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Small Uranium Companies May Need to Change Strategies to Survive - Dustin Garrow (Transcript)

October 6 2019, 10:37 GMT+01:00

Dustin Garrow, former Paladin Director, and industry advisor to Uranium companies, Uranium ETFs and Uranium Funds, was involved in writing the WNA Nuclear Fuel report, especially the uranium chapter. A lot of investors on social media are seeing the findings of the report as a signal for a recovery in the uranium price. We ask Dustin Garrow if this a realistic assumption.

Analysts say there needs to be production at higher price. This report says 'yes there needs to be more investment in the fuel cycle and particularly uranium. So everyone is saying the same thing. The Demand forecast marginally positive. Dustin tell some of the factors for altering the data from companies to show a more realistic outlook.

Will some of the junior uranium companies fall off the cliff if the price discovery takes longer than hoped. How will their strategies need to change?

Certainty is still not here, but the mood is more positive. Dustin Garrow saw 10-12 investment groups which is more than have attended more many years. Not a lot of the US utilities. He talks about conversations with generalist investors. And also an update about the 90 Day Working Group.

The report has previously had a reputation of being vague. But a lot of hard work has gone in to making it a little bit more commercial. But still avoids talking about the economics! It doesn't talk price. Surprised, we were. But it does now discuss long-term contracts and term market.

Did you know that the EU and US represents over 50% of the uranium requirements. 1.9 billion pounds of uranium, and 90% was on long-term contracts.

Interview Highlights:

  • WNA Expectations
  • WNA Fuel Report: What Will it Do For The Market?
  • Current Mood in The Market: When Will Price Discovery Happen?
  • Struggles of Raising Funds in The Junior Space
  • Investment Hacks: What Should You Look Out For Before Investing?
  • Buying Physical Uranium: What Should You Know?

Click here to watch the interview.


Matthew Gordon: It has. We, like you,have been trotting around, meeting people, interviewing people at the WNASymposium London, getting a sense of what the mood is. What do you want to getout of it?

Dustin Garrow: I think an important part is thebiannual market Fuel Report from the WNA. I happen to have been involved in theuranium chapter. And the initial reactions have been very positive from outsideorganizations and people. I think the report reflects more of the concern ofsome of the fuel cycle participants. And it goes not just to uranium, but also theconversion side. I think the industry perspective now is more in line with whatI've been seeing, particularly in the uranium side, on the supply issues thatare looming.

Matthew Gordon: The WNA Fuel Report comesout every two years. It has had a reputation of being just a little bit vague.It paints a broad picture. But this year, a lot of hard work has gone into it.And we've met some of the authors of that. You were involved as well. It's justthat little bit more commercial. It's getting to where it needs to be. You wereinvolved with the uranium component. What was the brief?

Dustin Garrow: I've been involved in the report formany series of it. It was originally designed as an internal communicationdocument. It wasn't nearly as critical as to how it was put together. And theother thing is you can't talk economics, can't talk prices for anti-competitivereasons. But then it became the industry position, as particularly moreinvestor groups, began to look in the uranium side. So, there's been thatlengthy transition. Still can't talk economics. But it now it addresses thingslike the need for long-term contracts. There is still a big hurdle at thispoint. A lot of companies are at the starting gate in various forms, butwithout the utilities committing to more than a 2-3 forward year agreement,they can't raise financing. It's now being recognized, the term-market, it’srole in this industry. I looked at the US and the EU deliveries since 2000. There'sreally good data on both the regions, which represents more than 50% of uraniumrequirements. Over that period, they've taken delivery of 1.9Bn lbs of uraniumand 91% was under long-term contracts. So, the idea that the utilities rely onthe spot market just doesn't reflect reality. They still buy about 20Mlbs ayear in the spot.

Matthew Gordon: It talks about long-termcontracts which is a really important part of the industry for sure, but it'snot giving any indication around price because it can't be anti-competitive.

Dustin Garrow: So you say things like ‘adequate’. Andthat depends on the specific company. What's adequate for a Cameco is not adequatefor a new build project somewhere else. But it's a crucial element in theprogression of the production facilities.

