Uranium Energy Corp (NYSEMKT:UEC) (FRA:U6Z) CEO Amir Adnani returns to illuminate the forces at work behind the uranium price rebound, including production cuts at majors like Cameco Corp (TSE:CCO) (NYSE:CCJ) a record number of planned nuclear reactors as well as many returning to operation after the chilling effects of the Fukushima disaster.
Transcript:
James West: Amir, thanks for joining me again today.
Amir Adnani: It’s great to be back with you.
James West: Amir, the last time we spoke, uranium was on its way to its lowest level in almost 10 years. That has now thoroughly reversed itself; uranium is trading above $23 a pound on the spot market. What, in your estimation, are the main factors that have caused this reversal?
Amir Adnani: There was no doubt in anyone’s mind about the demand side of the equation for uranium; really driven by nuclear reactors that are operating worldwide, and a record number of nuclear reactors under construction worldwide. It was clear that the appetite for having nuclear energy was real and is real, and so that side of the equation was always quite robust.
Now the issue for the last six years since the Fukushima accident in Japan has been the oversupply of uranium in the market, especially since so many Japanese reactors are offline – well, basically a majority of them are still offline, have been behind schedule in coming back online. We’ve had this ongoing oversupply in the market.
The key turning point here has really been news by major producers, and announcements by major producers, in cutting production. So as a response really to these uranium prices that have gone into the 10-year low that you talked about, we’re finally starting to see, perhaps, enough production cut news hit the market such that we’re seeing the price reversal for the spot uranium prices.
And so last year actually, when we look at late last year, this started with Cameco, when they announced that they were going to shut down their Rapid Lake mine and reduce their production out of their US operations. But the one headline that has definitely moved the market and grabbed everyone’s attention is the world’s biggest uranium producer, KazAtomProm, based in the country of Kazakhstan, announcing just recently, 10 percent production cuts. And James, to really put that into perspective, I mean, you look at, for example, the impact Saudi Arabia would have as the world’s biggest oil producer if it announced 10 percent production cuts. Saudi Arabia is 12 percent of the oil market.
Kazakhstan is 40 percent of the uranium market. So for them to announce 10 percent production cut given how big of a weight they are in uranium production worldwide, this is very meaningful news.
And we have to also take notice of the political winds that have changed, especially in Washington, with the Trump administration coming in, which is a far more pro-nuclear-power administration than what we’ve had in the US the last eight years with President Obama.
James West: Yeah, okay. Interesting. Let’s look at that Saudi Arabia analogy for a moment: I seem to see that the price increase in oil as the result of the producers cutting production has also catalyzed new production from players in the shale space in the United States. To what degree do you think there’s a risk that this rising price environment in the uranium space as a result of shut in production could actually catalyze new supply, and ultimately have a longer-term deleterious effect on uranium when it all sort of comes online?
Amir Adnani: The incentive price for developing new uranium mines, especially conventional uranium mines, open pit underground, based on all the different feasibility studies that have been published in the last few years, the incentive price is around $75 per pound. So at $23 per pound, we’re just nowhere near the levels needed where you’re going to see that kind of mass development.
Furthermore, the marginal cost of production is about $40 to $45 per pound, so we’re not even anywhere near that. What was so just incredible about the uranium price falling to these levels of $20 per pound is that there isn’t a single uranium mine on the planet that can make money at these prices, at $20 per pound. In fact, I think the all in cost of production for the lowest cost mine in the world is around $23 per pound, also in Kazakhstan.
So you really have to recognize that while percentage-wise, it’s good to see the uranium price off of the $17.80 low it got to in late November – that’s on a per pound basis – and so from there, to see it now around $24 per pound, it’s a nice percentage gain of 25 to 30 percent, but relative to, again, where it needs to be to incentivize new mine development and projects to start generating free cash flow, we’re still a ways off from that.
And James, that’s what’s so exciting for me, is that the price action is definitely heading in the right direction but it’s got a long way to go, and particularly with in situ recovery projects that my company UEC is focused on, being in the first quartile of costs you have that benefit where you can become more relevant and economically competitive as this price continues to trend up, but again, for new projects to be developed, we need a much higher uranium price. We’re not even anywhere near that yet. So that’s an exciting picture.
Uranium Energy’s Staying Power
James West: All right. Let’s focus on Uranium Energy Corporation for a while. What has developed in the last two years for uranium energy that you’ve been able to stay in the game, as it were, throughout this dark, dismal price period?
