Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Leigh Curyer, chief executive officer of NexGen Energy.
Last week the spot price of uranium closed at USD $18/lb. If you are a contrarian resource investor, there is no better place to be than in the uranium sector right now. Market participants have not seen prices this low since September 2004. Just like today, the outlook was bleak in late 2004 when prices were sub-USD $20/lb but investors who were buying reaped mega profits as prices soared to USD $137/lb by mid-2007.
According to Bloomberg, Cameco Corporation (TSX:CCO) short interest is at an all time high while shares have diverged and are up nearly 35% from their 52-week low, certainly something worth paying attention too.
Another uranium company investors are closely following right now is NexGen Energy (TSX:NXE) which has 100% ownership of the Arrow deposit, the Athabasca Basin’s largest high grade exploration and development stage project. Arrow hosts an Inferred mineral resource estimate of 3.48Mt containing 201.9Mlbs U308 grading 2.63% U308 which was based on approximately 60,000 m of drilling up until the end of 2015. Since then, NexGen has drilled an additional approximate 73,000 m and it remains open in all directions and at depth.
I was fortunate to sit down with Leigh Curyer, Chief Executive Officer of Nexgen Energy to talk about the macro uranium market and provide an update for shareholders.
AN: As of late, there has been a focus on above ground inventory which has been blamed for the continuous decreasing spot price. What is your interpretation of how the supply and demand fundamentals will drive the price of uranium in the next 2-3 years?
LC: There is a little known fact that the above ground inventory levels are currently lower than what they were in 2007 when the price of uranium was over USD $135/lb. Additionally, a significant portion of the present day above ground inventory is held in China for domestic nuclear reactor use and is not expected to ever leave that continent. So to suggest that the market is oversupplied at present with uranium due to the price you just have to look back to 2007 when above ground inventory levels were higher when the price was substantially higher.
Secondly, we currently have a situation where Kazakhstan, a major uranium producing country, quadrupled production from 2011 to 2016. As Kazakhstan has maintained that level of production, trying to produce a pound of uranium at the given cost structure has now become exponentially more difficult as they deplete higher grade reserves. Additionally, they have recently come out publicly and stated they want to ‘manage inventories’. What this means is they are happy with their market share and now want to optimize their margins which is likely to mean less pounds on the market at low prices.
Thirdly, right now the spot price is under USD$20/lb, but very thinly traded. Over 90% of trades within the year are contract-based which is outside of the spot price market. Very marginal volumes will trade at less than USD $20/lb on the spot market. As a result, you see utilities that recently signed a USD $43/lb contract for a project in Spain. This illustrates the fact that the utilities don’t have confidence in their ability to procure an endless supply of uranium at less than USD $20/lb. Also, I doubt there is a uranium mine on the globe that could generate a profit at USD $20/lb uranium.
Considering all of the above I believe the downward trend in prices will bust. As to when this will be, this is tough to judge, but I believe you will see a tightening of supply over the course of 2017 which when paired with no real identifiable primary production coming online within the next 5 years, will create rising prices sooner rather than later.
AN: Investors pay close attention to the people behind the company. You recently attracted a major mining executive to your Board, Dr. Mark O’Dea. Could you briefly speak about the technical & financial expertise of your management and Board members?
LC: NexGen is a unique company in that even though we are at the exploration and development stage, our management and board are experienced in grassroots discovery right through to development, permitting and production. In regards to project financing, development, and production NexGen’s Chairman of the Board, Christopher McFadden, was the former Commercial General Manager of Rio Tinto’s uranium division. The experience and skill set of our management group and Advisory Board provides us with the capability to take Arrow through development and into production.
We recently welcomed a prominent and highly successful mining executive to our Board, Dr. Mark O’Dea. This was a result of a recent site visit where he was not only impressed with the asset but the way the Rook 1 campsite is being managed. There is already production disciplines incorporated into the camp.
In respect to the management group, our technical team, based on the success of their hit rate, has proven they know how to discover uranium. In the head office, we have a focus on capital efficiency and optimization. The definition of the maiden Arrow Deposit equated to CAD $0.13/lb discovery cost. This shows you our discipline with respect to capital efficiency in discovering a pound of uranium. We deploy over CAD $10 in the ground for every CAD $1 of G&A. We never guarantee the result, but we guarantee the process and if the process is adhered to then the result will be the most optimal given the asset; this philosophy transcends the organization and is core to the culture at NexGen.
AN: With the upcoming New Year, what is the focus of the 2017 winter drill program? As well, when can investors expect to see the Inferred resource converted into the Indicated category?
LC: Our 2017 winter drill program will commence prior to the release of our updated resource estimate which can be expected between the end of Q1 and start of Q2. The updated resource will demonstrate a higher proportion of the inferred resource into the indicated category coupled with an increase in the global resource size.