Matthew Gordon: If I look at peoplelike TradeTech or UXC, they can get into this. And I think is important forcommercial reasons that they can get into this. They sell those reports intoutilities funds etc. But these interviews are for the ordinary guy like me andyou, who want to buy shares in equities. What does this report do for them? Doesit give certainty to the marketplace so therefore, people start behaving in adifferent way and therefore the equities react?

Dustin Garrow: What's important is a lot of theinvestment analysts have concluded that there is a need for more production andit will be at a higher price. It has to be because of the economics of the newproduction facilities. The WNA, without talking the economic side, is saying, y’es,there is a need for more investments in the fuel cycle and particularly uranium’.So now everyone is saying the same thing. Now the contrarian would say, ‘well,now it's time to look over the other direction’. I think one thing that wasbrought out in the WNA Fuel Report is the demand forecast. Recently the WNA hada low-case which had demand eventually dropping off. Well, now even the low-caseis a positive I think it’s 0.1% growth. But it's not a drop off. So, across thethree cases, the reference case is about 2% growth per year and the higher oneis 3.5%

Matthew Gordon: How did that how didthey marry this up with the supply case? Most companies will overstate, will bea little bit hopeful about what they're going to be capable of doing, but theyare restricted by a number of factors.

Dustin Garrow: I think what what's another importantthing is there's more judgment being put into the WNA Fuel Report. In otherwords, you can take the public statements of all these companies and say, ‘well,his history suggests that it's going to take longer, it's going to be slower’,or whatever and more of that's going in the report.

Matthew Gordon: That's great news.

Dustin Garrow: So, it's not like, ‘oh, no, you'vegot to say just public information’. So, there's some judgment that goes intoit from people…Frank Haney, who ran the working group. He's retiring next yearafter 50 years in the industry. So, we have some long beards involved.

Matthew Gordon: So that's the WNAFuel Report. Generally, very positively received. It's certainly an upgradefrom where it’s been, a lot of hard work gone into it and a lot more realism. Let'stalk about mood. I've been speaking to people and I'd say the general mood ispositive, without necessarily being certain. It's better than it was 6 monthsago when we first started discovering the world of uranium. I've had somefantastically wide-ranging views on when price discovery happens from 3 monthsthrough to 18 months. Now everyone's got a different business model, andeveryone has different needs. But the people sitting in the middle are thinkingmaybe it's going to happen next year. What are you hearing?

Dustin Garrow: I thought it was interesting that atthe WNA symposium I think there were ten or twelve investment groupsrepresented. We've never had that before. We've had maybe 2 or 3.

Matthew Gordon: And these aregeneralists?

Dustin Garrow: These are these are the guys thatare either going to buy physical or buy inequities. They're the guys that aregoing to put the money up for the industry. And someone said last night at adinner I attended… when you've been around in this business so long, you walkin a room and you sense the mood, and it is on that positive side by theproducers, either real or those that plan to come into production. The meetingsthat I've had outside of this symposium had been very positive. It's not, ‘oh,well, what about the Japanese? They're never going to’…It's more like, ‘I'm onboard now. When is it going to happen?’. The Section 232 in the United States… wehad the July 12th memorandum from the President, which some people interpretedas, he had no interest in helping the domestic industry. But if you read hisstatement, it was ‘at this time’. And now the 90 Day Working Group will comeout with some kind of remedy. But it will be uranium conversion, enrichment andprobably be pretty neutral regarding the utilities. What's going to be theirexposure? But the point being, it's not going to affect the general market.It'll be kind of played out in support of the US government. But I think someof the utilities, particularly in the US, have the big unfilled needs, aresaying, ‘well, I still don't know what's going to come out’. We'll have thatanswer by mid-October. And then I think that they'll start making theirprocurement decisions.

Matthew Gordon: We've had similarconversations. I think quotas, tariffs, subsidies. No-one knows.

Dustin Garrow: I think that’s all off the table. Therewill be some form of government support just directly. It won't limit importsof other origins or anything like that.

Matthew Gordon: Let's step back andsee what happens there. But I think that's going to be very interesting,obviously, for the US uranium companies. One of yours, Energy Fuels, obviouslywaiting to see what's happening there.

