gained from other countries, for example, where a lockdown doesn’t have an immediate effect; it’s not a silver bullet in a 2-week period, unless you’ve got highly localised breakouts that you are looking to contain. I do expect that it will be extended in some form. If you look at where we are at with their case numbers, when KazAtomProm announced on 7th April, that they would be initiating a 3-month production disruption, the cases were somewhere around 50 new cases a day. You know, we’re talking 1,500 cases a day now in Kazakhstan, and that is after some significant lockdowns back in May.

Plus, what we’ve got is a range of measures that the state commission discussed in conjunction with this announcement. And one of those measures is that 80% of workers in national companies should be working remotely. So that also correlates quite closely with what KazAtomProm is doing. They have got about 80% of their workforce, probably a little bit more, who are at home at the moment, either working from home if they’ve got corporate roles, but mostly on some sort of a furloughing arrangement. So, of course, they won’t be able to come back to work, and they’re not going to want to bring people back to the fields, start acidifying new wells and doing wellhead development and then being told on three days’ notice, no, the caseload is back up too high. Sorry, you’ve got to go home again. You would expect that KazAtomProm management are going to have to look for some level of stability before they would want to start bringing workforce back.

All the writing is on the wall for an extension here. I feel for the KazAtomProm executives and I feel for the employees and shareholders, but in terms of, for shareholders, you have got to remember that the last time that KazAtomProm announced this production disruption their margin went up significantly with the Uranium price. I think shareholders aren’t going to do too badly. They’ve got a nicely inbuilt hedge here for the extension that we’re going to see.

Matthew Gordon: Obviously not only KazAtomProm and the board and the workers, but also the people of Kazakhstan, because it does feel a little bit compromised – the decision-making. As you say, 2-weeks, it suggests to me that when the world of politics and science collide, you don’t necessarily always get the right answers. And, it would seem logical that there will be an extension based on the data around the world, but we shall see.

But let’s get back to KazAtomProm. What will this mean technically for them? With the fields, there’s been again, conversations online, on Twitter in chat rooms, people trying to understand – nice mug, by the way – trying to understand what could happen technically if this extended period of lockdown continues, will they be able to just have the fields ticking over? Will the Uranium be, I think the phrase was ‘frozen in’, as it were? What are their options? How do they keep this thing going so that when they do get a chance to, you know, get things back up into production, the ramp up time isn’t more extended than it needs to be?

Brandon Munro: The Uranium production has been ticking because, as I think everyone who has been following this show for a while would have gathered, the fields were already acidified when the initial wellhead disruption was announced. And so those solutions that are coming out of those in situ recovery wells initially weren’t affected, but of course the recovery starts to drop and that ticking starts to tick at a much slower pace. And that varies according to the different assets. The better quality assets will have a longer period in which they tick along than some of the poorer quality assets. The important thing here though, is that after three months of no forward wellhead development, many of those assets would be ticking really quite slowly now. And if the production disruption is extended for any length of time, you would expect, materially, that many of those assets will stop ticking. We will see production coming out of those wells that don’t have a forward trajectory of wellhead development to look forward to, will stop production.

Now for your question on getting back into wellhead development, well, there are a couple of things about that. The first one is just sheer logistics; KazAtomProm employs more than 20,000 people, and the majority of those will be involved in this type of field-related activities in one form or another, whether it’s doing the wellhead development or logistics associated with it, et cetera. It’s a very big exercise just to simply remobilise that many people. And you might expect that they’ll do it in phases, et cetera, et cetera, particularly, which seems very likely for the foreseeable future, if they need to be doing that conforming with all sorts of social distancing rules, transmission rules, et cetera, et cetera.

KazAtomProm, in this part of Kazakhstan where most of their development is, it gets pretty cold by about October. They can start having decent-sized snow in October. That doesn’t stop well head development. But what it does do is it does make logistics that little bit more difficult. They are probably keeping an eye on the confluence of seasonal factors, logistical factors, but primarily it’s about health factors and the government policy.

Matthew Gordon: At times like this, you have got to be mindful that people’s lives are at risk. You can’t play with that. And I think the board of KazAtomProm, like many, many others, are making the right decisions, but at the same time in the background, you’ve got a cheering mob of Uranium investors who are absolutely delighted for a different set of reasons: that this supply to the market is being drastically affected. And the hope is that that will drive price discovery in the marketplace. I guess what the question is, you know, what are you hearing with regards to when you think things could come back online in Kazakhstan? Or is it just unknown at the moment?

Brandon Munro: It’s unknown, it’s unknown. And what will be really interesting is what guidance KazAtomProm chooses to give. They will need to give some guidance because they are listed on the London Stock Exchange. And they are very aware of that. And they’ve provided what I think has been good, accurate reporting to LSE over this period. But from about 7th July, that’s when the three-month period, since they first announced this, an estimated three months comes to an end. So somewhere around that time, they will need to be thinking about updating investors. The real interesting question is, what timeframe, if any, does KazAtomProm put on the extended production disruption? Do they take the path that Cameco has taken, and just say, look, we are down for an indeterminant time? Or do they try and play it the way the government has, and says, look, it’s this much, but it could be extended?

It’s the uncertainty of this that I think will have the biggest impact on the minds of fuel buyers in particular. The cheering mob, I don’t think they are going to be too influential in the equation here. It is obviously important for equities and equity sentiment, but in terms of the actions of KazAtomProm, or Cameco for that matter, or fuel buyers, that’s not a relevant factor at all. That’s just a side show. And people within the industry aren’t exactly cheering at moment because no one who is on the supply side here really revels in a competitors’ misfortune when it’s like this, when there are lives at stake, as you say.

