The art of strategic patience

The art of strategic patience

Last week we announced our June quarterly activities report, in which I commented that:  

"We continue to advance FEED (Front End Engineering and Design) and other key workstreams on Etango, while maintaining strong balance sheet liquidity and strategic patience with respect to progressive satisfaction of key external factors - including the anticipated near-term grant of the Etango ML and strengthening uranium term contract liquidity and pricing dynamics" 

This note gives shareholders some further context on what we mean by strategic patience.

When we released the Etango-8 Definitive Feasibility Study (DFS), we stated that, uranium market conditions permitting, we would target mid 2023 for a final investment decision (FID) on the development of the Etango uranium mine.  We are now at mid 2023 and the uranium market is not yet conducive to us making a final investment decision, despite an extraordinary flow of positive signals for the prospects of nuclear power.  We touch on some of the reasons in our uranium market summary, which I have set out below with links to the key developments.

The uranium market plays a crucial role in developing a new uranium mine because a project financier will expect to see a proportion of the project's production contracted to meet their minimum debt coverage ratios.  This means those contracts will need to be fixed price escalated or, for a market related contract, have a minimum (floor) price that assures the lender of a minimum pay-back in all future price scenarios.  In negotiating a market related contract, a buyer will expect to receive a price ceiling in return for a price floor - and the higher the floor (relative to market conditions at the time of negotiating) the lower the ceiling.

So, at the point of signing long term uranium contracts, shareholder returns are - to a significant extent - capped by either the fixed price or the price ceiling embedded in those contracts.  

I remain a strong believer in the near-term prospects of nuclear power and, as a consequence, uranium market dynamics.  Therefore, I do not believe that we should be locking in shareholder returns at current contracting terms and, furthermore, I want to ensure that shareholders and the broader investment market understand that we will be patient and enter the market at a time that we believe is in the best interests of shareholders.

In other words, we will be strategically patient.

There are three elements to our strategy of strategic patience that I would like to convey to shareholders.

Firstly, we need to avoid setting arbitrary deadlines.  In my experience, this can come in an overt form (eg promising fund managers that you will achieve milestones by a particular date) or from less obvious factors (eg management who insist on building at all costs).  Bannerman has been methodically working on Etango for more than 15 years - drilling more than 300,000m to define the ore body, obtaining all environmental clearances, building a pilot plant, completing a definitive feasibility study and now progressing FEED.  So I have been careful to avoid setting or being held to timelines that are not in the best interests of our shareholders.

Most importantly, our team have designed the FEED process to enable strategic patience and to make time our friend whilst the uranium market firms.  By equity-funding the FEED workstreams (which are often funded by debt drawdown after FID) we are ensuring the project continues to move forward and remains shovel-ready.  This process also ensures our DFS does not go stale in a minerals sector that is increasingly exposed to cost uncertainty.  We are also, in conjunction with lead project engineers Wood plc, approaching procurement processes in such a way that we don't risk tender fatigue or receive bids on equipment, etc that become out of date.  You may have followed our February 2023 appointment of proven project builder, Gavin Chamberlain, to the role of Chief Operating Officer. Gavin is deftly executing this strategy, drawing on his vast experience that includes project lead for the massive Husab uranium mine in Namibia. The end result is a process that is moving forward, without regret cost, and can be accelerated in readiness for construction. 

Finally, we have the cash balance and cost management to be patient.  Through prudent expenditure control that has seen our expenditure invested predominantly into project development, we retain a 30 June 2023 cash balance of A$42.6M.  For context, our cash outflows for the quarter were A$2.67M, of which A$2.24M (84%) comprised FEED and other project work.

Accordingly, with the benefit of the above elements we have re-framed our timing expectations on making a final investment decision.  Our quarterly stated that:

"Bannerman’s well-established position with respect to offtake marketing is that the company will not diminish the long-term underlying value of Etango by committing to contracting of its planned uranium output on price (and other terms) that it considers unrepresentative of long-term market fundamentals and producer opportunity.  As such, Bannerman’s strategy remains unchanged – advancing FEED and other key workstreams on Etango to deliver currency of quotation and overall development shovel-readiness, while maintaining strong balance sheet liquidity and strategic patience with respect to satisfaction of key external factors.  This approach is advancing Etango towards, uranium market permitting, a targeted positive Final Investment Decision during H1 CY2024. Construction of the Etango Project is expected to take approximately 34 months (including detailed design)."

I hope that this note gives you an insight into the above statement.