Dustin Garrow: I think that activity in the term-marketis what's going to help raise the spot price. So, it's not going to be the spotprice goes up and then there's term activity. The utilities are already doingtheir due diligence. They're contacting suppliers. How much have you got? Whattimeframe? What kind of pricing are you looking for? That's a precursor forthem coming out. And like one of the US utilities was just in the long-termmarket, 2021-2025… So, again, they're starting the process that they've not beenwilling to do because of the price differentials for a number of years.

Matthew Gordon: So, you were at the EightCapital dinner last night. What were you hearing? What were the questions thatare being asked?

Dustin Garrow: Well, no one's saying, ‘well, is theprice going to drop?’. What are the factors that are going to move it up andwhen do we see those asserting themselves? Now, some of us, we are die hardoptimists. We could start to see it before the end of the year. But I think byfirst quarter, keep in mind, there's a big conference in Nashville at the endof October, where there's only like 3 US utilities here. They'll all be in Nashville;the producers will be there. I think there'll be much more discussion becausewe'll know what the working group recommendation is or outcome. So, we couldsee some of them will say, ‘well, I'm going to get out there now. I'm not goingto wait’. And we could start to see an uptick in term-contracts.

Matthew Gordon: Based on yourassertion that you think it's pretty soon, a lot of companies are going to likethat news. Not saying it’s going to happen, just that they’re going to likeyour view. If that doesn't happen… we've been speaking to a few people andwe’ve been interviewing a few people. So, we've got a broad sense of what'shappening with it with a junior uranium space. A lot of them are needing toraise capital to keep going. They may get to the end of the year, but that'sit. Do you feel that the funds or the institutions that you're talking to areready to have those conversations with these juniors or are they going tostruggle?

Dustin Garrow: I think some, because they have agood business plan, good projects, they'll be able to maybe live on the dripfor a while. They're not going to get that big multi $100M financing donewithout term-contracts. I think they may be optimistic on how long that takes. It’snot that the price goes up, the next day the phone rings and all the utilitiessign big contracts and by the end of the week away you go. It can take monthsand months. And at some point, the Cameco’s enter the market. And at somepoint, you're going to see a lot of activity once you get to a certain degree.

Matthew Gordon: That's great sayingthat because I think if I look at the retail following that we've got withinuranium. Very passionate, very optimistic and patient group of people, veryknowledgeable too. But they shouldn't expect an immediate pop in price. There’llbe a gradual escalation on price. Is that what you’re saying? That could be aswell as long as 12 months before it gets to where it needs to be? When does itget to $50?

Dustin Garrow: Well the term-price at $30 we could see$40 very quickly, because I think that's the next plateau. A bit of contractingby some, then another pop up to $50. Well, how long does that take? Are wedictated to by the utilities when they come on the market? So, yes, by sometime. First half of next year should you see a lot of term-contractingactivity. And it'll affect the spot-price. I think we're within a 6-monthwindow.

Matthew Gordon: I’m going to go backto my institutional days. I'm looking at price, if it hits $40. Most of thesecompanies are still under water at $50-$55. So, in a meaningful way, it doesn'tmatter if it is $20 or $40, but for the funds, if they see contracts in place,they have security. They still have to take a guess on what the future holds. Andthat the company can get product to the utilities. They're got to say this willget to $55. That's only break even for some of these companies. Some thesecompanies need to make more than that to be able to pay back anything they haveborrowed. So, there's still a lot of uncertainty in terms of ability to raisecapital. Is there not, at this point?

Dustin Garrow: Yes. That's why some of them are outmeeting, a lot of meetings, a lot of discussions and preparation for them. Thenyou go out and you do your whatever amount of term-contracting. I think thefinancing is available, but with the right conditions.

Matthew Gordon. We've been meetingand talking to a lot of the funds and institutions, and they're generalistswho, as you say, are coming back in and having a look at what's going on. They'rehaving to get back up to speed, to understand what's happening in the market,and they've going to take a view on what the future looks like. But, yes, Ithink the money is there, under the right conditionas. But that is going tocome down to 2 quite important things that I've discovered in the past 6months, management teams who have produced uranium and got it into market. Notmany of them, right? And then, of course, the basic fundamentals of mining, isthis a good asset? Can you get it out of the ground, let alone get it intomarket?