The Arrow deposit still requires significant drilling before we can fully understand the true extent of the deposit because it not only is open in every direction, but even within the area of mineralization we have been unlocking significant high grade zones which warrants further delineation and definition.
What we believe will impress the market is the rate of conversion from Inferred to Indicated given the relatively few number of meters drilled. Nearly every hole we drill at Arrow hits mineralization. The continuity of mineralization is prevalent at Arrow and is clearly established.
The drilling objective for winter 2017 is to convert even more of the Deposit into the Indicated category to justify a pre-feasibility study at the end of 2017 which will illustrate a production profile that makes Arrow a leading global supplier of uranium. That is the power of Arrow which we do not believe the market, in general, understands.
Furthermore, not only do we have the size and grade, but it is basement-hosted and the Deposit is 100% on land which will translate into lower capital and operating expenditures relative to the other operating uranium mines in the Basin which require sophisticated mining techniques and freezing of the ore prior to extraction.
AN: How would you compare Arrow to Cameco’s assets in the Basin such as McArthur River or Cigar Lake?
LC: If you look at Arrow from a geological point of view, this deposit has the size and grade profile of those mines but it is 100% on land and basement-hosted as opposed to being hosted in the Athabasca Sandstone which requires complex extraction methods. This geological advantage means that the possible extraction methods utilized at Arrow should be much more simple and cost effective due to the lack of surface and groundwater. Given Arrow’s current stage and its unprecedented growth, we believe the market will catch up to the highly strategic nature of Arrow and that it deserves not only a strategic premium but a scarcity premium as well.
AN: What catalysts can investors expect in the upcoming 12 to 24 months?
LC: First we will have a 35,000 m drill program starting in mid-January which will focus on global resource growth as well as increasing the Indicated mineral content. Then we will publish an updated resource estimate in late Q1-early Q2 2017 which will demonstrate the deposit is still rapidly growing and is also converting quickly from Inferred into the Indicated category. Then we are planning to release a pre-feasibility study by the end of 2017 which will incorporate two additional updated resource estimates; one from 2016 drilling and one that incorporates winter 2017 drilling.
The PFS is your baseline document to initiate the permitting process in Saskatchewan. Upon completion of the PFS, we plan to launch our permit application for the mine and mill at Arrow.
The permitting process is well-defined in Saskatchewan which will assist in expediting the receipt of the permits. What is unique for us is that there was a previous mine in the area, Cluff Lake, which operated for 22 years producing 62 million pounds of uranium at an average head grade of 0.90% U3O8 and has since been successfully reclaimed. There were no legacy environmental issues at that mine which leaves a positive impression for community stakeholders.
The permitting process for any mine takes time, but, given the technical characteristics of Arrow, the strong political support for a mine in that region, and that there has been mining in the district previously, we expect the project to be permitted in the normal course.
AN: NexGen has attracted an impressive group of shareholders. One that comes to mind is Li Ka-Shing, the second richest person in Asia according to Forbes. What else can you share about your shareholder base?
LC: Mr. Li (via his CEF Holdings) is the newest shareholder having invested USD $60M into NexGen Energy in June 2016. He is astutely aware of the need for nuclear power in Asia and has a very long-term investment horizon. He is investing in this project to benefit from the future fundamentals that will positively impact it. Having a shareholder such as CEF is further validation of the quality of Arrow and our ability to successfully steward it.
Our other major shareholders are well known resource fund managers such as Blackrock (U.K.), 1832 Asset Management, and Rosseau Asset Management to name a few. These types of investors have participated in numerous discoveries in the past and have the technical prowess to identify projects that will eventually turn into producing mines.
For the average retail investor this is a major vote of confidence to know you can invest alongside astute resource focused institutional investors who have performed site visits, modeled the resource, and undertook thorough due diligence prior to making their investments.
AN: We’ve discussed the uranium market, your team, and asset base, is there anything else you would like to mention?
LC: There aren’t many public uranium companies with our type of profile. Our strategy from day one was to look for a world-class asset in a world-class jurisdiction. We can confidently now say we have discovered a world-class asset and being in Saskatchewan, clearly a world-class mining jurisdiction. Personally, when I am investing those are the first two criteria that need to be met before I consider going any further. With respect to uranium, Cameco has successfully been in production for the past 30 years but if you want exposure to a tier 1 asset when the market recovers with exploration upside, unlevered production, and cash to optimize our flagship project, I would have to say NexGen Energy. That is where my money is.
AN: Mr. Curyer, thank you for taking the time out of your schedule for the update.
LC: Thank you, Andrew.
