African uranium production is often dismissed by some North American promoters talking their own book. There's lazy narrative of political instability and low-grade ore that looks to distract from the reality. In fact, there are many signs that the next generation of uranium producers will come from Africa.
The good news is that they are cheap compared to their North American counter-parts. But it’s not a case of instead, but as well. The uranium investment thesis is strong. Near-term demand far outstrips future supply. Let’s have a look at the facts.
The World Nuclear Association’s Nuclear Fuel Report forecasts global uranium demand and supply scenarios out to 2040. Predicting a growth of 41% in base case generating capacity by 2039, uranium supply production capacities remain stable until 2028 before declining. A quarter of all uranium mines end their production lives in the next 13 to 18 years, resulting in a 30% production decrease in the five years from 2035 to 2040.
Current market prices do not support uranium exploration and development investment, yet Africa holds 18% of the identified uranium resources globally. Despite the low-grade, high tonnage orebodies that often exclude African projects from the lowest cost quartile, Africa is poised to play a major role in easing supply constraints as market prices rise.
Even more importantly for a sector that has a renewed focus on supply security, Africa plays a vital balancing role between West and East and provides important commercial diversification. We look at the projected global supply and demand for uranium against the realities of African uranium mining to understand whether the common narrative has substance.
Global demand for nuclear energy is rising in response to several factors. Increasing concerns about climate change have accelerated the search for low carbon energy sources, while world governments seek secure energy supplies given the growing uncertainty over gas and oil.
The initial capital investment in a nuclear power plant is high, yet, ongoing operational costs and fuel purchases are stable, providing governments with less exposure to fluctuations in raw material supply.
As fossil fuel prices and price volatility have increased, nuclear power has become an increasingly cost-effective solution.
Many factors affect electricity demand growth. The three most important are population growth & urbanisation, electrification of transport, and alternative generation technologies.
Electricity demand and population growth are linked, with the growth in electricity demand double that of population growth since 2000. Currently, one billion people lack access to electricity globally, with governments seeking universal access to electricity for their people. Increasing urbanisation is further fuelling a need for electricity generation.
At the recent COP26 climate conference, China announced an investment of $440 billion to build 150 nuclear reactors in the next 15 years in a bid to provide baseload stability to their power expansion necessary to meet their projected demand for electricity.
In attempts to reduce urban pollution and vehicle emissions, many countries are implementing electrification programmes for public and private transport vehicles. The effectiveness of such programmes is reflected in the three-fold rise in plug-in vehicle sales from 773,600 in 2016 to 2.1 million in 2018.
Paradoxically, alternative electricity generation solutions may assist demand for a long-term stable electricity supply. Until recently, US shale oil and gas exploitation has maintained gas prices below those needed to undercut nuclear supply. In a country that dominated the nuclear energy scene for decades, six nuclear power plants have closed or are scheduled to close in two years.
However, there are risks associated with wells' productivity and life, plus the environmental concerns around fracking and its impact on water supplies. The increasing focus on renewables has prompted political support for removing subsidies on fossil fuel generation.
Also, major countries such as South Korea, Russia, and India have ignored such gas solutions, largely committing to nuclear power for future generation needs. China is currently constructing 16 new reactors, Russia is constructing three with another 11 planned and India has seven nuclear reactors under construction.
The rise in renewables has driven a search for solutions to discontinuous power. Large-scale grid storage solutions such as vanadium flow batteries, or hydro-pumping storage are actively pursued. However, each solution has challenges. Either geographical constraints with the hydro solution or competition for a limited resource, such as lithium and vanadium.
With these global trends considered, the World Nuclear Association's (WNA) 2019 report estimated world reactor uranium requirements at 67,600 tU in 2019. The WNA expects demand to rise to 84,850 tU in 2030 and 100,000 tU in 2040.
Uranium supply consists of three categories. Primary supply refers to mines, including current, idle, planned and under-development projects.
