Friday 21st October 2016

Resource Clips

A tale of two miners

Cameco and Paladin respond to market vagaries, put their faith in the future

by Greg Klein

A second quarter of relatively low cash costs and high realized prices might have added an understandably rosy tint to Tim Gitzel’s outlook. During a Q2 discussion on July 31 the Cameco Corp TSX:CCO president/CEO expressed optimism in Japan’s—and ultimately the world’s— nuclear industry.

Nine Japanese utilities have submitted applications to restart 19 reactors, he pointed out. Two plants, Sendai units 1 and 2, have entered a 30-day public comment period after passing safety evaluations.

Cameco and Paladin respond to market vagaries, put their faith in the future

Safely distant from the radioactive ore, a McArthur River miner operates
a scoop tram by remote control. Like Cigar Lake, the Cameco operation contains grades 100 times the world average.

“While the initial restarts will be positive, we expect it will take some time for a significant number of reactors to resume operations and begin to consume the inventory built up over the past several years,” Gitzel said.

“While the near to medium term remains uncertain, let me assure you that there are brighter days ahead for the nuclear industry,” he declared. “Today there are 70 reactors under construction around the world, representing billions of dollars of investment and significant growth in future uranium consumption. We expect a net increase of 91 new reactors over the next 10 years and continued growth in the decades to come. Nuclear energy continues to be an integral part of the world’s energy mix.”

The company’s sticking to its previous forecast of annual demand rising from 170 million pounds U3O8 today to about 240 million pounds within 10 years.

As for the present, Cameco’s “marketing strategy and strong portfolio of contracts continue to serve us well in an uncertain market and provide us with an average realized price that continues to outperform both the spot and long-term prices,” he maintained.

With mines in Saskatchewan, the U.S. and Kazakhstan, Cameco currently supplies about 15% of world uranium supply.

For the three months ending June 30, revenue reached $502 million, a 19% increase over the same period last year. Gross profit surged 37% to $136 million and adjusted net earnings rose 30% to $79 million, or $0.20 per share.

Evidently prospering despite market vagaries, Cameco continues to bring new supply onstream. Although a technical problem caused a short-term suspension of the newly opened, 50.025%-held Cigar Lake operation, the mine’s forecast to bring into the world 18 million pounds U3O8 by 2018. A Scotiabank analyst asked Gitzel, “In an environment of excess supply, why wouldn’t you keep those pounds in the ground until they’re needed?”

Replying that it’s “a great project” with favourable cash costs, Gitzel added, “We need the pounds. We’ve got sales commitments for those pounds.”

But not all the company’s projects withstand the storms so strongly. Earlier this week the company received conditional environmental approval for its 70%-held Kintyre mine proposal in Western Australia. A 2012 prefeasibility study, however, “indicated the project would require higher uranium prices or greater total production,” Cameco has stated.

Even so, its expansionary activities contrast with Paladin Energy TSX:PDN. Dismal uranium prices consigned its Kayelekera mine in Malawi to care and maintenance last May and forced the sale of a 25% interest in the Namibian Langer Heinrich mine to China National Nuclear Corp. The sale closed in July, helping Paladin refinance its flagship.

Production cutbacks notwithstanding, cost-cutting measures helped Paladin pull in revenue of US$69.28 million for three months ending June 30. Apart from developments in Japan, the company’s July 28 statement noted China’s expanding fleet. According to Paladin, China put two more reactors into commercial operation last May, bringing the total to 20, with another 29 under construction and 57 planned. “The country anticipates adding 8.6 gigawatts electrical of nuclear capacity during 2014, as compared to 3.2 GWe in 2013.”

Looking to the future, the company continues to develop other projects. In June Paladin announced a 25% increase in measured and indicated resources at its Michelin deposit in Labrador. “Future drilling will concentrate on expanding the mineral resources at both the Michelin deposit and the deposits and prospects occurring in the immediate surrounds,” Paladin stated.

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