The Uranium Deal 10 Years in the Making (Brandon Munro)

The Chinese state apparatus is not going to put themselves at risk of investing hundreds of billions of dollars going from 2% of their grid being nuclear to something more like 15 or 20% of their grid if they don't have 100 years of uranium to make sure that they're not going to get screwed by the rest of the world.

Yeah, it's great to be on the podcast. Back in those days, 2019, uranium spot price would have been below $30.

It's come a long way.

Yeah, it sure has. Those were the days when we were deep in the shadow of Fukushima. And it wasn't just the fact that the commodity itself was going through a cyclical downturn, it was that there's so many cycles in this sector that in a downturn become a reinforcing vicious cycle. Now what's really interesting and the reason I'm quite a fan of this history from that era is because those cycles in most cases they reverse and they become virtuous cycles. So the perfect example is the contracting from Fukushima because the producers were all contracted and therefore protected from declining prices. They just kept pushing the material out. It was really only the beginning of 2017 when Kazatomprom eased back a little bit on the pedal. They didn't have that kind of contract protection. And then 2018 is when Cameco started making changes to their supply. But really all that did was that just elongated the impacts of Fukushima. So a demand event became a demand and a supply event because there was no appropriate supply response because everyone who was producing was either protected or they were Kazakh.

And it was a wild move for Cameco in those days because of that contract protection, they were able to buy in the spot price, deliver into their contracts, and make better money than they could depleting the mine.

That only works for a period of time.

And now that's literally happening in reverse now before our eyes. So that supply response has now gone 180. But we've still got the suppression in place because of that lack of investment over that entire period.

It became Etango-8 because we made it smaller. So, in our defense, and it's a fair poke, but in our defense, we really changed the mine plan and the whole development pathway. It was an enormous development, 20 million tons per annum throughput, moving 85 million tons per annum of dirt. Now for an open pit mine that's not just iron ore stripping, that's pretty big internationally. Namibia does open pit really well. So it is the right environment to tackle a project like that. That looked great before Fukushima. The world was crying out for uranium. We were going to produce 7.2 million pounds per annum that was going to easily find a home. And then Fukushima happened. So the company produced and updated DFS, one of them in 2015. And then it was shortly after that that I came into the company. And really one of the breakthroughs that we had in that period was defying the advice of the mining engineers who told me if you want to make it cheaper, you go bigger still. And we did work out that we could make it smaller and make it modular. And the Etango-8 is because we decreased the initial development pathway from 20 million tons per annum to 8 million tons per annum.

Yeah, thanks. Look, we're absolutely delighted with the deal, and it won't surprise you to know that we've had a bit of time to think about these things. As part of our corporate strategy, really, we've been considering amongst all of the various constraints how to develop this asset as a single asset developer. For most of that journey, the capex well exceeded our own market capitalization. And if I put that in context, the original development capex with the larger project was 873 million US. Now when I came in as CEO, we were a $20 million company. So there weren't too many options in those days, but things started to pick up and the first step on that journey was we engaged some debt advisers out of Sydney and we spent a year with them really understanding what does a conventional project financing syndicated debt facility look like? Where are the disadvantages for us? Where is it going to make it hard slash impossible realistically for a single asset developer to get started? Now that was more than 3 years ago and that heavily informed our thinking. Some of the aspects of this business that we knew were hard, we knew were challenging, just came screaming home to bite us when we started to get this analysis done. So you mentioned $45, which is what found its way into many of the long-term average price targets. The problem is in those days a banking syndicate, just by the nature of the way they finance things, there's a heavy recency bias and a heavy regression aspect to how they price everything. So anything that's not sold they would put in at best $45 and that's assuming they haven't got a look back over the last 5 years that would have averaged at more like 32, 33.

So the first thing is it confirmed what we suspected, which to go to a traditional syndicated finance you've got to be heavily contracted. And we understood at that point that the market was still some way off producing the type of market signals that would help us there. But we also went deep into what covenants would look like. How that would affect many of the aspects that have really gained prominence as advantages to this deal that we've just signed, such as working capital and how you interact between maintaining financing covenants when you've got a huge working capital draw because of the way that deliveries work in our sector and how much flexibility the customers have got as to when they can ask for the product and when they have to pay for the product. So that was step one. That was a year's worth of work. We also took the chance to use that time to do a gap analysis of not only the nine studies but also where we're at from an ESG point of view. The original permitting for this project had all been done according to Equator Principles, but they'd moved on since then. So there was a fair bit of infilling that was very valuable for us.

