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Mining
Welcome to Ten Bagger, where Lowell Resources Fund chief investment officer John Forwood gives us his take on a sector of the ASX resources market full of value.
This month, John picks out two uranium explorers with exploration upside.
Uranium prices have been on a tear of late, rising from a little over US$60/lb early last month to US$72.50/lb today, touching decade highs of US$73.10/lb.
The nuclear energy input is now riding high on sentiment not seen since before the Fukushima disaster in 2011, which prompted Japan to shut its reactor fleet entirely for four years and took a massive chunk of demand out of the market.
And for investors long skeptical like Lowell Resources Fund (ASX:LRT) chief investment officer John Forwood, the worm may be turning.
“I’ve been sceptical about uranium for a long time. Ever since Fukushima we’ve heard all that the uptick is just around the corner. That’s 12 years ago,” he said.
“The nuclear energy supply chain is a bit of a black box. The steps between mining uranium and producing nuclear energy are many and varied and they are dominated by countries that probably you would prefer those steps not to be in.”
Previous spikes have come about as non-participant buyers like the Sprott Physical Uranium Trust and British fund Yellowcake have bought up pounds in the spot market. But now Forwood sees real optimism in demand from actual end users — nuclear power utilities.
“I think it’s really the amount of nuclear energy utility buying, which had well exceeded last year’s level of contracting by around the middle of this year,” he said.
“It looks like it could be well on track to be double, at least, the level of contracting this year as last year. And so that’s real end user interest.”
While demand is improving, supply is starting to see challenges.
The world’s largest producer Kazatomprom — a State miner from Kazakhstan — is planning to lift output from 45Mlb to 65Mlbpa by 2025. That caused a dip in prices recently.
But Forwood says that could be a stretch, while Cameco’s decision to keep McArthur River below its full production capacity is as much skills related as it is supply discipline.
“Just like a lot of industries at the moment they’re struggling to get the right people and you obviously need a very, very skilled labour force in a uranium operation,” he said.
Uranium spot prices have lifted every month since April this year and are around 50% higher year to date, an unusual winner in a rough 10 months for the commodity complex.
The big ASX players have all recorded stunning gains so far. $1.6 billion Boss Energy (ASX:BOE) is up 131% YTD, while $2.9b Paladin (ASX:PDN) is 46% higher.
Both are expecting to restart production by early next year at mines in South Australia and Namibia respectively.
The Aussie market’s largest explorer, Deep Yellow (ASX:DYL) is already worth $1 billion, up 97% YTD.
But Forwood says the real upside is in the small end of town exploration space.
“As usual, we’re looking for bucketloads of exploration upside, because a lot of the pre-developers, developers and companies with feasibility studies that might be in or through permitting — Boss, Paladin etc. — when you do the numbers on the NPV of their projects, it’s hard to see value at current uranium prices,” he said.
“Hopefully the uranium price will go higher.
“But what we’re hoping to achieve with our investments is to have some exploration success, which will drive share prices without needing the uranium price to jump any further or even if the uranium price softens.”
He pointed to NexGen Energy (ASX:NXG) as an example. It discovered the Arrow deposit in Canada’s Athabasca Basin — the highest grade uranium producing region in the world — on February 14 2014.
Trading at 23c a share Canadian at the time, the dual-listed developer is now worth C$4 billion and has seen all time gains of almost 2300%, trading currently at C$8.12.
“If you have significant uranium success as you’ve seen with companies like NexGen with the Arrow discovery a number of years ago in the Athabasca Basin, the share price can just go ballistic without the actual uranium price doing anything,” Forwood said.
So where is Lowell looking for its uranium exposure? It all comes down to value, Forwood says.
Basin Energy is one of Forwood’s picks, boasting a large ground position across three projects in the Athabasca Basin.
Located in northern Saskatchewan, that’s important because ground in the Athabasca is the most sought after in the world for uranium exploration.
“It’s got the highest grade uranium deposits in the world. I think McArthur river contains mmore than 600 million pounds at a grade of over 16% uranium, which is off the scale. And then you’ve got NexGen’s Arrow discovery which is about half the size but also at a similar sort of grade,” Forwood said.
“So you’re seeing the potential to make super high grade discoveries in the Athabasca and Basin has been able to get access to some of this hot exploration ground because explorers on the TSX-V have been absolutely decimated — as a general rule, not just in the uranium market.
“Last year Basin did a deal before their IPO to joint venture into a number of projects held by a TSX-V company called CanAlaska, which has a very big ground position in the Athabasca Basin.”
Basin is now at 60% ownership of the Geikie project, where maiden drilling intersected anomalous uranium in four of the eight holes in a 2217m program, with results as high as 0.5m at 0.27% U3O8. A phase two program is planned for early next year.
A geologist and lawyer by background, Forwood says breakthroughs from other explorers have made projects like those held by $7 million Basin an intriguing proposition.
“Historically, it had always been that the Athabasca deposits had been found at the geological unconformity in the basin. So you get the basement rocks, and then you get the overlying younger sedimentary rocks and all the major discoveries had been made at that interface,” Forwood said.
“But more recent discoveries, Arrow included, indicate that you don’t have to be at the unconformity to make the big discoveries. You can be in the basement. So Basin have got ground in their Geikie project which is actually not in the basin proper, it’s actually on the edge of the basin.
“It’s got no sedimentary cover rocks, it’s just got 10m of glacial till over it.
“It hasn’t got the unconformity, but it’s been proven that you don’t need the unconformity to find the big deposits. So it’s a new paradigm and Basin are taking advantage of that.”
Haranga Resources also has gold interests, but its flagship asset is the Saraya uranium project in Senegal, where Haranga has the majority 70% stake in a project once walked over by French uranium giant Areva.
Significantly, $9m capped Haranga has already defined a JORC mineral resource at Saraya of 12.45Mt at 587ppm U3O8 for 16.11Mlbs of uranium oxide.
From Haranga’s 22 diamond holes there have been 45 intercepts containing 524m of mineralisation with a weighted average grade of 775ppm U3O8, with 541 holes already sunk into the ground by both Haranga and previous explorers.
“(The grade) certainly sounds low when you compare it to the Athabasca deposits,” Forwood said.
“But the mineralogy indicates potentiall low-cost metallurgy, and when you compare to say the Namibian deposits, which are grading somewhere between 200-500ppm typically, it looks pretty attractive.”
He said the resource comes from just one anomaly. But the project covers some 1650km2.
“There’s six lookalike anomalies and some of them look substantially better, bigger, higher tenor anomalies than where the initial resource has been delineated. The initial resource has expansion potential as well,” Forwood noted.
“Hopefully Haranga are going to end up with multiples of that initial 16 million pound resource at similar or maybe better grade, you don’t know.”
Africa’s big uranium producers include Niger, a major supplier into France where a recent coup has raised concerns of supply blockages. Senegal may not have a long history in yellowcake, but its does have a solid history as a commodity exporter.
“Senegal is not a known uranium jurisdiction and there is work to do in terms of working through the legal framework for uranium to be produced, but Senegal is a well endowed and significant producer of a number of commodities,” Forwood said.
“Gold, mineral sands, oil and gas, etc. So there’s a level of optimism if not confidence that uranium development will be able to happen in Senegal.”
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.
At Stockhead we tell it like it is. While Basin Energy and Haranga Resources are Stockhead advertisers at the time of writing, they did not sponsor this article.
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