Uranium market update (June quarterly)

Uranium spot prices rose through the quarter, opening at US$50.75/lb and gaining 10.7% by the end of the quarter. In the second week of June, prices peaked at US$57.75/lb, reaching their highest level since April 2022, when prices declined following the Russian invasion of Ukraine. Despite slight easing over the remainder of June, spot prices remained above US$56.00/lb by the end of the quarter, closing at US$56.20/lb.

Underpinned by increasing concerns about the long-term security of nuclear fuel supply, current tight primary supply capacities, and anticipated demand growth, uranium prices are expected by most commentators to continue rising. This positive trend is in stark contrast to broader commodity markets, which have generally declined over the quarter, reflecting increased global interest rates and slowing economic growth around the world. 

At the end of May, a published Bloomberg news article suggested that Namibia was considering greater nationalised ownership of mineral and petroleum projects. With Namibia containing one of the richest uranium reserves in the world, supply of uranium from the country forms an integral part of the global nuclear fuel cycle. Following publication of the article, the Namibian Ministry of Mines and Energy clarified that the government has no intention of seeking any additional ownership stake from existing mineral or petroleum license holders, and remains committed to upholding the sanctity of contract. The Namibian Minister of Mines and Energy, Hon Tom Alweendo, reiterated this stance during his speech at the African Energy Forum in Paris in early June.

The quarter has seen continued public policy shift towards the incorporation of nuclear energy as a key baseload energy source of the future, with governments worldwide implementing policies to develop new reactors, extend the life of existing reactors, and incentivise investment in emerging technologies, such as Small Modular Reactors (SMRs).

In Japan, parliament passed a bill allowing ageing nuclear reactors to operate beyond the 60-year limit, resulting in two more reactor restarts at Takahama Nuclear Power Plant by Kansai Electric Power Company. In South Korea, a construction restart of Shin Hanul Nuclear Power Plant units 3&4 was announced following the administration's strategy to ensure “restoration of the country’s nuclear power plant ecosystem”.

Construction is underway on a total of 59 reactors worldwide. In Indonesia, Norway, the Philippines, and Sri Lanka, plans are currently being considered to introduce nuclear power plants, including both conventional and SMRs, into their national energy mixes.

In conjunction with reactor development and extension plans, the June quarter has also seen policymakers place particular focus on the security of the long-term nuclear fuel supply. To this end, the West is looking to re-examine Russia’s role as one of the world’s top energy exporters, with several significant public policy announcements made during the quarter, including:

• The United States (U.S.), France, Japan, Canada, and the United Kingdom formed the Nuclear Fuel Alliance, with a particular focus on dislodging Russian influence over the international nuclear energy market. 

• The U.S. Senate Environment and Public Works Committee passed the bipartisan Accelerating Deployment of Versatile, Advanced Nuclear for Clean Energy (ADVANCE) Act, prohibiting the possession or ownership of enriched uranium owned, controlled, or organized by Russia or China (unless the Nuclear Regulatory Commission specifically authorises it). Note, this legislation must be passed by the House and Senate and approved by President Biden to be implemented.

These developments, and the intensification of security concerns regarding long-term nuclear fuel supply, has resulted in utilities reviewing their inventory policies and stock-building, in an effort to ensure operational sustainability and reliability. Whilst no further actions have been taken yet, and a ban on nuclear fuel imports transited through Russia was not included in the European Union’s 11th Package of Russian Sanctions (following the invasion of Ukraine), utilities continue to assess risks to the supply of nuclear fuel in the current geopolitical environment.

For U3O8 contracting, 2022 was the highest uranium contracting year in a decade. Despite this, the first half of 2023 has seen some inertia, as utilities look to secure enrichment/conversion services first before progressing uranium contracts. As a result, U3O8 contracting is anticipated to accelerate in the next 6-12 months.

According to the Energy Information Administration’s 2022 Uranium Marketing Annual Report, the maximum anticipated market requirements for the U.S. civilian owner/operators at the end of 2022 is 402 Mlbs U3O8e over the next 10 years. Nearly 45% of these requirements (179 Mlbs U3O8e) remain unfilled.

In line with shifting public policy, further improvement in public sentiment towards the adoption of nuclear energy is being witnessed around the world. In the U.S., a recent national survey found that 76% of respondents favour nuclear energy due to its affordability, reliability, efficiency, and environmental benefits, and 71% of respondents agreed that more nuclear power plants should be built in the future. In Finland, 68% of the population supports nuclear power, citing climate change as the predominant reason, whilst in Estonia, 75% of the population is reported to support the construction of a nuclear power plant.

Overall, these developments indicate that long-term uranium market fundamentals remain strong.