Julian Tapp of Vimy Resources (ASX: VMY) - How is The WNA Fuel Report Put Together? (Transcript)

August 2 2019, 14:06 GMT+01:00

We spoke with economist and statistician Julian Tapp of Vimy Resources. He discusses with us the importance of the World Nuclear Association WNA Fuel Report which comes out in September at their London Symposium, which Julian worked on. What is in it that the market doesn't already know? Why do companies and equity analysts see it as a catalyst moment for Uranium and Nuclear?

He also explains the politics of Uranium in Australia and the reasons why the market must - and might - be opening up to a nuclear future. How has he navigated the Appraisal process in a seemingly anti-nuclear environment? Why is the geo-politics of the Uranium market so difficult to predict? He also explains his reasoning behind his view of the US Section 232 positioning of Uranium as a Security issue. Many Fund Managers and Shareholders of Uranium equities will find what he has to say interesting from an economic point of view.

A different view on the market for sure.

Click here to watch the interview.

Matthew Gordon: Thanks for joining us today.  I just wanted to introduce a few more of the Vimy team to our audience and I had a good chat with Mike yesterday. Why don’t you give everyone a little bit of a background about what you’re doing at Vimy and perhaps even a bit of a background as to where you came from before that?

Julian Tapp: My background is I’m an economist by training.  Used to be a lecturer in Economics.  Moved into the private sector, worked in the automotive industry, worked in the oil industry.  My wife’s from Perth, so eventually we moved back to Perth and there aren’t many jobs except for in mining.  So I ended up getting a job in mining and I was very fortunate I got a job with a company called Fortescue Metals Group.  Went there to do financial modelling for them, pretty school got bagged into sorting out all of their problems and in the context of mining in Australia, approvals are a difficulty.  So I kind of became adept at solving problems where they needed to get approvals.

I worked for them for about nine years.  I left them and then Mike Young, who you know, approached me.  He’d had a look at this project, wanted to know whether he thought the approvals were doable in a timely manner, asked me to have a look at it.  I said, “Yeah. Uranium’s always difficult, but we can do these approvals.  I’m happy to come on board and help you get the approvals.”  I also said, “And by the way I’ve looked at the project.  The project looks quite good.  I’m not entirely sure what they think they’re doing because they’ve actually got a mineable deposit and they’re out exploring, trying to make it bigger.  But if you want to bring something into production, the way you get into production is to actually advance it, not make it bigger and bigger and bigger because it’s no closer to production.  The reason why Vimy’s not worth much money or EMA, as it was then called, is because it’s so far from production that people can’t see it getting there.  So if you want to get this project up, what you need to do is push forward with what you’ve got, not keep looking for more and more products.”  

So both of us came on board, and even that far out fairly soon we knew that there was likely to be a change of government at the next election and we knew that the new government would likely prohibit any further Uranium mining, and in fact we had some discussions with the then opposition, to say, “Look, we need to know what your policy is.”  They basically said, “Look, if you get your approvals, we’ll let you go ahead.” So we got the approvals just in time.

Matthew Gordon: I want to talk about the approvals process because if I look at the Australian politics in relation to nuclear energy since 1971, and the various changes of governments. The nuclear industry has never really known where it is stood.  You’ve had the Three Mine policy.  Obviously one of those mines closed down, so they had to open that up again.  It’s a very confusing environment in which to operate. How have you come in from Fortescue, which is iron ore… how have you gone about understanding the nuclear environment in Australia, to be able to effect approvals?

Julian Tapp: Let’s distinguish between the State and Federal.  At a Federal level, that was where the Three Mine policy sat.  That was introduced by the Hawke government, and look, you’ve got to understand the tenor of the times. The Cold War wasn’t over then.  Mining was associated with nuclear weapons in a way that made it very easy to get a ban up, and then that ban stayed in place basically until the Howard government came to power at a federal level.

Is there a risk that federally it will go back under a Labour government?  I don’t think so, and the reason is for a long time there were people like Martin Ferguson – who I had quite a lot of dealings with for iron ore – who viewed Uranium as something that Australia should be doing, the Industry Resources Minister in a Labour government.

But the icing on the cake was when, I think it was the Rudd -Gillard / Rudd government collectively between them authorised the export of Uranium to India, who was not a signatory of the non-proliferation treaty for the reason that they developed their own.

Now, once Labour had done that, it was almost impossible.  These were left wing, they’re not the right wing Labour people. They were the left wing Labour people who wanted to improve relations with India and who were prepared to say, “Yes, we’ll export Uranium to India.”  Within reason there’s no way back from that federally.

Completely different at the State level.  At the federal level, it’s easy to ban Uranium mining because the feds control the export. So if they don’t want you mining, all they’ve got to do is say, “You can’t export it.”  The Minister or signature and it’s over.

But mining’s always controlled at State level.  You’ve got this bizarre thing.  I think you can explore in Queensland but you can’t produce.  And now in West Australia, when the Labour government came in, they said, “Well, we said we’d the let the four mines through, so we’ve let them through but nobody else is coming through for the time being.”  And the way they’ve done that is effectively to say, “We won’t grant a mining lease with permission to mine for Uranium on it. That’s our policy, so now everybody knows you can’t get a Uranium mine up.  They’re entitled to sign a permit saying ‘you can’t get Uranium from this,’ so that’s the end of the story – for now, right? 

Do I think it will last and can we wait forever?  No. I think when the Uranium market recovers and mulder rock gets up, there’ll be a certain amount of, “Well, this is actually sensible.”  Remembering that the current Labour government at the State level got up on the promise of jobs and I think that’s absolutely crucial to understand why they support something like Vimy to the extent they do, because of the belief that will create jobs.

