Conversation with Dustin Garrow, Managing Principle of Nuclear Fuel Associates.
With a possible uranium renaissance finally on the cards, uranium investors will be clambering for all the content they can get their hands on. Well, this isn’t one they can afford to miss.
It’s been an extremely eventful few weeks for uranium. We had Cameco suspending its Cigar Lake uranium operation, Kazatomprom announcing impaired uranium production figures, and then the NFWG report. The report was tonally definitive: it’s time to restore America’s competitive nuclear advantage. However, there was a deficiency when it came to the specifics, particularly subsidisation figures and timescales, but it was just a policy document after all.
We were keen to gain some insight into the uranium space: Garrow was the man to ask. He’s a uranium market commentator and sits on a number of boards for uranium junior mining companies.
First things first, what is his take on the NFWG announcement? Was it what Garrow expected? Having been involved with the section 232 petition peripherally, Garrow is pragmatic about the working group outcome. While he appreciates the general message, he admits there was an expectation of many more specifics. He strikes a similar tone to Energy Fuels CEO, Mark Chalmers. This is a good first step and is just a policy document. He wants to see the DoE follow through with a robust, detailed plan to rebuild the American uranium industry; it’s the only away American uranium companies can compete internationally. Garrow also states that the timescale will be key: no commitment has been made beyond the 2021 budget, and American uranium players won’t be able to stick around forever. Worryingly, it looks like this plan will be a long time in the making.
Not only do uranium companies need to stick around and wait for the uranium price to elevate, they also have to wait for the entire American uranium infrastructure to wake up, including enrichment facilities. Garrow thinks uranium investors need to focus on the supply-demand fundamentals. The gap has never been bigger, and it seems likely this will be the final catalyst when the commercial market really starts to shift.
So, the U3O8 price has risen to US$33/lb. How will this price move in the short term? Garrow is aware there are numerous theories out there, but his instincts tell him that price discovery and the utility companies’ buying habits are like the chicken and the egg. Price discovery is driven by increasing demand from the utility companies, but Garrow thinks this demand is triggered by a rising spot price. Once the uranium spot price rises past a certain point, Garrow says this is a signal for utility companies to start buying again. Garrow thinks we’re still a little early, but remarks that several utility companies were making moves before COVID-19 in an effort to capture the long-term market. He’s hearing that some are in discussion with bigger American uranium producers about long-term contracts. These are exciting moments for uranium investors; best make sure you pick a winner! Garrow states there will never be a uranium mine built on the spot market, so keep that in mind when making investment decisions. Uranium investors need to pick winners and identify losers. Negotiating long-term contracts can be extremely complex and requires a specialist set of skills: skills that many uranium companies lack.
The general mood in the uranium space is optimistic. Uranium has been discussed in the highest levels of the White House, and there appears to be no doubt that the American government plans to follow through with its intentions. The government has also realised that the reactor space has become dominated by foreign powers. There are ZERO orders for U.S derived reactors in the foreign market. It’s very clear: it is time for the United States to catch up.
- Nuclear Fuel Report Announcement: Opinion and Expectations
- Time of Benefit to Uranium Miners: Anything to Look Forward to?
- Building the Reserve: What it Means for Producers
- Supply and Demand Fundamentals: A Singular Source of Clarity
- Price hits $30: Will it Hold, Rise or Drop Away?
- Cameco: Contracts, Terms and Delivering Results
- Identifying Winners and Losers: Knowledge of Putting Together Deals
- Mood in the Market: Optimism for the Future
- What Will Make Generalists Come Back to the Uranium Space?
CLICK HERE to watch the full interview.
Matthew Gordon: Dustin, how are you, Sir?
Dustin Garrow: I’m fine, considering the extended lockdown here in Colorado, but we’re up in Steamboat Springs, so it is not the worst place to be.
Matthew Gordon: No, it’s beautiful. Absolutely beautiful. And keeping yourself busy?
Dustin Garrow: Oh yes. I think, certainly with the improvement in the Uranium market, there’s been a lot of conference calls with investor groups that are either currently invested or are looking to come back in the space and they’ve seen the price go up some 40%. I see this morning it was, you know, above USD$33, and so it continues to improve. So, it gets a lot of attention.
