Preparate to meet thy boom
Scramble for uranium is good for investors, and SA
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 COUNTRYSource: NEA & IAEA/World Nuclear Association
Possibly a separate investment structure for uranium. Bobby Godsell