Junior uranium companies: at last something new!

Things usually move rather slowly in the nuclear world. New reactors take a long time to gain approvals and then build, while the technology has also moved along relatively slowly since the 1940s and 1950s, when change was dramatic. Similarly on the fuel supply side, new uranium mines and enrichment facilities usually take many years to get through the planning and approval stage and the corporate structures today bear at least some resemblance to the distant past.

In one area, however, there are signs of more dynamic change taking place. At the turn of the new century, the uranium supply industry had been battered and bruised by years of low prices, largely caused by abundant secondary supplies. Only a few companies survived this era, so production had become increasingly concentrated in a small number of low-cost mines run by big companies, in only a few countries around the world such as Canada and Australia. There were only a few companies, such as URI (Uranium Resources, Inc) and Strathmore, which could be identified as ‘junior uranium companies’ – in other words, smaller companies involved in exploration, mine development and small-scale production.

The position today has changed dramatically. In just a few years, upwards of 400 companies have emerged which claim to have uranium amongst their interests. The perception that uranium production needs to rise sharply to cover both higher anticipated demand and falling secondary supplies, spread very quickly. This has been reinforced by the rapid upward movement of uranium prices, which ended 2006 at over $70 per pound, after being stuck at around the $10 level for the 15 years prior to 2003. This has encouraged financial backers to make money available and the companies, particularly in Toronto, Vancouver and Melbourne, have raised large sums. In fact, the increased interest in nuclear currently being experienced in financial circles started with uranium. It has only more recently spread to the possibility of new reactors, as major political leaders and environmentalists have come out in favour of nuclear as a contributor to preventing global warming and ensuring energy security of supply.

There are, however, plenty of cynics surrounding the junior uranium company phenomenon. These would claim that the companies are merely mining the financial markets in yet another speculative frenzy, taking advantage of the wall of money always actively seeking the next big story. Now that uranium has suddenly become big news, they view the speculative money feeding at least part of the uranium price rise as another element in the process.

There has to be some truth in this – there has been at least an element of hype. For ‘old hands’ in the industry, some of the stories put out by many of the companies produce wry smiles of amusement. Reading some of the descriptions of new nuclear power programmes would lead one to believe that 100 new reactors will be urgently requiring massive uranium supplies within a few years. The names of hundreds of old known deposits have resurfaced, as have many of the long-retired people now unexpectedly attracted out of retirement, who discovered and started to develop them. Credibility with the financiers is achieved by a good story involving earlier exploration records combined with some people with previous ‘form’ in uranium.

It is notable, however, that the majority of the companies have been involved in exploring for other metals and minerals, particularly gold, and have now added uranium to their portfolio. It’s hard not to be rather cynical about this – once interest wanes and something else becomes ‘flavour of the month’, they are more than likely to head off in that direction. The Vancouver market, in particular, is populated by large numbers of such venture mining companies. Investors, however, tend to be aware that such companies are not for ‘widows and orphans’, but they provide a good gamble for those seeking higher than average returns.

In practice, many investors have done very well out of the junior companies, particularly those who got in early. With the uranium price rising steadily since 2003, share prices have also tended to move upwards, although some have been very volatile and there have been ‘market corrections’ when general commodity prices have been on the slide.

What more do we know about the junior uranium companies? Firstly, it is clear that nearly all of them are involved at the early stage of exploration. It is believed that world expenditure on uranium exploration quadrupled between 2001 and 2005 and now stands at over $200 million per year. The juniors are responsible for over half of this, the remainder being carried out by the current major producing companies. Altogether, this can be called the beginning of a second major exploration cycle for uranium, following the first in the 1970s and 1980s, when many of the current operating mines were discovered. Maybe a third of the companies are also buying up previously known deposits – indeed there has been a rush to acquire the data from previous exploration activities, while share swaps and other similar corporate activity is very much part of life for such companies. Very few of the companies, no more than 20, have yet reached the next stage, which can be termed active mine development, in other words going through the regulatory process, preparing environmental impact assessments and bankable feasibility studies and beginning to invest in the mine infrastructure. What is clear is that it will still take many years for new discoveries to result in active mine production – this is true for all metals and minerals, but in uranium it tends to be prolonged. In some cases, this may be 20 years or so – it has taken that long to get current mines into operation. Of the junior companies, only a small number are now producing, such as URI and Mestena in the USA, Paladin Resources in Namibia and UrAsia in Kazakhstan.

As time goes on, however, more and more junior companies will reach the production stage. It’s interesting to consider the countries where this is likely to take place. About half the junior companies have their headquarters and stock exchange listing in Canada, with about one third in Australia. Yet the geographical spread of their activities is much greater. Although Canada and Australia are both prominent at the exploration and known deposit acquisition stages, many of the companies are active in both the USA and Africa, with smaller numbers working in Asia, Latin America and Europe. So new production could come from any of these locations – indeed there are good grounds to believe that Africa and the USA may well outpace Canada and Australia, at least over the next 5-10 years.

With the exception of the Honeymoon in situ leaching mine in South Australia (which SXR Uranium One should commission by 2008), there is nothing immediately coming up from the juniors in the two big producing countries, which currently account for half of world output. One reason for this may be that the regulatory process seems to be rather more lengthy in these countries (and Australia is only now escaping from anti-uranium public policy and sentiment). It is notable that Paladin have got the Langer Heinrich mine in Namibia up and running in a relatively short period of time, encouraged by supportive public authorities. Other African mines, in South Africa and other countries, are likely to get into production well before all the projects in Canada and Australia, currently only being talked about. The position in the USA is less clear, as the regulatory process there can also be lengthy, but there is every prospect of some of the juniors getting production moving strongly upwards in the 5-10 year timeframe. American utilities, who have been most exposed to the uranium price spike, will no doubt support this. Yet the big increase in world production before 2010 is likely to come from Kazakhstan, where operations are largely controlled by Kazatomprom, clearly a major established player in the market.

Another feature to watch with the junior uranium companies is that they are often very dependent on the uranium price staying high. The average grades of many of their deposits are quite low, suggesting they may be quite high up the cost curve. While buyers are keen to diversify their sources of supply, particularly at present when they feel weak against the established producers, price is vitally important and they won’t generally support those with high cost profiles.

It is clear that there will inevitably be a huge amount of consolidation in the junior uranium sector. The better companies will inevitably become acquisition targets for the major producers, particularly if these find themselves short of material to satisfy contracts. Indeed, cynics about the sector would claim that this is all most of the juniors really want to do – they have no intention of ever producing a pound of uranium themselves and are just seeking to sell out at a good profit to whoever comes along. This may be true of many, but there are clearly those who are dedicated to getting mines up and running. But of course, everything has its price. What is likely is that over the longer term, there will likely be only 10-20 survivors out of the current pool of 400 who are still involved in uranium, independently and at the mine production stage. Possibly even fewer. So a wave of takeovers, mergers and even corporate failures is now likely to ensue.

Finally, it must be said that the junior companies have brought a fresh air to a sector that, with a few exceptions, appeared on its last legs only a few years ago. Some would say that a lot of the fresh air is also hot air, but this is inevitable in a business such as mining, with its sharp up and down swings. Industry meetings have certainly been enlivened by the appearance of many ‘characters’ from the past and by the arrival of financial types, only really out to make money (and not apologetic about this). And as said earlier, the rising interest in uranium has presaged the increased focus on nuclear power as a whole, which must be a good thing.

Steve Kidd is Head of Strategy and Research at the World Nuclear Association, where he has worked since 1995 (when it was the Uranium Institute). Any views expressed are not necessarily those of the World Nuclear Association and/or its members

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