This process itself started a bit more than two years ago and the market at that point hadn't really matured enough for us to want to have strategic financing conversations. There just wasn't enough tension. We didn't like where the price was at that point. But we were starting to field enough inbound inquiries, I suppose, inbound interest, that we decided to formalize a process, recognizing that if we were going to deal with the preferred partners, which weren't only Chinese but they tend to be sovereigns or SOEs around the world because of the nature of our industry, it's always going to take time. So we formalized that a bit more than two years ago, engaged Azur and Vermillion Partners via Natixis, which has got a strong French presence, and between that organization they gave us coverage in everywhere except Russia. And that's when we started working more earnestly on what would a strategic financing ultimately look like. And then a little bit later in that process we then started to firm up on a debt alternative. It wasn't a typical syndicated finance for the reasons that I described, but we went to a very credible, very experienced resource debt provider who had the most sophisticated view on the uranium sector that we'd come across. And therefore, they weren't going to start dumping $45 into their model for anything that was unsold. And what we came up with there was a structurally very attractive debt alternative because it gave us a lot of flexibility. We could lock in the debt facility without having any minimum levels of contracting and then they would exist basically as covenants as we started to draw on the debt. And given you've got to spend your equity first, that would have given us the time and the flexibility to then fold in contracts without being under duress. So that was a well-formed alternative and that gave us the ability as the NBOs started to come in from various parties and as we developed a clear sense of what was available to us in the strategic financing, we were able to quite accurately compare it against what does a debt and equity scenario look like to develop the asset in that way.

Yeah. I mean, in Namibia, you have a number of the majors in there. There's two different Chinese utilities. The French are in there via Orano. We've seen Paladin being able to equity fund now. That wasn't entirely dissimilar when they did that in 2004, 2005 to where we find ourselves. The one boundary condition that we put on this financing is it just wasn't tenable for various reasons to partner with Russian entities. But they are in Namibia. So Namibia is very open to the entire geopolitical spectrum. It's really just your pariah states like Iran and North Korea that they can't deal with. So that does open it up. The other thing is not in uranium, but in phosphate and other minerals. We've seen Middle Eastern investment into Namibia, which as you can imagine the way nuclear progressing in the Emirates and the way that the Saudis are talking about nuclear, that's also an area that they will be investing in going forward.

Correct. Yeah.

Yeah. You've basically unpicked the magic in this deal. It's because our partner CNNC is a 45% joint venture holder in the JV Co., there is another 5% that's a local Namibian partner. So hence the read-through that you talked about before. So because they're a 45% holder, they've been willing to grant the JV an extraordinary level of flexibility in this offtake. And as a result of that, we were happy to make it 60% disproportionate to their 45% ownership. And frankly, most companies would be happy to make it 100%. In our case, we wanted diversification for obvious reasons given where geopolitics is at the moment, but also we wanted to build a broader uranium business. And that's where the 40% that's not sold to CNNC group, that's where that becomes really important for us. But you touched on...

We don't want to be a single asset producer forever. We've got a broader strategy. We've got some very good capability in the organization. We have executed a corporate strategy where patience has, I think, been rewarded and has certainly produced appropriate shareholder returns. But with our primary asset financed soon upon completion and then into construction with a relatively low risk operation and profile, that puts us in great shape to build our business further. Now there aren't many companies in the world who market uranium. It's a very concentrated sector. So to have a full-scale marketing capability coupled with some of the smarts that we believe we have, that puts us in a really strong position to partner with further assets, to develop other assets, other forms of corporate activity, and you only have that value in your business if you own those customer relationships. So it...

It needs to be us, not the JV Co. Of course, we're doing it for the benefit of the JV Co. and it gives us a variety of alternatives. If we really like where we're seeing uranium prices in a year's time, then we'll start fixing some of those using some of that 40%, given we've got so much at-market exposure via the 60%. But it's this total control and some really strong ring-fencing, confidentiality and so on inside Bannerman that enables us to effectively have that 40% attributable portfolio that we can market.

We tested that a lot. We tested it with investors. We tested the concept more broadly with customers. It was well known that we're in a strategic financing process. And to your earlier comment, Trav, you only need one hand to come up with the obvious contenders being in Namibia. And because it's not majority owned by a Chinese entity, our feedback so far is the utilities are comfortable. Now, we've got some work to do to demonstrate just how thorough that ring-fencing is. In many respects, they're competitors. So there was a lot of attention during the negotiations paid to ensuring the integrity of those confidentiality arrangements and those ring-fencing arrangements. And it was a bit counterintuitive to our partners, right, because they're saying, well, hang on a sec, we've got a 45% economic interest in what you're selling and you won't even tell us the terms on which you're selling it. And we said, that's how it has to be. And I think in a genuine demonstration of the trust and rapport that's built up between us and the executives at CNNC, they agreed to it.