Matthew Gordon: But was that what you were majoring on?  You’ve managed the approvals process for Vimy.  You’ve looked at a lot of historical examples, but what were the challenges you faced in terms of getting the approval process through?

Julian Tapp: To be fair, we got the approvals under the previous government, which supported Uranium mining.  So the coalition government supported Uranium mining and understood the need to get the approvals through before the election.  To be completely clear, they did not hurry our approvals.  You don’t hurry approvals because if you’re seen to have done something that is regarded as hurrying it through, there’s a risk that it becomes legally challengeable.  So it took them quite a long time to do them and that was because they were going round dotting the I’s, and crossing the T’s to make sure that when the approvals were given, they were not subject to challenge. 

So one of my areas of expertise is actually reading through the regulations and understanding what you can and can’t do. It’s funny, it’s not what people think it is.  It’s not about beating up the environmental regulators to make them do what you want.  It’s going to them, “Hey, guys, what are your concerns?  Let me help you give me the permission that I need.  Tell me what I can do to help you.”  That’s much more effective than going in with a stick and saying, “I demand this now.” 

So it’s learning how to work with them and that may sound odd and it may sound straightforward to you, but you’d be surprised how many people think the way you get your approvals is to find some politician to beat up the environmentalists in their departments so that they give you what you want.  And that doesn’t work.  But what does work is going in and saying “Okay, so you’re concerned about this plant or that animal or radiation from here.  Here’s the evidence that there’s not going to be a problem.  Now if that doesn’t satisfy you, tell me what I need to do to satisfy you.”  And it’s quite a long process, but we had time.  We worked through it all.

Matthew Gordon: You said something earlier which I think is possibly the cause of this.  This misunderstanding about what Uranium, what nuclear is in today’s environment.  We talked about the Cold War and nuclear is weapons, but it’s not.  It’s a massive power source, clean energy power source.  I think the problem is education.  When you go through the approvals process and you’re talking to people about why you should be able to do what you want to do, these politicians are controlled by what the public thinks and there’s a lot of the public who still feel there’s some security issues around it, or there’s some environmental issues around it.  Perhaps not everyone understands the output of nuclear in terms of energy globally – and it’s not just an Australian thing, but Australia does seem to have an unusual relationship in terms of...it is polarising as a topic. Do you agree with that?  Is Australia confused…?

Julian Tapp: Somebody gave me this advice a couple of years ago when I was complaining to them about the opposition of some of the Labour to Uranium mining.  And it’s like, “Oh, actually there’s not that much opposition,”  so it depends what the age of the people you’re talking to.  There’s a cut off at about… it’s currently sitting at about 40 years old.  Anybody who’s older than that remembers the Cold War and all the other things, and so Uranium in inextricably linked in their minds to ‘Ban the Bomb’ and CND and all these things they supported. But once you get under that age, there’s a lot of them I’m seeing, going “Well, actually I care about climate change.  If this is part of the solution, then we shouldn’t be opposing it. Nuclear has to be part of the solution to climate change.”  Most of the arguments against nuclear are either based on fear arguments that aren’t true, or over egging what renewables can do.  I have no problem with renewables, but they cannot deliver 100% of dispatch-able power.  They just can’t, and people will tell you , Oh, yeah, well you can do it with batteries.”  If you’ve got a wind farm and you’ve got a massive battery next to it, what that can battery can do very effectively is smooth out variations in wind so that it can deliver a constant base low power.  When the wind’s blowing a bit hard it charges up, and when the wind’s blowing a little less hard, it’s helping boost power.

What they cannot deal with is these two days when the wind doesn’t blow.  On an average year you’ll probably get three days where there’s no wind blowing.  You’re kidding if you think you can have a battery farm big enough to deal with three days of no wind. 

So then the back up’s got to be gas, and by the way if it’s gas, it’s going to be an open cycle, and the carbon emissions from an open cycle gas are 700 grams per kilowatt hour roughly.  And so even if that’s only used 20% of the time, the wind mill’s just gone from 15, 14 grams per kilowatt hour up to about 150 once you’ve factored in the gas.  And so they’re in a completely different ballpark.  You’ve got nuclear down at sub five, and you’ve got the best wind farm in the world with gas back up, sitting up at 150. They’re just a complete difference. 

And that’s one of the things that people don’t seem torealise, that in some sense the use of intermittent renewables is locking infossil fuels for the long term, and it partly explains why so many… like gas companiesare so keen on renewables, because renewables have to have gas back up. 

Matthew Gordon: You’re in a working group at the World Nuclear Association, which touches upon this.  For people who want to understand a little bit more about Vimy… you’re an economist.   When you spoke with Mike you were talking strategy.  You were saying “Well, how do you create value here quickly?”  We need to get this closer to production than it is today.  So that’s a strategic input from an economist. You’ve gone through an approvals process as an economist.  Objection handling to get people to understand what it is that you’re trying to do and get those approvals done.  What are you doing today for Vimy?

Julian Tapp: Well, you’re aware that Vimy’s now working in the Northern Territory.  Short of giving some support in terms of what we’re doing in the Northern Territory, but most of my attention is still running through the rest of the secondary approvals.  It’s a dark art, primary approvals, secondary approvals and everything else there.