What what’s going through the mind of fuel buyers right now is still COVID distraction. It’s still, we are not hearing about any real level of contracting taking place or mobilising for long-term contracting at the moment. We’ve got this pause in operations for fairly understandable reasons. What will be interesting to see is if KazAtomProm leaves a very wide-open scenario here, whether that’s enough to get the attention of fuel buyers and then to start realising, as you say that we’ve now got a situation that’s likely to lead to price discovery. And if you’re too slow in that situation, you can be on the wrong side of price discovery.

Matthew Gordon: Yes, it’s interesting. And we’ll talk about it in the Crux Club on the topic of what is holding fuel buyers back. We talked about it during the AUSIMM, but we will save it that for the Club. I just thought it was a brilliant answer. And one that I really hadn’t kind of understood in that way before, but we’ll come back tomorrow.

Now, so let’s just stick with Kazakhstan again for a second because the implication, the big, ‘so what’ I want to get to, the, ‘so what does this mean’ component of the conversation, I want people to understand why we are talking about Kazakhstan, why it’s important to understand that this is. If I look at Australia, who have handled this COVID-19 disruption extremely well, you have had about 100 deaths in a population of, what? Over 24M? You have handled it extremely well. You have taken it extremely seriously, as has New Zealand. The Qantas CEO came out with a statement last week and said, we are not going to get back to international flights until July 2021. That’s how seriously they’re treating it. That was a statement from a CEO of an Australian company. KazAtomProm, if they came out with a statement like that, that would send the industry into a tailspin, wouldn’t it?

Brandon Munro: Well, it would. Yes. It is 40% of the world’s production and the world’s lowest-cost production, with the exception of one or two bi-product streams of Uranium. It would absolutely set the world into a tailspin, but I do think that a statement like that is very unlikely. It is a good one reserved for your Uranium dreams between about three and four in the morning, when you are not officiating conferences on the other side of the world, but I don’t think we will see that level of announcement coming out from Kazatomprom.

Matthew Gordon: But we don’t know when. The point is that no one knows when. Uranium investors don’t know when, utility buyers don’t know when, and until that answer, that certainty can be brought back, or at least some sort of certainly can be brought back, it continues to be the great unknown for the supply-demand story in Uranium.

Well look, let’s talk about the ‘so what’ component here: given what we are hearing out of Kazakhstan, what do you think people are going to start doing? I think, you know, people looking at Uranium as an investment proposition, it is getting more and more attractive because the supply side is just being hammered every day that this continues. The story becomes more and more positive on the supply side. The demand side, I think, is well understood. For investors looking at Uranium as an investment proposition, looking at this, I guess they must be pretty intrigued, confused, and maybe excited in equal measure. What are you seeing? What are you hearing from your investors?

Brandon Munro: Yes, I think that is a good way to look at it. I mean, intrigued because of what we’re talking about; who knows where this is going to go, who knows when it’s going to end? Who knows what the implications will really be in terms of KazAtomProm joint venture partners and what they need to do? And there’s lots of speculation about what some of those joint venture partners who’ve been selling forward into the spot market, what they might need to do if they completely run out of production for an extended period of time. We could see multiple producers entering the spot market to buy back pounds that they’ve already sold in the next 12-months. There’s an enormous amount of intrigue. The confusion really comes from price response. Why haven’t we had a more interesting and assertive price response right now? Both at a Uranium price level where the Uranium price has sort of settled into a comfortable zone at circa USD$33, but in particular from Uranium equities. And whilst there has been an overall negative macro backdrop, and Uranium equities have still done okay in that context, we’re still looking at our cousins who are gold developers and so on, who have just been enormous runaway success stories right now, thinking, well, yes, we deserve at least that much. I mean, the gold bugs are crowing about USD$1,800. And you look at where Uranium’s going to go to on fundamentals, let alone on supply disruption, and we are going to take that sort of price performance and rub it in the dirt. There is confusion as to why we are not seeing a stronger response. And of course, the excitement; well, that comes from a number of things, but more and more the shareholders and investors and fund managers that I’m talking to are starting to draw comparisons between where we are now and where we were in 2004, 2005.

Multiple comparisons are being made between say, the Cigar Lake flooding event. That was only a three-month flood. So that was a pretty short disruption. But what it did was it created uncertainty. There was an uncertainty about whether this giant new development in the form of Cigar Lake was going to come on at all. Were they ever going to solve the problems that were leading to the flooding? And the fact that there were multiple flooding events, created that fear that one of the enormous, new high-grade projects that was banked as filling Uranium demand for many, many years was suddenly in doubt. So that is a parallel that we do have here with this production disruption. And of course, it’s not just limited to Kazakhstan, we’ve got Cigar Lake itself that is off production at the moment in Canada, with no line in sight as to when that’s going to come back on.

So equal measures – yes, I’d agree with that. I think all of those things are running through Uranium investors’ minds at the moment. And what I would say to that is you need to take those 3 equal measures and give yourself enough patience that they all become relevant in a positive way. If you are investing with just a little bit of patience at the moment, up to the end of this year, then the intrigue will play out, most likely positively, I believe. The confusion becomes irrelevant because we will have to have some degree of price discovery by then. And the excitement; well, we’ll know by the end of the year if the excitement was justified or mis-founded, but it will definitely be there. And for equities investors, that’s a chance to take advantage of the volatility that will follow.

Matthew Gordon: It’s kind of interesting. I’m thinking back to the last run, and I think the Uranium price popped before Gold, and this time it’s the other way round: Gold has got a little bit more exciting than the Uranium space this time round, and it perhaps distracted people from what’s going on the Uranium space in a way, in terms of the generalist investors. I will be interested to sort of see what the parallels are that we can draw from around those times. We are going to do a little bit of work on that one. I’ll come back to that one.

