Producers vs. Explorers: where should you invest if uranium goes ka-boom?
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Lithium, two years ago, was unloved.
Then, a sudden but completely foreseeable realisation that we didn’t have enough to feed the EV thematic sparked massive price rises, which encouraged investment, which has now inspired fresh exploration and development.
Now all lithium stocks – from the cashed-up majors to the small exploration stocks – are loving life.
A succession of positive uranium news flow over the past 12-18 months has experts and industry insiders saying it is a matter of ‘when’ not if’ uranium has its own ‘lithium moment’.
— Kevin Bambrough (@BambroughKevin) August 31, 2022
In 2021, primary demand from nuclear reactors of 180 million pounds already outstripped supply by 60 million pounds.
Then came the steady stream of news; nuclear reactors were being built, having lives extended, and coming out of mothballs at record rates all around the world.
India, Japan, the EU, Russia, China, the US – they all want a lot more nuclear.
Positive Nuclear Power Headlines Continue: South Korea’s Ambitious Plans
South Korea plans to grow #nuclear power to ~
1/3 of total energy mix by 2030 to boost energy security & meet climate goals. https://t.co/fZOXVAf916 #SPUT pic.twitter.com/MF2g1CSf42
— Sprott Asset Management (@Sprott) September 1, 2022
That will have a tangible impact on demand says Lotus Resources (ASX:LOT) managing director Keith Bowes.
Take Japan’s recent decision to restart its reactors, for example.
“Each reactor uses between 250,000lb- 450,000lb per annum of uranium,” Bowes says.
“They are bringing on seven new reactors so that is probably at least 1.5Mlb per annum of additional demand coming online which the market maybe hasn’t considered at this stage.
It all adds up.
High demand leads to high prices, which will encourage a flood of capital into the sector.
“There is a lot of upside room for the current uranium price of ~$US50/lb,” Bowes says.
“People are talking about $US100/lb – I think that is possible.
“The message from the utilities is that they acknowledge that there is a shortage, they acknowledge that the uranium price has to go up to get new production online, and at some point in time they are going to have to pay more for their uranium that they are paying today.”
A rising tide lifts all boats, as the saying goes.
While the miners mint profits — which means divvies — the more speculative junior stocks could enjoy some of the biggest % gains.
They are relatively de-risked. Relatively. There’s always risk.
“All the new announcements about reactors staying online for longer, and bringing old reactors back online – it’s the companies which have assets that were previously operated and are on care and maintenance and can come on relatively quickly that will benefit from those,” Bowes says.
Lotus has one of four restart/ under construction projects on the ASX which can come online relatively quickly to meet to initial surge in uranium demand.
LOT’s Kayelekera in Malawi is one of the largest uranium projects in the world currently on care and maintenance. It produced 11Mlbs of U3O8 equivalent a year between 2009 and 2014.
A DFS last month confirmed its huge potential, with an ore reserve of 15.9Mt at 660ppm U3O8 for 23Mlbs backing a 10 year mine life, producing 2.4Mlbs annually over its first seven years.
The restart project would have a low capital cost of just US$88m, with all in sustaining costs (AISC) of just US$36.2/lb in its first seven years.
In June, BOE formally announced its plan to rebuild the Honeymoon uranium mine in South Australia.
The 2.45Mlb per annum mine, which will cost around $113 million to construct and refurbish, will be just the third operating in Australia alongside BHP’s (ASX:BHP) Olympic Dam and the privately owned Beverley mine, also in SA.
Boss plans to be in production by the fourth quarter of 2023 with a three-year ramp-up to its full production rate, timed for the looming nuclear supply shortage expected from 2024.
PDN will be digging yellowcake again at the Langer Heinrich mine in Namibia from the March quarter of 2024 after green-lighting a US$118 million rebuild in July.
The company boasts US$177.1m in cash and has no corporate debt, meaning at the moment it is funded to first production itself.
And PEN recently started a US$3.4 million early works program at the 53.7Mlb Lance Project in Wyoming, designed to facilitate an accelerated restart and ramp-up of production operations ahead of a final investment decision to be approved in H2 this year.
A recent DFS envisaged 14.4 Mlb of production over 14 years. It would cost just $60m to build, with positive cashflow achieved at the end of year 2.
These projects, greenfield in nature, still have a couple of years before they come into operation.
Bannerman’s Etango-8 project in Namibia has been ‘reimagined’ as smaller scale mine initially, but with the ability to ramp up production as demand improves.
A PFS in 2021 envisaged 3.5Mlb of production per year over 15 years. It would cost $US274m to build.
A DFS is scheduled for release on Q4 this year.
Deep Yellow recently acquired fellow mine developer Vimy and now has two advanced projects on the books; Tumas in Namibia and Mulga Rock in WA.
In February 2021, a PFS was completed on a ‘Langer-Heinrich-style’ 3mlb per annum open-pit mining operation at Tumas.
The company expects it will take ~3.8 years to pay back the initial project capex of $US320m. Over an initial 20-year life, DYL is anticipating a project net present value (NPV) of $US407m, based on a uranium price of ~$US65/lb. Its breakeven uranium price would be about $US41.62.
A DFS at Tumas is due later this year.
91Mlb Mulga Rock is the only uranium project in WA to reach “Substantial Commencement”, which opens the pathway to development.
Legendary investor Rick Rule often talks about how he bought into Paladin Energy at 10c per share back in the mid-2000s.
It went down to 1c … then all the way to ~$10 a share, creating fortunes in the process.
“It’s much easier to get a 10 bagger if you start with a sub $2m market cap, than if you start with a $200m market cap,” he says.
“The truth is that in capital intensive cyclical businesses like mining, 10 baggers happen because you buy out of favour sectors before they return to favour,” he says.
George Bauk, exec chairman at high grade uranium explorer Valor Resources (ASX:VAL), agrees.
“The early bulls in a market are looking for value,” he says.
“Value comes in early-stage explorers, which have multiples ahead of them if they hit something big.
“For junior explorers, it’s all about discovery; the catalyst that creates new 10-bagger stocks.”