Financing uranium mining

A guide for junior mining houses
October 30, 2015

Introduction

In today’s economic climate, the traditional project finance model based on high stable commodity prices and the availability of debt is being challenged. Further, there is a reluctance for commercial banks to lend as they continue to consolidate following bad debts, with limited access to capital markets and regulatory tightening that will invariably cause them to employ higher levels of capital.

This coupled with factors in the uranium market such as:

  • the volatility in the price of uranium;
  • the difficulty, given the nominal levels of uranium trading on exchanges,
    in establishing a spot price and benchmark for offtake contracts; and
  • the bilateral contracts between major consolidators and consumers that are the favoured method of purchasing,

combine to create major challenges for junior uranium mining houses looking to finance new concessions.

Furthermore, the industry is presently very concentrated with 70 per cent of production through four key players, Areva, Cameco, Rio Tinto and Kazatomprom. Forty per cent of annual production comes from four mines; healthy for some but perhaps not all, not least new entrants into the market.

However, the demand for uranium is set to expand dramatically as emerging economies, such as China and India, initiate substantial nuclear plant programmes. How can junior mining houses exploit the obvious opportunities?

The price of uranium over the last 10 years

Uranium has experienced decades of low investment and low prices; the former probably as a consequence of the latter. The price of uranium, the fuel for nuclear reactors, over the last ten years has fluctuated considerably.

The mineral soared to $136 a pound from less than $10 between 2000 and 2007. However, the credit crunch caused the uranium spot price to plunge. It sat at $41.94 in July 2010 but has rallied 75 per cent over the past eight months, with the most commonly-traded form at $72.25 a pound mid February 2011, down slightly from the 35-month high of $73 reached at the start of February 2011.

The graph produced by the International Monetary Fund below and the table to the left show the incremental rise and fall in the price of uranium over the last ten years.

Uranium monthly price


The projections of prices going forward

According to forecasts from the CRU, a leading commodities consultancy, the price of uranium will rise dramatically to a record high as surging demand from countries such as India and China stimulate a decade-long bull market:

“Persistent market deficits are set to continue, with supply struggling to meet strong demand from Asia, and in particular China. Nuclear generating capacity in China is on track to increase by over 800 per cent to 80GWe in the next ten years, most of which is already under construction or in the advanced stages of planning. Strong demand growth is also likely in South Korea and India and additional demand is expected from new entrants such as the UAE. As a result, global demand could more than double by 2030.”

CRU suggests that prices are likely to peak in 2015-17, with a predicted average price of $112 a pound in 2017.

According to the World Nuclear Association, China is planning to construct approximately 187 nuclear reactors in addition to the 13 it already has. CRU predicts that Chinese demand for uranium will quadruple in the next 10 years and by 2030 the country is expected to surpass the US as the world’s largest consumer of uranium. Traditionally, uranium demand has been concentrated in the US, France and Japan.

The graph produced by the World Nuclear Association below outlines the spread in uranium production and demand in the Western world in the period between 1945 and 2004.

Western World Uranium Production and Demand 1945-2004

In addition to the surge in China’s demand for uranium:

  • Kazakhstan plans to boost uranium output by
    10 per cent to 19,600 metric tons this year, indicates Vladimir Shkolnik, chief executive officer of the
    state nuclear company, Kazatomprom (Bloomberg,
    1 February 2011);
  • Russia began a ten year plan to pump $10 billion into expanding its uranium resource base in 2006, part of a program to accelerate the country’s nuclear energy. Spearheaded by the Natural Resources Ministry and the Federal Atomic Energy Agency, the program will increase annual uranium production sixfold by 2020, ensuring ore supplies for existing and new nuclear stations; and
  • South Korea’s ambitious plans include raising its uranium self-sufficiency ratio from 6.7 per cent this year to 25 per cent by 2016 and to 50 per cent by 2030 as the world’s fourth-largest oil importer looks
    to reduce its dependence on foreign crude.

So will supply keep pace with demand?

Ur-Energy, a junior mining company and Baobab Asset Management, among others, suggest that the future demand of uranium production will outpace supply. As the graph below illustrates, the costs of new global uranium supply is expected to rise sharply with a positive impact on prices.

Therefore, there are clear opportunities for junior mining houses and other investors interested in this sector.

The volatility ratings

In the uranium market high prices in the late 1970s gave way to low prices in the 1980s and 1990s, with spot prices below the cost of production for all but the lowest cost mines.

In 1996 spot prices briefly recovered to the point where many mines could produce profitably, but they then declined again and, as the uranium monthly prices (in the graph above) show, only started to recover convincingly at the end of 2003.

Nevertheless, the quoted “spot prices” apply only to marginal trading from day to day and usually represent less than 20 per cent of supply. Much of the purchasing in this sector is done through bilateral contracts between major trading companies (consolidators) and major consumers (nuclear power utilities) via long term contracts with producers selling directly to utilities. Purchasers and consumers generally prefer not to deal with single mine companies instead they look to acquire processed and enriched uranium.

