Has uranium bottomed out?

My CEO today is Mike Young, the CEO of Vimy Resources. It’s a $40 million market cap uranium explorer, it’s got a deposit called Mulga Rock in Western Australia, undeveloped.  The deposit’s an old one, but the main reason for talking to Mike is just to educate us about the uranium business at the moment and also of course to think about whether Vimy is worth investing in.  But fundamentally the question is, is this the bottom of the uranium market? I mean, it’s been at the bottom for quite a while, ever since Fukushima really and the accident there, uranium has been something that nobody wanted to get into because it was on the nose of course. 

But, as Mike points out in the interview, China and Russia have been continuing to build new nuclear reactors and so demand for uranium continues to rise while the supply is being retrenched and the big producers have been cutting back.  Obviously a question to you as to whether you make a bet on uranium, at what point you do that and whether Vimy is the right way to do it.  But Mike certainly gives chapter and verse on both the uranium market and Vimy. 

Here's Mike Young, the CEO of Vimy Resources.

Mike, you’ve just done a feasibility study of the Mulga Rock deposit out there in Western Australia, but just before we get onto that, can we just talk about the history of it a bit?  Because it was found a long time ago, back in the 1980s and Vimy bought it in 2008 I think.  Tell us a bit about what happened.

Sure.  A company called Power Nuclear Corporation of Japan came into Western Australia looking specifically for uranium deposits and they went into a very remote part of WA where they knew there was a favourable geology, but it was all covered in sand so there was nothing on the surface that indicated there was uranium.  So what they did was they basically bulldozed a line through the bush for 168 kilometres and then they drilled a hole every 4 kilometres to see what was there, because that’s what they used to do. 

Goodness me!

Yeah, and you can still see the line today, it’s called the PNC baseline and we still use it for access, but you can still see it on Google and it was quite an extraordinary feat to think of people coming down into the West Australian bush at the end of the 1970s and it was a real grassroots exploration.  They discovered the main deposit, the Ambassador Deposit, at that time.  Then from there, they did further exploration around the region.  It just happened that they hit the best deposit with that exploration line and that became the centre of exploration.  They spent the next 20 years off and on doing exploration in the region.  They did a test pit at one of the satellite deposits called Shogun, did a bulk sample. 

Then by about 2000 I think the political movement in Australia – the 3 mines policy had come in, there was corporate issues back in Japan and so they decided to literally quit and left the ground open.  It was picked up by a gentleman who’s still one of our shareholders, a guy named Mike Fewster, in about 2000.  Then he listed a company called Energy Minerals Australia in 2008.  Then I got involved in 2013, the company had a bit of debt, needed a bit of reorganising and so we decided to rename the company, Vimy.   

Andrew Forrest put some money in.  I knew Andrew through my association with him when I was running BC Iron – we had a joint venture with FMG and then one of Andrew’s long time employees, Julian Tap, was also working with us, so Andrew backed us and that allowed us to really get a flying start.  As I say, we renamed the company to Vimy and then we’ve basically been non-stop since then, so that was 2014 when Andrew put the money in and we recapitalised the company.  It’s been a good ride since then.

When I look at my IRESS screen it shows the share price of the company back in 2008 as 3 bucks.

Yeah, we did a 7 for 1 consolidation.  When we did the recapitalisation there was a lot of convertible debt with Macquarie and Acorn that we converted.  We had 1.4 billion shares on issue at that time and the price was around 3 cents at that time.  We did a recapitalisation of 7 for 1, a bit like – Bannerman has a very similar history.  I was a founding director of Bannerman and the price hit $3.30 at one point, these things took a real flyer. 

Yeah, well I suppose the uranium price back then, or the U308 price was $80-dollars-something a pound or possibly it got to $100 at one point, so I suppose those were optimistic days for uranium, which has since disappeared.

Yeah, and there’s no doubt Fukushima’s had a huge effect on the industry and continues to do so.

Why should investors think about investing in uranium now?

