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Earlier in July, Kazakhstan outlined changes to its uranium Mineral Extraction Tax (MET) which will directly impact Kazatomprom (KAP), the world’s largest uranium producer. In short, the new MET thresholds will become effective beginning on January 1, 2025 with the MET rate increasing from 6% (FY/2024) to 9% (FY/2025). In FYT/2026, a floating rate MET will take effect dependent on both U3O8 price and volume produced. The MET range then will range from 4% to a high of 20.5%. The net result of this newly enacted MET regime is to increase the overall costs from Kazakh produced uranium.
When factoring in Australia's continued reluctance to support domestic uranium mining, we see an ever shrinking geographical base which gives us confidence in uranium project development or mining. Along with continued turmoil in Niger and elsewhere in Africa, our thesis favoring North American projects (Athabasca Basin, Four Corners and Wyoming) continues to be validated.
Kazakhstan - Not only does the newly enacted MET regime increase the overall cost for Kazakh produced uranium but it also incentivizes a tradeoff favoring lower production prompting higher pricing. In summation, the MET rate will be is at 4% for uranium production less than 500 Mt (1.3M lbs U3O8) and it gradually increases to 6% for production up to 1,000 Mt (2.6M lbs U3O8), 9% for up to 2,000 Mt (5.2M lbs U3O8), 12% for up to 3,000 Mt (7.8M lbs U3O8), 15% for up to 4,000 Mt (10.4M lbs U3O8), and 18% for production exceeding 4,000 Mt (10.4M lbs). The MET will also increase based on certain U3O8 price thresholds.The increase equates to +0.5% if the price of U3O8 exceeds $70/lb, +1.0% if greater than $80/lb, +1.5% if greater than $90/lb, +2.0% if greater than $100/lb, and +2.5% if greater than $110/lb.
As can be seen above, the new MET regime may serve to incentivize a price appreciation outcome, over a increased volume outcome. The MET incentive structure can be seen to limit production volumes in favor of supporting prices.
Australia - As announced on July 26, the Australian federal government chose to reject Rio Tinto-owned Energy Resources of Australia's (ERA) application for a 10-year lease renewal at the Jabiluka uranium mine, located in the Northern Territory. This decision was justified given that in May, the Northern Territory government declared special reserve status over the Jabiluka area, which is near Kakadu National Park. Elsewhere in the country, recall that since 2017, Western Australia (home to a considerable amount of Australia's uranium resource) has been under a uranium mining ban imposed by the state government. Though the ban excludes four uranium projects which previously received ministerial approval (Wiluna, Kintyre, Yeelirrie and Mulga Rock), South Australia and the Northern Territory currently allow for the mining and export of uranium. Of late there has been increasing political pressure to life the uranium moratorium imposed in Western Australia.
Niger - Several high profile mines have been caught up in permitting purgatory/cancellations ever since the political coup last year installed a governing pro-Russian, military backed junta. Earlier this summer, French owned Orano had its development pans for Imouraren rejected by the Ministry of Mines. Even more recently, Goviex Uranium (GXU) was informed by the Ministry of Mines that it no longer had mining rights for the Madaouela uranium mine. Given the constant domestic turmoil, Global Atomic (GLO) recently hit delays with regards to the long awaited financing package for the Dasa uranium project.
Whether higher mining tax rates in Kazakhstan, continued lack of government support in Australia or ongoing political turmoil in Niger, the uranium investment environment in any of these jurisdictions remains far from ideal. As for our favored North American situated producers/near-term producers:
Cameco (CCJ, CCO): The full Q2/2024 results will be disclosed on July 31st before the market open. Production is expected to be slightly ahead of 6.0M lbs with consensus estimates for EPS and EBITDA at C$0.29 and C$333M respectively (C$0.13 and C$345M in Q1/2024). Watch for any changes to FY/2024 guidance - recall that as indicated during the Q1/2024 release, Cameco had pans to produce 10.0M lbs (100%) at both Cigar Lake and McArthur River/Key Lake, along with plans to produce 12,000 tonnes of UF6 at the Port Hope conversion facility. As per financials, FY/2024 revenues were previously benchmarked to between C$2.41B-C$2.53B with the average unit cost of sales (uranium) being between $57/lb-$60/lb.