But let me talk about the other great unknown here; we have always talked about politics in this, okay. There is geopolitics going on, but there’s also the politics of the US. They have got the elections in November this year in the US. It has been an exciting 4-years for sure, certainly. I always call it TV gold, because it has never been so polarised. I don’t think in the US, I certainly haven’t felt it in my time anyway. I think it was earlier this week? Well, at the beginning of this week, end of last week, the Democrats have come out with a document. It’s called ‘Solving the Climate Crisis’. Let me hold it up here – Solving the Climate Crisis. It is fairly involved; 540 pages of involved ideas for how they are going to, well, how they’re planning for a clean energy economy for America. It is a fantastic read. You can get it online. I will make a link to this below in the description section, but you’ve also had a read of the section talking specifically about nuclear, and nuclear’s involvement as far as the Democratic Party are concerned. What did you make of it?

Brandon Munro: No question that it’s a positive for nuclear power. And we don’t have to go back that far to a time when there was a lot of uncertainty around what the Democrats’ position would be on nuclear power. Bernie Sanders was vehemently opposed to nuclear power, and AOC of course, was saying all sorts of things about everything, but including criticising nuclear power. All of a sudden, what does this mean? It means that it removes the uncertainty of the US election in November from the mind of both nuclear fuel buyers and also Uranium investors. So no longer is there a scenario as there would have been if Bernie Sanders was running with heavy support from AOC. No longer is there a scenario where the Dems could get in and that would send nuclear power progress in the US back by years.

What does the report actually say? Well, it says a raft of things, and I agree that it is well worth a scan through and a read. First and foremost, nuclear power is recognised alongside other traditional renewable forms of low-carbon energy with hydro. And so that discrimination against nuclear power has been removed from this solving the climate crisis document. They strongly recommend the implementation at a federal level of federal support for low-carbon energy sources, including nuclear power. And they highlight the fact that a number of States have already introduced zero-emission credits and so on to assist with nuclear power. There’s no talk of removing or discriminating against nuclear power at a subsidy or support level. And they go further in saying that that is at a federal level and States should be able to go further and produce their own initiatives, which means that the States who need the base-load resilience of nuclear power can still go with the zero-emissions credits and other forms of support to nuclear power to keep it going.

The report does have evidence of a little bit of compromises in the drafting, and there’s a little bit of the old-fashioned rhetoric about risks and so on. But by and large they’re founded in, I think, a logic, and generally quite fair. There’s a lot of calls for the regulator getting tougher, et cetera, et cetera. And the nuclear industry, as long as that doesn’t impose unreasonable levels of red tape and green tape, the nuclear industry would welcome that by and large. So, very positive. And now November becomes less of an important attribute for what Uranium investors need to look forward to. Now it’s back to the sit-com, as you say, we can just observe it for its pure interest and entertainment value, and not for its effect on our Uranium holdings.

Matthew Gordon: What I took from it, and it really is quite comprehensive, and if you look at what people’s expectations were from the Nuclear Fuel Working Group, they couldn’t go far wrong by taking a look at what is in this document, for some of the joined up thinking that I think we are going to be hopefully going to be seeing from them in the near future to bring some level of certainty into the you know, the nuclear ecosystem and for Uranium equities, some certainty around how this all comes together to provide a zero carbon, you know, cleaner and greener, or clean-energy economy for the US. It is quite nice to see documents like this, but then it becomes, because this is entirely the Democratic position. There is no kind of cross-party components to this. No doubt, if there is compromise within the party, it is going to have to be even more compromised if it becomes a cross-party platform, whether it be through the Nuclear Fuel Working Group or something even bigger. But that all takes time. I’m not quite sure how to view that as an investor. It is positive, but how many more steps do we need to wait for to get an idea of how the US is going to react?

Brandon Munro: Well, it does take time. And I think that is why the strong bipartisan support for nuclear that is now confirmed by this document is important. We are no longer looking at the Nuclear Fuel Working Group report that was released two months ago, and just wondering, you know, how much of that is really going to get implemented before November, if there’s a change of government. Now we can look at it and say, look on its merit, we are going to see those steps being implemented.

Another thing that came through really strongly in the Democrats’ position is strong support for SMRs and the technology development associated with the SMRs. There weren’t so much unconventional new conventional reactors, and there wasn’t a lot of foreign policy emphasis in the way that we had from the Working Group, but equally there wasn’t any debate about that topic. They just decided that this is a domestically focused document that is about emissions control. It’s not about the industrial platform, so there was no need for them to comment one way or another. I would say all of the best bits of the Nuclear Fuel Working Group report have been preserved in a bipartisan way by the platform that the Democrats have put out on this.

What does it mean? And what for Uranium investors? Well, it’s part of the slow burn demand growth that we’re seeing in nuclear in the Western world. Nuclear is still driven by China, Russia, India, and the developing nations; you know, let’s not forget that for a moment. But the Western world is projected to grow modestly. And more importantly, we’ve seen a number of years now of the US reactor fleet deteriorating, and that’s been a drag on the nuclear industry and therefore Uranium industry really since Fukushima. The reversal of that deterioration is important because it stabilises what still represents 25% of demand for Uranium today, and in a very dynamic part of the sector in terms of leading long-term contracting and so forth.

It does matter in today’s terms. And at a micro level, decision uncertainty at a utility level, in other words, does the utility have confidence that they’re going to be buying for a reactor that’s still going to be operational in 4 or 5-years’ time? That decision uncertainty does filter through, into contracting decisions and the general performance, particularly amongst a larger utility that’s got a fair portfolio of reactors. If they’ve got a portfolio of a dozen or so reactors, and they’re looking at some of them coming off in a short period of time through an early retirement or an end of life retirement, they can manage the risk within that portfolio. If they suddenly look at that dozen or so reactors and say, actually, nothing’s coming up to end, and we’ve just got two 80-year extensions through, they have to buy for that entire portfolio. And that affects the way that they think about long-term contracting, which does dovetail now into the next several months. And what I see as a number of, a confluence of a number of factors, coming together for them to re-evaluate their procurement policies and probably get more active in that part of the market.

