Monsters of Rock: Uranium steals the headlines with eye-catching $658m merger and a major mine restart
Link copied to
Yellowcake investors may need to rub their eyes when they check out the news today.
After years of false starts, moribund prices, and lonely bag holding all their Christmases seem to have come at once.
This morning, confirmation the Australian uranium sector was swinging back into action came in two fell swoops.
First, John Borshoff’s Deep Yellow (ASX:DYL) announced it had secured support from the board of Vimy Resources (ASX:VMY) for an all-scrip takeover worth $658 million that will increase the chances of developing Vimy’s “world class” Mulga Rock uranium mine in WA.
Then Paladin Energy (ASX:PDN) — the company Borshoff built into a $4 billion mine builder in the last uranium boom in the late 2000s — raised $200 million from investors to support the planned restart of the Langer-Heinrich uranium mine in Namibia by 2024.
Not to be outdone, Boss Energy (ASX:BOE) has released the FEED study on the $113 million restart of its Honeymoon uranium mine in South Australia, paving the way for a final investment decision.
According to Numerco, uranium prices are trading on spot for US$57.75/lb, just shy of the US$60/lb mark often quoted to incentivise new production.
Five years ago uranium was trading for less than US$18/lb, a price at which even industry giants Cameco and Kazatomprom had to mothball major mines to remain viable.
And the Global X Uranium ETF is up almost 60% over the past year.
What a turnaround.
That’s with equities pulling back in the past few months as well, with the afterglow of the commodity’s initial surge powered by the Sprott Physical Uranium Trust’s raid on spot uranium supplies wearing off.
Euroz Hartleys analysts Steven Clark said while prices are up 25% since Deep Yellow’s first bid for Vimy was rejected last November, the Global X ETF has slid 15%.
With that drop in equity prices in mind, the deal to combine DYL and VMY comes at a slight discount to the rejected November offer.
Vimy shareholders will receive 0.294 DYL shares for every Vimy share they own, a 28.5c price at market value before both companies exited trading halts today.
Arguably the rationale for the deal has improved. Vimy now has certainty over the status of its flagship Mulga Rock uranium mine near Kalgoorlie in WA after the anti-uranium WA Labor Government said it had achieved substantial commencement in line with its major environmental approval.
Mark McGowan’s Government has said uranium mines approved before it came to power in 2017 like Mulga Rock will be allowed to go ahead despite its stance on the extraction of the nuclear fuel.
Vimy’s recent $17m capital raising (adjusted from a bolder $19m target after market jitters when Russian forces briefly sparked a fire at Ukraine’s largest nuclear power plant during the fundraising period), has also bolstered the merged company’s financial muscle.
It will have $106 million in cash in the bank, with the Mulga Rock development likely to be the main focus along with Deep Yellow’s Tumas project in Namibia.
With a combined resource base of 389Mlbs, if both are developed the company – owned 53-47 by shareholders of DYL and VMY respectively – will have annual production capacity of up to 6.5Mlbs.
Forming the ASX’s third largest active uranium company, the merger has the support of both Vimy’s board and both companies’ largest shareholder Paradice Investment Management.
“This Merger de-risks and underpins our path to development at Mulga Rock,” Vimy MD Steven Michael said.
“The combined financial, processing and operating strengths of both companies will enable greater optimisation and the delivery of Mulga Rock, as well as an established exploration team that can unlock considerable value at Alligator River.
“The Merger provides Vimy Shareholders the opportunity to share in the expected significant benefits of being part of a larger,
geographically diverse Merged Group, with the expertise to develop the full portfolio of assets in the near term.”
Deep Yellow boss John Borshoff told Stockhead the deal will see the team responsible for Paladin’s early success return with two major assets in its stable.
Should Vimy shareholders approve the deal, he believes it is the first significant consolidation effort to take place since the Fukushima meltdown in 2011 which prompted Japan to close its reactor fleet and sent uranium into a long bear market.
“It’s the only consolidation event that has been of some significance since 2011,” Borshoff said.
“That platform will enable a huge amount of things in terms of facilitating the projects, and ensuring that we can get accretive projects to add on to that if they suit us. Without being too blase, the world is our oyster and (other) groups can’t say that.”
Borshoff is not too focused on the spot price. He said the term price needs to come up to higher levels to actually support the financing of new deals.
But he thinks utilities are likely to be caught unawares when they realise how short supply is.
A new factor as well is Russia’s war with Ukraine. Russia and supportive states in central Asia especially Kazakhstan are major exporters of uranium.
Another factor is the drive towards decarbonisation, which has brought nuclear energy back as countries attempt to move away from fossil fuels.
Borshoff thinks even Australia, where nuclear power is prohibited, will look towards the energy source in the future as small modular reactors are developed over large-scale nuclear utilities.
Paladin has come out with a double whammy of an announcement this morning, launching plans to restart its Langer Heinrich mine in Namibia.
The project was placed in care and maintenance in 2018, but has a low cost pathway back to production, with a restart plan previously released by Paladin estimated it will cost US$81m to restart operations, producing at its peak 5.9Mlbs of U3O8 annually at Life of Mine C1 costs of US$27/lb.
With a total mine life of 17 years, that looks very economic at spot prices of almost US$60/lb.
PDN will raise $200 million in an institutional placement with another $15 million coming from a non-underwitten share purchase plan at 72c a share, an 8.9% discount to its last traded price.
That will give PDN a $259m warchest to bankroll the return of Langer Heinrich by calendar year 2024, with a formal restart launch expected in July 2022.
It has also locked up a tender award from Fortune 150 listed US energy provider Duke Energy for the equivalent of 5% of peak production from Langer Heinrich, adding to the 25% life of mine offtake already held by CNNC Overseas Uranium Holding Limited.
PDN said the restart decision was supported by the offtake deals as well as “continuing strong uranium market fundamentals with positive macro tailwinds for uranium driven by nuclear’s position as a reliable, low carbon baseload power source and a well-defined Mine Restart Plan providing a low-risk pathway to a return to production.”
Boss is also inching towards announcing the restart of its Honeymoon project.
Given its 12-18 month lead time and existing export permits, a revived Honeymoon will likely be the third active uranium mine in Australia after BHP’s Olympic Dam and the Beverley Mine once it’s in production.
A FEED study released today confirms the project is “economically robust” with an IRR of 47% at a US$60/lb uranium price and capital cost of $113m with an 8% contingency, 6.6% above a feasibility study estimate from 2021.
The mine will deliver 2.45Mlb of uranium a year at an all in sustaining cost of US$25.60/lb according to Boss, with potential to extend it beyond its initial 11 year mine life through exploration.
An FID is expected after the second tranche of a $125 million placement is completed on May 5.
“The FEED shows Honeymoon’s costs are in line with the forecasts contained in last year’s enhanced feasibility study, which is a superb outcome given the wider inflationary environment,” Boss MD Duncan Craib said.
“It also confirms that production is projected to meet our targeted levels.
“These key findings come against a backdrop of significant increases in the uranium price and an exceptionally strong supply-demand outlook.”