Dustin Garrow: Well, as you know, we're having morespecific questions. In other words, will a rising tide lift all boats? I thinksome of the investors that have either been in the space or more sophisticated,whatever, are saying, well, now of this group of companies, where should Iplace my funds? I think probably the primary question that I'm getting back is,‘I’m on board, I think it’s great, next year. But where do I place my funds?’And part of it is, like you say, management teams, the experience. And that'shard to come by these days. Very difficult. There’s just not many veteransleft. And uranium is a unique commodity because of the political, social issuessurrounding it.

Matthew Gordon: I've been calling it inthe past few days ‘Mining +’. Mining's hard enough. Then you have the uraniumcomponent, which is a political hot bed. And some of those geopoliticalconcerns. But without getting at the macro, we all agree that the generalconsensus is it's positive, a huge infrastructure needs filling. But if we comeback to the management team. There's about 50-55 companies in the uranium spaceat the moment. As the market recovers, you're going to have new entrants comingin. It's hard to imagine that any of them are going to have relevant uraniumexperience.

Dustin Garrow: It will be difficult.

Matthew Gordon: So, again, for our Subscribers,that's something that they need to consider when making an investment decision.A new story doesn't necessarily equate to capital appreciation, because these newentrants are unlikely to get into production with new management teams with noexperience. Not impossible, just unlikely.

Dustin Garrow: During the last uplift, there werelike 400 / 500 companies. I was at PDAC and everybody was tacking up a sign. ‘Wealso do uranium’, on top of everything else. And geologists with some drilllogs they were they were getting funded. I think this time around it will bemore difficult, because the questions will be asked, ‘who is behind it?’, pealit to the next layer and. And who's going to do this? I want names. And that'sgoing to be a difficult part of the equation for some of the companies toconvince funds. And it goes into the term-contracting. The utilities will say, ‘I'lldo a 200,000lbs /300,000lbs contract. I'm not going to do 500,000lbs. I don'tknow you guys. I don't know your project. It's not built. So, I'm going to becautious’. So, that means junior companies have to even do more contracts thanmaybe an established producer, of which there aren’t many left.

Matthew Gordon: Yes. A few thingsgoing on there. If you don't have anyone who's produced or been involved withproducing uranium before, as an investor, you've got to think twice becauseit's complex. It is not just drilling holes in the ground, finding it, diggingit. It's not that simple. There's what happens afterwards. The bit that you'vegot a huge track record on was, I’m not selling you by the way… I’m just referencingthat you have huge experience in this, the contract side of things. That's noteasy because, time comes into this. There are buying cycles. Term-contracts are5, 7 years, aren’t they?

Dustin Garrow: They come in cycles. And just as aquick side note, when we did the bankable contracts for Langer Heinrich, thebanks laid out very specific requirements. How much volume? At what price? Overso many years. So, we had to then construct a contracting plan that met allthose needs. And sometimes you have holes and the banks go ‘fill the holebefore I'm going to press that release of funds’. So, there's more to it thanlike I said, the phone rings and you pass around contracts and you're done.Won't happen that way. It's not to say these other companies can't besuccessful. It just may take a bit more time. They may have to be more flexiblein contracting.

Matthew Gordon: I think the phrase Iheard yesterday was that ‘they don't know what they don't know’.

Dustin Garrow: And it’ll come to their front door.

Matthew Gordon: And that takes time.And that takes money. And sometimes they can't fix it. So, a lot of things tobe cautious of as an investor in the uranium space, unless you get a team that’sbeen there, done it before. I think that's important because a lot of people,generalists, I'm not talking about the wonderful uranium crowd that have beenin there through thick and thin over the last two years. I'm talking aboutgeneralists coming back home when uranium does kickback, will need to understandthat. It's not a case of all boats float on a high tide. I fundamentallydisagree with that statement. I think all boats float for a while. And then theinevitable happens, they sink. So that's great if you get it on the way up. Butif you're if you're left on the boat, you're in trouble.