Matthew Gordon: There’s a lot to unpack in that. A lot of moving parts. I do think we should come back to the SMRs, because I think it’s going to be really, really important across the world. Lots of companies and lots of countries are getting involved in that. And we talked to Ben Heard about that, and maybe we can talk about that in a couple of weeks. Actually, the Ben Heard interview came out yesterday, where we do talk about it, and I’ll put the link again below here. But the interesting bit to me in all of this is that the US, the politicians seem to be coming together, having the same thoughts about nuclear assets, you know, as a zero-carbon solution, which is great. It’s an evolving narrative. I think you’ve got activists as well who are now coming around to this way of thinking. A few have come out in the last 2 or 3-weeks as pro-nuclear as a solution. I think that’s kind of interesting.

We should probably now segue over to our Crux Club members and talk about a few other topics. Thank you, everyone who has been watching this. If you are at all interested in getting into some detail on a few of the topics, you can go and have a look around Crux Club and get that at Shall we jump ship and go and talk to the members?

Brandon Munro: Let’s get in the speedboat.

Matthew Gordon: Let’s get in the speedboat.

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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.

#15 Investors Excited, Kazakhstan Lockdown Continues – Brandon Munro (Transcript)

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.

The extended lockdown in Kazakhstan impacts KazAtomProm’s, the world’s largest supplier of uranium U308 (24%), ability to get their employees back to work. This in turn means that so far as much as 8Mlbs of uranium has not been produced. However, despite this news, the company has maintained guidance with regard to being able to supply their term-contract customers. They are 6 to 7-months of inventory with which to draw on, but indicate that they will probably need to go in to the spot market to acquire uranium pounds to fulfil order (at still low prices) and maintain their stockpile position. What are the impacts for utilities and uranium investors. We discuss.

As COVID-19 continues to restrict production in Canada and impacts production in Australia and Namibia, we discuss the implications for junior uranium companies. Investors and potential investors take note.

And for members only, Brandon and I discuss why utilities remain inactive. What are they focussed on instead? And what has happened to the price momentum? We look at some of the factors. Please join the waiting list for Crux Club if you want to get more insight in to the uranium sector and other commodities from our expert contributors each week. All for less than a dollar a day

We Discuss:

  1. 3:43 – KazAtomProm’s Announcement: Implications and Opinions
  2. 6:12 – News & Announcements from Uzbekistan: Struggles Dealing with COVID-19
  3. 9:28 – A Look at Australia, Canada and Namibia: COVID-19 Update and Impact on Businesses
  4. 13:05 – Get the Calculators Going: Growing Supply Deficits and What it Could Potentially Mean for Investors

CLICK HERE to watch the full interview.

Matthew Gordon: How are you doing, sir?

Brandon Munro: Yes, I’m really well, thanks, Matthew. How are you?

Matthew Gordon: Not bad. Not bad. I have a busy week. And got a lot on today so thanks for joining us from the cottage, it looks like?

Brandon Munro: Yes. It’s the school holidays. It is that big test. I feel like I am in a reality TV show – will I get the kitchen done in time? We have had trades people wandering around doing all of that. I’ve been doing a little magic with my hands. Or claiming to. Hoping it will be fixed up by someone else but saying that it was me. You know, one of those jobs. We have got a little bit of freedom here in Western Australia and I think when we can’t travel anywhere else it just really pays off to have a place of your own where the kids can just unpack and unwind and run around and do all that sort of thing.

Matthew Gordon: Yes, you guys in Australia and Canada have got so much in common: you have got so much land that everyone gets to have a second home. It is a very unusual thing here on our tiny little island of Great Britain. Very jealous. Very jealous.

Brandon Munro: Well, we have got something else in common because this little town I’m in, Bridgetown. It is beautiful. Fabulous place. But it has the record for being the coldest place in Western Australia. And as many of your people know, it is kind of hard to find cold places in Western Australis, it is normally the other end of the spectrum. So being the industrious people that they are, they even market that fact. Its tourism claim to fame is that it is called, ‘Fridgetown’, and so we start these days at the moment at about 1 or 2 degrees, which is a little bit fresh for the tootsies, but we manage, we adapt, we survive.

Matthew Gordon: Wowsers. I didn’t realise it went down that low. There you go – I have learnt something. But today we are going to talk about Uranium, as usual, for our weekly catch up. A new announcement from KazAtomProm.

Brandon Munro: Yes. Totally not unexpected. And we have been talking about it on our show for several weeks now and I think we drew similar conclusions. But it is helpful. It is good to have it out now. It is good that the market is now informed. And as people would know who have read the announcement, KazAtomProm have said that it is a month that they will be delaying the resumption of wellhead development and other operations. And that is pretty consistent with what was expected and what we were thinking. But the little gems in the announcement, I think, are in some of the side comments and what may or may not be able to be read into those. There is lots of the use of the word ‘initial’, ‘if safe’, ‘resumption’, and so forth.  They have left the door open quite clearly for an extension. Also, what is quite interesting is when the time comes to ‘resume’, whatever that means, it is quite clear that it is going to be a softly-softly approach here. KazAtomProm have said in their announcement that they will be gradually returning to wellhead development. And it seems like they are even going to test the waters a little bit with their logistics by resuming exploration first rather than wellhead development. I find all of that quite interesting. I think what we are looking at here is a company that is positioning for a real possibility, perhaps even a likelihood that this one-month period is going to have to be extended, if not in fact, at least in substance.

Matthew Gordon: I think the Uranium bulls are getting quite excited about that: the implications of an extension or a possible extension there. Are you hearing the same sorts of things?

