Alex Molyneux of Paladin Energy & Azarga Uranium

The following interview of Mr. Alex Molyneux was conducted by phone and email from March 11, 2016 to March 14, 2016. Mr. Molyneux is based in Asia and has particular insightful knowledge of the Chinese uranium / nuclear power markets. His expertise has been recognized both in Asia & North America. He’s currently the CEO of Paladin Energy (TSX: PDN) and holds a non-executive Director’s role at Azarga Uranium, (TSX: AZZ) where he’s also a top shareholder.  

Please explain the situation at Paladin Energy where you have been upgraded from interim to permanent CEO.

AM: There hasn’t been a massive change really. It’s just that there’s a lot going on at Paladin Energy and I think the Board is comfortable that I have the skill-set to be useful with the current business plan and strategy. I’m happy to be able to report hat we’re making huge progress at Paladin. The, ‘all in’ cash cost has declined from US$50.75/lb last financial year to the US$33-35/lb range and there’s room for further savings.

You’re the 2nd largest shareholder of Azarga Uranium and in the past served as its Chairman. What does your extended role at Paladin mean for Azarga?

AM: Both companies are very important to me and to the future of stable sources of uranium supply. The board of Paladin has cleared me to resume a non-executive role at Azarga Uranium. This is actually perfect because BlScreen Shot 2016-03-15 at 7.39.58 AMake Steele is doing a great job as President, so as a non-executive Director, I can keep an eye on things without being a hindrance. It may be worth noting that I’ve purchased an additional 152,000 shares of Azarga in the open market since standing down as Chairman.

Are you able to comment on the progress Azarga is making on its Dewey Burdock project? How does Dewey compare to Peninsula’s Lance ISR project?

AM: The key for Dewey Burdock is to hear back from the appeal that was filed by the Nuclear Regulatory Commission and the Company regarding one point on the NRC’s decision on the Dewey’s project license. That is still outstanding. It’s something that could be imminent or a few months away.

How Dewey Burdock compares to Lance is that it’s smaller but much higher grade… actually five times the grade… and has lower projected operating costs. Once it’s permitted and constructed, I think the value of these assets is could be quite comparable.

Lance provides clear evidence that these kinds of projects do get through. It’s now commissioned and Peninsula Energy’s market cap is around A$150m (about US$110m). Dewey Burdock is probably about two years behind Lance. Many of the permits required are the same and both projects share a similar process.

Here we are FIVE years! after the Fukushima nuclear event and uranium prices remain depressed. Is it possible the uranium renaissance narrative is flawed?

AM: No, I remain confident that nuclear power has a bright future. Liquidity in terms of the volume of spot trades is down about 40% and the price down about 10% since the start of the year. However, I don’t think anyone should be questioning the thesis on uranium demand. Remember, there are more nuclear reactors operable, under construction, planned or on order and proposed than before Fukushima. And, despite a weak beginning to the year, uranium was pretty much the best performing mineral commodity in 2015.

Demand is growing. This year, the world will consume around 8% more uranium than in 2012 (the year immediately after Fukushima)… but demand growth has been painfully slow. Major nuclear reactor build programs get pushed out with minor delays… Japan’s reactor restarts have been surprisingly slow with only four back online. However, the industry has been growing and probably has on the order of 4-5% annual growth for the medium term.

On the supply side, isn’t possible that low-cost pounds from Cameco will fill any potential supply gap for the next 3 to 5 years, putting a lid on any uranium price rebound?

AM: The supply situation is really a positive not a negative. Its where uranium stands out in the commodity complex. There is actually about 6% less supply now than in 2012. What’s killing oil, iron ore coal and other commodity prices is the massive capital expansion in the later part of the so-called resources ‘super cycle.’ Fukushima had the effect of immediately curtailing supply-side growth.

There has only been two major projects commissioned in the last few years, the combination of which are not enough to replace lost supply. Cameco is a prime example of what’s not there in our sector. They’re the largest publicly-listed producer, but they are forecast to have declining production from 2017-2018 if they don’t bring on new projects.  They have publicly stated that their projects need uranium prices of US$70-75/lb.

At Paladin, we are in a similar position. We have the Kayelekera project that was placed into care and maintenance back in 2014. It’s fully built and could, in the right market, expand Paladin’s production by 40%… but even a ‘re-start’ project like ours needs something like US$70/lb. for it to go ahead.

Recent reports from analysts suggest the, “incentive uranium price” required to support new projects is $75/lb.+. Assuming we’re still a few years from away, might a supply shortfall be a long way off?

