Australia’s complicated relationship with uranium has not been a subject of great interest for investors in recent years, with the price of the commodity in the doldrums.
Uranium has been a crazy market so far this century. In 2000, the price was languishing at US$7 a pound, but by 2007, the spot price hit US$138 a pound. Everything was going swimmingly until the earthquake/tsunami disaster that massively damaged the Fukushima nuclear power plant in March 2011. Japan closed its reactor fleet, and several countries abandoned plans to build nuclear plants, sending the uranium price from US$75 a pound on a one-way ticket to US$18 a pound.
But in any commodity, the cure for low prices – eventually – is low prices. Uranium is heading inexorably into a major supply shortage, as demand grows again, on the back of concerns about the carbon-dioxide emissions from fossil fuels. Nuclear energy is, right now if viewed objectively, seen as the only realistic zero-emissions source of baseload power, if fossil-fuels are excluded – although it is not seen that way in Australia, at present, anyway.
That is why, as at April, there were, around the world, 54 nuclear reactors being built, 111 planned, and 328 proposed – to add to the 441 reactors already in operation. ASX-listed uranium project developer Bannerman Resources (BMN) says 20 new nuclear power plants are scheduled to connect to the electricity grid between now and April 2021.
Add that to the COVID-induced shutdowns of major producers such as Cigar Lake in Canada (the world’s biggest uranium mine) as well as the Rössing and Husab mines in Namibia, and Kazatomprom’s mines in Kazakhstan. You have demand starting to, firstly, bring down the high inventory levels that have overhung the market for years, and secondly, open up room for the uranium price to rise.
Starting the year at US$24.85 a pound, the uranium price eased to US$24 by March, but the shutdowns have put a rocket under it. Uranium touched US$34 in May – a four-year high – and more importantly, analysts see it as having legs beyond the COVID tailwind, as demand regrows.
Earlier this month, for example, the China Nuclear Energy Association (CNEA) stated that China will build six to eight nuclear reactors a year between 2020 and 2025 and raise total capacity to 70 gigawatts (GW), up 43.5% compared to the end of May. The CNEA said the country’s total installed nuclear capacity is expected to stand at 52GW by the end of 2020, falling short of a 58GW target.
John Borshoff, CEO at ASX-listed uranium company Deep Yellow (DYL), says the shortage is clearly identifiable by 2023, but that the sector is ill-prepared to supply looming shortage in time. He says there won’t be significant new mining development without a substantial and sustained shift in the uranium price to a minimum of US$60 a pound. There are clear implications for the price to overshoot the forecast US$60 a pound to US$70 a pound “incentive price” levels, once the extent of the shortage is realised by the industry.
Last month, Australia’s commodity forecaster, the Department of Industry, Science, Energy and Resources, projected an average uranium price of US$28 a pound for FY20, rising to US$38 a pound in FY21 and to US$47 a pound in FY22. That is starting to get close to the figure seen widely as the incremental cost of production – about $50 a pound.
Australia is the third largest uranium producer, exporting 7,270 tonnes in FY20, worth $650 million and Australia also has the largest resources in the world. Price growth is expected to push the value of Australia’s uranium exports to $747 million by FY22. But Australian production is set to decline from 2021 due to the closure of ERA’s Ranger mine, scheduled for January 2021. This will leave Australia with two operating mines: Olympic Dam and Four Mile, both in South Australia.
BHP is a significant producer of uranium at Olympic Dam, but it is very much the commodity that dare not speak its name in the company’s annual report. You don’t invest in BHP for uranium exposure. Uranium is a by-product of the copper, gold and silver mined underground at Olympic Dam. In FY19, BHP produced at Olympic Dam 3,565 tonnes of payable metal in concentrate, a 6% lift on FY18. ERA is closing at Ranger; while Four Mile is mined by Heathgate Resources, owned by US company General Atomics.
So where else can Australian investors look?
In fact, there is a plethora of potential uranium exposures on the ASX. But I think the most promising of them are the following group:
1. Boss Resources (BOE, 6.4 cents)
Analysts’ consensus price target: 9.5 cents
One of only four companies with an Australian uranium export permit, Boss Resources plans to restart the Honeymoon mine in South Australia, which has been on care and maintenance for several years. Honeymoon was mothballed by its Canadian owner, Uranium One, in 2013, because of low prices. Boss bought the operation in 2015 and has progressed it through scoping and feasibility studies to operational readiness and planning, and is ready to restart the project quite quickly. Importantly, Boss says Honeymoon will produce at a cost of US$32 a pound. With a recent resource upgrade to 24 million tonnes, at a grade of 660 parts per million of uranium (giving 36 million tonnes of contained uranium), and a “conceptual exploration target” of 32–38 million tonnes, Boss says Honeymoon is one of the few uranium projects worldwide positioned to participate in the early stages of a new bull market. Boss surged 20% in mid-July, when uranium stocks were heartened by the inclusion of nuclear power in US Presidential candidate Joe Biden’s US$2 Trillion Climate Change policy.