But basically speaking, to get your primary approvals, they get signed off by the Minister.  You get your mining lease, get your environmental approval.  Then subsequently, if you want to drill a hole and extract some water you need a licence to drill the hole and you need a licence to extract water.  The environmental impact of drilling that hole and pumping the water has been gone through and assessed under your public environmental review, but you’ve still got to get the licence from the Department of Water to drill and then you’ve got to get a licence to pump.  You basically have to drill the hole and you have to test the pump and make sure that the amount of water coming is what you thought and what you told the environmental regulator would happen.

You’ll have a whole series of those and they’re the secondary approvals.  Now the reason why we make the distinction between primary and secondary is primary approvals, he Minister can say, ”No, I don’t think so.”  When you come to secondary approvals it’s a bureaucrat who’s got a form and you have to satisfy that you meet the criteria and then the signs.  There’s no political decision or there shouldn’t be.

So we’re still going through all the secondary approvals and they take a lot of time.  That’s part of my job and then I’m also involved – well, I do some work with the WNA, and I do work on the political side because we still have to fight to get Uranium normalised in Australia.  A nuclear power station is prohibited under the EBBC act in Australia and it’s just kind of bizarre that we’re prepared to mine Uranium and send it to other countries, but we’re not allowed to build a nuclear power station here.

Matthew Gordon: It does sound a bit strange.  It’s a case of not in our back yard. 

Julian Tapp: And look, to be fair, I don’t think the set up of the grid here is such that at the moment there’s an opportunity to put a 1 gigawatt reactor anywhere.  Electricity demand is not growing and 1 gigawatt is quite large in the context of lots of individual grids, but modular nuclear reactors have to make a…. If Australia’s going to meet climate change obligations, reduce its carbon emissions and still keep its industry and still have cheap electricity, I think the small nuclear modular reactor’s got to part to play.

I don’t want to put a timeframe on it but I think the most important thing is we need the ban of nuclear removed.  The argument that nuclear shouldn’t be allowed in Australia because it’s not economic is a political argument. 

Matthew Gordon: It can’t be purely on the economics.  There’s got to be some sort of renewable component to it.

Julian Tapp: No, but those who oppose nuclear power… the gamut of the argument is it’s not economic.  Well, if it’s not economic, why are you banning it, because if you’re right, then you don’t need a ban because nobody’s ever going to build one.  So they say, “Oh, well, it’s not economic that apply government subsidies.”  Well, I’m happy for you to legalise it and write into law that you’re not allowed to subsidise it.  If the modular nuclear reactors work, they’re not going to need subsidising.

Matthew Gordon: I see your argument.

Julian Tapp: That actually brings me to another point because there’s a lot of misinformation about the cost of nuclear power.  So to give you an example, there’s an argument that you can’t build a nuclear power on time and on cost. 

And that is true in the US context and it’s true inparticularly for modern reactors that have just been built in Europe – the onesin Finland, the ones in France.  But ifyou put your global hat on, and look at let’s say the Japanese Build Programme,when the Japanese starting building nuclear reactors in the 70s, it took themfive years from first pore to commercial operation.  The same in the 70s, same in the 80s, same inthe 90s and the last reactors to be built before they had current problems withFukashima – five years.  No increase inthe length of time

Look at Korea.  Same story. From when they first started building them to when they finished them – right through it took roughly five years to build a reactor.  It’s only in the US where it went from, believe it or not, the first Gen1 reactors took less than five years, they were about an average of four and a half years.  When they finally stopped starting any new ones, those last ones that were built, the last ones started in 1978 or whenever it was, took 12 years.  And actually if you want to know why, you can actually see a rise in environmental activism and changes in the regulations while they were constructing them meant they had to retrofit them.  And if you know anything about building, if you change the design halfway through the programme, you’re doomed. 

So I don’t believe this thesis.  And also if you look at the UAE. So the Koreans built four reactors in the UAE and people forget that it is actually a difficult hostile environment to do construction in.  It’s incredibly hot.  Remember you’re setting concrete and a whole load of things that are quite difficult to do in that environment without a decent water supply – because it’s in the middle of nowhere – and without a trained workforce.  So they’ve built those roughly on time and on budget.  They’ve had some commissioning problems, primarily because as I understand it, UAE wanted to run them themselves and yet hadn’t trained up the workforce necessary to take it over and now I think they’ve solved that by giving the contract back to the Koreans to run them for the first five years.

At a reasonable cost and on time, it can be done. Thesame thing is true in China, by the way. The only time you’ll see an increase in the length of time it took theChinese to build a reactor was just after Fukashimo because they suspended workon them for 18 months and then they had the debacle with the AP1000 where anAmerican component failed halfway through the construction process.

And again this notion that it takes a long time to build one – Japan, Korea, China, roughly five years between pour and commercial operation.

Matthew Gordon: That’s certainly an interesting topic, an interesting debate and I guess you can back it up with numbers.   It just seems to me that there’s a lot of people with vested interests who do like this misinformation around the marketplace because it is very fragmented in terms of the way people perceive nuclear and therefore Uranium by association.   Which kind of leads onto your role at the WNA.  You’re in a working group there.  Do you want to tell us a little bit about what the working group is doing, not necessarily the detail?

Julian Tapp: So basically the WNA produce a fuel report every two years.  No sooner has one been published, then you start work on the next one.  At least for demand it’s a bottom up model, so you have a list of every country that’s got reactors, what you think the life of those reactors are, and then mechanisms to calculate the amount of Uranium that each reactor requires.  So it’s literally a bottom up process.  You build up demand for Uranium.  It wouldn’t come as any surprise to you that it’s a pretty stable outlook, and it’s not difficult to forecast because if you’ve got a reactor you know roughly how long it’s going to run for.  By the way, if you’ve got a reactor and you know what it’s capacity is, you know roughly how much Uranium it needs. 