Ur-Energy (URG, URE): The full Q2/2024 results will be released around August 6, 2024. Recall that earlier in July, a quarterly operational update was announced for both Lost Creek and Shirley Basin. During the Q1/2024 quarter, a total of 38,221 lbs were captured while 39,229 lbs were dried and packaged. A total of 35,445 lbs were shipped. Recall as well that FY/2024 guidance was previously guided to the lower end of the guidance range between 550,000-600,000 lbs.
More recently (and more important to the upcoming quarterly earnings), we highlight the $60.0M public share offering as announced on July 26 at a price of $1.05 per common share (close expected on July 29). The company is building up quite the cash war chest, seeing as $61.3M in cash was already held in treasury as of June 30, 2024. Though the proceeds of the offering will be used for the traditional working capital and ramp-up developments, it was added in the press release that "Ur-Energy frequently evaluates opportunities to expand its portfolio of uranium projects". The company presently has two assets - the currently producing Lost Creek and the rapidly progressing Shirley Basin. Combined, these two assets amount to ~28.0M lbs (global) of U3O8. We note that compared to US based peers such as enCore Energy and Peninsula Energy, Ur-Energy's 28.0M lb resource base lags far behind.
Lastly, we highlight the fact that Ur-Energy currently has a contract book for a total of 5.7M lbs covering the 2024-2030 period. It may also be possible that certain proceeds of the raise may be allocated for the purchase of physical uranium in order to hedge the production ramp at Lost Creek and Shirley Basin. Additional contracted volumes may be announced as part of the upcoming Q2/2024 results release. We maintain our 1.10x NAV8% valuation objective which equates to upside of 170% from the most recent close. Shares of Ur-Energy currently trade at a 0.40x NAV multiple.
enCore Energy (EU): The full Q2/2024 results will be released around August 15, 2024. Though production YTD has been relatively low from Rosita, Alta Mesa began contributing as well given a successful startup as announced on June 13, 2024. Alta Mesa provides for a total operating capacity of 1.5M lbs annually with additional drying capacity of 0.5M lbs. There will be a gradual production increase throughout 2024 and beyond as oxygenated water is currently circulating in the Production Authorization Area 7 (PAA7) wellfield. As production ramps higher in PAA7, note that work has already started in a new PAA8 wellfield as well. Full operational capacity is expected by 2026. We maintain our 1.15x NAV8% valuation objective which equates to upside of 58% from the most recent close. Shares of enCore Energy currently trade at a 0.73x NAV multiple.
Peninsula Energy (PENMF, PEN): As per the latest quarterly activities reported (released on July 25), construction activity is in full effect with all indications still pointing to a ISR production start from the Ross Central Processing Plant by year-end. Upon completion, the Lance project will be home to a 5,000 gpm ISR processing plant with the capacity to produce up to 2.0M lbs of dry yellowcake (U3O8) per year. Recall that earlier this year, an updated Mineral Reserve Estimate (MRE) was announced for the Lance property, increasing the the global resource by nearly 8% to the current 58.0M lbs. The M&I resource increased by nearly 20%, going from 21.7M lbs to the current 26.2M lbs. Of note is that drilling only encompassed the Ross and Kendrick areas while the largest property component, the Barber production area did not have any drilling last year.
The overall resource potential for Lance can’t be understated - the whole property encompasses an area measuring 8km x 37km. A total of ~7,360 drill holes have to date been used to estimate the current resource estimate. Spread over that large a surface area, the drilling number remains relatively light as plenty of empty, untested space remains. Recall that the current exploration target for Lance is between 104M-163M lbs. (or a mid-point of 133.5M lbs). FY/2024 drilling will focus primarily on MU3 and MU4 wellfield development. The plan is to continue with upgrading and increasing the Indicated and Inferred resources within the Ross area. The current number of rigs currently working on Lance has tripled as they are now completing and installing wells. We maintain our 1.20x NAV8% valuation objective which equates to upside of 165% from the most recent close. Shares of Peninsula Energy currently trade at a 0.44x NAV multiple.
