What Does Cameco's Production Cut Mean for Uranium?
Publisher's Note: Last week, Cameco announced a major supply cut in the uranium market. Next year it will take 13 million pounds, or 9% of global supply, off the market. Uranium stocks responded immediately. I caught up with CanAlaska CEO Peter Dasler to get some color on the situation, as he has a unique perspective considering his company's joint venture with Cameco. Enjoy.
Nick Hodge: Hi, this is Nick Hodge with The Outsider Club. I'm sitting down today with president and CEO of CanAlaska, Peter Dasler. CanAlaska trades under the ticker CVV on the TSXV or under the ticker CVVUF Over-The-Counter. It seems almost every year I run into Peter at the New Orleans Investment Conference, which I just returned from.
The same happened this year, we had a nice chat there in New Orleans about the uranium space. I thought it would be good to have him on, especially in light of recent events in the uranium space, to do a brief interview about the uranium sector. Peter Dasler, thanks for joining us today.
Peter Dasler: Thanks Nick, it's great to be here.
Nick Hodge: I want to jump right into it because there was a big announcement out of Cameco (NYSE: CCJ)(TSX: CCO) last week that shook the entire uranium industry really. They announced that they're going to take offline their McArthur project and their Key Lake project, taking some 13 million lbs. off the market next year, or 9% of primary supply.
I think uranium prices went up some $2 immediately, and a lot of uranium stocks this week have been up some 20%-30%. Peter, can you just give me your thoughts on that situation and maybe break it down for us a bit?
Peter Dasler: It's quite clear that the uranium price has been very low because of reprocessing of spare uranium that's been sitting out there not being used in Japan and not being used in Germany. What Cameco said in their news is that this is completely unsustainable, virtually every uranium producer out there has a market price somewhere around about $35-$65 a lb.
If the end users are only prepared to pay $20, then something had to happen, it was unsustainable. Cameco's been buying this cheap reprocessed uranium for a while and reselling it. Buying it at $20 and selling at $40. Other juniors had been doing that as well. But it's not sustainable.
The reason why there's a strange lag is that normally end users have 7-14 years of uranium on supply. The 140 end users of uranium, the nuclear power plants, have got down to only getting about 30% of their supply for the last three or four years. They've been waiting, they've been waiting to see if they can get a cheaper and cheaper price.
This is a game that really tightens up Cameco or BHP or the Russians. This summer Cameco said, "We'll shut down for a month and see if we can shake the market a little bit." It really didn't happen, people said, "We'll wait a bit longer." It's a bit like a game of chicken. Cameco's finally said, "Look, we've got spare uranium on hand, we produced a lot of it here. We can make a profit right now at these prices, but it's time to shake the market and tell it to move up."
I think it was a great move by Cameco. We see that another year or so, this demand is huge from the build out in China and the new build out in 23 other countries around the world. It was a wakeup call for people.
Nick Hodge: Peter, tell me what the next couple of chess moves are in the uranium space? You've got the Kazakhs who have announced now a production cut and now Cameco has announced a production cut.
We know that for utilities, it really doesn't matter to them if they're paying $25 a lb. or $200 a lb. for uranium because it's such a small input cost into building, and maintaining, and decommissioning a nuclear plant. What are the next couple of moves? Is this the impetus finally for the utilities to act? How do you see the next 6-12 months in the uranium space now that we've got these announcements?
Peter Dasler: I think the utilities will react to this and once they start to react it'll be a rush to the door. We saw this previously when we had shutdowns because of flooding McArthur and Cigar Lake. We saw big blips in the uranium price. Literally, you can triple the price of uranium coming out of a mine.
I think the number is, you can go from $40 a lb. to $140 a lb. for the uranium coming out of the mine, and it only makes a 0.4% per kilowatt-hour difference in your electricity bill. Going from $0.07 a kilowatt-hour for production cost and sales cost to $0.075 is insignificant.
It was a game of chicken, I think Cameco has made a strategic move there. I think the first buyers will start to lock in uranium supply because you cannot run a nuclear power plant without uranium. The last thing you want to do is shut down that nuclear power plant just because you're short, because it takes a long time and a lot of money to slow it down and then to restart it.
Nick Hodge: You actually have a special relationship with Cameco because you have a JV with them on one of your projects that they're earning into. While they're announcing these production cuts for next year, they're clearly still thinking much further ahead than that because they're going forward with agreements like they have with you.
Can you tell us a little about the agreement you have with Cameco and sort of what they're planning to spend on the project you have?
Peter Dasler: Yes. We've got a very large property, about 350,000 acres of land, immediately west of the McArthur River uranium mine. This is the giant mine, this is the very high-grade mine that Cameco gets up to 20% of the world's uranium from every day.
This property is one that we worked for the last 10 years with Mitsubishi Corporation. We made a number of discoveries of targets that look like large uranium deposits. Unfortunately, the time lag got too much for Mitsubishi and we ended up buying them out last year.
A month later we did a deal with Cameco, where Cameco is spending $12.5 million on this property. The reason why is that it's within 10 miles of their existing mine. They have made a discovery which they announced last year of 68 million lbs. of 7.99% uranium within half a mile of our property boundary. We have been pointing out to them that we had a very large target which seemed to be the continuation of that.