Matthew Gordon: Yes. I mean, as a percentage, it has moved up significantly in the last two months for sure, after some period of flat-lining. But we spoke in September when you were in London for the WNA conference, we caught up there and talked about the marketplace and winners and losers and so forth. But a lot has happened since then. We have had a lot, we have got you know, the indeterminate shutdown at Cigar Lake. We have had KazAtomProm closed down for a 3-month period, or at least reduced their facility’s output. Namibia; Rossing, Husab affected, Australia -it looks like reduction in the numbers but may face closure depending on how they manage things. So, the market is sort of driving that supply-demand fundamentals story even further, even tighter to the cross point there.
We also had a fairly big announcement yesterday, and I do want to get your feedback and all of the above from the Department of Energy in the US about revitalising the nuclear energy complex there. So why don’t we start off with yesterday’s announcement first: it is short on detail, no numbers, no dates no sense of how money is going to be allocated, and I think the market was disappointed. If you look at the share price of some companies, I think they did drop pretty quickly after 12 o’clock. Was it what you expected?
Dustin Garrow: Well, I think, you know, having been kind of peripherally involved in the 232 process, which by the way, ended a year last July. And so, the Nuclear Fuel Working Group (NFWG) was an entirely new creation from the Trump administration. And I think with the 13 Federal Agencies involved, there’s always a little scepticism of how a group that large, representing such a diverse number of areas within the government are going to come together, which they did. But I think that there were some expectations of you know, more specific actions. I think they’ve laid out, obviously, there’s more direction. But I think as Mark Chalmers at Energy Fuels said, you know, this is the first comprehensive study of the US fuels cycle in decades. And so that’s an important first step. And the Secretary of Energy though made the comment that this is a roadmap. In other words, this will allow the government now to see their proposed to have a senior administration official oversee the ongoing process. I understand there’s even a call later today where the stakeholders, which would probably be producers, processors, certainly the utilities, NEI, will all have a chance, I think, to begin to discuss some of the details perhaps of how does this now get implemented.
And then I think one of the bigger issues though, Matt, is the length of time we’re dealing with. I mean, on the Uranium side, they talked about the Uranium reserve being put in place and it may be something that enhances the American assured fuel stockpile program, which was put in place actually back in 2012. And they put some numbers: 17Mlbs to 19Mlbs pounds beginning this year. But you can assume, is that a 10-year program, which they’ve talked about? Will there be some ramp up? Well, you know, again, those kinds of details are really lacking.
And the other that’s important is how do they allocate that? When they submitted their 2021 budget request, it said to keep at least 2 US Uranium mines in operation. Well, you know, first of all, that’s a pretty meagre domestic industry. You know, most of the projects are pretty small, in situ recovery mines, so do they actually mean specific mines? Companies? You know, what will be the annual volume?
The Secretary of Energy said yesterday, they don’t have a process for determining pricing, which is pretty important. I think the producers have told the government that they need, really, a long-term government commitment at reasonable prices, considering the production cost profile in the US. And it’s got to go on in order for it, allow them to raise capital to rehire people to, you know, again, restart their facilities. I think one of the issues, clearly, is they’ve stated that it’s only no commitment is made beyond the 2021 budget request. So right now, it’s a one-off situation. So anyway, yes, I think the market, the investment side was expecting more specifics, and they may come in time, but it may take a while.
Matthew Gordon: So yes, thanks for the answer. I think the thing that was missing as well was an indication of how it’s going to engage with the stakeholders. There’s a lot of stakeholders. There’s a lot of money to be deployed. There’s a lot of planning and economics to be worked out. The timeframe here is, or potentially, could take a long time to put together before anyone is in a position to make a decision about allocating budgets, and even then, it’s got to go through a congressional process of approval. Even though this is a bipartisan proposal, or recommendation, this is going to be a long time in the making. How do Uranium miners, because that’s what we’re here to talk about today, how do Uranium miners get an understanding or a sense of how they benefit and when?