Well, I guess investors are always looking to pick the absolute bottom of a curve.  If you think of normal commodity cycles being like, I guess, a sin wave where you have peaks and troughs and all investors want to pick the trough and sell at the peak of course but not everyone can.  The interesting thing about uranium is, because of market dynamics and various things it’s been in the trough for a long time.  From a downside risk, there’s very little risk because the price just cannot go lower and in fact the current spot price can’t stay where it is for a bunch of reasons we can talk about, but mainly to do with existing supply uranium contracts and future supply.

One of the interesting things is there’s now more reactors operating now than there was at the time of Fukushima.  In the non-OECD countries, particularly China and Russia, although there was a hiatus in building, they continued to build and that’s really where the growth is coming from.  While demand is starting to taper off and there’s been supply side discipline from some of the big producers, we’re still seeing Chinese turning on reactors.  In fact, there was an announcement over the weekend and another reactor had been turned on and was about to go in the grid. 

I guess the thing is, for your investors looking for the bottom of the market, we’re certainly in the bottom of the market in terms of uranium equities.  When we start going up the other side, that’s the million dollar question but we keep getting closer to that point.  

Explain to us why the price won’t go any lower?

Well, basically, the price that you see every day, and this is I guess a frustrating part of this particular commodity, it’s unlike any other.  The price that’s announced every day is called the spot price and unlike every other commodity, the spot market in uranium is not a clearing house, it’s not like an LME, it’s not like a gold spot price where there’s complete transparency.  The way the spot price works in uranium is that the buyer and the seller can, if they wish, provide the data to the uranium analysts and there’s only 2 uranium analysts that publish pricing and that’s a company called UXC and a company called TradeTech.  The information that they get to publish the spot price is basically provided on a voluntary basis and that’s only the spot price.  The spot market’s a very small part of the entire market.  For example, in 2016, primary supply was around £160m and in 2016 I think the spot market was about £40m and most of that was trader to trader churn.  The same ton of uranium could be sold 6 times and be reported as £6m if you like.  That’s the thing about the spot market.  It came into being back in 2007-2008 when the prices peaked.  The price got up to $138 in June 2007. 

Before that, the spot market was basically a place where a producer like me would just put excess supply and the utilities could go and buy that access supply at the prevailing contract price.  But then, when 2007 came around, we had cheap debt, it was just before the GFC and arbitrage players got in.  Traders could get in, they could buy this extra supply, they could amass it to a point where they could actually have enough uranium to compete with the miners and that created what we know as an arbitrage market.  Arbitrage, as you know and your listeners probably know is when you try to buy something cheap and sell it at a higher price, and that created the spot market.

While all that’s going on of course the utilities are just writing contracts.  90% of the uranium bought by utilities in the world is on contract.  These are long term contracts, some of them are 10 years, some of them are 5 years and the utilities write these contracts really in response to supply and security of supply, not so much price.  The cost of electricity out of a nuclear power plant, 80-90% of that is capital and sustaining capital, not the fuel going into it.  So, they’re relatively insensitive to the price of uranium.  What that means is that when they’re looking for supply, they’re looking at security of supply over price.

But while the spot price has been dwindling they have been topping up their stockpiles and so some of these utilities are running 2-3 year stocks.

The spot price is currently around about USD$20 dollars a pound and I just wondered, what sort of relationship do the long term contracts that are now being signed have to the spot price?

The arbitrage has normally been 20-25%.  If your spot price was at 30% then the contract prices were in the 40s.  But the problem is there’s no transparency on the contracts.  The contracts are all between suppliers and the utilities and they’re not made public.  Getting an idea of what those contract prices are is very difficult.  For example, on of the contracts that became highly visible was between Cameco and Tepco in Japan, which was $113 a pound, when last year Tepco decided a long time after the Fukushima accident, Tepco decided that they would call force majeure and didn’t want to buy uranium anymore at $113. 