The variance comes on retirements and on new builds.  It’s funny, there’s this misunderstanding – and it’s quite prevalent – that reactors run to the end of their licence.  I’ll come back to this but you see it everywhere.  Almost every study looking into the cost of nuclear, assumes that the nuclear reactor has a lifetime of 40 years.  So they all run with 40 years in their model, and so there tends to be a default, “Oh, well, when it gets to the end of its licence, it’s the end of its life.”  Well, every US reactor that hasn’t closed down for economic reasons, has had its lifetime extended to 60 years and now they’re extending them to 80 years. 

The misunderstanding was that when they gave the licence out initially, it wasn’t their estimate of the life of the plant, it was ‘this is how long we’re going to licence you for,’ but the nuclear operators said, “We need a licence of at last 40 years to recover the upfront capital costs so we want a licence for 40 years.”

A similar thing in France. So what happens in France is a reactor has a certain length of lifetime and every ten years the French say “Shut your reactor down, inspect it.  If it’s safe, you can run it for another ten years.”  Yet in all these countries people who are doing forecasts go, “Oh, well, let’s assume the reactor runs to the end of its licence lifetime.”  It’s like, “Well, no, that’s not the way they work.”

The odd thing is, even if a reactor is actually only breaking even, doesn’t mean to say you won’t keep running it as long as you can because you incur a cost when you close it down and you’d like to postpone that cost for as long as possible.  You have to be losing quite a lot of money before you’ll take the decision to close a reactor on economic grounds.

Matthew Gordon: Well, remediation etc, and also the capital cost of building a new one, it does make a difference sometimes, yeah.

Julian Tapp: So when we do the forecast for the WNA, you have a variety of views of how long these reactors are going to last for, and you have a working group and there are people from the nuclear utilities and there are miners and a whole load of people involved in coming to a discussion about that.  They tend to rely on whatever official government policy is. 

So in my opinion, the forecast in terms of the lifetime of reactors are very conservative, and in discussion, so it’s a consensus process, I say, “Well, yes, but they’re actually not… If the way the licensing works, they’re not going to have to close this reactor unless it’s unsafe.”  That’s what the licence is about, so are you telling me that when they do the inspection at the end of 40 years, the regulators going to say it’s unsafe, because unless you think that, then it won’t close after 40 years.  They’ll keep extending the lifetime.  It’s the same everywhere you look.

Matthew Gordon: If it’s by consensus, not everyone on the team has to agree with the assumptions or the figures, quite frankly, but there’s great store put on – especially this year – on the fuel report, because people need it to be positive.  They need it to reinforce the narrative which may change the way that the US behaves, the way the utilities behave – because there’s this very large supply demand gap.  I think people are seeing this as a huge catalyst. Do you think it is?

Julian Tapp: Do I think when the fuel report comes out, it will be a catalyst to change the view of the market?  No, it’s an incredibly conservative industry, and so the majority of views are very conservative and they’re reluctant to change.  That’s not a criticism of anybody.  You run a nuclear utility, you’re risk averse, and thank goodness, right ! 

I won’t discuss individual country’s per se.  We talked about this slightly earlier on, in France you’ve got this policy of Macron to shut the reactors down.  When he came to power he inherited Hollande’s policy which was to reduce nuclear to 50 per cent by 2025.  I’ve got to say actually I think it’s a misrepresentation indeed of what Hollande said because Hollande made that promise or purported promise when the view of electricity demand was that it was going to continue to grow in France. The promise was ‘Hey, we’re going to grow renewables and eventually nuclear will be down to 50 per cent because we’ve grown the generation capacity so much”  It wasn’t that we’re going to shut nuclear power plants to get the number down to 50 because that’s nonsensical if you’re worried about carbon emissions.  There’s no benefit to shutting an already constructed nuclear plant because it’s incurred a lot of its carbon emission costs, right?

That got morphed into “No, no, you promised to go to 50 per cent,” and then in the run up to Macron being elected, he basically got confronted into agreeing that he would adhere to the existing policy, and then as soon as he got into power it’s like, “Oh, well, look, I’m not going to do this if it’s going to increase carbon emissions.”  So he’s now kicked the decision down to 2035. 

In my opinion that’s a political fudge because heknows – and if you read the text of what he says, he’s quite clearly said “I’mnot closing any of them unless it’s going to help reduce carbonemissions,”  which is my opinion istantamount for him saying, “Actually guys, I’m not going to close any of them.”

In places like Germany, it’s an absolute disasterreducing your emissions if you want to close nuclear power plants. 

Matthew Gordon: That’s the thing that interests me about the way that the WNA puts these reports together. If it’s a consensus based, work group based, and they’re using quite conservative assumptions, is there a way that politics can interfere with economics.  You as an economist, you look at numbers and you interpret them because you’re basing it on fact.  With politics, it’s a bit grey in places, so how do you – or how does the WNA – put out a meaningful report other than purely indicative numbers?

Julian Tapp: France would be a good example because the default will be that we have to adopt whatever government policy is.  So you’ll now find a default position for the reference scenario in the context of France will be the number of reactors is going to go to 50 per cent of electricity generation by 2035.  So is the reference always what efficient government policy is?  No. I’ll give you an example. 