Secondary supply covers relatively predictable governmental and commercial stockpiles, unusable fuel assemblies, and recycled material. Unspecified supply covers unpredictable sources offering limited information, arbitrary policies, or geopolitical and economic uncertainty.
A current deficit in uranium supply is largely being bridged through secondary supply by drawdowns on commercial inventories held by utilities, topped up with unspecified supplies.
The WNA reports that as stockpile depletion occurs against increased demand, idled primary capacity will return to service as early as 2023. In their middle case projections, planned mines will have come on stream, and prospective mines will be progressed by 2025.
By 2028, the gap between demand and supply will rapidly widen. Supply will plateau around 70,000 tU through to 2035, while demand will have increased from 82,000 tU in 2028 to 95,000 tU in 2035.
By 2035, four of the top ten mines in the world will have closed or run out of ore, with projections showing a rapid supply reduction to 50,000tU by 2040, against demand projections of 100,000tU.
African Mining Economic Viability
To understand more about Africa and its views on uranium mining, we spoke with Brandon Munro, the CEO of Bannerman Energy. Bannerman Energy is an Australian-based uranium development company whose flagship asset is the Etango Project. Etango is in the Erongo Region of Namibia, 30 kilometres southeast of the seaside town of Swakopmund.
The grade of uranium ore found in Africa is low. Yet, Munro cautions that several modifying factors affect mine viability other than simply ore grade.
While Namibia does have some of the lowest grades globally, he points to the Rössing uranium mine once owned by Rio Tinto. Rössing has produced ore continuously in Namibia for 45 years, even when uranium was at $7-8/lb. At the time of writing, the spot price is more than $50/lb.
Munro uses his Etango project to illustrate factors he considers matter:
- The mining is open pit, conventional and large tonnage, enabling economies of scale.
- The orebody outcrops at the surface and thereafter stripping ratios are very low, reaching around 2:1 over the full life of mine.
- Metallurgy is highly favourable: ore processing utilises conventional acid heap-leaching with recovery rates of up to 93% in pilot plant testwork. The mined ore is coarse crushed without the need for power-intensive fine milling.
- Mineralogy is homogenous, meaning there is no need for blending ore feed or mining concurrent parts of the orebody.
- The ore has very little acid-consuming carbonates or gangue minerals, resulting in low acid consumption.
- Infrastructure is all in place, with grid power, water pipelines, highways, railways, accommodation and a deep water port nearby.
- Labour and other costs are low, owing to a large alumni of local skilled workers and professionals that have gained experience at Rossing, Husab and Langer Heinrich uranium mines.
These factors all support lower production costs. Coupled with Namibia's mature infrastructure, a favourable royalty regime, and good fiscal management, they sum to a project’s economic viability despite the ore grade.
Market prices for uranium have been considerably below that needed to trigger restarting idled mines or cause current projects in Africa to move into production to meet current demand. Yet, it bears understanding the price to unlock such movement. From there, where will prices move in the next 15 to 20 years, given the WNA's projections?
The Nuclear Energy Agency (NEA) and the International Atomic Energy Agency (IAEA) released a joint report on uranium resources, production, and demand in 2020.
The report identifies the uranium resource base as sufficient to meet demand through 2040. However, they noted that much of the identified resource base could not be economically brought into production at current uranium prices.
We questioned Munro on the trigger price for Bannerman Energy to activate their Etango project. He advised that the Etango-8 breakeven price (the price at which all costs are taken into account including the repayment of capital) was around USD$47/lb.
Bannerman’s August 2021 Etango-8 PFS adopted a price-assumption of $65/lb, which generated a 21% post-tax internal rate of return and a post-tax NPV of USD$222M. Munro suggested that this would be perceived by many as a suitable incentive price for
“a large-scale mine with a long mine life and the capacity to expand later." He added that the company was willing to be patient to ensure they entered production at a price that captured appropriate shareholder returns, noting that "at $75, that NPV goes to approximately $350M post-tax."