That’s gone to court and I’m sure they’ll settle at a lower price, but that gives you an idea of just how wide the market is.  We do know that some utilities have bought at the prevailing spot price because some contracts are fixed to spot and so the price could be anywhere from the spot price to the 60s and 70s.  Going forward, as we see some of the supply side falling away for some of the big producers are cutting back or even indeed closing mines, the utilities will start to realise that they’ll need to start writing contracts again and then that brings me back to what is effectively the marginal cost of production for uranium and this answers your question.  

It’s a long, long answer but the spot price is lower than almost every single uranium mine’s cost on earth, so it’s not sustainable and that’s really why the spot price has to move up.

Given the fact that Russia and China have been building nuclear power stations in recent times, what does the balance of supply and demand look like going forward?

The real key thing is that what’s happening is that on the supply side you’ve had major cutbacks by both KazAtomProm which is the nuclear company in Kazakhstan and Cameco, the biggest single producer on earth have had massive cutbacks, as have Areva, now known as Orano.  That’s where the supply side is cutting back.  The Russians and the Chinese have been buying predominantly from Kazakhstan which supplies 40% of the world’s uranium and they’ve been stockpiling and they’ll eat into those stockpiles.  But on the western side what you’re seeing is basically a tightening of supply. 

These contracts that I spoke about, most of the utilities still have contract cover but by the early 20s, the cover starts to drop away quite drastically and it means that they’ll start writing contracts now for first deliveries in the ‘20s.  Just on that, this is another thing about the uranium market that’s quite confusing, utilities buy yellow kegs from say, a company like me, and then that has to go into what’s called the nuclear fuel cycle and that means it needs to be basically fabricated into fuel pellets to go into the reactors and that process is about 2 years. 

They buy uranium well in advance, two to three years in advance of their requirements, so that they know they have the uranium in the fuel cycle system.  Unlike iron ore or any other commodity where it might sit on a wharf for 3 months and then be turned into steel, the stuff can be sitting around for 3 years before it’s actually used but they still write the contracts today.  So this is where I think the opportunity is, is that when we look into the early 20s, we see supply side cuts now, we see the utilities starting to think about writing contracts for delivery in ’21 and ’22, means they have to start writing contracts in ’18 and ’19.  That’s really the opportunity.

For a company like us, where we’re not operating at the moment and the project’s about a two year build to go from final investment decision to first uranium, it actually works quite well for us because we’ve got a guy in America who’s our marketing guy and he’ll be chasing contracts and if we get contracts later this year and early next year for delivery in two years then that’ll be right when we’re coming into production.  

This is obviously a good time to now talk about Mulga Rock, tell us what the resource is there?

The resource is 90 million pounds.  We often talk in uranium, we talk in pounds because that’s how we sell it, so the total resource was 90 million pounds, it’s 71 million tonnes at 570 PPM.  Of that, the ore reserve is about 42 million pounds, so that’s 22 million tonnes at 845 PPM.  However, we do plan to mine higher grade parts of the ore body for the first five years, particularly in the first two years, which would be around 0.2% or 2,000 PPM.  The way that we’ve designed the mine schedule is that we’ll really get the value upfront by mining some of the high grade zones first before mining the rest of the ore body and that obviously has a better effect on the value of the operation.

Right.  Tell us about how you create the saleable product from the ore, what sort of concentration process is required?

Sure.  It’s an interesting deposit, it’s basically a low grade lignite, if you like, so it’s an old river channel that was full of organic material, the organic material’s trapped the uranium – the same reason we use charcoal as a water filter, same thing happens.  It traps the uranium – we basically will mine it like a coal mine.  We’ll do what’s called strip mining.  This is one of the really appealing things of this operation is that we’ll be dumping the mine waste behind us as we go so our rehabilitation will be ongoing, it’ll be real time rehabilitation.  Then what we do is take the ore out, we basically wash the sand out of it using sand mining techniques and we throw that sand away.  It’s actually quite inert, there’s no uranium in it at all. 

Then we take this coal, this lignite if you like, and we put that through an acid leach process.  These are just open tanks using sulphuric acid.  The uranium will then come off the material and then we use what’s called resin and pulp.  Your clients would be very familiar with carbon and pulp in the gold mining, it’s the same process.  You’re basically capturing uranium with these resin beads, you then put that through a second process and it strips the uranium off and we precipitate it with hydrogen peroxide of all things and then that creates what’s called yellow keg. 

