Can you give us your outlook for uranium and how you see geopolitics and external factors playing into it?
Warren Gilman: It’s a topic that’s near and dear to my heart because about 50% of our asset value is in uranium at Queen’s Road Capital. Uranium is a transparent yet challenging commodity to assess. In terms of demand, it’s incredibly transparent. The demand comes from nuclear reactors. We know how many nuclear reactors there are in the world, how much uranium they need every year, and how many reactors are being built. It takes a long time to build them. We have an assessment of demand almost down to the pound for the next 20 years. So, demand is a known factor.
Supply is a bit more opaque. It is driven predominantly by mine supply, and that’s fairly transparent. We have a pretty good idea of what mine supply is. The only variable is some of the production capacity that is currently offline. For example, in Kazakhstan with Kazatomprom and with Cameco in the Athabasca Basin, it’s a bit of a question mark as to how quickly that supply gets ramped up. Overall, mine supply is pretty transparent. The big unknown is decommissioning supply and inventory levels that people have and how much they’re going to rely on drawing down those inventories, versus buying new uranium supply and restocking their inventory, so there’s a little bit of flexibility there.
When you assess those things, there is no doubt – uranium prices are going up. They’re going to go up in the coming year, and they’re going to go up over the course of the next two years. That’s patently obvious, barring any unknown disaster scenarios. How much they’re going to go up? Well, the uranium market has a history of overreaction. It has a history of correcting too far to the downside, and it has a history of galloping way ahead of itself on the upside, which can be great for traders, especially those playing in the equity market. I think we’re going to have a lot of fun times ahead of us in the years to come, but it’s going to be supported by the backdrop of ever-increasing uranium prices.
Geopolitics plays in our favour as uranium industry investors because one of the biggest suppliers of uranium and downstream products is Russia, and people have to start shifting their purchases away from Russian suppliers to more geopolitically conservative Canadian, Australian, and African suppliers. That means demand is going to be higher for uranium from those areas than it otherwise would have been, which is great for prices.
That doesn’t just cover Russian product – it also covers Belarusian product. It has an impact on Kazakh production, supply, and the marketing of their material. The Kazakhs are effectively the OPEC of the uranium market. Saudi Arabia accounts for 14% of the world’s oil supply and falling. Kazakhstan accounts for 40% of the world’s uranium production. That’s how important Kazakhstan is. When people start to shun Kazakh supply, you can see what impact that’ll have on demand for Canadian and Australian production. So, I think we have a pretty irrefutable positive backdrop.
With Kazakhstan and other countries in the region not currently producing, do you see a need to find new supply? Is there exploration happening in this space?
Warren Gilman: Yeah, there is. Surprisingly, not as much as you’d expect. Cameco’s exploration budget, for example, is still extremely limited. They’re much more focused on bringing their existing curtailed mines back into production. As a result, exploration is really in the domain of the juniors. And the juniors have been well-funded over the course of the last two years, so they’re starting to ramp up, but anything the juniors find will be lucky if it has an impact on actual supply in our lifetime. The time period for all mining companies to find, permit, finance, and develop a new ore body is normally 10, 15 years these days. For uranium, you can add another five to 10 years onto that because of extraordinary permitting requirements and regulation. If a junior finds something today in the uranium space, we’re talking maybe late 2030s or 2040s. It really doesn’t have an impact on the price of uranium today or for the next 10 years.
You talked a little bit about the juniors that are doing exploration and that they are well-funded. Where is that funding coming from?
Warren Gilman: It is very much driven by the equity markets. Up until this year, the equity markets have been reasonably kind to the developing uranium space. They’ve had access to capital, and so it’s almost 90% driven by the equity markets and then companies like Queen’s Road Capital, who are providing capital to the space to get people to explore and develop. It’s not an area that is well-supported by traditional debt markets, and so it must be equity.
Looking specifically at Queen’s Road Capital, how do you evaluate investment opportunities within this space? What makes a project stick out to you?
