Epstein interviews uranium industry’s Dennis Higgs of Uranerz Energy
Uranerz Energy Corporation (URZ) is a U.S. mining company that commenced in-situ recovery (“ISR”) uranium mining operations on April 15, 2014 at its first ISR mine in the Powder River Basin of Wyoming. The Uranerz management team has specialized expertise in the ISR uranium mining method, and has a successful track record of licensing, constructing, and operating ISR uranium projects. Uranerz has a processing agreement with Cameco (CCJ), the world’s largest public uranium company and has entered into long-term uranium sales contracts for a portion of its planned production with two of the largest nuclear utilities in the U.S., including Exelon (EXC).
The following interview of Executive Chairman & Director, Dennis Higgs, was conducted by phone and email on July 16-17. I believe the answers to the questions I asked were answered in a very detailed and informative manner. This interview is being released after the company’s announced $10 million capital raise on July 16th, which was subsequently increased to $12 million on July 18th. The Company anticipates that the net proceeds from the offering will be utilized to continue development and operation of mining facilities, including well fields, at the Company’s Nichols Ranch ISR Uranium Project. Additionally, proceeds will be used for working capital and other general corporate purposes.
Please briefly describe the process that took 8 years to get Nichols Ranch into production. Do you consider this a barrier to entry for new projects?
Uranium mining is a highly regulated industry. There are several government agencies that take an active role in the licensing and permitting of uranium mines, at both the federal and state levels.
Uranerz began with the acquisition of its property position in the Powder River Basin. The projects needed to have exploration drilling to confirm that there were uranium resources that could potentially be mined. Once it was determined that a resource may exist that was amenable to the ISR mining method, permits needed to be filed with the regulatory bodies: the Nuclear Regulatory Commission (“NRC”) and the Environmental Protection Agency (EPA”) at the federal level, and three different state agencies within the Wyoming Department of Environmental Quality (“DEQ”): water quality, air quality, and land quality. To get to the point of filing the permit and license applications the Company had to collect one year of background data (for example air quality, water quality, vegetation, soils, etc.). Then the applications had to be prepared in the required format for each of the federal and state agencies. So just to get to the point of filing the license and permit applications you will have invested about 1.5 years in the preparation of the documentation.
The timeline for Uranerz was mid 2006 to late 2007 – collection of baseline environmental data for the state Permit to Mine and federal NRC Source Material License applications and preparation of these applications. Submittal of these two applications took place in December of 2007.
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The state Permit to Mine was approved in December, 2010 (3 years from date of submittal). The NRC Source Material License was approved in July 2011 (3.5 years from date of submittal). The deep disposal wells Approval to Inject (issued by the EPA) was received in October 2012.
From late 2011 to early 2014 Uranerz was constructing the processing plant, first well field and mining infrastructure (2.5 years from start of construction with EPA permit delays). On April 15, 2014 we announced the start of mining operations.
The Uranerz applications for the environmental permits were submitted at approximately the same time that two other uranium companies submitted applications for their Wyoming projects. Neither the federal or state regulatory bodies were prepared in terms of manpower for review and processing of three major ISR applications at the same time. It had been over 15 years since these agencies had reviewed and approved an application for a new ISR uranium mine in Wyoming. Applications submitted more recently should have shorter review and approval timelines.
Yes; we consider this a barrier to entry for new uranium mining projects!
Why are you toll processing with Cameco when you have your own mill?
Although the Nichols Ranch facility is licensed as a full processing facility, the toll processing agreement with Cameco provided the ability to reduce capital expenditures, headcount, and potential start-up issues. Under the agreement with Cameco they will do the resin stripping, precipitation, drying, and packaging for Uranerz. We don’t have the usual headache of ‘tweaking’ these circuits to get them running properly. Cameco has the excess capacity at their Smith Ranch-Highland Mine, which is the largest producing uranium mine is the U.S. The Nichols Ranch facility was constructed with foundations and walls for the full processing plant which will allow us to bring the resin stripping, precipitation, drying, and packaging circuits in-house when we are ready, without significant civil engineering work.
