Preparate to meet thy boom

Scram­ble for ura­nium is good for in­vestors, and SA

Finweek English Edition - - Front page - DAVID MCKAY

How ura­nium will chan­nge our lives

WHEN NEAL FRONE­MAN first said he wanted to mine ura­nium, many thought he was clutch­ing at straws. “One ra­dio pre­sen­ter laughed me out of his stu­dio,” says Frone­man, whose sxr Ura­nium One (Ura­nium One) last month an­nounced an im­pos­ing R22bn ($3,1bn) merger with Cana­dian firm, UrAsia En­ergy.

The ridicule, or at best, faint scep­ti­cism, came about in 2003 when Frone­man’s plan to mine gold from Afrikan­der Lease (Aflease) in Klerks­dorp was de­railed by the strong rand. It was a lesser-known fact at the time that Aflease also owned the welldrilled (by An­gloGold) Do­min­ion Reefs ura­nium re­source. To gen­eral sur­prise, Frone­man an­nounced his near bank­rupt com­pany would now mine it. It looked like clas­sic horse chang­ing, mid-stream.

What hap­pened next was a rein­ven­tion that took Aflease’s stock from R3/share to more than R90/share. Peter Ma­jor, an an­a­lyst for Cadiz, who has been crit­i­cal of the UrAsia En­ergy merger, ac­knowl­edges Frone­man was in­cred­i­bly quick to pick up the strands of the ura­nium story. “He’s run the ura­nium trend ag­gres­sively. He picked it up very early,” says Ma­jor. Says Frone­man: “I took a month’s leave in De­cem­ber 2004 and read ev­ery pos­si­ble ar­ti­cle on ura­nium. I made it my busi­ness to see how the mar­ket would look in a few years’ time.”

Since then, per­cep­tions about ura­nium have changed so dra­mat­i­cally that the min­ing of metal has be­come the sub­ject of Gov­ern­ment edict, and the busi­ness im­per­a­tive of ev­ery ma­jor SA gold pro­ducer. Gov­ern­ment wants to tie ura­nium de­vel­op­ment to down­stream busi­ness in an at­tempt to cap­ture new in­vest­ment in the sec­tor, which is flow­er­ing. In fact, there’s no gold min­ing ex­ec­u­tive in SA who isn’t now con­sid­er­ing dig­ging for ura­nium.

Har­mony Gold’s Bernard Swanepoel is hop­ing to swap his com­pany’s ura­nium as­sets for po­ten­tial gold ounces in Rus­sia owned by Vic­tor Vek­sel­berg’s Ren­ova Group. “There’s a good sense of want­ing to

co-op­er­ate,” says Swanepoel.

“But the devil’s in the de­tail,” he adds. The plan might see Ren­ova Group build a ura­nium plant next to Har­mony’s Rand­fontein mine west of Jo­han­nes­burg, which has an es­ti­mated 124m pounds of low-grade ura­nium in slimes dams.

An­gloGold Ashanti, mean­while, has al­ready recog­nised some value in the ura­nium stock­piles it has through its 50% stake in Bri­tain’s Nuf­cor In­ter­na­tional. This was achieved through the list­ing of the £110m Nuf­cor Ura­nium on the Al­ter­na­tive In­vest­ment in which Nuf­cor In­ter­na­tional has a 10% stake.

More re­cently, how­ever, An­gloGold Ashanti CEO, Bobby God­sell, has spo­ken of “a case for look­ing at a sep­a­rate in­vest­ment struc­ture” for ura­nium if in­vestors be­gan in­vest­ing in ura­nium dif­fer­ently from gold.

Ura­nium’s sin­gle most im­por­tant call on our at­ten­tion is its func­tion as the raw ma­te­rial of cheap, abun­dant nu­clear fuel. Against a back­ground of black­outs in SA, there’s no un­der­stat­ing the eco­nomic rel­e­vance of the fact that a kilo­gram of ura­nium pro­duces as much en­ergy as 38 tons of coal or 150 bar­rels of oil.

Gov­ern­ment says it will grasp the net­tle. The Trade and In­dus­try de­part­ment has spo­ken of spend­ing R900bn de­vel­op­ing 12 con­ven­tional nu­clear re­ac­tors and as much as 24 Peb­ble Bed Mod­u­lar Re­ac­tors (PBMRs) in SA. French state-owned com­pany, Areva, the en­tity that helped de­velop the PBMR, has shown an in­ter­est in help­ing SA build its nu­clear ca­pac­ity.