2. Paladin Energy (PDN, 13 cents)
Analysts’ consensus price target: 25.7 cents
Paladin owns 75% of the Langer Heinrich Mine in Namibia, with a subsidiary of China National Nuclear Corporation (CNNC), Overseas Uranium Holdings, owning the balance. Langer Heinrich – one of the world largest known uranium deposits – began operations in 2007, and until the partners closed it in 2018 because of poor uranium prices, it had produced and sold more than 43 million pounds of U3O8.
Paladin plans to bring Langer Heinrich back into production to capitalise on stronger uranium prices. The company has completed the Restart Plan, which is based on a US$81 million ($114 million) cost to bring the mine back into production. The life-of-mine plan has shown three phases:
- The ramp-up, which will last for one year
- Mining, which is expected to last around seven years, and
- The stockpile phase, which will run for about nine years.
Paladin says peak production would be 5.9 million pounds of U3O8 a year, for seven years – and at a miserly cash cost of production, of US$27 a pound, over the life-of-mine.
The company says a major plus for it is that potential customers know the Langer Heinrich product, which was aligned to feedstock specifications of its major customers. In ten years of operation, Langer Heinrich never missed a shipment or had a shipment rejected.
Partner CNNC will take 25% of annual production at the prevailing spot price; Paladin believes that selling the remaining 75% will give it upside exposure to uranium prices. There is also potential to extract and sell vanadium at Langer Heinrich.
While using stockpiled material during the ramp-up phase in the first year will reduce the start-up risk, Paladin has not yet given firm details of when it will officially push the re-start button.
3. Peninsula Energy (PEN, 6.8 cents)
Analysts’ consensus price target: 20.2 cents
Peninsula is a producer of uranium, from its wholly owned Lance Projects in Wyoming, in the US. Peninsula has in place delivery obligations under sales and purchase agreements through to 2030: it will deliver 525,000 pounds of U3O8 into existing term contracts over the next 18 months, which the company says will generate about US$9 million ($12.7 million) in net cash margin at current uranium spot prices.
PEN’s contract book set to be further enhanced by US Department of Energy (DOE) uranium buying programme recommended by the Nuclear Fuel Working Group (NFWG) and budgeted by the President at US$150 million ($211.3 million) a year: PEN says it is the only ASX-listed uranium company capable of benefiting from a US-sourced buying program to establish a uranium strategic reserve.
4. Deep Yellow (DYL, 24.5 cents)
Analysts’ consensus price target: n/a
Deep Yellow holds a portfolio of ground in Namibia – in the same region as Langer Heinrich – that are highly promising for uranium. The latest drilling results from its Nova joint venture (39.5% Deep Yellow, 39.5% Japan Oil, Gas & Metals National Corporation, a Japanese Government Agency, 15% Toro Energy and 6% Sixzone Investments) were particularly exciting, with one intersection returning a maximum grade of 736 parts per million eU3O8: to put that in context, the neighbouring Langer Heinrich mine has a resource grade of 445ppm U3O8.
The Barking Gecko prospect – also in Nova – has also yielded encouraging results, including one intercept grading 305ppm eU3O8. At its wholly owned Reptile/Tumas project nearby, Deep Yellow has defined a current resource of 45.1 million pounds of U3O8, grading 420 ppm U3O8. In total, the company’s Namibian resources amount to 156.6 million pounds of U308, grading 320 ppm. The exploration program is targeting an additional 125 million pounds–150 million pounds U308, in the grade range of 300 ppm–500ppm U308.
While it develops the Namibian projects into what it says will be a low cost, tier-one uranium producer, Deep Yellow also intends to build-up a multi-project, global uranium platform through participating in consolidation through M&A activity, in a counter-cyclical market. Taking advantage of the depressed nature of the sector, DYL says it is focused on acquiring up to three projects to establish a pipeline for development from 2023–2030. It is assessing a pool of six to eight targeted projects. If its acquisition program – expected to kick off this year – goes as planned, DYL expects ultimately to have a low-cost, multi-platform global uranium portfolio delivering 5 million–10 million pounds a year.
5. Bannerman Resources (BMN, 3.9 cents)
Analysts’ consensus price target: n/a
Bannerman Resources has resumed testwork at its 95%-owned Etango project in Namibia, as part of an updated definitive feasibility study (DFS). Bannerman says Etango is the largest unaligned uranium project with a DFS and will be a world top ten producer once developed. It is a large-scale, advanced uranium project that is ideally positioned as the market continues to improve.
Based on the DFS, production at Etango is expected to be 7 million pounds–9 million pounds U3O8 per year for the first five years and 6 million pounds–8 million pounds a year thereafter. Etango will have a minimum mine life of 16 years, with significant expansion potential through the conversion of existing inferred resource, as well as the deposit being open at depth and along strike.
6. Tribeca Global Natural Resources Limited (TGF, $1.20)
Investors who want an exposure to uranium within a more diversified resources portfolio could look at listed resources investment fund Tribeca Global Natural Resources Limited (TGF). The fund has just over 16% of its portfolio invested in uranium, its third-largest exposure by commodity, behind base metals (22%) and precious metals (20%). TGF’s ASX-listed holdings are Paladin Energy, Boss Resources, Peninsula Energy and Bannerman Resources.
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