Brandon Munro #5 - Uranium: A Chess Game, with Missing Pieces (Rewind to May)

Back in May, we conducted an interview with Brandon Munro; regular Crux Investor viewers and readers will know him well. He is the CEO of Bannerman Resources (ASX: BMN) and is a uranium market expert. His commentary is always compelling and incisive, and he is never afraid to speak the difficult truth. What was going on back in May, and what can investors learn from these events to aid their investment decisions in the here and now?

Matthew Gordon talks to Brandon Munro, May 2020

For some context, back in May, the U3O8 spot price was knocking on the door of US$35/lbs. It has fallen slightly in recent weeks, sitting at a shade under US$33/lbs today, but even $35/lbs was nowhere near what uranium players are looking for; US$50/lbs is the widely supported bare minimum.

At the time, Munro bemoaned the psychological sentiment barrier of the uranium spot price. Recent price developments have further affirmed this belief. Until the sentiment of utility companies is forcibly modified by inventory, supply and other market conditions, uranium is going to continue in this unprofitable void with only a few producers managing to strike a small margin.

The NFWG report has been out for a while, but it was a real hot topic in May. The majority of uranium investors now see it as a move in the right direction and the first step of a more comprehensive strategy aimed at restoring America's competitive nuclear energy advantage. It is a policy document that needs to be built upon with concrete strategies and definitive numbers. Cameco's President and CEO, Tim Gitzel, explained his opinion at the time. Like the stateside uranium CEOs, he was entirely positive and thought the report provided an honest look at how the US industry has fallen away. He was pleased to see the DoE's demand for pounds sequestered, but he was adamant that he didn't want to see any form of preferential market availability afforded to uranium players ahead of McArthur River. It doesn't appear this is going to be the case right now, but we are still waiting to see exactly what the US administration has planned, especially in an election year.

During a Cameco conference call at the time, it was explained that COVID-19 had its most severe impact on uranium producers who had been committing pounds of uranium via sales whilst expecting to mine them several months from now. KazAtomProm is an example of a company that has successfully mitigated potential impacts like this by maintaining a minimum 6-month inventory at all times. As a consequence, the company is able to make up the pounds it has lost to the coronavirus lockdown via its inventory and spot price purchases rather than relying on new production. This drains the market of more pounds, possibly as much as 20Mlbs, and fits neatly into the de-stocking thematic that is becoming ubiquitous amongst uranium majors. It will be interesting to witness how this dynamic uranium space continues to develop over the next year; which uranium companies will be caught short? And which will try to take advantage of unsuspecting investors.

At the time, Cameco stated that it took the Port Hope Uranium Conversion Facility offline for the right reasons. It was down for strategic reasons including accelerating some planned summer maintenance. It was claimed to be more a case of bringing forward planned downtime rather than an unexpected cessation of operations. Cameco was confident that Port Hope would go back online sooner rather than later, and this was proven to be true just a few weeks later, with the Port Hope Conversion Facility’s UF6 plant and Blind River Refinery recommencing operations on May 18th and being ramped up to normal operating capacity on May 25th.

However, the tone for Cigar Lake was established around this point, and it has continued to be representative of the company's strategy today. The discussion around Cigar Lake featured broader ESG decision making issues that regarded the protection of employees, families and the wider community. Cameco claimed it would only turn Cigar Lake back on when the company is confident it can run it safely and sustainably, but with COVID-19 restrictions loosening, it is becoming increasingly clear that there is a strategic element behind this continued shutdown. Uranium producers want to see the carry trade made obsolete and the supply-demand deficit exposed in a way that induces a feeling of concern within the utilities. We thought Cameco was playing the long game at the time, and now it is obvious that this decision forms part of a multiple-year game of chess. Cameco's strong balance sheet and access to capital should they need it, will continue to protect their position in the meantime, but the strategy wholeheartedly revolves around bringing about comprehensive destocking of uranium inventories. Picking up the loose change equates to price control and they and KazAtomProm seem determined to clean up the sector and take back control from the utilities. As will all economics the power shifts between buyers and sellers. Now it's time for sellers to see some of the upside. It is also worth noting that perfumed/blended uranium, fuel fabricated from uranium that does not conform to the corresponding limits for Enriched Commercial Grade UF6, was considered by Munro to not be a possible substitute for Cameco's lost production because the Japanese utilities were not forthcoming.

During this interview, Munro explained the importance of mobility for uranium inventories; in fact, he stated that this is much more important than their overall size. The mobility of inventory appears to have an inversely proportional relationship with uranium price movements. A mobile inventory gives uranium companies something that is extremely desirable right now: optionality.

KazAtomProm CEO, G. Pirmatov, had made some significant statements around the time of this interview, and Munro delved into them. Its ISR-amenable resources give it a competitive advantage over its peers; it is able to "flex up" and "flex down" its production levels without it meaningfully impacting on the unit-cost of production. Companies are also able to slow down ISR projects whilst continuing to achieve the same level of recoveries at first. The better quality Kazakh assets with a larger well configuration have a longer runway before they run out of uranium product.

The main activity that had been disrupted at the time for KazAtomProm was wellhead development, and this was predicted by Munro to have a varying impact on each of the company's JV partners. With KazAtomProm's shutdown recently being extended by a further month, these factors have become increasingly important for investors today, and investors should carry out careful due diligence of a uranium company's front-end logistics to make sure they won't be left short. All in all, it can only really mean pounds being taken out of the market, and that can only be a good thing for uranium investors.

Munro then explained that with big players supplying +40% of the world's uranium, the remaining c. 60% would be primary supplied by vertically integrated players, such Orano, which is vertically integrated with French utility, EDF. There is a clear top 10 that could help plug the widening supply-demand deficit, but outside of this it will be a free-for-all, with uranium juniors across the world vying for their piece of the uranium pie. In this instance, the fundamentals of these companies become extremely important. Many of these companies will never get into production, and Munro advises caution before investing.

Uranium junior miners will only going to get financed once they have enough long-term contracts are in place with utilities. The U3O8 spot price remains a strong indicator of uranium market sentiment for equity investors. The utility companies are far from immune from the consequences of COVID-19, and this has been to the detriment of long-term uranium contracts. With no palpable appetite for serious discussion from utilities yet, it looked, and continues to look, like another waiting game for uranium players.

Company Website: https://www.bannermanresources.com.au/