Price pressure on Gupta uranium mine
Uranium prices are in the doldrums, the metal is in oversupply, and some experts say the global nuclear industry is in decline and South Africa’s plans won’t be realised soon.
Yet the Industrial Development Corporation (IDC) saw fit to fund to the tune of R250-million the Gupta-owned Oakbay Resources and Energy’s acquisition of a uranium mine with a life expectancy of just 16 years.
In 2010, Oakbay obtained a 74% interest in Uranium One Africa, a subsidiary of Uranium One, and renamed it Shiva. This was financed largely by the loan from the IDC, which is mandated to contribute to economic growth. It says the decision was made on commercial grounds.
The success of the investment is not dependent on the roll-out of South Africa’s mooted nuclear build programme.
Oakbay says it does not foresee that the programme will be operational before the life of the mine ends.
The IDC also says the case for the investment was not based on the country’s nuclear procurement programme.
Since the mine was bought, the uranium price has fallen.
“I think it’s naive to be too bullish on uranium,” said Peter Major, the director of mining at Cadiz Corporate Solutions.
Yet, he said the weak rand had helped all local mines.
The only asset in Oakbay Resources and Energy at the time of the loan was the mine. The IDC loan covered 67% of the purchase price plus transaction costs, totalling R375-million.
The interest accrued on the loan, another R256-million, was converted into a 3.75% stake in Oakbay Resources and Energy. With a high market cap of R8-billion – and the mine as the only underlying asset at the time – this stake was worth R300-million, and is now valued at R630-million.
Although R120-million of the original loan amount is still owed, the IDC said the outstanding capital is secured by the assets of Oakbay, which had a historical cost of about R7.5-billion, according to the audited financial statement of 2013. The company was sold to Oakbay for a mere R311-million, excluding transaction costs at the time.
The Gupta family’s relationship with the government, and with President Jacob Zuma in particular, has come under scrutiny recently, culminating in the deputy finance minister, Mcebisi Jonas, revealing the family had offered him the post of finance minister. This was one of several similar allegations by current and former government officials about the family’s influence.
At the weekend, the ANC’s national executive committee discussed these serious allegations. It urged all members with information to approach the secretary general’s office.
The IDC said the controversy has not changed its view on its Oakbay investment. The depletion of global coal reserves and a global move towards “cleaner” energy means uranium is becoming an important strategic commodity, it said.
The size of the Shiva resource has the potential for the development of a significant uranium operation and to create a significant amount of employment. “It was projected that, when the mine achieves its steady-state production levels, 4 500 employment opportunities would be created.”
The mine has so far created 800 jobs. It now needs between R800-million and R1-billion to bring optimum uranium production on line. The company intends to raise capital from local and foreign investors.
The IDC says a bankable feasibility study was prepared by consultants and was made available to the corporation for review. The study was in respect of an underground uranium mine with an associated processing plant producing U308, or yellow cake (a powdered uranium oxide that is used to make nuclear fuel), as its primary product and a smaller amount of gold as a by-product.
The study was also reviewed by international independent consultants appointed by the IDC. The consultants’ report concluded that the project was technically viable and that no fatal flaws had been identified, the IDC said.
The company’s market capitalisation would seem to be inflated and is questioned in media reports.
But IDC said it got a good deal by buying the stake at a 10% discount, and does not believe the share price was overvalued at the time of listing.
At the time, the market cap of R8-billion at R10 a share received an unmodified opinion – indicating fair value – from KPMG, Oakbay’s auditors. The company currently trades at R21 a share and has a market cap of R16.8-billion.
In Oakbay Resources and Energy’s 2015 annual report, it said it had commissioned a bankable feasibility study for uranium production to be completed in 2016.
According to its 2014 pre-listing statement, Oakbay said industry experts projected that the demand for uranium would grow significantly over the next decade.
“The current annual global consumption is 190-million pounds, while annual global mine production is 140-million pounds, resulting in a 50-million pound deficit,” the statement said. “Currently, there are 439 operating nuclear power plants in the world and 62 are under construction. In addition, there are at least 465 further nuclear power plants which are either in the planning or proposal stage.”
But a Fitch special report, published in January, said an oversupply continued to exert pressure on spot uranium prices. “The excess inventory comes from several sources, such as higher-than-usual uranium stocks that utilities have accumulated since 2011 on lower prices and lower Japanese off-take. These factors are likely to continue to weigh on the spot uranium market until 2020, and perhaps longer.”
The World Nuclear Industry 2015 status report said the nuclear industry remains in decline, with the 391 operating reactors being 47 fewer than the 2002 peak of 438.
After the Three Mile Island (1979) and Chernobyl (1986) nuclear accidents, the uranium price fell constantly until 2002 when the world experienced a large growth spurt.
“China comes out of nowhere, oil, coal and gas prices are shooting up, and all of a sudden uranium looks very attractive again. Word was it was now much safer, more efficient and much more environmentally friendly than all the other conventional energies,” said Major.
“But then we seem to have a replay all over again with uranium prices peaking at $140 a pound in 2008, followed by the Fukashima disaster, followed by a huge fall in all commodity and energy prices. Déjà vu.”
From 1981 to 2004, almost no new uranium mines were opened or processing plants built. And the thousands of tonnes of stockpiles, mainly nuclear missiles, flowing on to the market in that time are now drying up, said Major
This led to a spike in the uranium price in 2007, when it touched the $140 to $150 a pound mark. But then came another “perfect storm”, following the 2008 financial crisis.
Oakbay’s chief executive, Varun Gupta, told the Financial Mail in November last year, when the spot price reached $35 a pound, that he anticipated a 35% to 40% uranium price increase in the next two years.
The uranium (U308) price, according to leading nuclear consultants UxC, is currently $30 a pound. It was $60 a pound when Oakbay bought the mine in 2010, and when the feasibility study was done.
Although the comfortable price is different for each uranium producer, “a few years ago, a number of producers felt that $55 a pound was a comfortable price level”, said Maxim Edelson, the senior director of Fitch Ratings. But for the Fitch-rated low-cost producers, JSC National Atomic Company Kazatomprom and Uranium One Inc, comfortable prices are above $35 to $40 a pound.
When Oakbay bought the Dominion uranium mine from Uranium One, it was a good deal, said Major. The mine could almost break even just on the gold price, he said. The rand subsequently weakened and the gold price shot up but the uranium price has fallen about 40% since then.
“But with Shiva’s value being written down today in Oakbay’s balance sheet, it is probably inevitable to some degree they will have to show some kind of loss. You have to keep the assets’ carrying cost in line with the environment and market conditions of the day.”
Shiva is largely just running the gold plant and would currently need to mine a lot of uranium to run the plant economically. “Still, with the protection of the weak rand, a uranium mine in South Africa should be able to make a buck at even these low current dollar prices,” Major said.
“Uranium faces competition from other power-generating technologies, with an increasing share of renewables in the global mix, especially in the long term,” said Edelson.
“For example, the capex for wind and solar power stations between 2015 and 2040 is estimated at $4.5-trillion, while nuclear power capex is estimated at only $1.5-trillion … Uranium is, however, likely to continue to underpin the base-load electricity demand,” he said.
The Nuclear Energy Corporation of South Africa has said it is considering resuming uranium enrichment at its Pelindaba nuclear research centre.The notion of making fuel rods in South Africa – with the intense regulation and all the safeguards and costs that come with it – is crazy, Major said. “What you do is mine it here, turn it into yellow cake and then send it to the experts for conversion into fuel rods.”
Given that there is no shortage of uranium on the market, enrichment technologies are closely protected, said Edelson.