 China, for ages, had an official policy that they’d have 50 gigawatts of generating capacity by 2020.  There came a point where you realise it’s physically impossible for them to do that because when you look at the number they’ve got under construction, even if they all get completed in record time, you still don’t get to the 58, and nobody thinks that they can start and finish them in three years.   So when it becomes impossible, then you’re allowed to say, “No, look, I’m going to walk away from official policy.”  We had a debate. If we can’t all agree a number different from government policy, then the default is whatever the government policy is.

So similarly, I’ve proved to be wrong on that, when Germany first announced that they were going to close all their nuclear plant by 2022, I was like, “Are you kidding me, right?  They can’t do it.  It’s going to be madness.  They’ll be sucking power from Polish coal power plants.  I mean, why is that sensible?”  And then when I started talking to the Germans, they were like, “Oh, no we’re doing it.  We’re definitely doing it.”  Everybody I talked to said we’re doing it.  It’s like, “Okay, going to have to accept it for the time being.”  Even the optimistic forecast for Germany is that “No, everybody’s accepted that they’re going to close them all by 2022.”

Matthew Gordon:  But even that is under review at the moment in Germany.

Julian:  It depends what happens to Merkel and her replacement.  I think everybody thinks that can’t change, but now you’ve got actually industry chiefs saying, “No, this isn’t going to work.”   I don’t think people realise how much energy costs are embedded in things like making cars.  We all think, “Oh, well, cars.  How much electricity goes into them?”  Well, actually a lot.  And if your electricity costs are twice what they are anywhere else in the world, your cars are going to be ten per cent more expensive.

So German industry - and Germans have a very advanced industrial manufacturing base – relies on cheap electricity and that’s slowing being ebbing away from them.

Matthew Gordon: But isn’t this the big problem across Europe?  If you look at the costs of electricity over the last 30 years, it’s significantly more as a proportion of the average household spend than it was.  Industry going the same way, and some countries the rate of incline is ridiculous.  It’s too much.

Julian Tapp: It’s really interesting because when you look at places like France, because of their nuclear power they have traditionally had the cheapest electricity.  That’s beginning to be undermined by the fact that there’s a European electricity trading system. So as the Germans start getting rid of their nuclear power, they’re sucking it out of France.  The wholesale price goes up because there’s more demand, but then in the context of the French, they’ve had nuclear power for so long that the average person in France has an electric central heating system.  They have night storage heaters or underfloor heating, so they’ve kind of built their entire life around cheap electricity. Why would you have a gas boiler when you can get electricity heating for half the price?  They’re not going to be happy if the price for electricity starts to go up.

It comes back to the whole context of Australia.  Australia has got industry built on cheap energy and if we continue down the path of a solution that’s expensive, it’s going to decimate what’s left of the industry.  It’s only here because it made sense to be here because of cheap electricity.

Matthew Gordon: The French are the world’s second largest consumer of nuclear energy at 63 megawatts.  So you’d think they should be highly literate in all things nuclear, but you’ve had this confusion around – I think what you were saying is that when Hollande was talking about reducing down to 50% of energy being produced by nuclear, he was saying, “Well, I’m assuming that the demand is going up and other forms of renewable would be contributing to that.”  So not necessarily a reduction in the amount of power, but as a percentage it would be less.

Julian Tapp: The thesis was that nuclear would be diluted by an increase in renewables, not that you had to close plants to bring about that outcome.  That’s why I don’t think Macron’s or his successor… You’re probably closer to the politics of Europe than I am.  The Germans have been not only determined to phase out their nuclear, they’re bullying everybody around them.  Part of the reason why the French are closing the two reactors at Fessingheim is because they’re right next to the German border.  The same thing, they’re bullying the Swiss.  Any nuclear reactors on any river border, the Germans want closed. 

Matthew Gordon: We need to understand though, that the general trend is up.  Just want to go a bit more macro.

Julian Tapp: Now that’s a really good point because one of the things I keep saying to people is, “Look, it’s very easy when you sit inside western Europe and America and you talk to each other and you say, “Oh, my God, nuclear’s time is kind of waning.” It’s like, “Well, actually that’s not true.” In Europe it’s about level. The UK are probably going to build some…

Now that’s a really good point because one of the things I keep saying to people is, “Look, it’s very easy when you sit inside western Europe and America and you talk to each other and you say, “Oh, my God, nuclear’s time is kind of waning.” It’s like, “Well, actually that’s not true.” In Europe it’s about level. The UK are probably going to build some…

Now that’s a really good point because one of the things I keep saying to people is, “Look, it’s very easy when you sit inside western Europe and America and you talk to each other and you say, “Oh, my God, nuclear’s time is kind of waning.” It’s like, “Well, actually that’s not true.” In Europe it’s about level. The UK are probably going to build some…

Matthew Gordon: I’m looking at the numbers.  From 2001 through to today, the numbers are about the same.  That’s 20 years, is it roughly the same?

Julian Tapp: Europe’s actually static.  It’s not going up but it’s not going down.  America, there will be some retirements, but I think long term people expect the US programme to come back but not in the next five years or anything like that.  They can’t get over their current problems they’ve had with the AP1000 disaster and bankruptcy and everything else like that.  But that’s not where the growth is and that’s not where anybody thought the growth was going to be.  I hate to say it’s China, but they’ve got a big problem and they can only sort it out with nuclear.  The best will in the world, solar panels in Beijing aren’t going to give them the electricity they need, and the place where it’s windy is up north and the power consumption is all in the south.  It doesn’t make any sense to set windmills up north and then put in 2000 km of grid to take it to areas.