That is a uranium oxide, it goes into drums, the drums go into shipping containers and then they’re trucked to the port of Adelaide and we’ll have about 80 shipping containers a year.  We’ll do 3.5 million pounds in about 80 shipping containers, 40 to 50 truckloads a year.  It’s a pretty simple process chemically. 

Did you say you take it to Adelaide?

Yeah.  Adelaide is geared up for uranium exports because of Olympic Dam. 

Right, so that’s a long way, Mulga Rock’s in the middle of the Great Victoria Desert, not far from Kalgoorlie.

Well, it is a long way but I think people often forget in the west that when you’re eating your bowl of Weet-Bix it’s come from the east coast on a truck, so trucking’s not that expensive and when it’s in the yellow keg form it’s actually quite dense.  A 1 litre container of this material weighs about 3.5 kilograms, so it’s actually quite dense and it only adds about 60 cents a pound to the total cost.  It’s not that big a difference.  It’s not like you’re trucking iron ore.  I think iron ore and coal are obviously low value products and need huge infrastructure.  This is a very high value product and it’s no different than – we look at some really remote base metal mines where they ship concentrate out, the trucking costs are actually negligible compared to the product’s value.

Right, okay.  You released a definitive feasibility study in January, tell us what you found?

Firstly, I’d ask that your listeners go to our website and download the study.  I’m really proud of the document itself, we actually designed it to make it readable.  I often say it’s a bit like a national geographic, there’s lots of pictures and lots graphs and lots of maps and you don’t actually have to read the words to get the gist of it, but right on the third page we’ve got what we call the key physicals and financials.  Effectively what we’ve got is a 15 year mine life.  There’s probably the chance to extend it out to 20 years.  We’ll produce 3.5 million pounds of uranium a year, that’ll power about 8 nuclear reactors and it’ll save about 50 million tonnes of CO2 a year, so that’s kind of interesting, that’s about 11% of Australia’s total CO2 outputs.

The all-in costs are around $30 dollars a pound through years one to five, $34 dollars for life of mine.  When I say all-in, that’s everything, that’s royalties, sustaining capital, everything.  The capital for the project is around AUD$490m and about $100 million of that is mining equipment.  We’re going to do our own mining.  We did two test pits when we did this study.  We actually spent $2 million digging 250 metre pits to assess the overburden, this is really important.  Because the ore body is about 50 metres down, we really wanted to get a good idea of how easy it was to strip the overburden and so we dug two test pits and we found that the entire overburden sequence is free digging. 

What that means is no drilling and blasting.  That’s a significant cost saving as your listeners would probably know. 

It’s not rock, is that what you mean?

Yeah, it’s basically river sediments.  What that means is it’s all free dig.  We get down to the ore, we extracted 100 tonne of the ore, we brought 50 tonne of that to Perth, we put that through a pilot plant.  A pilot plant is normally done at a scale where the engineers will give you a process guarantee and that’s what’s happened in this case.  Then we produced about 15 kilograms of yellow keg and we sent 4.5 kilograms of it to the three commercial converters which is the first stage in the nuclear cycle and they gave us a thumbs up on the quality of the product. 

We literally mined, refined and exported yellow kegs during this process, so it was a very detailed DFS.  As I say, we’re going to do our own mining and about $100 million of the capital will be covered by equipment through vendor finance, which the three vendors that we’ve been talking to have all agreed to that and agreed to very good terms.  Then the rest of it would be at this point we’re looking at a 50/50 debt equity mix and we’ve been engaging with a French Bank called Society Generale and we’ve chosen them specifically because they’re French and the French are 75% nuclear, so they’re used to dealing with both the uranium mining and nuclear energy production.  That was one of the big reasons we went with a French bank. 

That means you need about $200 million in equity, new equity? 

Correct.