Dustin Garrow: Well, again, I have been trying to make a determination of how the government is going to approach a newly created entity or activity. They may decide we have got to in put a lot of resources, we’ll have a lot of video conferencing. We will make decisions quickly. We’ll just have to have to wait and see. But you know, I think normally the government is very deliberate in how they do things. So again, it may take a while. And again, I think that one of the issues, there’s a lot of US producers, when you look across those that have existing facilities, those that have proposed developments that they’ve been working on for years. I mean, I don’t want to necessarily identify specific companies, but the list, as you point out, is fairly lengthy. I just looked this morning at the in-situ recovery capability; if you look at all of the projects, existing, proposed, you know, it’s above 20Mlbs a year, which no one has, the most anyone has produced recently is below 5. So again, I think there will be a lot of stakeholders, as you say, involved, and it will be an interesting process.
Matthew Gordon: Okay. So, given the big thing we heard though was that the US government would be acquiring or servicing a Uranium reserve, you’ve talked about the 17Mlbs to 19Mlbs over a 10-year period. I mean, right now as it is today, I can think of a couple of companies that between them, they maybe could put together 1Mlbs today. They are also going to need to see the price recover to a point where it is economic for them to get their facilities back up and running. Of course, I’m referring to the 2 petitioners here in this instance, I know lots of people are throwing their hat in the ring about how quickly they get back into production, but they all need a price to be incentivised to do that. It’s nowhere near that at the moment. So, it is nice to see a spot price at USD$33/lbs but it’s going to be better for these companies to understand what the utilities are prepared to pay in terms of term contracts, however they’re structured. And we are going to talk about that later. So, that’s the only thing I’m seeing; building over reserve. What can it mean and what can investors interpret that as meaning for the companies that may be invested in US companies?
Dustin Garrow: So, what will happen on the project with the producers? Yes, I think that some have been preparing for the commercial market to improve to the point where they can be participants. But I think, as you know, it’s all about the timing and how long does it take? I mean, it’s like Fukushima, you know, Tim Gitzel at Cameco has said, he never thought 9-years later we would be where we are. Finally, the market is seemingly beginning to respond. So, I think that’s a, you know, a big factor for the US production industry, some have been able to benefit from long-term legacy Uranium contracts, which has kept their operations going. Those have pretty much run out, or they’ve moved the deliveries forward in negotiations with the customers to benefit now rather than over the next few years. There are a couple of producers with contracts that are still in place, but they’ve really dropped off. So, then the question becomes, what do you do now?
Do you keep, you know, they have to cut back, I mean, production now is at virtually zero, so you’ve got these several companies that have gone to bare minimums. There’s not really a, again they would have to rehire people, so it is how long do the investors want to be involved in kind of living off of very minor raisings? When will the market be there? Let’s put it that way; be it the government or the commercial market. So, I think that’s kind of, you know, it’s put them in a difficult position. Even waiting until October 1st, if the USD$150M is approved, you’ve still got another five months at least before there would be any funding available.
So, anyway, it’s a difficult position right now. And that includes conversion. I mean, the Metropolis Plant has been shut down for well more than a year. I think it’s approaching two years and you know, it’ll take a while for them to get back in operation. I see that they have put a date of 2022 on that. And I understand they are still shipping yellow cake off site. It’s being transferred to other converters to be toll converted so they meet their delivery commitments. But that’s a big deal; when you move yellow cake off site from a conversion plan. So, anyway, yes, it’s gotten down to where it’s at a difficult situation.
Matthew Gordon: This is a difficult situation, but I’m trying to work out where the power lies and I’m trying to, and again, help investors understand where the market dynamics are shifting to, because what we heard yesterday was the significant intent from the US government by the Department of Energy, that’s what I heard, but it’s going to take time. And it’s going to take time before they know how they are going to allocate budget and they’re not committing to anything beyond 2021. So, I think there are some immediate beneficiaries when the system starts working with whatever they construct starts working, for sure. And if they do start buying pounds this year, then again, there’s a couple of beneficiaries of that. But it seems to me that the power has shifted back to the market dynamic, which is the supply-demand fundamentals, which, you know, has been growing and has been accelerated with this COVID-19 situation we see here. The gap is huge. The demand-supply gap is huge like it’s never been before. And do you think that investors, companies, funds alike should be focused on that, knowing that the nuclear working group is, and you feel the working group is working towards solving something, but let’s focus on what things we know and what things we can control rather than relying on a government which is traditionally slow moving?