Brandon Munro: Not really. Obviously, people are excited about what continued disruption can do for the tightening for the market and the Uranium price. But like many things, this is an announcement that was anticipated. It was expected. There isn’t anything that is a catalyst as such, and so we haven’t seen lurching prices on ASX etc, etc. I think the market has just kind of taken it in its stride for now.

Matthew Gordon: I couldn’t help but notice that Shell also made an announcement this week with regards to Kazakhstan. What do you know about that?

Brandon Munro: Well, they have announced that they are withdrawing all of their staff. They have chartered a couple of jets and they are taking them all back to the Netherlands and then they will be distributing all them around the world. That in itself is very telling; the word is because they cannot be absolutely sure that their people there will get adequate medical care, which isn’t a slight on Kazakhstan at all, I mean, that is exactly what has happened to any country that has really grappled with either a first or a second wave COVID problem. But what is says to me is that in their judgement this isn’t a problem that is just going away in just a couple of weeks. They can’t just simply tell their staff, stay at home, lock yourself down. Take full-paid time at home for two or three weeks and then we will ride this one out. They have probably already been through that thought process, and now they are saying, look, we are better off taking the hard pill and actually moving everyone out. And you wouldn’t really do that for a matter of two or three weeks. There seems to be some longer-term thinking. 

And the moves that big, enormous majors, particularly in the oil and gas sector in this part of the world, make are always a leader. It is always influential to both private and public enterprise. I think it is significant that Shell have made this decision. It will be really interesting to watch what some of the other partners, Chevron and others do in its wake.

Matthew Gordon: And the other thing I noticed was Uzbekistan – they put out a press release. So that whole region is really grappling with how to deal with what’s going on there with COVID-19?

Brandon Munro: That’s right. Uzbekistan is now back into lockdown. Not quite as rigid as the initial lockdown, but for all intents and purposes the same. So now we get to watch what Navoi Mining, the Uzbek state-controlled Uranium miner does in response to that. Do they just carry on, or do they take the lead from KazAtomProm? The dynamics are very different here – we need to be clear on that. Navoi Mining, they sell mainly off the market: to the traders, to the Indians, to the Chinese. They aren’t a market participant to the same extent that KazAtomProm is. They are not the dominant player. Whilst they are still firmly in the Top 10 of Uranium producers, and any significant disruption there is going to affect 2020 supply, they are not going to be thinking about the market in the same way that KazAtomProm might be, or Cameco might be for that matter. I think they will be more reactive. But I think that just illustrates what a regional issue this timing of this second wave that is being experienced in central Asia.

Matthew Gordon: That’s what strikes me about this: I think that Uranium bulls looking at this will be just encouraged; it is just another story around supply that they can confirm their beliefs about. Why don’t we just do a round up and then maybe have a conversation about supply and then have a conversation about Australia, Namibia, Canada, if you may? So, Australia – all good?

Brandon Munro: Australia is all good in South Australia and Western Australia. And to a lesser extent, Queensland, which are the major mining centres, Northern territory included. But we are experiencing our own second wave in the State of Victoria which doesn’t have any Uranium mining or exploration or any Uranium influence whatsoever. But it is just a healthy reminder to the rest of the country that these things can escalate very, very quickly, and that is what we have seen. Victoria has just announced a fairly hard lockdown of all of Melbourne, the capital city there of 5M people, for 6-weeks. So South Australia has got its border closed with Victoria. Western Australia has got its border closed with everyone at the moment and probably for some time to carry on. But no foreseeable disruption to mining. Just a reminder that a second wave of COVID can potentially be more painful than the first.

Matthew Gordon: And news out of Namibia?

Brandon Munro: Yes. Namibia, the Erongo Province, or the Erongo Region, as it is called in Namibia, they are back in an extended lockdown for another 28-days. It was announced earlier this week. That is very difficult for the local people. Very problematic for many, many reasons. Mining has been exempted as an essential service, so Rossing and Husab can carry on. But as we have talked about many times, it is still that element of greater difficulty that is involved as a result. And there has been a bit of press about increasing industrial relations tension at Rossing. You might also see the interplay between those two things. I am still expecting disruption at the edges of both of those giant Namibian projects.

Matthew Gordon: We have an analyst based in Namibia. We were talking to him this morning. And he was saying, you know, obviously with youth unemployment quite high and poverty levels as they are the dependency on mining is there, but at the same time they have got to manage this in a responsible manner. And I think they are doing that, the Namibian government. Interesting. And then Canada – what is happening at Cigar Lake?

Brandon Munro: Well, nothing is happening but what is very noteworthy is that Northern Saskatchewan is still grappling to get COVID under control. And it is an outlier compared with most of Canada. And that is really the driver here. I don’t see Cigar Lake coming on anytime soon. I think it is entirely feasible that we could see Cigar Lake remaining off until the end of the calendar year even. And what always happens in these situations is that when you put a project into care and maintenance, as effectively Cameco has, it is a little bit like jumping into a cold swimming pool or a cold river – it is damn painful at first, but you do adjust. You do acclimatise. And there is probably an element of that going on corporately. All the while, we haven’t seen much of a spot price response and we haven’t seen the utilities bashing the door down with Cameco to start term contracting. Whilst there are health and safety concerns as we continue to see persisting in Northern Saskatchewan, I don’t see Cameco sort of chomping at the bit to change the situation at all. 

Matthew Gordon: The supply side of this macro story, is certainly… I think we are able to work out some numbers now. We are starting to get a sense of how much disruption there is going to be on the supply side. You are talking about end of year for Cigar Lake. That is all of a sudden vey meaningful. The implications of Kazakhstan’s operations being delayed a month and potentially more – that is 4-months now, right. That has huge implications. I am hearing, you are saying that Namibia may be having minor disruption, and the same for Australia, which is something. But are you starting to get a sense of the deficit in the marketplace as a result?