Yeah. So, look, on the day we traded in line with our peers. If you were looking at your watch list that day and you didn't see that there's an announcement, you wouldn't have looked twice.

Yeah, there was a reaction.

Yeah.

I think it was just, you know, how markets are when there's information that they haven't unpacked, it tends to be a sell first, ask questions later. And part of the reason why we've recovered since then and why we're actually leading our peers and we've significantly outperformed our peers since then is because key shareholders on our register are buying. And I think that reaction that we saw on that day is indicative of a broader evolution of understanding of this deal. The initial reaction is question marks. It's question marks about the degree of the sell-down. It's question marks about what the implied valuation is because of the valuation that we used to strike the investment into the joint venture. But my experience talking to both shareholders and non-shareholder investors is just with a little bit of understanding about the deal and what it delivers and how it repositions us and effectively transforms us as an investment proposition, it then switches very quickly to positive. So we're up about 15% from when we announced the deal or when we went into a trading halt before the deal was announced. Our peers are anywhere between sort of minus 3 and plus 10% over that period. So this is a slow release benefit for our company and there's a couple of key reasons for that.

If you just purely look at it from an investment perspective, if you don't even try and worry about what it does for the business and how it changes the way that we can produce and sell uranium into this market, the single biggest challenge for me talking about Bannerman since we got our mining license granted to us was concerns about a multi-hundred million dollar overhang, an equity overhang. I feel like I've been walking through thick mud telling the story ever since then. And I get it, right? Like no one wants to start laying down a position in a company and then get hit from behind. And we've just raised or put into the joint venture the equivalent of 450 million bucks and that's on as we stand today a 950 million market cap. So there was still a lot to go until last week. Now you could couple that with a bit of debt and we've talked about some of the disadvantages to that. But even with a reasonable debt burden there was still a multi-hundred million overhang on our stock. That will take time for those perceptions and those concerns to clear. It's just the nature of things. And then the other one is we've just transformed our risk profile and I suppose when analysts put out their reports, you know, for a company like ourselves, they don't grade us on risk. So they're not going to say, right, this has gone from a six out of 10 on risk to a three out of 10. But what it does do is it opens up the number of investors who will be comfortable with us. And in particular, given our market cap sits below a few of our peers, we believe that it will start to put us more in the crosshairs of generalist investors going forward. And we're just breaking through that billion dollar market cap, which means increased liquidity and increased opportunity for some of those generalists.

So the one thing that's really interesting with this deal, and I'll come back to answer your question, but this is context that's useful to understand the whole process. CNNC, like many Chinese companies, has got a very long-term outlook on this sector, which is such a pleasure after dealing with investors where six weeks can be an awful long time. The consequence of that is effectively they're looking for this to be a JV showpiece. Their preference over time has been majority ownership and control and operatorship. They did have an experience with Paladin, which has had an interesting history since they invested their 25% in Paladin, which hasn't all been positive over that journey. And this was an unusual transaction for them in that they were going to be minority partners and secondary partners. Now, it was the result of, I think, the respect that we've developed for each other that we could strike a deal like this. And they came to understand that this can be a showpiece example of how they can partner with companies and compete against other nuclear players to basically attract the offtake and attract the product. And there's a number of ways where that came through in a sincere way in the negotiations. Much to our surprise, I've got to say, we've been nothing but impressed with the executives and the way that they've done things throughout this entire process.

So then it comes back to your question, Trav, which is when we said to them, you know, investors will be looking at this JV to find out where is the pathway to control. And we said, so we don't want that. They just understood the implications and agreed. So unlike a typical joint venture where you would have disproportionate funding mechanisms which necessarily lead you down a path to being diluted, they agreed to take it out. There's a standstill in the agreement which is as strong as you will ever see in these types of documents and there's no other mechanism where we can be diluted that's specified in the agreement. And the underlying principle here is that apart from ensuring that no one can be concerned about a predatory risk here from a much bigger, much stronger partner, the underlying principle is they want the pounds out of the ground at least as much as we do. They need those pounds out of the ground. So some of the techniques that an aggressive joint venture partner might use, starving cash flow, starving capital and so on, they just wouldn't be effective. And based on my relationship with the people we've been dealing with, I just don't think that that's part of their contemplation or part of their playbook.

Oh, god, it was fascinating. We had very good advisers who were able to really talk us through the constraints. You know, in many cases I felt like they were negotiating against their own organizational constraints, particularly the approvals, as much as they were negotiating with us. It's an SOE.