Dustin Garrow: Well, yes, I think that you know, as we are all aware now, with the COVID-19 effects on the Uranium market, and as you say, the supply side is really the issue. I mean, demand effects seem to be relatively modest. EDF will probably have the biggest impact. But you know, here in the US, the Department of Energy just put out their short-term energy outlook on April 7th. So they have attempted to include some COVID-19 effects on the economy. They see nuclear down less than 2% this year in total generation of electricity in the US.
China has said their nuclear plants are back. You know, I don’t think they ever reduced operations. South Africa is keeping a unit down a little longer than they thought, but it’s really the cutbacks on supply which could be the final catalyst on the commercial market side, which I think, the understanding of supply issues really came up with the WNA report in September, when they came out and said, in every scenario there’s a need for unspecified Uranium sources. And that was a way of trying to describe inventory in increased production at existing mines, whatever, to fill that gap. So, I think that we have had now, you know, more than 6-months of the industry realising that supply certainly was an issue.
Now we have had these cutbacks, you know, the general census production would be about 140Mlbs, 142Mlbs this year. Last year it was around 140Mlbs. If you’d start, depending on your assumptions of restarts of Cigar Lake and things like that, they are probably going to lose 20Mlbs, maybe 25Mlbs this year, if not more. So, you’re down 110Mlbs to 115Mlbs with Uranium requirements. If you look at WNA of, you know, around 180Mlbs, you have still got secondary supplies; 25Mlbs seems to be a number that people are agreeing on. So, like you said, that gap has really gotten substantial. And then the restarts, I think when the Kazakhs start to put in well fields, they have to put the Lixiviant to them. So, there is a slow ramp up. But yes, I think that we may now be seeing the market finally being transitioned into one of deficit, of structural deficit. And so, there’s just got to be better contracts longer term, not just to restart the mines that are down: principally MacArthur and things in Kazakhstan, but for new mines. I mean there is a, I think an acknowledged need to build new production capacity beyond what’s in care and maintenance. And by, pick a date – you know, is it 2023, 2025? It looms large when it takes years to get these projects actually producing yellow cake, which is the ultimate, let’s say, need of the market.
But the movement of the spot price; one of the points that was brought up recently is when that gets closer or exceeds term prices, then the utilities can go into their managements and say it’s no longer USD$25 and low 30s, or really closer to USD$40/lbs. True long-term contracts have been kind of in that range. People haven’t really been signing them. But now spot, you know, that relationship has always been pretty close and that again has justified the term contracting. So, I think we may be moving into that new phase of the market.
Matthew Gordon: Yes, I think that’s interesting. We have heard CEO’s talk about submitting RFPs, but the numbers that they’re submitting not close to anywhere near close to what the utilities are wanting to see at the moment. But do you feel that the gap, where we are today at USD$33/lbs, and where most people are saying, well, most that I talk to, to be able to run this economically, some will get into production at USD$30/lbs, but they are not making much money. You want to make money, right? That’s the name of the game. So, do you think, how quickly do you see these markets move? You were around for the last cycle – you saw it explode. Do you think we’re in the same or similar market conditions to back then? Which would allow the price to move rapidly when it does start going, or we’re going to be stuck in the thirties for some time? In which case, it’s not going to move the dial for a lot of producers.
Dustin Garrow: Well, I think, at this point there’s several opinions, of course: there are those that say, yes, the price will move up. The spot price will maybe move into the mid-thirties, it could stall out. We could see a new trading range kind of in the USD$32/lbs to USD$35/lbs area for a while. Then the utilities would say, well, you know, it just shows maybe there’s not as big of a supply issue looming. There are others saying USD$40/lbs by third quarter. USD$50/lbs by the end of the year. I think what triggers, particularly the term contracting, is both the level and the velocity, you know, that the price keeps moving up. Then the utilities reach a conclusion that well, this is now sending me a signal that supply is an issue in the future. And so, I think we’re still a little early, but I think we are more likely to see some of the utilities again, they started to come in the market before the COVID effect. A couple of the big US utilities distributed long-term requests for proposals, one in January, one in February, but they were really capturing the true long-term market. I mean delivery starting, you know, kind of $22/lbs to $24/lbs and going out to $28/lbs to $30/lbs. So, they were beyond the carry trade impact.