Dustin Garrow: TradeTech, one of the two long timeindustry consulting firms has just put out a study on production. And it goesbeyond, ‘well, here are the costs’. They look at full cost because a newproject’s not going to be built on cash costs only, but then they try to lookat what are the impediments? What about the secondary licensing? What about themine plans? What about contract? Have they gone out and approached the market?Are they ready to do that? So, it's kind of a guideline, a cookbook, to look atand go, ‘well, you know, just because you've got the best technical project,you may not be in the first mover group. You may not veto the third’, becauseof where the projects located for a number of reasons. So, the industry istrying to help some of the consulting firms in that regard.

Matthew Gordon: But that's fine forpeople like you and me. We can afford that report. I saw it yesterday. Greatreport. And we can interpret that and extrapolate what we want from that forretail, family office, high net worth. They’re not going pay for that report. Theydon't have access to that. They're going to have to trust the information thatthey've got access to. And that's why I’m interested in talking to people likeyou, you've been around the block a few times. You've seen a few cycles, influencerswho understand what's going on in the uranium space. But it can also help bringto light some of these issues. What the company says and what the company iscapable doing are sometimes polar opposites. They're very far apart and that'sthe difference between making money and losing money. And that’s important.This is investor’s money. That's what I care about.

Dustin Garrow: I think money will be made in thisspace again. I think it will probably be on a more selective basis.

Matthew Gordon: Pick the right team.The right boat.

Dustin Garrow: Yes. And a lot of it's the rightteam that can get things done.

Matthew Gordon: Are you seeing anygood stories out there? Over the past 2-3 days and over the past six month I'veheard different business models and I don't mean physical or ETFs or equities. Ijust mean companies which are up or coming at it in a different way, whichmakes sense, or companies which have got all the fundamentals in place. Whattype of company would you invest in? Or advocate in investing in?

Dustin Garrow: I think you've hit the high points, thosethat can demonstrate some experience in the commodity and mining in general.That always helps. If they're not totally cash starved at the moment, that's aplus. It gives them a little more breathing room so they can go out and meetwith utilities and lay the groundwork. And if it's like, ‘well we can't go out,we can't talk to anybody, we don't have any money’, then it'll be tough for theutilities to put you on their supplier list. When they don't see you and youmay have the best widget, but they can't see it. The utilities need yellow cakein the can. They aren't that interested in your share price. They can't stuffshares or certificates in their reactor. They want to make sure in 2023 on June1st you're going to deliver that 100,000lbs, because they work it into theirfuel plan. So that's what they're after. And so it goes beyond just theinvestor side. You've got to convince the customers that you've got credibility,particularly with new projects. If you're a new person on the block it's it canbe a challenge.

Matthew Gordon: I just talked aboutsomething which was buying physical uranium. There's a company in the UK calledYellow Cake. You've got one in North America which is called Uranium ParticipationCorporation (UPC). How does that work? What is buying physical uranium?

Dustin Garrow: There's really more than one modeland I'll talk UPC, Yellow Cake. They're being characterized as sequesters ofthe uranium. UPC has held their inventory for 15 years. And Yellow Cake, thebusiness model, as you know, I'm chief commercial officer for Yellow Cake. Isto accumulate that inventory at good acquisition cost. The current 9.4Mlbs weacquired at under $22. Buy it and hold it for an extended period, add to itwhen the stars are aligned correctly to where we go out and raise money, buymore. We've got the option with the Kazakhs. And it's an investment that the investor can make up abet on the market. In other words, ‘I think it's going to keep going up. I willaccumulate shares’. At some point they may say it's $45-50, could come off.Then they'll take a different decision. But it's basically that store of valuethat they can make decisions on.

Matthew Gordon: And it's based purelyon the price of uranium spot that that day. ‘I bought it $25, it’s now at $40,I'm checking out’, because it just happens to be in the form of shares. You’re buyingand selling physical product.

