The conclusion of one calendar year and the commencement of another is an opportune time to reflect on the state of the nuclear industry and to try and assess our competitive position within it. This sort of annual strategic review always provides solid foundations to better understand the business challenges and opportunities that lie ahead. It seems particularly relevant as we begin 2013.
In our view, the nuclear power industry is currently at a very interesting and critical juncture - some 22 months removed from the existentially threatening event that was Fukushima - yet less than a year away from the expiring HEU agreement, a universally acknowledged bullish market development that could send uranium prices higher as above ground stockpiles dwindle and utilities need once again to rely on newly mined supply. In this narrative, 2012 was supposed to be somewhat of a transition year with slow but measurable signs of a post-Fukushima recovery, both in sentiment towards nuclear power generally and in the actual demand metrics. Unfortunately, this scenario did not eventuate and, if anything, the market ended the year on a weak and dispirited note as spot U3O8 prices retreated materially in the fourth quarter.
It appears the selling charge was led by the hedge funds who decided (correctly as it turned out) that the post-Fukushima recovery trade was no longer a plausible 2012 event and that the uranium stocks were names best not visible in year-end portfolios. Driving this change of heart were developments in Japan itself where, before Fukushima, their nuclear power industry was both a cornerstone of their economic strength and a point of national industrial pride. As an island nation without meaningful natural resources, security of energy supply has long been a paramount Japanese concern, and explains the compelling industrial logic behind their historic embrace of nuclear power. So, when signs of widespread public angst (and even visible public protests) began to emerge against nuclear power in Japan last summer, it became clear that the "back to business as usual" forecast was too optimistic and the consensus 12-18 month timeframe for a uranium market price recovery would be more protracted.
Just how protracted now becomes the key unanswered question as to how the uranium market - and by close association the uranium share market - will perform in 2013. Restart of the idled Japanese reactor fleet, the world's third largest, is widely acknowledged to be the single biggest catalyst for a broad based industry recovery but unfortunately the date for these restarts keeps getting pushed out. On the surface, this would seem to be bad news but paradoxically may turn out not to be for two important reasons.
Firstly, much of the perceived slippage in the restart schedule has been politically driven. In December, following a snap election, the LDP returned to power with a large majority and this party (which had governed Japan for much of the last 50+ years) is perceived to be much more pro-nuclear.
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Shunichi Tanaka, NRA Japan: The most important man in nuclear? |
In fact, the LDP was largely responsible for the national nuclear build out strategy and hence is likely to be much more forceful in championing the view publicly that nuclear needs to have an important ongoing role in the future Japanese electrical generation mix. Sensing a change in the political winds, utilities there sensibly have not forced the restart issue and have instead embraced the call for transparency in assessing what went wrong and what can be done to strengthen safety and operational protocols. A new regulatory body called the NRA (Nuclear Regulation Authority) has been created, is currently drafting new rules, and is expected to be operational by July, following which, restarts can be considered.
While this timeline may be somewhat frustrating for public uranium company shareholders, we take the long view and believe some "short term pain for long term gain" will be the likely result here. The culture of engineering and technical excellence is deeply rooted in Japan - as best exemplified by their leadership in high speed rail technology - and the public needs to have their confidence restored that the same zero tolerance safety standards that prevail for bullet trains will also be the objective for nuclear utility operators. While admittedly a high bar, the Japanese track record for safety in high speed rail is truly extraordinary (only a single fatality in 7 billion passenger trips) and so what nation is better suited to establish the next generation of safety standards for nuclear? If Japan Inc. gets it right - and we have every confidence that they will - then their regulatory blueprint may well serve as the new gold standard in nuclear and can potentially inspire a return of public confidence generally in the safety of nuclear power.
This would certainly help the long term demand case, perhaps even restoring some of the discussion about a "nuclear renaissance", but one of the surprising things in analysing the market effects of Fukushima is
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"Campbell Newman lifts the uranium ban in bid to tap $18 billion deposits." |
how little impact it has actually had on plans for new nuclear build in the years from 2016 and beyond. This is the timeframe in the market that is of the most critical interest to Laramide as this is when our large Westmoreland Project is projected to begin production. Our ability to plan our future took a dramatic turn for the better in late 2012 as the long awaited change in the Queensland political landscape finally resulted in the overturn of that State's unfavorable policy towards uranium mining.