And, you know, as a couple of the market observers have said, they probably saw the best prices that may be offered under new term contracts for quite a while. But then they’ve kind of stepped back a bit with the COVID-19 effects, where they have had to handle all of that. And some of it is reloads. You know, again, spring and fall are big reload timeframes in the US, and the fuel groups get involved in that. Having worked in a fuel group in the past, you go out to the reactor do you do fuel start-up tests, and so that is a high priority. And you know, they’ve got a pretty full agenda right now of issues they have to get cleared. But I’m hearing that some are still in discussions with the bigger producers about long-term contracts. And again, Matt, that’s one thing that, you know, people tend not to focus on. If we went back 15-years and there’s a certain way you have to go about –
Matthew Gordon: Well, let’s get onto that. Let’s get onto that.
Dustin Garrow: I think the market fundamentals are moving in the right direction right now.
Matthew Gordon: Okay, well let’s get on to that. So, then let’s put it in a way that people are going to understand: so, Cameco has got orders to fill. Cameco is not producing any product at the moment, okay, it’s got orders to fill. It needs to find pounds in the market, and it has been able to cobble together pounds over the last year, put together with their own output, and you know, they’re hopefully making some money there. There’s not a lot of pounds out there now, but they just, they have these contracts in place. What happens if they cannot find the pounds that they need to fill the contracts? Do they just turn and go, sorry, can’t do it. We’ll have to wait until there’s something in the market, or we have to wait until we get into production. What are the punitive terms in a contract if you don’t deliver?
Dustin Garrow: Well, there are, you know, force majeure protections. Now, I don’t think MacArthur would qualify, but Cigar? I mean, it was shut down due to provincial health restrictions. So that to me is, if they had to trigger force majeure, they could do it there. But back on they’re making their deliveries, keep in mind they’ve got purchase agreements in place. I think they’ve got a couple certainly within Inki and as they made clear on their quarterly, they’re taking a disproportionate share of that production; meaning they’re taking pounds that were produced for KazAtomProm. So, I think that they’ve probably set up some agreements with probably, maybe the Kazakhs with others. Maybe the Uzbeks right now, that you don’t see in the spot market, but they are near-term purchases. So that’s one thing. It wouldn’t surprise me if they’ve gone to their customer base and some of them that said, hey, do you really need these pounds right now? What if we deliver them a year from now? That goes on. So, it affects the delivery commitment side. They’ve not really suggested that, but that’s what I would be doing.
And the other is loans. I mean, I think you know, again, Cameco is a pretty conservative company. Would I approach maybe utilities that are holding big inventories, which they don’t intend to sell but they don’t need for maybe several years? And there’s certainly one big region where that’s applicable and put in place contingent loans. You know, if we need to draw down this material, can we do it under this, these…? So, I think they’ve probably done some things on the procurement, acquisition side, more than just coming into the spot market to probably ensure that they’re going to meet their delivery commitments.
I mean, at the end of the day, it’s long-term delivery. Reliability is what carries the day in this industry. And even the Kazakhs have said, that is where they are continuing to progress that they want to be viewed as a long-term, reliable supplier. Well, to do that; you meet your delivery commitments. So, so I think that’s, you know, if you’d look at what Mike Campo will be doing, I think Orano is in a somewhat similar position. People kind of don’t talk about them. But in a normal year, if MacArthur was operating and Cigar, normally, they’d get about 20 million pounds out of Kazakhstan Canada and Missouri. Now, based upon some assumptions, they might lose 7Mlbs or 8Mlbs this year: with MacArthur, with the Cigar, with the cutbacks in Kazakhstan. And I think one of the telling issues there is, when they shut down McArthur and they borrowed one year’s worth of production share; 5.4Mlbs immediately from Cameco, it didn’t suggest to me they have a lot of available inventory. So again, when people say there are producers buying in the market, I assume that that’s both Cameco and Orano.
Matthew Gordon: So that’s just a sort of a mix on the market and off market acquisitions. And in a way it’s kind of a, I would just call it a structured finance really. Because you’re talking about borrowing under certain conditions with a view to either replace or pay at whatever structured finance rates you have agreed. So, it is much more complicated than I think most people appreciate, the way, the way that the product moves around the market.