Brandon Munro: Absolutely. If we go back to our discussions in April, for example, I was projecting a 20Mlbs 2020 disruption. So, in other words, forecast of 2020 production I was predicting 20M lbs short compared with what the case would have been at the beginning of the year. Now, that was prefaced on Cigar Lake being off for 4-months, Kazakh operations being disrupted for 3-months and relatively minor disruption in most other centres ranging between about 5% and 8% of annual production. Now, the only one of those areas that has outperformed my expectations is Australia. But Olympic Dam had significant disappointment on the production side for unrelated reasons. So that was largely evened out.

So, now we look at it, it is not operations are down for 3-months, it is notionally 4-months, and every chance that with the slow resumption of wellhead development, that is going to look lie 5 or 6-months. Cigar Lake, which is in care and maintenance for 4 months and counting and quite possibly going to go to the end of the year. Namibia and others that are dealing with second waves. So that 20Mlbs is locked in now, and the question is, how much does that grow? Does 20M lbs go to 30Mlbs of disruption? If these significant players stay off to the end of the year, we could be talking about 50Mlbs of disruption.

This is still brewing as an astonishing supply side event for a sector that is already very tight on the supply side. And all the while utilities and intermediaries are distracted with other issues and other matters. So we have seen a little bit of a recovery in the spot price, but given the risk here to the supply side for the rest of the year there has been no price response to talk about, which just stretches the ‘lacky band’, or the rubber band even further, and it makes for an even better close to 2020 or 2021 if you are sitting in the seat of a Uranium investor.

Matthew Gordon: Well, this might be the perfect point to switch things over.  I am just going to say to our regular viewers, I hope you enjoyed what Brandon had to say. We are now going to move into the Crux Investor Club section where we will go into a bit more detail about price, why it hasn’t moved and what utilities are doing and what the implications are for investors. So, thank you very much for watching.

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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.

KazAtomProm (KAP) – Perceptions, Misconceptions and Price Discovery

NAC Kazatomprom JSC
  • Shares Outstanding: 259M
  • Share price US$13.9 (10.07.2020)
  • Market Cap: US$3.6B

After months of speculating about what sort of strategy KazAtomProm could be deploying, it was time for Crux Investor to interview the company in an attempt to clear some things up.

We interviewed Riaz Rizvi. He’s the Chief Commercial Officer of the 25% of JSC NAC KazAtomProm (AIM: KAP) that was listed in London in 2018. NAC KazAtomProm JSC is the national operator of the Republic of Kazakhstan for both the import and export of uranium, rare metals, and nuclear fuel for nuclear power plants. Let’s get straight into it!

Since 2009, Kazakhstan has been the world leader in ‘natural’ uranium mining. The company has priority rights to Kazakhstan’s extensive uranium reserves.

KazAtomProm’s large portfolio of assets includes the entire complex of Kazakh enterprises that are involved in the front-end of the nuclear fuel cycle. Such projects/assets range in their position in the developmental phase, such as geological exploration, development, and production of uranium for the nuclear fuel cycle. The company also has assets with a focus on scientific research & development of patented technologies. KazAtomProm is the global uranium powerhouse and produces c. 24% of the world’s primary supply of uranium: the largest production volume globally with the largest inventory too. The remainder of Kazakhstan’s 40% of global primary uranium production is attributable to KazAtomProm’s JV partners.

Matthew Gordon talks to Riaz Rizvi, 13th July 2020

Interestingly, Rizvi reminds investors that KazAtomProm’s environmental footprint is the one of the smallest globally, partly because all of KazAtomProm’s projects are ISR amenable. Relative to its production size, KazAtomProm is perhaps the greenest uranium producer in the world. KazAtomProm is also the lowest-cost uranium producer in the world (other than a few uranium by-product streams, such as BHP’s Olympic Dam). Having been the world’s largest uranium producer since 2012, the company is now also the largest seller. This is a rare collection of features in the world of commodities that puts the company in a league of its own.

KazAtomProm has shown its has the longevity to survive most market conditions, but its mindset has changed a great deal in recent years. Up until 2018, it was a state owned company, and the company was focussed on consistently increasing its production to drive down total costs due to economies of scale. However, over this period, there was huge destruction in uranium value. From when uranium peaked at a whopping US$138/lb in 2007, post-Fukushima in 2011, demand flooded out of the uranium market, with the U3O8 spot price collapsing to just US$18/lbs in 2016.

KazAtomProm is now focussing on value creation. Is that a collective sigh of relief I hear from uranium investors from around the world? When Rizvi first became involved with the company in 2017, it began seriously looking at this new strategy of value over volume. The strategy is routine for most, but some American uranium companies, market commentators, politicians and even investors have long-held that is merely a front for a more sinister strategy. More on that later.

Rizvi states that KazAtomProm recognises it has a duty to the overall health of the market; thus, it has a responsibility to produce at levels conducive to uranium price discovery. The company has a unique ability, courtesy of its ISR projects, to “flex up” and “flex down” its production levels without it meaningfully impacting on the unit-cost of production. The company designs its medium and long-term sales plans based on a holistic view of the market. In 2017, for the first time, the company announced it was cutting production, and this was then extended for the period of 2018-2020. Most recently, the company extended this to 2021. Cameco, Orano, Rosatom and other majors have had production cut too, with uranium juniors like Paladin placing projects into care & maintenance. There has been a rationalisation in the industry, and Rizvi believes it has gone a long way towards rebalancing the uranium supply market.