Is that from uncle Andrew again?

I haven’t talked to Andrew in a while.  As you know, he’s busy.  I guess the big question is, when you’re sitting at 10-11 cents how do you raise that much money?  The thing is, everything we do will be offtake led.  We need to get offtake contracts before we can go to the decision to raise equity.  The process will be this, we’ve got a gentleman in the States named Scott Hyman, he used to work for Cameco, the biggest uranium miner on earth, and before that he worked for an American utilities, so 30 years in the industry. 

We often talk about how before you have offtake contracts with people you have to have relationships, and Scott’s got 30 years of relationships, so we kind of got a winner when we hired Scott.  He’s over in the states, we’re concentrating on getting contracts with American utilities, they’re 25% of the entire market.  Then once we get those contracts, we’ll work through the banks to determine what pricing we need.  Once we have that, start announcing contracts and announcing bank financing, I would expect that all of that will happen while the uranium market continues to get better.  I would expect that our share price will increase and that’ll allow us to raise the equity at a much higher price than we’re sitting at today.

Well, you would hope so.  What’s your market cap now?  I’m just trying to look it up.  It is $40 million.

Yep.

40 into 200 is 5, so anyone buying now is looking at a 5 times dilution unless the share price goes up.

Well, let’s put it this way, if we’re sitting at 10 cents and we’re trying to raise $200 million then that’s not going to happen.  But we won’t be at the point of raising $200 million until we’ve announced contracts and until we’ve announced bank debt.  I guess the thing is for your listeners, we’re not going to move on this until we have contracts.  Those contracts will be 5 year contracts, they’ll be at pricing that allows the board to give it financial and investment decision.  The thing about this particular space is that even though the spot price fluctuates like any other commodity, once you’ve got locked in contracts then that’s the price that you’re going to get for the next five years.  That will allow the bank finance, although in today’s market, who knows?  I would expect that you would also see a corresponding rise in equity price once we started announcing successful contracts because that’s what everyone’s waiting for.

Can you tell us or bring us up to date on where you are with negotiations on contracts?

I can.  I spend a lot of time on this, this is one of the key areas of my activities.  I’ve been in the States twice this year, I’ll be back over again this year, we’ve got another conference in London.  The nuclear industry, like any other industry, does have lots of conferences, they tend to have them in really good places like Monterey and Vienna.  We’ve been in front of the utilities, we’ve getting close to the point where we want to start talking terms.  The American utilities are – currently there’s a bit of fly in the ointment with American utilities. 

Two American uranium producers have filed a Section 232 with the Commerce Department.  That’s the same Section that was used for Mr Trump to bring in steel and aluminium tariffs.  What they’ve done is they’ve filed for a 232 application to try and get the Commerce Department to force the American utilities to buy 25% of the uranium from American producers.  What that’s done is that’s made the American producers just sit to wait what the outcome is.  That’s slowed things down but what that does is that pushes the urgency to our contracts out a bit further, but it means that when that is resolved there’ll be a flood of contract writing going on. 

In 2017, there were five long-term contracts written and as far as I know, in 2018 none have been written.  American utilities are basically waiting to see what happens with price and waiting to see what happens with this 232 application.  Now, if that were to get up, that would mean that America would need to produce 12 million pounds of uranium in a year and they have not done that in the last, I think, four years.  I think they produced less than 1 million pounds last year, so there’s a lot of moving parts in that issue and I think the outcome will be there may be tariffs, particularly from the non-westernised countries.  But, be it as it may, what we’d expect to see is when it’s resolved there’ll be a flurry of contracting activities. 

Our activities have been basically to be in front of the utilities, myself and Scott, bringing them up to speed where the project’s at, bringing them up to speed where the pricing we need to move forward is and that’s as far as we’ve gotten.  We haven’t written any contracts yet, obviously when we do we’ll be announcing that.

Of course.  Well, I’m going to have to leave it there, it’s been great talking to you.  Thanks very much, Mike.

My pleasure, Alan, any time.

That was Mike Young, the CEO of Vimy Resources.