On the crest of a uranium wave?

Tim Boreham

Independent Investment Research

The paradox of the current uranium market is that the more the major producers curtail output because of a stubbornly low price for the commodity, the higher the hopes of a recovery.

With a number of false dawns since the 2011 Fukushima disaster that smashed demand, no-one should be holding their breath. But the industry true believers contend the market will drift into undersupply and catch buyers on the hop when their current long-term contracts expire.

Paladin Resources (PDN, 12c) last month joined other major global producers by flagging a likely mine closure: it’s taken the first steps to putting its Langer Heinrich mine in Namibia on care and maintenance, citing the lowest spot uranium prices in 15 years.

In November last year Kazakhstan’s Kazatomprom said it would cut output by 20 percent for three years. In early December Canada’s Cameco to suspend output at its McArthur River mine for ten months.

In all, the cuts are thought to remove 17 million pounds of primary uranium supply this year, or 12 per cent of supply. Kazakhstan is the world’s biggest uranium producer McArthur River alone supplies 10 per cent.

Langer Heinrich produced 3.4 million pounds in 2017, with the mill fed by previously stockpiled ore.

Amid a global oversupply, the spot uranium price hovers around $U23 ($30) a pound, not far off the late 2016 nadir of $US20/lb.

 The price peaked at $US140/lb in 2007, when more than 500 resource explorers purported to be looking for the element (with the exception of a handful of them, they’re now looking for lithium or growing cannabis).

Predictable shares in ASX-listed uranium explorers and developers such as Vimy Resources (VMY, 12c), Bannerman Resources (BMN, 4.3c) and Toro Energy (TOE, 2.7c) are in the dog box.

But does every canine have its day?

Vimy’s Mike Young recently said the yellowcake market is on the crest of a wave of a price recovery and that

“It’s better to be on your surfboard in the takeoff zone rather than sitting on the beach waxing it.”

On Young’s reckoning, uranium costs an average $US55 a pound to produce, so most miners would go bankrupt at the spot price.

While contract prices are less than transparent, they’re much higher than the spot price: in 2016 fellow ASX-listed developer Peninsula Energy (PEN, 26c) signed a ten-year supply contract, while Berkeley Energia (BKY, 86c) inked a five-year offtake deal at $US43.78/lb.

At the time the spot price was below $US20/lb.

 “The uranium market is unique compared to other commodities in that contracts are signed years in advance of first delivery,” Young says. 

Vimy has good reason to talk up the market, given it’s due to release definitive feasibility study on its flagship Mulga Rock project (near Kalgoorlie) in the current quarter.

The country’s third biggest undeveloped uranium mine, Mulga Rock was approved by the Barnett government and re-approved by the Labor administration.

With a resource of 71.2 million tonnes containing 90.1 m.t. of uranium oxide, Vimy is envisaged as a 3.5 million pounds a year producer. Put in context, Vimy assumes global demand of 240m pounds by 2024, compared with the current 150m pounds. 

Ironically, the economics of Mulga Rock are supported by side production of copper-zinc and nickel-cobalt, key ingredients of alternative battery technology.

On Vimy’s numbers, there are 447 reactors across 31 countries, with a further 56 under construction and 160 planned or permitted. Of these, China accounts for 38 reactors, with 20 under construction and 40 planned.

Joining Vimy in the surf is Peninsula, which is seeking to expand its Lance project in Wyoming. The mine currently produces about 400 pounds a day (146,000 pounds a year), but is licensed for three million pounds a year.

Berkeley Energia this year it starts building its Salamanca mine in Spain, the only major uranium project under construction.

Bannerman, meanwhile, is developing its Etango project in Namibia as an open pit and heap leach operation, based on a nano-filtration technology that is expected to reduce costs.

But without definitive signs of a recovery, we suspect investors will remain happy to eat Chiko Rolls on the beach while the likes of Vimy wait in the breakers.

 Silex Systems (SLX) 27c

The uranium processing innovator is one of those once high flyers the market has long forgotten about. But a vaunted deal with a heavy-hitting consortium of US nuclear companies could put Silex back on investors’ radars.

Having shed its solar assets some time ago, Silex’s focus has been on commercialising its laser uranium enrichment technology.

This know-how, which makes the process far more efficient, has been licensed to the US-based Global Laser Enrichment (GLE) consortium.

In May 2016, the 76 percent GLE owners GE Hitachi said they wanted out of the venture, citing “changing business priorities and difficult market conditions.”

Silex intended to introduce new shareholders, but with no apparent interest it has been negotiating to buy the stake at a “heavily discounted valuation”.

Nuclear power producer Cameco would continue to hold the remaining 24 percent of GLE.

Rather than receiving royalties as initially planned, the purchase will give Silex a controlling stake in a facility intended to be built at Paducah, Kentucky.

The initial feedstock probably would be 300,000 tonnes of depleted uranium called the Paducah tails, owned by the US Department of Energy (DOE).

While subject to change, the plan is to process over 40 years into natural grade uranium at a nominal rate of 2000 tonnes a year.

That output, to be sold on the global market, is the equivalent to that of one of the biggest uranium mines.

There’s a few missing parts of the equation, notably the likely purchase price and the cost of building the plant. As a rough guide for the latter, Cameo acquired its stake for $US124m in 2008, implying a $US550m valuation for the entire venture at the time

Understandably, Silex also needs the approval of the DOE, the US nuclear watchdog.

 Silex had expected a deal to come to fruition in the March quarter, but deadlines have slipped. The company said its due diligence had identified “additional risk factors”, with some sort of result in the “near future”.

Can’t be too careful.

In its heyday Silex was worth more than $1 billion, compared with today’s market cap of $57m supported by $36m of cash.

A third generation processing technology, Silex’s process involves laser excitation to separate isotopes, rather than the old gaseous or centrifuge diffusion.

 It’s more efficient and enables smaller, modular plants to be built.


Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.


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Tim Boreham
Tim Boreham
Editor of New Criterion
Independent Investment Research

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

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