Dustin Garrow Yes. There’s no question. And again, I just want to say, I’m speculating a bit on Cameco, but I know them again as a long-time conservative company and they want to meet their delivery commitments. So that’s what I’d be doing. I’d certainly be putting the loans in place. But yes, I think you’re right. I mean even in the spot market today, you step back and you say, well, the volume is 30Mlbs through mid to late April. And the question of course is where did those pounds come from? Well, I’m being told that actually some producers are selling. There are a couple that because of production cost structures are not as sensitive to backing out of the market, let’s put it that way. Some of the traders have been doing a bit but also the financial buyers, those that kind of showed up in a wave in 2018, they bought, there was speculated 10Mlbs, 12Mlbs, 15Mlbs.
I think that last year some of them may have managed those inventories a bit, sold some off. But what I’m being told is, is that then in the market, selling and buying; they’re acting more and more like traders. So, we see what’s called turn in the market, and that’s kind of reflected in that 30Mlbs. So, it’s not really 30Mlbs. It’s probably less than that, but we have had pounds transacted more than once by some of these. So, again, the market is, as you say, more complicated than it appears on the surface. But again, the financial buyers acting as traders, and it’s not all of them, but it’s enough to kind of kid more volume in the marketplace.
Matthew Gordon: Okay. We’re getting into an area which I love: which is where you work out how you make money. Okay. So, you have already started to describe the fact that term contracts can be extremely complex mechanisms, yes? You’re laughing because you know it. You know that they can be designed and cut in a number of different ways. So, park that, bear that in mind. It’s a complex thing. I have been trying to help people understand how to identify the types of companies, junior Uranium miners who have more of a chance of getting into production than others. So, we have looked at the fundamentals of the asset and the management team’s experience, their access to, or availability of cash to move this through, and the stage of development that they’re at. And they clearly the economics of what they’ve got. But the bit we very rarely talk about, it is that thing we talked about at the start, which was the complexity of putting deals together. Because even if you can economically get into production, you’ve then got to deal with and contend with putting these contracts together. Not everyone has those skills. So, what is your experience there? Is it simple or is it complex?
Dustin Garrow: What sounds like simple is pretty, pretty complex. Now, to make a couple of comments, I have listened to a number of the recent interviews with the CEO managing directors of development companies and I don’t hear a lot about the customers. In other words, it’s, well, term contracts are kind of the, we need to get those, but they focus a lot on optimisation; getting their costs down, which obviously you’d need to do. But I think that in one of your recent interviews, the managing director said the optimisation starts to get, the benefit gets smaller and smaller, and you know, term contracts aren’t something that come kind of later in the process. I’ll go on record; there will not be a Uranium mine built based on the spot market, ever. It has never been, and it won’t be in the future. It is too risky. Too specific on the customer base.
So, term contracts really, to me, trigger the development process. In other words, without term contracts, there are very few instances where you get financing, so you really can’t then get your capital in place to then start developing the mine. And you know, and I harken back to when we did the Paladin bankable contracts, those were a necessary part of the project moving forward. Without those, we wouldn’t have had the financing to do that.
Now again, I think one of the exceptions was the Berkeley energy agreement with the Middle Eastern sovereign wealth fund, which said, yes, term contracts would be nice, but they didn’t really require them. But everyone else is really going to look up, and you know, Cameco say MacArthur doesn’t restart without new term contracts. Converdyn: we will not restart Metropolis. So, it’s not just a nebulous concept.
Okay. So how do you go about it? First of all, new production centres, assuming a relatively balanced market, now, if it becomes a seller’s market, that’s going to change the dynamics. But the utilities will say, we’ll do a small contract, we’ll do 200,000lbs, 300,000lbs as a starter, and then if you develop the project, if you meet your delivery commitments, we’ll consider a larger commitment, because we can cover off with our flexibilities that we have gotten from our long-time reliable suppliers to cover if you don’t meet your delivery commitment.
So that’s another thing. I think there’s a sense that million pound contracts are just out there. Very few, if any. And they’re going to, again, the newer producers are going to have to see a suite of small volume agreements. Now, how do you go about that? Again, the utilities approached the market either on market, it’s called, which is an official written request or proposal, which they send out to their list of suppliers. So, in other words, even under that circumstance, you have to get on the supplier list, so you make sure you even see what they’re distributing.