Warren Gilman: That’s easy. We’re totally ore body driven. It’s the quality of the ore body, and in the uranium space, that is largely a function of grade. We look for very, very high-grade deposits. Look at the two investments that we have, NextGen and ISOEnergy (ISO). With NextGen, the A2 high-grade is 19 to 20% uranium. ISO has a resource approaching 50% uranium. Those are extraordinary grades and those are economic at any price and that’s what we look for. We look for ore bodies in any commodity that are going to be profitable at virtually any price.
The next cab off the rank in terms of priority is, once you’ve established a great high-grade ore body, can you develop it? Do you have the ESG profile that will allow you to develop it and keep it for generations? That comes down to things like geopolitical risk and location. If you have an ore body in Saskatchewan, Canada, you’re in great shape. After that, the geopolitical risk increases almost exponentially.
We keep our geopolitical risk very limited. Our favourite is Saskatchewan, and I’ll come back to the concept of grade here, because grade is relative, and if you’re looking at hard rock deposits, the basin is the place to be. But I won’t rule out ISL, (in situ leach,) where grades are an order of magnitude lower, but your operating costs are an order of magnitude lower because you don’t need to build a mine; you just need to drill some holes. We can look at high grade ISL deposits in places that have a track record of permitting and allowing ownership. Texas, for example, is a good place for ISL. That’s what Queen’s Road looks for. We’re a longer-term investor, we’re not a trader. The answer to your question depends on what your investment timeline and profile is, but as a longer-term investor we look for pretty safe places to put our money.
We see global support for the reemergence of nuclear as a clean, low carbon, and reliable source of energy for the coming decades
There has been a lot of pushback against the uranium sector and nuclear overall. Are you still hearing a lot of this pushback in terms of critiques or countries not interested in getting on board, and how do we move past this?
Warren Gilman: We’ve certainly come a long way. We see global support for the reemergence of nuclear as a clean, low carbon, and reliable source of energy for the coming decades. The biggest single demand for uranium is still the US domestic fleet, and we now have bipartisan support in the US for the resurgence of nuclear. Both Democrats and Republicans are in favour, which is the first time that’s happened, I think, since the 60s. That’s certainly a reflection of the mood of the world. Here in Asia, countries that were previously questioning their support of the nuclear industry, specifically Korea and Japan post-Fukushima, have done a complete 180 and now they are in full support of the industry again. Obviously, China will become the single biggest point of demand for uranium going forward with their fleet of around 50 reactors under construction. It has been a sea change.
There are a few pockets of resistance. Europe is a great battleground right now where you have almost two extremes. You have France that has been historically incredibly supportive of the nuclear industry and is constantly beating the drum that Europe needs to grow their nuclear capacity, especially given their experience with the supply of Russian gas since the Ukraine war began. And you’ve got Germany who, even though it relies on very dirty coal for most of its power, has decided to close all its nuclear reactors. That mindset in Germany must change, simply because continuing to have most of your energy coming from dirty domestic coal is simply unacceptable. The German people will come to realize that, but the biggest resistor right now probably from a global perspective is Germany. They are protecting their local coal miners and local thermal generation industry. That inevitably will change. And then I think you’ll largely have consensus in Europe as well. Then you have consensus in North America, Asia, and Europe. You can see that the prospects for growth in the nuclear power industry (and therefore demand) for uranium is going to power ahead.
What other commodities does Queen’s Road Capital Investment look at?
Warren Gilman: The overarching answer to that question is we’re commodity agnostic. I go back to my earlier comment, it’s all about the ore body. And if we can get invested in a great ore body that’s going to make money at any foreseeable commodity price, then that’s what we want exposure to. Having said that, you can then say, well, you probably have, even within that framework, a little bit of bias. And you can just look at the portfolio that we currently have at Queen’s Road to get an insight into that. The portfolio right now is about roughly 50% uranium, 25% gold or precious metals, and 25% copper. All of those are things that we think have a positive bias over the course of the next 10 years.
In terms of things we’ll look at going forward, because our current portfolio is a bit of a rear view mirror, what will we do over the course of the next three years? We’ll probably do more of the same because we continue to like all three of those commodities, but we’ll focus again on decarbonization and electrification of the sector. Likely more copper, maybe nickel added into the mix, and anything that supports electrification.
