Financial carry trade uranium deals still offer the cheapest supply source for nuclear utilities in 2019-2022.
Paladin CEO Alexander Molyneux said last week that such contracts “remain the most competitive source of supply” for uranium fuel buyers, despite indications from the U.S. Federal Reserve that interest rates will rise four times this year for the dollar.
Molyneux explained that although forward price curve have steepened in response, “forward price indicators remain at levels below the majority of miners’ cost of production and, as such, are yet to offer incentives for producers to commit to new long-term supply transactions.”
The observation suggests that enough inventory is right now available, at spot, to compel intermediaries in the uranium market to stay active and find arbitrage opportunities.
For a firm that needs much, much higher spot prices to have a shot at staying a going concern—despite fighting off bankruptcy and successfully re-listing on the Australian Stock Exchange in February—today’s market dynamic can’t be good.
As part of the restructuring, Paladin transferred 98% of the company’s issued shares to a group of creditor bondholders and conducted a $115 million capital raise through the issue of new 2023 secured notes, a transaction resulted in $36.9 million in net proceeds.
Unlike its peers, Paladin does not have the flexibility to use purchased pounds to meet delivery obligations. Its contracts are unhedged and TradeTech’s April 13 spot price indicator stood at $20.50 per pound U3O8,
By contrast, Peninsula has been able to take advantage of cheap uranium, delivering spot material into long-term contracts at an averages sale price of $51-53 per pound until 2030.
Ur-Energy, likewise, has adopted a strategy for 2018 that has it building a 250,000-350,000 pound inventory from existing production and buying at $24 under spot deals to deliver 460,000 pounds into long-term contracts valued at roughly $49 per pound.
Even Cameco, which holds a contract portfolio comprised of a 40:60 mix of fixed price and spot-related pricing, halted production at McArthur River in January, opting to meet deliveries with pounds from Cigar Lake, inventory, existing purchase contracts and opportunistic buying.
Langer Heinrich C1 Cash Costs Jump 42%
According to the first half financial report for its fiscal 2018 year, Paladin is solvent. Now, however, with the release of an April 18 activities report for the March quarter, the outlook is shaky. Key performance metrics at the Langer Heinrich mine in Namibia nose dived from December.
The stockpile of medium-grade ore used as process feed since mining was curtailed at Langer Heinrich in 2016 will run out in mid-2019.
The firm told the market in late Februarythat it faces what could be a make-or-break decision by the end of calendar 2018. Does it resume mining, start to use low-grade stockpiled ore or put the operation on care and maintenance?
All three options depend on spot prices, as the firm’s order book of long-term contracts uses market related pricing.
The firm’s C1 cash costs, at a shocking $29.82 per pound U3O8, exceeded its average sales price of $22.16 per pound by almost $8, the result of technical problems at the Namibian asset’s processing plant.
That’s 32% higher than the previous quarter and a staggering 42% higher than a year ago. It should come as no surprise that production, ore milled and grade likewise dropped compared to last quarter and 2017, respectively.
Although gross revenue of $12.4 million on deliveries of 560,000 pounds U3O8 was 55% below the December quarter, the number is misleading.
Paladin has been building inventory for a delivery this month to China National Nuclear Corp., which owns a 25% equity interest in Langer, and higher sales in the range of 1.1 million pounds to 1.2 million pounds are except in the June quarter.
Cash and cash equivalents stood at $50.5 million on March 31.
Technical Problems Besiege Operations
A cascade of technical problems besieged Langer Heinrich, which had seen steadily improving operations since the innovative Bicarbonate Recovery Plant was built in 2015.
The lower tons, Paladin said, were exacerbated by a Namibia Water Corp. decision to restrict water supply because of high sulfur levels contaminating the sea water feed stream to the desalination reverse osmosis plant.
The firm explained that the ongoing issues are impacting plant throughput and efficiency. Blending ore to minimize the effects “is difficult due to limited ore sources.”
The introduction of a revised control strategy has stabilized the counter current decantation circuit, but the full benefits have not been realized due to poor settling of the solids.
Challenges with resin movement due to contamination in the resin slightly improved NIMCIX performance. Plans are in place to replace the resin in the next financial year.
The Bicarbonate Recovery Plant continues to operate successfully with bicarbonate recovery slightly below design specifications for the plant.
The firm said initiatives to minimize metal recycle from the precipitation area are complete and a reduction has been observed in bicarbonate consumption.