Moreover, very little uranium is traded on an exchange (in part due to the fact that the mineral is not of homogeneous quality) making it difficult to establish a spot price and hence a benchmark for offtake contracts. As a consequence, junior mining houses struggle to achieve a fair share of the potential price escalation for uranium.

The consolidators – a market insight

The current consolidators

Since the early 1990s the uranium production industry has been consolidated by takeovers, mergers and closures. The World Nuclear Association statistics below show that in 2009 ten companies marketed 89 per cent of the world’s uranium mine production:

Company

tonnes U

%

Areva

8623

17

Cameco

8000

16

Rio Tinto

7963

16

KazAtomProm

7467

15

ARMZ

4624

9

BHP Billiton

2955

6

Navoi

2429

5

Uranium One

1368

3

Paladin

1210

2

GA/Heathgate

583

1

Other

5550

11

Total

50,772

100%

Production is thus concentrated among a few major players, more so than for other minerals, which makes it harder for smaller companies to break into the market and which adds to the volatility in price.

The future consolidators

As with every industry with dominant players there is an interesting dynamic as they seek to protect the benefits that dominance brings while others try to break into the dominant group. Market volatility coupled by long lead times for mine development, consumers’ preference for long term supply contracts and protracted periods when price is below the cost of supply has conspired against new entrants to the market.

However, rapidly growing and predicted sustained demand has created new opportunities. Junior uranium mining houses have also had the benefit of greater access to specialist exchanges where they have been able to raise risk capital for the early stages of exploration and mine development. Hence there is a latent demand for new offtakers or consolidators that are not the existing dominant players in the industry and who have the covenant to purchase production in the future and enter into long term supply contracts with end users. Better still if they can offer processing and enrichment services as part of that supply contract. These offtake contracts are vital
for junior uranium houses to raise debt for mine development.

A number of new entrant consolidators are emerging. If you would like to explore the opportunities, please contact us.

Uranium Monthly Price

Commodity Prices

Month

Value

Feb-01

7.39

Mar-01

7.69

Apr-01

8.23

May-01

9

Jun-01

8.78

Jul-01

8.75

Aug-01

8.95

Sep-01

9.15

Oct-01

9.47

Nov-01

9.43

Dec-01

9.5

Jan-02

9.59

Feb-02

9.72

Mar-02

9.95

Apr-02

9.75

May-02

9.9

Jun-02

9.9

Jul-02

9.89

Aug-02

9.85

Sep-02

9.8

Oct-02

9.84

Nov-02

9.86

Dec-02

9.88

Jan-03

10.16

Feb-03

10.1

Mar-03

10.1

Apr-03

10.1

May-03

10.9

Jun-03

10.9

Jul-03

10.95

Aug-03

11.24

Sep-03

11.49

Oct-03

12.37

Nov-03

13.18

Dec-03

13.35

Jan-04

14.8

Feb-04

16.05

Mar-04

17.14

Apr-04

17.75

May-04

17.75

Jun-04

17.88

Jul-04

17.9

Aug-04

17.9

Sep-04

18.6

Oct-04

20.08

Nov-04

20.2

Dec-04

20.5

Jan-05

20.54

Feb-05

21.2

Mar-05

21.84

Apr-05

23.14

May-05

28.25

Jun-05

29

Jul-05

29.28

Aug-05

29.65

Sep-05

30.43

Oct-05

32.75

Nov-05

33.56

Dec-05

35.53

Jan-06

36.75

Feb-06

37.69

Mar-06

39.77

Apr-06

41.1

May-06

42.28

Jun-06

44.17

Jul-06

46.5

Aug-06

47.44

Sep-06

52.44

Oct-06

56.06

Nov-06

61.44

Dec-06

66.57

Jan-07

72

Feb-07

76.25

Mar-07

89.44

Apr-07

110.43

May-07

119.11

Jun-07

136.22

Jul-07

131.5

Aug-07

109.6

Sep-07

85

Oct-07

77.5

Nov-07

92

Dec-07

91.8

Jan-08

87.56

Feb-08

76

Mar-08

73.71

Apr-08

69.44

May-08

61.67

Jun-08

59

Jul-08

61.84

Aug-08

64.5

Sep-08

63

Oct-08

48.6

Nov-08

50.5

Dec-08

54.33

Jan-09

51.44

Feb-09

47

Mar-09

43.38

Apr-09

41.72

May-09

48.56

Jun-09

51.5

Jul-09

49.7

Aug-09

47.19

Sep-09

44.28

Oct-09

46.11

Nov-09

44.75

Dec-09

44.44

Jan-10

43.83

Feb-10

42.1

Mar-10

40.91

Apr-10

41.33

May-10

41.3

Jun-10

40.78

Jul-10

41.94

Aug-10

46.06

Sep-10

46.67

Oct-10

48.83

Nov-10

57.18

Dec-10

60.65

Jan-11

63.88