The num­ber of re­ac­tors SA will ac­tu­ally need is not known, but emerg­ing mar­kets through­out the world are chas­ing down sim­i­larly am­bi­tious en­ergy cre­ation tar­gets.

Har­g­reaves Hale, a UK stock­bro­ker­age, reck­oned in a 2006 re­port that of the 178 nu­clear re­ac­tors un­der con­struc­tion, planned or pro­posed glob­ally, more than 60 were wanted in China and In­dia. De­mand for new nu­clear re­ac­tors rep­re­sented a 40% in­crease as emerg­ing and first world coun­tries seek to re­duce their reliance on tra­di­tional forms, nor­mally fos­sil, fuel. (See ta­ble overleaf.)

Even in first world economies, the move to­wards nu­clear fuel is dra­matic. Says Dar­ryl Le­vitt, a part­ner at law firm, Fasken Martineau DuMoulin, in Toronto: “The prov­ince of On­tario, when faced with a loom­ing en­ergy cri­sis, re­cently opted to move away from coal and more into re­viv­ing its nu­clear pro­gramme. Build­ing and re­fur­bish­ing nu­clear plants in the re­gion will cost R144bn ($20bn),” he says.

Con­se­quently, the pres­sure on ura­nium ox­ide, the raw ma­te­rial used to man­u­fac­ture nu­clear fuel, is enor­mous, and sources of sup­ply are clearly fall­ing.

To­tal world re­ac­tor ura­nium ox­ide re­quire­ments in 2004 were 172m pounds com­pared to a pri­mary sup­ply of 104m pounds. There are above ground stocks in the form of de­com­mis­sioned nu­clear weapons, mostly Rus­sian, but this is ex­haustible.

The num­bers un­der­pin what’s hap­pen­ing in the ura­nium ox­ide mar­ket, the raw mined ma­te­rial known as “yel­low cake”, where prices have bal­looned. Says Aus­tralia’s Re­source Cap­i­tal Re­search: “The ura­nium price is fore­cast to reach $90/lb by mid-2007, an in­crease of 37% over the cur­rent spot price and $115/lb by late 2008, a 75% in­crease over the cur­rent spot price.”

This has spawned a ver­i­ta­ble pond of new ura­nium plays of which sxr Ura­nium One is among the first. But there are oth­ers in for­ma­tion. First Ura­nium, which listed in Canada in De­cem­ber rais­ing about C$232m, is a prime ex­am­ple. “The list­ing of Ura­nium One (Frone­man’s com­pany) re­ally helped us. Some­one went first,” says Jim Fisher, COO of First Ura­nium, in which Jo­han­nes­burg’s Sim­mer & Jack Mines has a 64% stake.

Fisher be­lieves new ura­nium coun­ters will of­fer gold com­pa­nies bet­ter op­por­tu­ni­ties to get into ura­nium. “To come into the ura­nium mar­ket where we think we’re near­ing the top of the cy­cle may not be the bright­est thing,” says Fisher. First Ura­nium could, there­fore, present it­self as a vi­able part­ner to com­pa­nies like An­gloGold Ashanti or Gold Fields. Gold Fields is in fact an­other gold min­ing com­pany seek­ing to de­rive rev­enue from its ura­nium. The group’s busi­ness de­vel­op­ment man­ager for Gold Fields, John Munro, says his com­pany may ei­ther sell or joint ven­ture a ura­nium de­posit, Beisa. “We’re look­ing into op­tions where we can re­alise value,” says Munro. “This could be a joint ven­ture, or we could sell it. There are all sorts of op­tions.”

In­ter­est­ingly, it was Beisa that al­legedly put Brian Gil­bert­son, the min­ing supremo, off deeplevel min­ing for­ever, and it might be an im­por­tant les­son on the fragility of com­mod­ity mar­kets. Gen­cor closed the Beisa mine in 1984, two years af­ter it was opened, at much ex­pense. Its clo­sure was forced by the col­lapse in the price of ura­nium ox­ide

The Trade and In­dus­try de­part­ment has spo­ken of spend­ing R900bn de­vel­op­ing

12 con­ven­tional nu­clear re­ac­tors.

from $100/lb in 1984-dol­lar terms.

One fear is that short-term spec­u­la­tors have taken a hold of the ura­nium mar­ket. “In 2006, about 33% of over­all ura­nium trad­ing vol­umes have been ac­quired by the in­vest­ment com­mu­nity. This gives the im­pres­sion that spec­u­la­tors are some­what ar­ti­fi­cially driv­ing the mar­ket up to some de­gree,” says Le­vitt.