You prudently signed long-term contracts with utilities, 3 of which remain in effect for the next several years, can you describe each one?
Uranerz has entered into three uranium off-take agreements with two major U.S. nuclear operators, including Exelon which operates the largest nuclear fleet in the country and the third largest fleet in the world. We are bound by confidentiality requirements in the contracts so we can’t give quantity or pricing information. Within the limits of the confidentially we can state the following:
- all the agreements are long-term contracts with deliveries over four to five year periods for a portion of our planned production;
- two contracts are with Exelon and one contract is with another large domestic nuclear utility company;
- one contract determines the uranium sales price using a combination of spot and term prices, with a floor and ceiling (today we would be selling at the floor, which is significantly higher than the current spot price); one contract has a base price with fixed escalation; and one contract is base price plus an inflation adjusted escalator;
- the two initial contracts were negotiated and signed in 2009 when the spot uranium price was significantly higher than where it is today; and
- the contracts spell out a fixed delivery schedule (for date and quantity).
If it is helpful, here is the description in a recent filing Uranerz has with the Securities and Exchange Commission:
In anticipation of receiving all the approvals necessary to begin uranium extraction, we commenced a marketing program for conditional sales of uranium from our Nichols Ranch ISR Uranium Project. In 2009, we entered into a sales agreement with Exelon Generation Company, LLC for the sale of uranium over a five-year period at defined pricing. That agreement was subsequently amended to defer the delivery schedule by a year and adjust the pricing terms. On January 25, 2013 we entered into a second supply agreement with Exelon for the sale of uranium over an additional five-year period commencing in 2016, at defined pricing adjustable for inflation.
In August of 2009, we entered into what was then our second contract for the sale of uranium to a U.S. utility, also over five years, with a pricing structure that contains references to both spot and term prices and includes floor and ceiling prices. That agreement was also subsequently amended to defer the original five-year delivery period by a year, reduce the annual volumes to be supplied, and adjust the pricing terms. These three long-term contracts for the sale of uranium are with two of the largest nuclear utilities in the U.S.
Instead of producing your own uranium to sell into contracts, why not just buy spot uranium and deliver that into the contracts?
Under the terms of our agreements with the utilities, Uranerz is not allowed to do this under any of the contracts.
The difference between Uranerz and our peers is primarily our property position. Uranerz holds over 70,000 acres of land that hosts significant mineral resources in the Powder River Basin. The Powder River Basin has a solid record of uranium production, good grades, and well-known structure and hydrology. Cameco and Uranium One, two of the largest ISR uranium mining companies in the world, are continuing to extract uranium near the Uranerz properties in the Powder River Basin. This area has the largest producing uranium mine in the U.S.; the Smith Ranch-Highland, which is where Uranerz ships it resin under the toll processing agreement.
- We have a very experienced management and operations team in place; many that have been with Cameco or have been active in the uranium sector for most of their careers.
- We have solid off-take agreements with two U.S. utilities that provide a sound basis for supporting our operations and allow us to operate in today’s low uranium price environment.
- At Uranerz’ Nichols Ranch deposit the average grade of uranium is double that of some of our peers.
- Uranerz’ deep disposal wells are able to handle much more water than required for our well field needs.
- Some of our uranium mining peers have significantly more shares outstanding.
- Some of our uranium mining peers have significantly more long-term debt.
- Some of the debt carried by certain of our peers are at inferior terms to the debt though the State of Wyoming carried by Uranerz.
How do you describe the difference in operating costs between In-Situ Recovery and traditional hard-rock mining performed by companies like Energy Fuels Inc (UUU)?