But I went back 15-years and looked at term contracting and 70% of the volume was placed ‘off-market’. What does that mean? That is direct negotiations and it can be done by new producers. I did some of that with Paladin. And certainly, existing producers, you know, Cameco is in, talking to their, as they’ve said, their best and largest customers to extend their current contracts. So, you know, I think that that’s another issue that’s not fully appreciated. Is there going to be term contracting going on? Cameco – 36Mlbs? Well, there’s never been an announcement by a utility. Cameco only does it in the aggregate. So, a lot of the term contracting has been ‘off market’.
So, if you’re a new producer, you really can’t sit and wait for the phone to ring because it won’t ring. So, you’ve got to get out, and it is as important as optimising your project as talking to funding sources, but it’s actually engaging. When do you engage the utility industry, which ultimately will determine your future? And so, it’s complicated. And again, I won’t go into all the aspects of each contract. It’s more than price. People just think, well, I need USD$50/lbs, but there’s delivery, timing, delivery locations you know, quantity flexibilities, usually, you know, now even there’s 10%, 15% to the favour of the buyer. Extension options. The other thing too is that it has an impact on your working capital. If you look at Cameco’s delivery schedules, it’s skewed to the Q4 because they give their customers, in general, the right to call the delivery date. Now, if you’re a small new producer, if you do that, you’ve got to assume a pound you produce in January may not be delivered until December. So, you’re going to have to sit on that pound for months. And so that needs to be part of your economic calculation. Which some of them, I don’t think, take that into account, but you can negotiate better delivery terms if you’re a new guy. So that’s what I’m saying; you need to ICA marketing plan strategy, again, it is as important early on, is how are you going to construct and operate your asset?
Matthew Gordon: I think that that’s fascinating. It says to me that companies which are not talking about this, or not talking about their ability to do this, either don’t know or are nowhere down that process. It’s also interesting to me that, you know, in a buyer’s market and a seller’s market, the terms are going to be very different. The pricing and the structure of those terms, the securitisation capability of those terms will be reflected in the cost of your money as you’re talking to funders. Because if you’re a small company, new to the market, whatever your experience, you’re going to need a series of these small contracts to build, to add up to something that’s interesting to funder to allow you to complete your capex and get into production, because one small deal isn’t going to cut it. It is a fascinating, fascinating space and thank you for talking about it. And I’m sure there’s a lot more to it than that, but it’s a new thing that investors should be looking at and listening for from companies. I have not heard it. I have not heard that conversation from very many people. I can count on one hand how many people here have done it before and are capable of doing it.
Dustin Garrow: Well, Matt, what you hear is that, ‘we have met with’, or ‘we were in discussions with’, and I think that they’re just saying, ‘yes, I set up a meeting with six utilities during the WNA and we had a nice…’ Utilities generally want to meet because they want to see what is out there and what is realistic. But that is, you’re far away from negotiating a term contract or a SWU.
And just back on that comment you just made, when we put the bankable contracts in place for phase one at Langer, I think there were 4 or 5 utilities that we had got contracts with, and we actually had a couple of holes that needed to be filled in right at the last minute. But without that, the bank said, you know, you’ve got to meet these criteria on pricing volumes, delivery dates and all of that. So, I mean, it was a very specific set of criteria.
Matthew Gordon: Yes. It is a fascinating area to get into because there’s a few variables that you’ve talked about there, which could affect the economics in a meaningful way. The cost of money is important down there. The terms you negotiate with the utility in a buyer’s market can affect, especially when some of these guys are, you know, needing X dollars to start, to breakeven; worth considering and worth analysing.
Look, Dustin, thanks very much for running through with your experience of the term contracts market. I do appreciate it. To finish off, are you optimistic about coming back to the Nuclear Fuel Working Group (NFWG)? Are you optimistic that it’s a good thing for the US utility buyers and US nuclear complex as a whole?
Dustin Garrow Oh yes. I think that, again, it’s crucial that something is being done, that this has been looked at. And again, I think, Matt, to some of us who’ve had a long experience in the US, it’s at a very, very high level. I mean, Larry Kudlow has been involved. Bolton, before he left, was involved. So, I mean this isn’t just some low-level, a couple of departments are thinking about whatever. I mean it is at the highest levels in the White House. So, I think that there is a commitment to move forward to keep a viable US fuel cycle. I mean, we haven’t talked enrichment, but I think they realise we need to have domestic enrichment capabilities. And I think, you know, export reactors. I think the government has realised that the Russians, Chinese, to a lesser degree – Koreans, are dominating that market. And like they said, there are no orders for US-derived reactors in the foreign market. Zero. So, everything that’s going on in the middle East and India, you name it, there’s nothing on the order books for the US. So, there needs to be help somewhere if we’re going to reassert some kind of leadership role globally in the nuclear area.