AM: Well I don’t think we are years away from seeing prices like that. Analysts predict a meaningful deficit opening up in 2019-2020 and beyond… and that’s assumScreen Shot 2016-03-15 at 8.31.36 AMing there aren’t additional supply curtailments or production issues at major mines. Uranium has a very long work-in-progress cycle to take it from uranium, through conversion, enrichment and fuel fabrication.

This means utilities buy their material around at least two years ahead of time. I believe we will see the market normalize sometime between now and the end of next year. By normalize, I mean a return of trading liquidity in the uranium spot and contract markets and the realization by utilities that they need to lock down some pounds.

Are uranium market bulls conveniently ignoring the overhang of uranium inventories in Japan, the U.S. & elsewhere?

AM: Again, this is a misunderstood issue. The U.S. and Europe are at low levels of inventories and contract coverage. Japan has a large inventory, probably enough for five years. So, don’t look to Japan for any help. The Japanese haven’t been showing signs of inventory dumping. I think they see it makes sense to hold stockpiles for now that they’re starting up again.

The canary in the coal mine in is actually how low inventories really are on a looking forward basis. Think about it this way, emerging market countries such as China, India & Russia are rapidly expanding their nuclear programs. They need to build inventories in the same way that Europe, Japan and North America did when nuclear was being widely adopted there.

I believe China will need to expand its inventory by around 70 million pounds in the next five years. India has announced they’re building an inventory and estimates are that it will be around 50 million pounds. There’s also a new centralized inventory being built under the auspices of the International Atomic Energy Agency for smaller countries.

Mark my words on this one Peter… uranium consumption in 2020 will be about 20% greater than last year, so inventories globally will have to grow, not decline in the next few years.

Might the combination of improved Utility-scale battery storage, and falling capital & operating costs for solar & wind projects, start to diminish demand for nuclear power?

AM: Well the, ‘falling capital costs’ argument isn’t relevant in my view. Nuclear has falling capital costs also. China will demonstrate lower capital costs through their Hualong One reactor design. Much of it will be pre-fabricated and  benefit from superior technology. This design is forecast to reduce reactor capital costs by roughly 30%.

Screen Shot 2016-03-15 at 8.32.19 AM

Wind and solar are just not base load power and never will be… Of course that’s your point on utility-scale battery storage but really when mated with wind & solar, that’s an expensive solution. Seriously, how will renewables be able to compete with the 95%+ utilization of nuclear reactors that don’t require costly storage systems? By comparison, wind & solar have utilization rates of approximately 20%-30%.

The problems of deaths caused by particulates and heavy metals released by burning fossil fuels is a, ‘right now’ issue for China and India. Air pollution in those countries is a national disgrace. If we’re talking about a radical shift in energy patterns, then nuclear power is the key driver. Both China and India generate less than 3% of their electricity from nuclear power plants.

The IEA predicts nuclear capacity will grow by 60% to 2040. This forecast would result in 23GWe of annual capacity growth, growth like that hasn’t been seen since the ‘boom’ of the 1970s.

Everyone talks about China & India. Given your vantage point in Asia, can you offer commentary that goes beyond conventional wisdom?  

AM: Well the point I made on inventories is an important one. People don’t take into account the large inventory building Asian countries will need as they join the nuclear power club. On average, non-third world countries that already have at least one operating reactor generate about 15% to 20% of their respective electricity needs from nuclear power.

Also, as I touched upon earlier, the technology revolution underway within China, not to mention Russia the U.S. and France, will reduce both costs and construction times by using modular, pre-fabricated components. There’s also the likelihood in a decade or two of much smaller reactors (a tenth or twentieth the size of existing designs) that would proliferate more rapidly on the environmental and permitting fronts as well.

Are there concluding remarks that you would like to make on supply/demand dynamics, Paladin or Azarga? 

AM: I think we suffer as an industry from being not well covered. Uranium is not as big an industry as base or precious metals. It’s easy for analysts to not spend enough time and to make sweeping statements about vital metrics like inventories and technological advances without examining the specifics.

Arguably, the uranium industry is in crisis. Customers are actively building new capacity that will require upwards of 30% more uranium annually in as short as five years. Without realistic pricing, this simply cannot happen. Just because analysts have been wrong about the timing of a reversal in prices doesn’t mean it isn’t coming. It has to, and it will. The longer it takes, the more robust the rebound.

 

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Mr. Epstein has no prior or existing relationship directly with Alex Molyneux. However, at the time this interview was published, Azarga Uranium was a sponsor of EpsteinResearch.com. Mr. Epstein owns stock options in the Company. Mr. Epstein is not a registered or licensed financial advisor. His article(s) on Azarga and other small cap companies, must be considered carefully in this context. Readers are strongly advised to consult with their own investment professionals before making investment decisions. This company is highly speculative, not suitable for all investors. 

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