Negotiating 101. Classic Chinese as well. So let me just say, you know, we had advisers and we had board members who were waiting for the rub and we didn't see it. It was a very respectful negotiation where all of the so-called Chinese games were absent and I really mean that. It was done very, very quickly once we'd been able to agree key terms. Astonishingly quickly. Like in the various deal making that I've done in my career, I've never seen a Western party move that quickly. And they understood the constraints that they were under. So we had a negotiation which was quite intense that went for several days where we were working through everything. So, for example, they asked one of their compliance people from all the way up the tree to sit in on that entire negotiation because they knew having a compliance person in the room in addition to their lawyers and their financial advisers and the various in-house lawyers that they had, that would just smooth the path to having the agreement and the deal approved all the way up. So that's an example where at times we felt like they were playing their own system as much as they were trying to negotiate with us.

And I think one of the real lessons from it is quite early in the process, because we had other alternatives and we were in a very different situation to many parties who go to a big joint venture partner for money, we were very issues-focused when we were negotiating things. So if something didn't work for us, we would really work with them to understand, well, what's your problem with this? And so very early in the negotiation we got away from the idea of just saying no to each other. We would go through the process of explaining and they had Canaccord advising them in Beijing and...

We've had a view on the sector that has been pretty nuanced and pretty sophisticated. And you know, before we got on air, we talked about some of my background here that's enabled us to call it right so far. And we just see a real crunch point coming in 2029, 2030. This market will overshoot. There's a bunch of structural reasons why it will, to support that assertion, not only because most commodity markets do overshoot anyway. And we took the decision about a year ago that we wanted to keep moving the project forward, so we would be amongst it and we would be putting those market conditions into our bank account, not into a spreadsheet.

So we started with the early works development and it's been quite extensive on site what we've done. We were lucky because that early works, a lot of it was low on capex but very consumptive of time. So we were able to chew months and months and months of the construction timeline with our cash balance. But we're starting to push against the point in the construction timeframe where it starts to become expensive. It starts to be big leaks of capital, and if you pause a project at that point, history tells us that the capex becomes more difficult to control, your legally binding responses to contract tenders and so on, they lose their validity, so there's the opportunity to recut, and if there is inflation in the local environment it can find its way in. But fundamentally we think that by being a producer and selling pounds into 2029, 2030, 2031, that will overwhelmingly produce a better outcome for shareholders than basically riding the spreadsheet.

Yeah, I mean that's always the potential in any commodity, but there's so many constraints on uranium that in the same way that post-Fukushima the price didn't address the supply glut, I feel like it'll be very slow to respond in terms of a supply response to increased prices. So the overshoot, when I suppose I mean a price that sits above the long-term incentive price that would bring enough production in. And those constraints are political, they're environmental, they're the fact that we're such a tiny little sector that it's not well developed from a financing point of view, and it's people, and all of those things add up to elongate projects. And I mean, Bannerman's been at it for 20 years. There has been a significant market event which elongated that period. But, you know, we're probably best able to judge those constraints, and we're in an environment like Namibia where there isn't a disproportionate environmental or social pushback against uranium.

Yeah, you're right. The financing options are evolving, but you know we've been in the thick of it now for two and a half years and we've been able to have a very, I think, accurate finger on the pulse at the live firing end of things. Not the theoretical discussions, but you know what is actually available at the moment. And some things have come in such as Nordic bonds. There's a lot of interest in Nordic bonds that just wasn't there a year ago. There are other elements that if we were trying to finance a project in 12 months, we'd be working on right now.

The reality though is that we've had two and a half years to run this process. We've had broad interest from a bunch of different parties and this has come out demonstrably well above the others as a preferred alternative. So there's no regret cost in wondering if we could have got a better deal. We're confident that this holistically is a great deal for what we have been able to get at this point in time.

The other thing is if we were in a more stable macro environment, you know, I might be more inclined to think about what would an interim raise, raise another 100 million bucks and keep moving the project forward and see what's available for us in 12 months' time. But we're just nowhere near that sort of an environment. As an investor, you've got the, I think, the luxury of liquidity where if something goes horribly wrong, you can pull your money out and lick your wounds. When you're running a company and when the board's making decisions that are high consequence like this, you can't ignore the level of instability that we've got around the globe and what could happen to those sources of financing or equity market windows or even some of the key geopolitical levers over the next 12 months.

So we feel like we're striking the appropriate balance between getting the certainty of now moving forward at this timeframe and getting sufficient benefit from these trends that you described, that it's a great deal for us right now, and the possibility of a better deal comes with a whole lot of additional risk that we just don't think is worth taking.