With resource stocks tumbling into bear territory, the landscape for commodity investing is changing.
Precious and base metals equity has been selling off — largely because investors are bracing for sustained lower growth going forward and negligible inflation — but uranium, a brethren to those metals, is still attracting some attention.
The interest is largely connected to supply and demand fundamentals. A treaty that has seen Russian nuclear warheads converted into fuel for reactors is winding down this year, and perhaps more importantly, the sustained low price for uranium oxide (U3O8) means that all but the highest-grade producers are operating with negligible to negative margins.
“Not only is the uranium market decoupling from things like gold and copper — it is also decoupling from the overall uranium market in a sense,” Leigh Curyer, chief executive of NexGen Energy says. “Uranium investment is really just focusing on high-grade, high-tonnage assets in solid countries,” he says.
Apart from a few exceptions, such as Cameco’s (CCO-T, CCJ-N) McArthur River and Energy Resources of Australia’s (ERA-A) Ranger mine in Australia, the uranium industry has been dominated by low-grade producers. Indeed, in the industry parlance, anything greater than 0.2% U3O8 is considered high grade. McArthur’s average grade is over 10% U3O8, or 100 times the global average for economic deposits.
Curyer’s contention that future capital flows will gravitate towards projects with high grade and high tonnage has led NexGen to focus on Saskatchewan’s Athabasca basin.
“We need higher-grade, cost-competitive assets coming on stream in the next decade to fill the demand,” Curyer says. “This is what this would do in a solid country and solid province that is pro-uranium development.”
NexGen Energy is a soon to be listed on the TSX Venture Exchange, and has three key assets in the basin: Radio, Rook 1 and Northwest Athabasca.
The decoupling Curyer sees underway can already be gleaned from the success the company has had in raising money at a time when traditional base metal and precious metal juniors are struggling to find the funding to stay afloat.
In the beginning of March, as a private firm, NexGen closed a $4.2-million equity financing. This brought its total capital raised in the last 12 months to $6 million, which is a tidy sum, given the tight conditions of resource markets.
Curyer says the financing success reflects the good quality of the assets and the renewed favour of the Athabasca basin.
“Back in 2004 to 2008, a lot of money went into high-tonnage deposits. No one was really focused on grade,” he says. “Now investors have found that on a cost-competitive basis, and on a sovereign-risk basis [those investments] weren’t all that they were cut out to be.”
Curyer’s foray into the world of uranium began in 2002. After getting the itch to join a junior mining team, he left an Australian top-100 company in the agricultural sector to take the post of chief financial officer at Southern Cross Uranium, which later folded into Uranium One (UUU-T).
After the Uranium One deal he moved on to the world of private equity, heading up a $500-million fund for First Reserve, the world’s biggest energy company focused private equity firm. The job entailed analyzing nearly every uranium-development project on the planet, and coming out of that experience he knew that grade would be king going forward.
“Few mines are producing below the current spot price, and that helped shape our strategy,” he says. “The general consensus is that a supply gap is coming. Then you look at the cost structure of those projects that can get into production, and they need a spot price above US$90 per lb. U3O8 to inspire them to come on board . . . that is a lot of pressure on the spot price.”
The combination of a need for grade and a low-risk jurisdiction led the team to Saskatchewan.
“The Athabasca basin is off-the-scale high grade, it goes right up to 20%, and Roughrider comes in at 5%,” he says.
Ah, Roughrider. It is no accident that Curyer would mention the project that was hotly contested for by Cameco and Rio Tinto (RIO-N, RIO-L), with Rio eventually coming out on top. NexGen’s flagship project, Radio, abuts Roughrider and gives NexGen geologists a view of the Rio drills marching in its direction.
Rio doesn’t announce drill results, as they are not material given the company’s vast size, so the last-reported drill hole was 1.2 km from the property boundary. But advancing Rio’s drill rigs, combined with airborne geophysics flown by NexGen, have Curyer confident that mineralization trends onto the property.
NexGen plans to prove that this quarter with a 12-hole program that will focus on the typical host to mineralization which has been found at Radio.
“We always liked Roughrider, but we couldn’t take any ground around it. It was all taken up,” Curyer says of the company’s arrival on the prime real estate. “But then Radio came into range in early 2011, and we set out to get an option on it.”
The ground was known to be prospective since the late 1960s, but it was designated as treaty land shortly thereafter, thwarting any exploration. The protection status lapsed in the late 1990s, which opened it up to prospectors, where it eventually landed in NexGen’s portfolio.
And while Radio is the project’s flagship development, its Rook 1 property has been generating a lot of interest of late.
That is largely thanks to the work being done by Alpha Minerals (AMW-V) and Fission Energy (FIS-V). The two companies recently hit a discovery hole that returned 12.5 metres at an average grade of 2.49% U3O8, and enjoyed a strong market run as a result.
Success at a time when so many juniors are floundering has investors curious to see what NexGen can do at Rook 1 — a property that abuts Patterson Lake to the northeast in the direction that mineralization seems to be trending.
“The unconformity goes through the middle of our property,” Curyer explains. “And the geological idea is that the boulder field came from an ice sheet that pushed the boulders from a source in the northeast.”
In other words, NexGen interprets that the bedrock source of the high-grade boulders at Patterson Lake (it was those boulders which guided the company’s discovery hole) has its source on Rook 1.
It will test this thesis with a six-hole program beginning after spring break-up. The holes will target the same conducter system that reaches through both Patterson Lake and Rook 1.
NexGen has a 100% stake in Rook 1, and the right to earn into a 70% stake of Radio by spending $15 million over three years. It has already spent $1 million in the first year.
Its third property, the Northwest Athabasca project, is a joint venture with Forum Uranium (FDC-V), Areva and Cameco. NexGen has a 30% stake.
A recent 3,300-metre drill program returned a highlight intercept of 1.5 metres grading 2.48% U3O8.
In all, the company plans to spend $3.8 million on exploration this year, with $6 million in the treasury.
“Ideally I’d love to have a bigger summer campaign, but in these times we have to be conscious of our treasury position,” Curyer says.
If any of those 18 drill holes return something in the order of magnitude of Fission and Alpha’s discovery hole, NexGen will have no problem securing the capital needed to make the next program as big as Curyer and his team desire.