Matthew Gordon: Yes, I think it’s fascinating. I think we’re obviously, you know, with generation four, or just new and innovative technologies as a whole, and supporting that and the ability to export, we’re kind of walking into the realms of, you know, corporate America here; as we said, maybe a subject for another day as to how they can get back at the table.
But you know, today I wanted to talk about Uranium miners. I think you’ve given us another big clue there as to what people should be looking for listening for when they’re trying to identify the right companies to get after.
So, you’re obviously very busy at the moment I suspect, but not running around the world. Lots of phone calls, Zoom calls. What’s the mood in the market at the moment?
Dustin Garrow: Well, as you know, I am Chief Commercial Officer for Yellow Cake. And so, there’s been a lot of interest in investing in a fund that holds the physical asset. But I would say in the last couple of weeks, based upon group calls and individual one-on-ones, I have probably talked to 30 different groups. And you know, it’s interesting, they ranged everywhere from continental Europe, London, Hong Kong, Singapore, so, I mean it’s pretty broad. Australia, a lot of interest, a lot of knowledge, which I think is important. There were groups that have come in, they’ve left, they’re coming back, but it’s not, you know, tell me the fundamentals of supply-demand. It’s more of, I understand that, but what are the nuances and what’s the timing? I mean, I’m forever asked when is, and now I can say, well, the price has gone up. Finally.
Matthew Gordon: That is fascinating. Again, that’s fascinating. We’re seeing the generalists, we’re getting inbound, you know, being asked for our views on this, not that they should do, but they do. And to see them interested for the first time in a long time is, well, I’m glad, obviously, very nice, but what do you think it’s going to take for them to actually step in and put some money in and sort of see where this is going? Because you know, for me, they talk about spot price. That makes that the most important thing. They go, you know, when’s this thing going to get to a point where these mining companies can get into operation? I don’t know.
Dustin Garrow: But yes, Matt, a lot of them have gone beyond what’s the spot price doing today? What’s a spot price going to be in a month? They realise that this is a much more complicated industry, and what they’re asking me on, on the production side, are questions like management. In other words, I’m going to begin to invest not an asset, but do you think these guys are going to get this done or not? And so, I think, and that’s, you know, something we have talked about before is human resources, operational, technical, managerial marketing expertise in this business is becoming increasingly scarce. But I think that that’s why I guess I’m more optimistic is because, like I said, a number of…it’s the odd call when somebody says, ‘hey, I have got a clean sheet of paper. Tell me about nuclear and Uranium.’ It’s like, ‘Oh no, you know, I have been in and out, I have gotten done well, I have gotten burned, you know, and now I have got my list of critical criteria and it sort of goes beyond the spot price’. And a lot of them more and more are understanding the term market involvement and what that means. But yes, so I think that is what gives me optimism is the, let’s say, increased sophistication in the space of the investors. Because for years, as you know, decades we didn’t have it. There really wasn’t any investor group, you know, mines were built by big companies and so they were part of a big financing arena: the Rios, the Cameco’s and all of that.
But now it is, you know, it’s much more interesting because of the financial guys and their analysis. I listen to what they say. You know, in the old days it was, they had no clue. And now it’s like, no, we have run the numbers, we have our model and here’s what we’re concluding. So, it shows that they’re putting the time, effort in, which I think is needed.
Matthew Gordon: Yes, I guess there is a better…we have had inbound calls from fund managers, hedge fund managers, and they talk about specific assets and they’re telling me why certain assets within a company, unnamed, well, I’m not going to name it, will never work. They won’t work at a hundred bucks. So yes, there’s some very detailed analysis out there, but these, unfortunately the market isn’t aware of that information because it’s not capable of doing that type of analysis. So, it is a, I guess all of us are learning all the time.
So, I shall let you go, Sir. I thank you very much for today, as ever, but let’s not leave it six months next time. That was ridiculous. I know things were quiet, but I suspect they’re going to be a lot busier over the next few weeks and months.
Dustin Garrow: I think so. And you know where I am. I’m not going anywhere.
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