While one can't extrapolate Bannerman's figures across Africa, a 2018 analysis by SRK Consulting shows African production costs for U3O8 sitting in the mid-3rd to low-4th quartile at $35 to $48. These figures place Africa in that small percentage of resources open to exploitation with a modest lift in the market.
A charge levied against Africa is the sovereign risk for companies investing in mining assets. Such claims are understandable given there are several examples amongst Africa’s 54 sovereign nations of appropriation over the last decade.
Even industry heavyweight South Africa proposed mineral law reforms, which commentators feel amount to indirect expropriation.
Yet, Africa is a huge and diverse continent, with very different politics amongst regions and nations that negate a “one size fits all” approach to political risk.
Hence it's important to understand which countries hold the bulk of uranium deposits and their prevailing political climates.
The largest identified African resource is in Namibia, with 7% of global totals, South Africa holds 5%, Niger 4%, and Botswana and Tanzania with 1% each. Each country offers diverse challenges, not all of them political.
Munro has worked in Namibia since 2009 and lived there with his family for more than five years. He offers a robust response to suggestions that Namibia may not be a safe place for development:
"Namibia (is) a wonderful, safe, ... stable, supportive corner of Africa ... you can't take a big continent and apply the worst of what you've heard in certain parts of it to a country like Namibia."
"Namibia has been ... consistently exporting uranium for 46 years and has a government who understands [uranium mining], a government with the capability to regulate [uranium mining]. "
Regarding development, Munro feels the stability in Namibia surpasses that of some richer mining countries, saying:
"...compared to let's say, first-world jurisdictions, there's a level of development stability that you have in Namibia that you don't get in Canada or Australia."
Two key constraints on business in Africa are the availability of power and water. Orano (formerly Areva) owns a coastal reverse osmosis desalination plant, built to supply their large but unrealised Trekkopje uranium mine near Swakopmund in Namibia.
The plant produces about 20 million cubic metres a year, drawing 16MW from the grid. Of the output, 10 million cubic metres are made available to other mines in the area; however, the end-user costs are considerable at around USD$2.50 per cubic metre.
The Namibian water parastatal, NamWater sought to buy a majority stake in Orano’s desalination plant but could not agree on an acceptable price.
In 2021, the Namibian government announced plans to sign a public-private partnership (PPP) with a competent private firm for a new desalination plant. NamWater will enter an ongoing water purchase relationship with the contractor.
Namibia has an installed power capacity of 680MW, 51% of which comes from hydropower, 24% from solar, with the remainder from coal, thermal, and wind power.
This total capacity amounts to 40% of Namibia's power needs, with the remaining 60% supplied from South Africa through bilateral agreements with Eskom and SAPP.
Yet, South Africa has been undergoing load-shedding and rolling power blackouts since 2008 due to insufficient energy generating capacity. Load shedding is expected to continue for another two to three years. Economic loss from power interruptions is estimated to cost between 1% and 5% of countries' GDP across sub-Saharan Africa.
In response to the power generation risks, the Namibian government has promulgated a nuclear generation capability policy to alleviate reliance on South Africa while meeting growing in-country demand.
To date, there has been no measurable progress on this aspiration. However, Namibia is well suited for both solar and wind energy and renewables have experienced rapid growth in the last two years.
On balance, while the major uranium mining centres in Africa are not immune to risk and cost pressures, they do benefit from supportive governments, a trained workforce and relatively stable licensing regimes.
Continuing government infrastructure investment will de-risk operations and smooth cost volatility. Add to that pragmatic environmental frameworks that are not exposed to first-world lawfare or interest groups and Africa offers a particularly attractive development pathway for new projects.
Want to hear more from Brandon?
Brandon hosts a weekly Uranium show with Crux Investor covering:
- Market updates
- Uranium fundamentals
- Mistakes beginner (and experienced) investors make
- The implications of new discoveries
- The spot price and how it should affect investment decisions
- What it takes to run a uranium company
- International nuclear agreements
Basically, everything you need to know about investing in uranium.
Watch Brandon here.