Is the adversarial tone that has been struck by North American uranium companies towards Kazakhstan and Russia, as evidenced by the Section 232 Petition, weighing heavily on the minds of KazAtomProm’s management? Is this why, in recent years, the company has drafted in some Western figureheads from around the globe to sit on the Board? The company realised quite early on that showing and demonstrating an independent structure was crucial. All of the major national companies of Kazakhstan are housed under the umbrella of Samruk-Kazyna, the Sovereign Wealth Fund (SWF) of Kazakhstan and 100% shareholder of each company. The long-term mandate of Samruk-Kazyna was to create sustainable value and get companies as close to OECD standards as possible. Investors should realise that there was already a deliberate degree of separation between KazAtomProm and the government.

KazAtomProm was the first company under the Samruk umbrella to conduct an IPO. Samruk has many other ambitious plans to continue privatising companies within its portfolio. The Kazakh government is very deliberately reducing its role in major national companies in favour of economic health. This appears to be the motivation for transacting 25% of the company to the public, the maximum allowed under current Kazakh legislation. The company now describes itself as a commercial enterprise rather than a state-owned producer. It is early days and a different mindset may be ingrained and old habits may be hard to breakdown, but if the doubters are to be quelled, then a calming and consistent narrative must be acted on. This is difficult given the geopolitical tension uranium and nuclear finds itself in. Legacy thinking from the Cold War still lingers and commercial interests cloud thinking. The company is keen to distinguish itself from Russia and avoid getting caught up in the adversarial rhetoric that we hear between the US and Russia whilst the Russian Suspension Agreement is negotiated.

Rosatom is obviously a major JV partner of KazAtomProm, which hasn’t helped quash suspicions from the West of collusion. Rizvi is quick to remind us that KazAtomProm has 13 mining companies: 3 are 100% owned subsidiaries and 10 are JVs with companies like Cameco (Canada), Orano (France), Sumitomo (Japan) and the CGN (China). Once investors take into account the true scale of KazAtomProm’s influence, they may believe the validity of Rizvi’s next statement. KazAtomProm’s dominant focus is on the best interests of the company and Kazakhstan. He puts Western suspicions down to nothing more than “scaremongering” from some, and interested parties talking their own playbook. What do you think?

Moreover, despite Rizvi’s remarks about value over volume, is KazAtomProm actually trying to drive the higher-cost producers out of business by keeping the uranium price depressed? Interestingly, he decries the fact that the uranium market has ignored important fundamentals, creating a vacuum free of value, claiming “we (uranium companies) have all paid the price of it.” Even the biggest players have been struggling to cover production costs. In light of the uranium macro story, and demand projections for the next 10-years, Rizvi’s believes it is critical that some of the mothballed projects come back into production in combination with new projects to fill the market gap between supply and demand. The price signals aren’t right at the moment, even for high-quality tier-1 assets.

Rizvi asserts that the past 4-years of operational decisions at KazAtomProm are irrefutable evidence that the company is cutting production. Is it cutting production enough though? Kazatomprom believes “a healthy uranium market is…the right answer.” It obviously provides competition, enhancing the choice for utility companies, and it creates a healthier, diversified portfolio of supply, reducing the risk profile for utility companies. I believe in the validity of these statements, but it remains to be seen if the company is willing to do what it takes to bring about meaningful destocking of uranium inventories held by the utilities. In reality, putting the growth of nuclear energy into a position of increased risk may well not be the right way forward for the company. Perhaps this really is its position. It will be extremely interesting to watch how this game of chess unfolds as we edge towards significant price discovery.

The anti-KazAtomProm rhetoric spilling into the uranium market from the West is clearly far from ideal, but the company believes it will have no impact on its plans moving forward.

Interestingly, going forward, KazAtomProm will be unable to sell down its JV holdings below 51%. KazAtomProm will continue to be the majority shareholder in any future JVs. However, it is “absolutely the case” that it doesn’t need JV partners any more, especially once one weighs up the difference between the cash the company already generates and the cost to bring a new deposit online. Future JV partners will be brought in for a strategic reason, if at all.

Despite having its production capabilities hindered by COVID-19, KazAtomProm will continue to deliver on its contractual sales commitments for 2020: c. 13,500tU to 14,500tU. It will also continue to pay dividends. It has managed to achieve this by separating sales from production and leveraging the increasing price of U3O8 post-COVID. KazAtomProm’s inventory levels were slightly higher than intended (c. 8 months going into 2020), but it appears to have given the company a good buffer. Even if the company has to dip into the market, its contracts will never be “out of the money” as the contracts are linked to spot-price.

KazAtomProm’s cash cost of US$11-12/lb, selling uranium at US$33/lb with an AISC of US$13.5-14/lb is world-leading, and as a highly cash-generative business, the “clear” dividend policy is that the company pays out 75% of free cash flow, provided the EBITDA stays below 1X. When the time is right, the company will be investing in new deposits in Kazakhstan, but there are no market signals that indicate this is desirable right now. They also indicate no desire for M&A activity outside of Kazakhstan.

Let’s get to the part of this that every uranium investor is really interested in: the utilities, what do they want and when do they want it? Rizvi claims that over the last 6 to 7-years, it has been advantageous for utilities to defer their contracting decisions courtesy of a constantly falling uranium price, and instead buy on the spot-market. This has created a mindset that has been helped by a lack of emphasis on long-term negotiations in favour of short-term spot purchases. However, looking towards the end of the 2020s, there is a “gaping deficit” between demand & supply. All uranium players recognise that new production needs to come into the market, but the price signals aren’t there just yet. The effects of COVID-19 have removed a huge amount of material out of the spot market, which one might expect would cause the utilities to act; this a concerning impact on supply security. However, Rizvi simply thinks the utilities have much more important things to worry about right now than their nuclear fuel procurement, such as the RSA, the outcome of the US Elections and continued effects of COVID-19. There are plenty of questions surrounding enrichment and conversion right now, and these discussions will move on to uranium at some stage. KazAtomProm thinks these conversations will happen sooner rather than later.