Amir Adnani: A big part of it, for us, was remaining 100 percent unhedged, not being beholden to utility customers that, by tradition in the uranium business, like to get producers to sign contracts with a fixed price that has a ceiling. And a lot of contracts these days are hovering around $40 per pound, so it sounds like a higher price compared to the spot price, but honestly, at the end of the day I think investors and people like myself expect to see uranium prices over the years to be greater than $40 a pound.
But by being 100 percent unhedged, James, we were able to really take control of our financial situation the last two years by really reducing our burn rate and operating expenses, putting our production on hold, not wasting and depleting our resources into a very low uranium price environment. Especially uranium projects in the US take a long time to get permits; we know that firsthand, because we have two permitted mines in the US, we have a fully permitted processing plant, our Hawkstone plant in South Texas, and so when it takes a real long time, we’re talking about three to four years to permit these projects, you definitely don’t want to waste the resource into a low uranium price environment.
And if you don’t have contracts in place that force you to do that, then you have the flexibility to stay in the driver’s seat. And that’s what we were able to do. So by putting our production on hold, we were able to maintain 100 percent unhedged book. We’re one of the only 100 percent unhedged uranium companies in the world with production capability and production infrastructure and processing plants that’s on standby. We used the last two years to focus on making acquisitions and to make advancements on our existing portfolio as well by drilling and permitting and addressing that long-lead item that I just talked about, permitting. We started permitting our third project, third mine in the US in South Texas project called Burke Hollow, and just late last year we actually got the final mine permit for that project. We’re waiting for a couple of other licenses to come in that are in advanced review, and so hopefully before the end of this year we will have three fully permitted uranium mines as part of our South Texas hub and spoke strategy.
And so the downturn for us was really about advancing the business, but doing it in a very financially conscious way. We just recently completed an equity offering, James, that gives us in total, we have about $28 million of US cash on hand. So it also, from the standpoint of having a balance sheet that allows us to really make meaningful progress, we’re in good shape.
And we also really advanced the people side of our business. You know, we were able to use the last couple of years and the downturn appeals to contrarians, and it appeals to people that really have the vision. The new executive chairman of our company, Spencer Abraham, that joined us a year and a half ago, he was the former United States Energy Secretary in the Bush administration, and the executive VP of our company, the newly executive VP of our company that joined us about a year and a half ago as well, Scott Melby, he was the former president of Cameco, Inc. and a 33 year veteran of the uranium business. So you look at the skill set and the resumes that have joined us in the last year and a half, two years, you see the people that are in this business and understand the energy markets definitely saw a contrarian opportunity in uranium, and I think UEC’s positioning as that 100 percent unhedged but production-ready company in the US.
We’ve managed to really attract and appeal the right investors and the right team and the right people.
James West: Okay. So I would say that looking at your sort of profile at this point for uranium energy, Amir, that you are perfectly positioned, especially in view of Mr. Trump’s support of the nuclear industry generally and his specific focus on making sure that all of the infrastructure that he’s planning is sourced entirely from United States-derived products, from the raw materials to the finished.
Amir Adnani: You can connect those dots, and you just did. It’s a very compelling picture. During the inauguration speech, President Trump highlighted the importance of buying American, hiring American. In the uranium business right now, 95 percent of the uranium requirements to run the reactors, the 99 reactors in the US, 95 percent of those uranium requirements are being imported. And the last time the uranium industry in the US was vibrant, the US was the world leader in uranium mining in the late 70s. There were almost 25,000 jobs, according to labour statistics by the Department of Energy in the uranium mining industry; today there’s less than 700. So this industry could truly be of great importance for the incoming administration for a number of reasons that it can create an incredible amount of jobs, well-paying jobs, and at the same time it can make the case for greater energy security for the 99 reactors in the US it’s a strategic energy commodity.
We’re also fortunate, James, that the nominee for Energy Secretary now, Rick Perry, was the governor of Texas in fact from 2000 to 2015, he was the longest-serving governor of Texas, and during that time, during his tenure, is when UEC was able to permit our uranium projects that we have now in South Texas, emerge as a new uranium producer in the US, and so we also have very close understanding and have worked very closely with Governor Perry, who is now the incoming Energy Secretary.
So whether it’s our existing executive chair, Spencer Abraham, who was the Energy Secretary in the Bush administration or the incoming Energy Secretary Rick Perry and the combination of what this business, how it’s going to transform in the US, I think the next four years we’re going to see real significant growth in the US uranium mining industry. And UEC is just positioned in an unparalleled way to meet that growth and become a very significant company in the next four years.
James West: All right, Amir, that’s a great update. Let’s leave it there for now; we’ll come back to you in a quarter’s time or so and see how things are progressing. Thank you for your time today.
Amir Adnani: Thank you, and I look forward to coming back.