A nuclear plant’s the easy solutions and there’s nothing wrong with their nuclear programme.  They have not had a problem.  Nuclear power plants in China get seven cents per kilowatt hour when they delver into the grid and roughly speaking it appears to cost them about five cents per kilowatt on a fully costed basis, capital cost recovery and everything else.  So the nuclear power plants make money in today’s market in China.  So it’s just a question of getting round to it, and they just will keep building them.

Matthew Gordon: You’ve been very candid about how the numbers are created for the Fuel Report and obviously people are waiting for it.

Julian Tapp: It’s released in September.

Matthew Gordon: So everyone’s looking forward to that. I think some people are hoping it’s a catalyst for change.  I think you’re suggesting is that these numbers… the report’s done over two years…  these numbers are not numbers.  So therefore is it really going to tell the industry anything it didn’t know? 

Julian Tapp: So that’s on the demand side.  The demand is pretty stable.  Supply side’s completely different.  Since they’ve done the last fuel report you’ve had MacArthur River shut originally for ten months, now indefinite. 

When you have these meetings you’re not allowed todiscuss the price.  So you’re having todo forecasts of what you think’s going to happen on the supply side, but youdon’t know what the price is going to be. And it’s like “Well, if you tell me what the price is going to be, I cantell you which mine’s will come on roughly and when.  Hey, we’re not allowed to discuss theprice.”  So they’ll have an assumption…

Matthew Gordon: Why would you not discuss the price as a key driver to the metrics?

Julian Tapp: It’s kind of anti-trust consideration.  They’re very concerned about you’ve got nuclear utilities sitting round the same room, should they discuss the price?  My view is they should, but they don’t.  So you’ll not see anything in the nuclear fuel report that says what the price is.  I’m quite happy to discuss the way it works, so they approach all the mining companies that will answer a questionnaire – “What do you think your production’s going to be over the next however many years?” and you fill it in.

They approached us and said, “Well, when do you think you’ll be in production and how much will you produce?”  And then they just add them all up.  Supply can be a bit optimistic because the mining companies put their chests up and say, “Hey, I’m going to be in production next year and I’m going to producing £5 million.”  And you go, “They can’t do that.” 

Matthew Gordon: Their economic drivers are different.  As a public company they need to project for their investors, which is not necessarily…  It’s a very hopeful case.  For a conservative organsation, which you said, using these very hopeful set of data points from miners on the supply side…

Julian Tapp: I should distinguish. There’s existing producers who give their production profile and then for the new ones they get adjusted to reflect their WNA, just applies the same blanket formula to the new mines.  They get delayed and they get scaled back in size to reflect the risk and the likely delays in development, and it’s quite interesting.  The mines are categorised under development, almost ready to go, planned, pipedream.  They’ve got different names for them and I’m not trying to be derogatory. 

This year they’ve introduced more definitive categorisation which said, so basically if you’ve drilled and found something but it’s not got to the point where there’s a jaw core or any kind of preliminary estimate that would be accepted by a Stock Exchange, that’s just a some time in the future project.

If you’ve drilled and you’ve found a deposit, it may or may not be economic but you can call it – in Australian terms it would be a resource but not a reserve.  And then you get into a higher category and then if you’ve got a preliminary feasibility study and a) it’s economic, that gets into a high category and when you’ve got all your approvals done, you’re sitting there ready to go. 

So they’ve introduced a bit more rigour around… but then the same blanket thing’s applied to it, so depending on what category you’re in, you assume that ‘Well, they’ve told us they’re going to be up in 2024, but we know it takes two years longer usually than miners claim.  So we’re going to add two years. They said they’re going to be at X, so we’re going to put them in at 80 per cent of X.

Matthew Gordon: But can you factor in the economics?  Julian, mining is mining, right?  Some mines are more economic than others.  So some are making margins and some are not and that’s going to affect their ability to raise money, to be able to deliver.  They may not be able to function at all. You’ve got to understand what the price is at.  So if the market… the big contract, whetherit be spot, is at ten bucks lower than they economically mine at, at any pointin time.  They’re not getting intoproduction, as hopeful as their numbers are. 

Julian Tapp: There’s no economic viability.  Look, I wish they would talk about the price because then you could go to them and say, “Well, this guy’s done a preliminary economic study, but they’ve assumed a $70 price,” and so, yes, they’re telling you they’ll be in production in 2024, but that’s conditional on the price getting to $70 bucks by 2022 otherwise they won’t push the button.  They’re not allowed to make that decision and say, “Well, guess what? I don’t think it’s going to get to $70 bucks at least in nominal terms until 2030, so I’m going to push you out.” They just don’t do that. 

So I would say that to you that the supply side can be a bit optimistic to the extent that it relies on… it’s a process, but they do their best to try and trim back.  But now the problem is you’ve got MacArthur River that’s basically on indefinite suspension and you have the Kazakhs who have used their ability to easily control their production, reduce production compared to what was planned so everybody knows that can ramp up quite quickly, but nobody knows when they’re going to push the button and put it back up again.

This gets back to, if you like, the thesis that underpinned our whole price assumption in the DFS, which was we think the price is going to 60 because that’s the sweet point for a bunch of… sorry, and again I don’t wish to cast aspersions on anybody, but a bunch of oligopolists staring at each other, working out what they should do. Once you’ve cut production and the price goes up, you do not just turn the supply back on again because the price will drop again.  So you will let the price go up and you’ll stare at each other and then at some point the price will get to a level where you go, “Oh, my God, all these people are gong to come into production.”