Dustin Garrow: But the material doesn't like come inthe market. Now there's a different group, which there’s 6, 8, 10 investorsthat have bought physical. Now that means they hold the U308 at a conversionfacility. They come in, they add to that when they think the price is going up.And at some point, I think when they say, ‘well, OK, I've doubled my money insix months and I'll sell some of it off’. I think that happened earlier thisyear. So, that’s a different model.

Matthew Gordon: One is physicallyselling off, but that's a group of institutional guys, presumably. The firstone you described was there's an inventory sitting there. So, you can you canbuy shares in that. It will continue to sit there. And once you want to sellyour share, you can sell it someone else. But the uranium still remains there. It’snot going into the market per se. It's a security.

Dustin Garrow: Yes, it's a lot easier than if youbuy physical because then you get into the storage accounts. There's fees,there's all kinds of things. Not to say that's a bad part of a three-leggedstool, but it's different. And I know the analysts are really struggling with ‘howdo you model that?’. Cameco has mentioned it on their calls. But apparentlylate last year, that group bought 8-10Mlbs. Could have been more, could havebeen less. And I’m asked how and when will they sell? At what price? Some mightsell at $35. They go, ‘hey, I bought it at $25 I’ll sell it’. That's a greatdeal, I’ll go do something else. Others may say this thing's rate going upquickly. I'll hold to $50. They may sell at $35 and come back at $40. So, it'sa growing part of the spot market that to some degree you can’t model. It'slike, ‘well, how do we model this? We know what the utilities are going to do.We know the producer buying’. I contend you can't model it. If it was oneperson you go, well, I can kind of figure out what they're doing, but it's nowa diverse group all over the world. South America. Australia. North America.

Matthew Gordon: Right, so if I’mlooking at something like Yellow Cake. You buy at $22. If the price goes down. There’snothing you can do about that. So, the value of what you bought is less thanwhat you paid for it. But your expectation by investors buying shares is thatit's going to go up. So, there's no equity risk per se, it’s just purely on theproducts above the ground sitting in containers, Cameco’s facility or wherever it’sheld. Whereas equities, a bit more exposure to all the risks below the groundand management decision making and availability of cash. So, it's just adifferent risk profile.

Dustin Garrow: So, it allows you to participate inthe uranium space by either Yellow Cake, UPC or physical. I understand one ofthe large banks that's been involved in buying physical has been providing thatservice. You don't have to get a supplier or storage agreement. We'll do it underours. So, there's the entrepreneurial side of that, for a fee. So, then thattakes some of the goodness out of it. And then it’s the equities. Everybodysays, well I'm going to buy Cameco. Well yes. They're a fundamental part of thebusiness. But actually their upsides are limited by ceiling prices and definedprice contracts. So, if the price goes to above $100, if you look at theirsensitivity table, they start to hit a ceiling. Now, on the downside, theydon't go down below about $30. So, they've got a collar. And that's part oftheir business model. I'm not sure everybody looks at that. They think, well,if the price goes to $200 it great but in reality Cameco will hit their ceiling.

Matthew Gordon: It's also not goodbecause there will be a lot of entrants, new entrants in at that point.

Dustin Garrow: I mean but then the differentstrategy, different risk.

Matthew Gordon: So, to finish off becauseI know you've got places to be, you’re meeting lots of people today. You thinkuranium people should be looking at it, should be considering as part of theirinvestment portfolio. General consensus is quite positive.

Dustin Garrow: Yes. More and more people arelooking. I did a roadshow in April with yellowcake and it was mostly NorthAmerica. And certainly, we did Boston, New York, but out on the West Coast. LosAngeles. San Diego. So, we see a broader spectrum of interest. And I think it'swaiting on the Section 232 though, we don't know what that kind of means. Butonce the green light goes, even if it's a pale green. I think there's going tobe a lot of investment.

Matthew Gordon: People will bewaiting until then, I think generalists are waiting till then, see what thatoutcome is, whatever it is, some degree of certainty about how to move forward.

Dustin Garrow: Figure out what does it mean and thenthe utilities will react so you'll see that term market start to pick up.

Matthew Gordon: Dustin. Good to seeyou face to face here in London. Enjoy the rest of your time here. I thinkyou're diving on aeroplane tomorrow. We’ll catch up hopefully in October.


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