The fea­si­bil­ity of Beisa was also ul­ti­mately un­hinged by the ac­ci­dent at the Three Mile Is­land re­ac­tor in the US in 1979. This served to un­der­mine so­cial con­fi­dence in ura­nium. The Ch­er­nobyl dis­as­ter in the Ukraine in 1986 en­trenched the per­cep­tion that nu­clear fuel was un­safe.

Frone­man says the neg­a­tive per­cep­tion as­so­ci­ated with ura­nium was a real prob­lem: “To­day, it’s much eas­ier to talk about ura­nium but a few years ago, in places like Switzer­land, there was still a lot of sen­si­tiv­ity. It was very dif­fi­cult to mar­ket the com­pany,” he says.

The SA Gov­ern­ment’s view on ura­nium is one of em­brace, par­tic­u­larly given the coun­try’s rank­ing in world ura­nium re­sources (see pie di­a­gram). Mines min­is­ter Buyelwa Son­jica wants to tie up ac­quir­ing new ura­nium re­sources with plans to ben­e­fi­ci­ate yel­low cake into ac­tual fuel. She claims Gov­ern­ment isn’t in­ter­ested in con­strain­ing ex­ports, but the so­lu­tion to SA’s en­ergy cri­sis lies within its own borders.

Frone­man agrees that down­stream de­vel­op­ment is nec­es­sary in SA and wants Ura­nium One to par­tic­i­pate. “We’ve ap­proached Eskom and told them Ura­nium One will pro­vide power.

“Ura­nium One wants to be­come a nu­clear en­ergy com­pany, and we’d like to be­come part­ners in pro­cess­ing en­ergy. Per­haps we could be­come part­ners in sell­ing the PBMR. It’s a long-term strat­egy of ours, but you’ve got to start some­where,” he says.

So, how long be­fore SA sees the ben­e­fit of the ura­nium phe­nom­e­non? Ac­cord­ing to Tom Fer­reira, spokesman for PBMR Ltd, the reg­is­tered com­pany man­ag­ing the tech­nol­ogy, the first sign of PBMR will only be in a small test plant in 2008. A com­mer­cial mod­ule won’t be avail­able un­til 2016.

In the mean­time, Eskom is press­ing ahead with plans to in­stall new con­ven­tional nu­clear re­ac­tors in SA. “It’s very nec­es­sary,” says Fer­reira. “SA needs to add 1 200 megawatts (MW) of power ev­ery year to keep up with growth, equal to one new Koe­berg a year.” That’s where talk of R900bn in in­vest­ment orig­i­nates, but no one knows for sure what it’ll cost.

Fer­reira says PBMR tech­nol­ogy still needs to be as­sessed, but it may be cheaper than con­ven­tional nu­clear tech­nol­ogy. Com­pa­nies such as Areva and West­ing­house, which pro­duce it, won’t say what their cost will be. All are keep­ing their cards close to their chests. For the time be­ing, PBMR wants to prove it has the bet­ter tech­nol­ogy.

“The safety an­gle is the best ad­van­tage in the PBMR be­cause the laws of physics show melt­down in PBMR to be im­pos­si­ble,” says Fer­reira. “But it’s also mod­u­lar, which al­lows us to build to­wards ex­pected con­sump­tion, which is more cost ef­fec­tive.”

This is one of the rea­sons Ura­nium One is in­ter­ested in help­ing prop­a­gate the PBMR tech­nol­ogy, par­tic­u­larly if it has a sup­ply agree­ment. Ac­cord­ing to Fer­reira, it takes six PBMR plants pro­duc­ing 930MW to equal the ca­pac­ity of a sin­gle Koe­berg plant.

How long be­fore SA sees the ben­e­fit of the ura­nium phe­nom­e­non?

Once the sub­ject of ridicule. Neal Frone­man

New ura­nium coun­ters will of­fer gold com­pa­nies op­por­tu­ni­ties to get into ura­nium. Jim Fisher

Sources of ura­nium ox­ide are clearly fall­ing. Dar­ryl Le­vitt

KNOWN WORLD URA­NIUM RE­SOURCES BY COUN­TRY

Source: NEA & IAEA/World Nu­clear As­so­ci­a­tion

Pos­si­bly a sep­a­rate in­vest­ment struc­ture for ura­nium. Bobby God­sell

SOURCES OF GLOBAL ELEC­TRIC­ITY PRO­DUC­TION (%)

Source: World Nu­clear As­so­ci­a­tion

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