When Queensland Premier Campbell Newman announced this change in a press conference on October 22, 2012 the immediate effect on the valuation of Laramide was, as expected, very positive but this positive company specific development was quickly overpowered by the general year end market negativity referenced earlier. In fact, we ended 2012 with an effective enterprise value of less than $1/pound in the ground for our uranium resources, all of which are located in either Australia or the USA, highly desirable political risk jurisdictions if you are a nuclear utility buyer.
Even in the current weak spot market context, we do not believe this sort of valuation will prevail for much longer as we believe strongly in maxim that "the cure for low prices is low prices". The supply side of uranium was well and truly challenged before Fukushima and the prolonged period of weak and falling prices since then has now resulted in massive project delays, deferrals, and outright cancellations. And most of these are for the big visible projects that were expected to be the cornerstone of future supply in the decade from 2020 on: Olympic Dam, Kintyre, and Trekkopje to name just a few.
While painful short-term, this bodes very well for companies like Laramide who have remained in the sector and who have large meaningful development projects like Westmoreland that can be brought on when sentiment (and prices) turn. The pool of institutional calibre investable names in the uranium sector is now very small and will get smaller still if the transaction announced this month to take Uranium One private is successful. This transaction fits an M&A pattern that has become very predictable over the past few years - really since the 2008 financial crisis - whereby much of the meaningful potential future supply is reverting to either the oligopolistic uranium producers or to entities tied to the reactor vendors. Transactions of note include legacy projects like Kintyre and Yeelirrie (both bought by Cameco) but also the consensus new discovery companies such as Extract (China Inc), Hathor (Rio Tinto) and Mantra (ARMZ). There will clearly be an increasing scarcity value attributed to independent producers with meaningful production capability and this is the path that Laramide is on and that we think will ultimately prove very rewarding for shareholders.
2013 should be a year of much increased activity for Laramide as we begin the permitting process in Queensland and also carry out a much expanded exploration and development program at Westmoreland - this year with a much greater focus on resource expansion. We were very pleased with the results from last year's fairly modest 4,000 metre drill program and look forward to returning to the field with a large follow-up program. This year will also see us kick off exploration on our large adjoining JV tenement with Rio Tinto that has the potential to turn Westmoreland into a truly district scale opportunity.
Activity in the US will also be at a high level as we proceed to re-open the La Sal 2 Mine and look for a production decision on the Churchrock ISL Project in New Mexico where operator Uranium Resources Inc. finally delivered a feasibility study in December. That study showed modest Capex requirements of $35 million and very low cash costs of $20 to $23 per pound. The Project awaits final permitting, and presumably financing, to proceed but should prove quite profitable to Laramide beginning as early as 2014 as we hold a very attractive revenue based royalty interest over any production there. At La Sal, developments are proceeding on schedule and access to the Mine has now been achieved. If everything remains on schedule, the first batch of material from the mine could be processed on a toll milling basis through Energy Fuels' Blanding, Utah mill this summer. This would elevate Laramide to the ranks of publicly producing uranium companies, a milestone we believe will assist with the revaluation process we expect to happen over the course of the year.
In summary, we believe the very challenging post-Fukushima industry conditions of the past two years have masked an underlying long term strength in the industry which will still by all accounts see nuclear generation capacity growth to 455 GW by 20201. This amounts to an annualised growth rate of 3.6% year over year (or 38% over 2012-2020) which seems modest but is above the rates predicted for many western economies during that period. Combine this with forecasts for contracting primary mine supply and radically reduced supply from historic inventories and you have a set-up likely to be very profitable for those companies positioned to take advantage of this emerging dynamic. We believe Laramide is one of those companies and thank you for your support and patience as shareholders. The Tipping Point moment is approaching in Laramide and we hope you'll stick around for it ... it should be a good ride.