So I think if you’re a rational… Fraser Nash equilibrium strikes me from my economics days, you’ll say, “No, no.  When the price gets to 60, I’m going to turn it on because what I do not want is some mega project in some African country to get started with £10 million of production and then once they’ve started, they come in – particularly if it’s Chinese, they’ll never turn the taps off again.  Rationally they want to manage the price, they want the price to be as high as possible because all the time they’ve got supply turned down and the price going up, they’d rather the price kept going up because you make much more money that way than you do by increasing your production.  But there comes a point where you go, “I don’t want these other guys coming into the market.” 

So we think the estimate was about 60 bucks. They’llsay, “Okay. We’ve had a lot of upside now, and if we let this go any further soit’s time to turn the taps on.”  Theinteresting thing is my assessment would be – and I can’t tell you exactly whenthat would be – but demand out of China is going to grow and other countriesand I think the Middle East is silently developing and nobody’s really noticingit.  I think the Saudi’s will have a bigprogramme.  Egypt’s building some withRussian help.  There are some reactorsbeing built in Turkey.  You kind ofthink, “Actually, the rest of the Middle East will go, ‘Hang on a minute.  This is a good idea and we can have them, sowe’re going to have them as well.” There’ll be a sort of trigger effect after Egypt gets it and Turkey’s andKuwait and others, they’ll all start saying, “Well, hang on a minute.  It makes sense to have a nuclear reactor onour land, and free up the oil or gas that we’re burning for export and hey, wecan afford it.” 

Matthew Gordon: They can definitely afford it.

Julian Tapp: I think that’s an area to watch, but again it’s probably not in the next five years.  I think the Saudi’s will conduct a programme and they’ll try two to begin with, just to make sure they’re not making a big mistake.  Their programme is for 16 reactors or something.  They’d be made to let a contract for 16.  You want to let a contract for two, make sure the guys are doing the job properly and then let the rest.  So it’s coming.

Matthew Gordon: There’s a whole geopolitical component to this. I love what you’re saying about price control. You don’t want to go back to pre-Fukashima days when you’d 500 companies in the marketplace all competing and all going to be the next great big thing.  Mining doesn’t work like that. I’d love to talk about the influencers in the marketplace.  Not just the big companies, Cameco and Kazatomprom, but the way that Russia and China are going about selling programmes in the Middle East and how the US feels about this.

Julian Tapp: Oh yeah, well, and Belt Road. Again, I don’t think… It’s a subject beyond this. I don’t think people realise how much the Chinese are going to rely on nuclear as part of their armament – sorry to use the word – in terms of exporting Chinese… you know, trade routes, and they‘re doing in Pakistan.  For example, I think probably the first reactor is sub-Sahara and Africa will be in Kenya.  Why? Because that’s one of the end points of the Chinese Belt Road Initiative. 

Matthew Gordon: They’ve a lot going on in Kenya.

Julian Tapp: Reactors?

Matthew Gordon: Yes.

Julian Tapp: They have to import them and the Chinese are prepared to do that and probably on subsidised terms for the benefits it gives. 

Matthew Gordon: Not a lot of people are being open and honest about the way that the market is being managed. But let’s finish off today back on Vimy.

Julian Tapp: We haven’t talked about 232 either.

Matthew Gordon: People are a bit exhausted and apparently it’s happening in two weeks’ time anyway.

Julian Tapp: The deadline runs out. 

Matthew Gordon: People are talking about this 180 day extension as a possibility of coming in. 

Julian Tapp: So I would say to you – if you actually looked at what happened with the auto, effectively my understanding of it – and it’s quite technical – but Trump made a decision that has postponed implementing it.  So what he said is “Hey, I’m going to impose tariffs but I’m going to give you 180 days to negotiate to see if you can come up with a better solution.”  

The precedent in previous 232s, where the recommendation has been “Actually, you guys go and sort it out.”  So my recommendation is “Hey, here’s a big stick, but I’m not going to apply it just yet, because I’m sure you guys can work it out.”

Now the problem with nuclear is there are no parties to sort it out.

Matthew Gordon: It’s a very emotive subject, in the sense that the security issue comes through very loudly.  That’s the whole point of this 232.  It’s not just security around power.  It’s to do with weaponry, global nuclear power.

Julian Tapp:  I’m annoyed now at this because I lost a good bottle of red wine on this. 

There is no security issue.  I mean, I’m not sure what the right term for it is.  You have to really scrape around to find the security issue because in terms of a nuclear programme… I mean there’s just so much fuel siting around suitable for powering a naval fleet and in terms of their weaponry, I mean the big issue was  Tritium. I don’t know if you follow this, but Tritium’s an accelerator and a trigger for a nuclear weapon, but they’re actually downsizing their fleet of weapons and the Tritium ages over time.  What you do is you take the Tritium out.  You clean it up and put it back n again. On top of which the Tennessee Valley Authority make all the Tritium and it’s actually that facility is effectively a quasi-government owned one.

When the participants asked for measures to be taken, they asked for effectively a 25 per cent quota.  American’s have got to buy 25 per cent freshly mined Uranium.  Oh, and by the way, you should make Tennessee Valley Authority buy America.  Well, guess what?  If Tennessee Valley Authority was required to buy America, they alone consume more Uranium than the current owners could possibly produce in a central scenario.  All Trump has to do is say, “Okay, TVA, you’ve got to buy 100 per cent American, and that would keep America’s industry going.”