KazAtomProm’s main objective is not to drive the uranium price higher, but the company does recognise that this needs to happen to balance out supply and demand. KazAtomProm will not give a target price, but it feels we are still some way away from a long-term sustainable uranium price. In order to incentivise new production that usually comes with a c. 10-year lead time and can have a multi-billion CAPEX, the price has to rise, but Rizvi is coy on what number the company wants it to settle at. The current run-up in the U3O8 price is attributed to a nervousness in the market about the effects of COVID-19 on supply and whether producers would decide to make up pounds lost to the lockdown from their own inventory rather than new production.

When can we expect utility companies to sit down with producers? It’s difficult to say. Nuclear fuel’s resilience is actually to its detriment partly because the rest of the utility companies’ portfolios are currently being prioritised. When utilities start 1-3-year RFPs, depending on how much material is available in the spot market, if the pounds aren’t available to them, utility companies will have to have a serious discussion with producers about guaranteeing supply and only then will the price follow.

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Intriguingly, KazAtomProm only sends 10% of its produced uranium to the US. Was the Section 232 truly focussed on potential national security ramifications, or was it more of a ploy by uranium juniors to generate subsidies, bolster sentiment & investment and drive momentum into the U3O8 price uptick? Either way, it seems like a smart move for what has been a sector ignored by successive US administrations. The reality is that the US is by far the largest uranium buyer in the world, purchasing 50Mlbs pa or 25% of the global production. KazAtomProm will continue to diversify its portfolio, and part of that strategy includes increasing its market share in the US and Europe, but not necessarily by increasing output. Rizvi doesn’t believe that KazAtomProm is being targeted by the DoE’s NFWG report. He states that Kazakhstan is recognised by the company’s customers in the US as a key component within their security of supply strategies. An inconvenient truth for some. Increased US production could result in a strategic stockpile if the political rhetoric is to be believed, which could have a positive short-term impact on global supply-demand story. This could well be an “excellent decision,” because the “last thing we need is market forces that distort prices and slow down the recovery of the industry.” Very interesting indeed, considering this is exactly what some Western miners accuse KazAtomProm of.

The company does not know what the final impact of COVID-19 will be on its uranium production. It is also very difficult for it to gauge when it will be able to ramp up operations and how quickly, “it is not a binary outcome.” When the company decides to bring personnel back on-site, it will be done so slowly and cautiously. Rizvi doesn’t see the company fully-staffed and close to full production by the end of this latest lockdown extension. It’s going to take longer than that. The time lag between starting to redrill and reinject to achieving production is +3 months, and the low-pH solution can’t be injected year-round, especially at -40º in mid-Winter. The longer KazAtomProm isn’t operating, the harder it gets to get things going again, and the more excited uranium Bulls get.

What did you make of Riaz Rizvi?

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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.

#14 Kazakh Uranium Shutdown has MAJOR Impact – Brandon Munro

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.

What’s been going on this week in the perpetually vacillating world of uranium? This week has been a “fantastic” one for uranium. Let’s delve into it.

Matthew Gordon talks to Brandon Munro, 10th July 2020

As we discussed last week, with two senior Kazakhstan government figures, who are important in the nuclear sector, testing positive for COVID-19, and cases increasing across the country, there was much speculation about a potential lockdown, and this is exactly what has happened. There hasn’t been a lot of discussion about this issue in most uranium circles, but there should be as the implications are significant to the supply side from the world’s largest producer o uranium, KazAtomProm. Uranium investors appear to be underestimating how important this developing situation is. The Kazakhstan government has announced that from the 5th July, it will be reinstituting a “hard shutdown” for an initial 2-week period. This is likely to be extended halfway through the 2-weeks, based on where the caseload is at, resulting in more disruption to KazAtomProm production of uranium: the source of 24% of the world’s uranium production, and the lowest cost source of uranium production (except for a few by-product uranium streams).

When KazAtomProm announced on 7th April that it would be initiating 3-months of production disruption, there were around 50 new cases per day. They are now topping 1,500 cases per day. It remains to be seen how much of this is due to increased transmissions and how much is due to increased testing. It is telling that Shell has flown all its non-Kazakh employees out of the country. The Kazakh state commission has discussed implementing a measure that 80% of workers in national companies should be working remotely. This is in line with what Kazatomprom is operating with at the moment and solidifies the company’s current position.

KazAtomProm previously stated that it wouldn’t be making up the pounds it had lost during the initial 3-month shutdown period, and these missing pounds have only just started to impact the market now because of a time-lapse created by inventory and supply contracts. This additional curtailment will be perceived as positive news by uranium bulls. This situation has parallels with the flooding of Cameco’s Cigar Lake. The mine suffered a catastrophic water inflow in October 2006, followed by a second inflow in 2008. Re-entry was achieved in 2010, but production was repeatedly curtailed. We could see multiple uranium producers enter into the spot market to buy back pounds they have already sold in the next 12-months to satisfy JV partners. The major source of confusion is price response; uranium investors have been left scratching their heads at the lack of assertive price response. Cigar Lake is still offline with no confirmed return date, so a sharper price response for U3O8 and uranium equities might have been expected by now. We’re all just waiting for that key catalyst moment.

A nuclear power station

Lastly, touching on the political side of things, will the DNC support nuclear energy? Bernie Sanders and Alexandria Ocasio-Cortez were anti-nuclear, but the current position of a potential Joe Biden administration had been enigmatic. However, a recent 540-page document released by the Democrats, called ‘Solving the Climate Crisis,’ has a generally pro-nuclear message. This remove any uncertainty that might have been held against the November election because both sides will support nuclear as an energy solution. The discrimination against nuclear power has been removed, and it has now been positioned alongside the other green energy solutions. Another micro-catalyst?

What did you make of Brandon Munro this week? What questions do you want us to ask next week, and what issues would you like us to cover?

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.