This summer we got $2.2 million of their regional $11 million budget, that's a significant portion of it. Their geologist had convinced their management that there was a very significant target on our side of the property. In early September, they give us the first drill results of the first target at C10, we call it C10, it's a conductor. We had 5 meters at 1.5% percent uranium. Then they followed that up with another drill hole 30 meters away and another four meters of 1.3% uranium.
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That went out to the market, the market hasn't moved very much because of that. To us, it's an amazing couple of intersections and being the first drill holes on this target, we have got lots of hope for that. I think we'll get a lot of attention from Cameco's geologist in January, February, March. We don't have the budget approval yet but I understand that they are very keen to get on the ground to do some more drilling.
Even though they've got these cutbacks, finding a project like this, it will take five years to go through and drill to see what we've got there. In the first few months we'll get a pretty good indication. There won't be enough high-grade uranium ready for development once this demand comes through and having this so close to McArthur River, where all their production facilities are, is pretty exciting for us.
Nick Hodge: Yeah, I was just going to say it speaks volumes that while with their left hand they're cutting production but with their right hand they're still allocating funds from their budget for new discoveries and exploration. I think it really speaks volumes about how they see the market, I think they see it bottoming out and I think they see demand coming from these utilities in the next couple of years.
Like you say, they just didn't want to be the first to blink in the game of chicken, but it still seems like they're getting all their, to keep with the fowl metaphors, they're still getting all their ducks in a row for what's yet to come.
Peter Dasler: Yes. They have the advantage of having three very high-grade deposits. There's the potential for them to make a lot of money, more money than other people, it's very high. They've had their good cash runs over the last few years with uranium prices up to over $100 a lb. They've secured their long-term contracts at $48 a lb. or so. Right now they're saying, "You know what? If you're only prepared to pay me $20 a lb., we'll wait you out."
Cameco's in a far better position than most other people because of their high-grade deposits. It's a characteristic of what we find up in Saskatchewan, northern Saskatchewan in the Athabasca Basin. These deposits are 100 times richer and genuinely up to 100 times larger than any other deposits in the world. When you have those in your back pocket like Cameco does, you can make some demands on those end users.
Nick Hodge: I think it's an exciting time to be in the uranium market and you certainly have one of the best partners in the world with Cameco it seems like, getting ready to spend a couple of million dollars on your projects. Best of luck as that continues.
I know CanAlaska is primarily uranium focused, I'd be remiss if I let you go without asking you to comment briefly on a couple of nickel projects you've just picked up. The nickel sector has been quite hot lately, and there's been a couple of companies attracting quite keen evaluations recently with new nickel assets.
You have some new nickel assets as well, could you maybe leave us and switch topics a bit and tell us about your nickel projects before we hang it up?
Peter Dasler: Yes Nick, about this time last year we realized that the uranium market was still going to be a little bit slow. We were waiting for Cameco's deal so we got into looking at the Thompson Nickel Belt, which is the fifth largest nickel belt in the world, and it's right in our back doorstep.
For many, many years the ground in this belt was completely controlled by a company called Inco. That was now taken over by Vale, the Brazilian corporation. Over time claims lapse, and we watch claims that were coming open. We're able to pick up over 60,000 acres of ground that hasn't been worked since the early 2000s and not a lot of work for 10 years before that.
There were discoveries in the area, there are discovery drill holes and new airborne surveys that show new targets. We ended up picking up about $12.5 million worth of historical work, 60,000 acres of land, about 20 kilometers 10-15 miles away from the head frame at Thompson.
We consider this very strategic because sulfide nickel is the nickel that you want for batteries. At Thompson these 2.5% high-grade deposits are generally running about 10% of their grade as cobalt. Cobalt-nickel combination, we recognized that a year ago, we've got two large pieces of land and we're looking to get further pieces of land there. I think we can be very successful with that. It just adds another string to the bow for our CanAlaska shareholders.
Nick Hodge: Lastly Peter before I let you go, what are your plans for those projects? I know CanAlaska is primarily considered a project generator, do you expect to attract a partner to come in and do some work on those nickel assets?
Peter Dasler: Right now that's the approach. We have secured the land and we have started to approach parties that would probably be interested in them. The holding cost for this land is not that great, and as a project generator that's our model.
We go out there, we use the best technical knowledge we can do to acquire land. The acquisition cost is not that high, the initial work programs are not that high, but what we do is go look for a larger partner to help us. Mitsubishi put in about $18 million into our uranium projects. Our Korean partners put another $20 million in the large projects, and now Cameco's putting $12.5 million into our uranium project.
We look for large-scale projects which will attract those large end users. It's not beyond us to go and drill a hole and have a discovery. We're just looking to see what the market will do for us.
Nick Hodge: It's exciting times I think in the space not only for uranium but also for nickel and cobalt. We'll keep an eye on these projects and these joint ventures you have going, and we look for exciting news from your Cameco partnership soon. I want to thank you Peter for coming on and updating us today on the current uranium market and what CanAlaska has going on. Much appreciated.
Peter Dasler: Thanks very much, Nick. Yes, the fundamentals are there for electricity and batteries, so we're right in there. Thank you.
Nick Hodge: Thanks, hope to talk to you soon.
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Call it like you see it,
Nick is the founder and president of the Outsider Club, and the investment director of the thousands-strong stock advisories, Early Advantage and Wall Street's Underground Profits. He also heads Nick’s Notebook, a private placement and alert service that has raised tens of millions of dollars of investment capital for resource, energy, cannabis, and medical technology companies. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page.
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