This notion that somehow the Kazakh’s are under thecontrol of the Russians and there’s some big conspiracy to undermine USsecurity, I mean the really bizarre about this is if there’s a militaryrequirement at all for some future requirement for battlefield power sourcesfrom small modular reactors – and one of the problems is Australian Uranium,Canadian Uranium, Uranium from any country outside America, cannot be used forany military purpose.  I don’t mean itcan’t be used for bombs.  Can’t be usedfor any military purpose, so if they’ve got a portable generator with a little Uraniumpower pack in it used by the military, can’t use anybody else’s Uranium.  It has to be domestically mined. 

But that’s a long time off in the future and what this 232 may do is it may extract the last remaining economic reserves of Uranium in America and put them into their reactors over the next ten years, and then when they need it for the military they’ve exhausted all their domestic sources.  It’s Alice through the Looking Glass World where they’re in danger of putting in place an initiative that’s actually going to destroy something that they should be keeping for when they need it.

Matthew Gordon: Let’s come back to Vimy though. Finish off on Vimy.  So you are still working with Vimy in terms of the approval process.  Junior companies do obviously … Well, junior companies which are not yet in production – and obviously Uranium is a very special case because not very many people are at the moment.  They all have their problems in terms of financing.  It’s not an area that I necessarily want to discuss with you around the financing but do you think that – and coming back to your original proposition with Mike in the early days, saying, “You need to get this thing as near to production as possible,”  do you think that they have done what you and Mike talked about all those years ago to put themselves in a position to be able to be a meaningful Uranium producer?

Julian Tapp: So we don’t have the secondary approvals.  That’s bureaucratic in time and the market hasn’t yet recovered, and we would expect… Well, I’m very sure that we will get them all before the end of – say the end of this year, all the secondary approvals.

To give an example of some idea of… It may sound odd to you, but the failure of a tailiings facility in Brazil, which has seen the iron ore market get super charged by the lack of supply out of Brazil.  That’s whittled through any mining operation that’s got a tailings facility, and so Vimy, we got 20 more questions than expected about our tailings facility – in peak tailings facility right?  It’s like, “Well, no, it can’t fail.  It can’t go anywhere.”  These tailings facilities are built in valleys where they put a 10metre earth wall across the valley and if it builds behind too much, the whole thing slides. It can’t go anywhere.

The question, “Well, what happens if there’s an earthquake?”  I don’t care.  The worse that can happen is that the sides fall in.  It doesn’t goes anywhere.  It’s on flat ground and there’s no population within 100 km.  Have you seen BHP in Rio putting out… Could the failure have potentially catastrophic consequences?  Yes, of course it could.  Any tailings facility, any work round the world, if it fails, ours couldn’t because you cannot come up with a scenario short of an asteroid smashing into it where tailings could get distributed.  But nevertheless, we’re still having to go through proving in great detail that our tailings can’t go anywhere.  And that’s the sort of thing we’re up against by people who don’t like Uranium mining. But at the end of the day we’ve passed the political test and it’s just a case of working through the bureaucratic approvals.  Sure, they can delay you, but they can’t delay you forever.  We just keep working away at them. 

And we have some political support.  The problem is right now they look at the Uranium market and go, “Woah, so you said you needed $50 a pound, and the market’s at $25 “and it’s like you try and explain the difference between the spot and the contract and contract’s higher than spot and look at the volatility’  Nobody believes you until the market goes and then there’ll be “Oh, my God,  yeah you were right.” Well, too late.

So we’re working hard to say to them, “No, look, don’t worry about that. We can see, we will be in production by 2022.  So lots of people will sign up to the price being high enough to energise us into production.  So please triaging me on the basis that you don’t think I need the approvals right now because I do.  And that’s the discussion we’re having with them, and we’re making progress.

Matthew Gordon: So when is the market going to go?

Julian Tapp: I would say to you when the 232 result comes out, there’ll be a bounce, but we’re far enough away from the $30 threshold for it not necessarily to bounce through that.

You’re going to say to me, why $30?  And I wish I had an answer for you.  The only answer I can give you is talk to the traders and the brokers and they believe it.  So I don’t know where it came from, but there’s this accepted mentality that it was a threshold at $30.  As soon as it goes through that threshold at $30, they’ll all go, “Oh, it’s gone through the threshold.” They’ll start moving.  So the fact that they think there’s a threshold at $30 has become a self-fulfilling prophecy.  Our concern will be when the 23 decision comes out, there’ll be a jump in price.  It’s under $25 at the moment.  It could conceivably go up to $2.50, $3 in a space of a very short period of time, drift up slightly and then everybody will go, “Oh, it’s still got to go through the $30 barrier. “  But the other sleeping giant is Cameco, shut their mine, they’re having to buy, they’re not picking up the material.  Something’s got to give and I think the pressure will gradually start to wind up. 

I can’t tell you when.  It may or may not go through $30.  If it doesn’t, I’ll hang around for a while, but ultimately it will squeeze through it and then when it does, I think you’ll find you’ll see a run up like we had from April through to November last year, where it went from $20 to $30 in the space of ten months.  Well, it will go through $30.  It will go from $30 to $40 in the space of ten months and when the spot price is at $40, utilities will be saying to us, “Hey, we’ll write contracts at the price you wanted, as long as we’re sure you’re going to be there. 

So we need to make sure that when that time comes, we can actually sign a contract knowing that we can get into production and deliver within two years.

Matthew Gordon: Julian, thank you very much.  I’ve really enjoyed that.  I enjoyed the economic lessons of this conversation.  I’d love to catch up with you again soon, and maybe get into just a couple of points rather than this general approach we’ve had today because that’s been fascinating.

Julian Tapp: My pleasure.

Company page: www.vimyresources.com.au

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