Fundamentally, in-situ recovery mining operates with lower fixed costs than a conventional mine. That is, with lower labor costs and no dependence on rolling stock such as excavators and haul trucks to move ore, tonnage and grade become less of a factor in mine economics. Remember that with ISR mining, we are not moving or crushing any rock. Additionally, in-situ recovery allows the uranium to be recovered without any excavation and milling. As a result, there is no need for the operation of a mill and tailings facility. Most of the costs associated with in-situ recovery are in power and chemicals. Labor is very low relative to what one would expect in a conventional mining and milling operation. As a result, it is generally a rule of thumb that in-situ recovery operating costs are half (50%) or less than conventional mining for equivalent grades of ore.
You’ve been quoted as saying that your all-in costs to produce uranium is about $35/lb. Can you break that number down? Do peer ISR producers measure all-in costs the same way?
There is no standard in the industry to report costs of production in the uranium sector. To add to the confusion, some of our peers are Canadian companies, even though they may operate in the U.S. These Canadian companies may report under slightly different rules than the disclosure required under U.S. accounting rules. With no standards for reporting operating costs, it’s very difficult to compare the performance of producing companies.
Our breakdown of estimated operating costs includes $24/lb. for direct costs that comprises labor, power, chemicals, product shipping, toll processing charges, site communications, solid waste disposal, on-going site reclamation, and miscellaneous supplies. Adding taxes and royalties brings the total up to about $35/lb.
Many are not afraid to venture a guess as to how many of Japan’s nuclear reactors will return to service by year-end. Do you have a guess?
At this point, guessing is what all the experts are doing on this subject. For context, Japan not only suffered a crisis of catastrophic proportions resulting from the actual earthquake and tsunami; the country also suffered a crisis of trust in its nuclear management and government regulatory bodies. As a result, the delays in meeting expectations are more of a factor of building a new regulatory agency from scratch and rebuilding public confidence, rather than technical. Currently, the consensus in the industry appears that 2 to 4 reactors will restart in 2014.
The really good news is that Japan’s Nuclear Regulation Authority (“NRA”) granted preliminary approval for the upgraded design and safety features of Kyushu Electric Co.’s Sendai plant on July 16, 2014, allowing for their restart. It is now open for public consultation before granting final approval. These two reactors should be the first to restart in Japan.
Why do you think the spot price of uranium fell to $28/lb, a nine-year low. Obviously, supply and demand, but who’s doing all the selling?
According to the Energy Information Agency, U.S. utilities have built record levels of inventory in 2013, and as a result there is no significant buying right now. Market reports indicate that there remains significant inventory selling occurring from non-U.S. utilities as they reduce inventories to generate cash, and the U.S. government is liquidating its excess inventory of uranium as a means to fund cleanup programs at the old federal enrichment sites. Exacerbating this situation is the low pricing for enrichment (called separative work units, or “SWU”). When the SWU price is low, enrichers will start a practice called “underfeeding”. This means that they will process a lower volume of uranium to extract more U-235 to meet their enrichment contracts. The uranium they do not consume to produce that volume of low enriched uranium is sold by the enricher, acting as another source of uranium, like a uranium mine.
In 2013, 173 million lbs of U3O8 were consumed worldwide and 153 million lbs U3O8 were mined. The balance was made up with secondary supplies as described above, in addition to the uranium generated from the Megatons to Megawatts HEU downblend program which was 24 million lbs U3O8. The excess supply in 2013 created the situation we see today. So without demand in 2014, producers and enrichers putting their production into the market is creating the low price environment.
At what long-term uranium price would you consider signing new contracts?
There is no fixed amount that represents a floor for accepting a new contract. Factors such as production rates, spot price, and average weighted pricing would drive that decision. It is probably reasonable to say that it is hard to be enthusiastic about the current long term price as reported in the press.
If market conditions were to improve very significantly, how many annual pounds could you produce in 2015? 2016? 2017?
We could easily ramp up to production levels higher than we are currently discussing. The critical path is the wellfield development coupled with plant capacity. Doubling production from our current expectations could become a matter of enough drill rigs and timing of header house (wellfield) construction. However, that is something that must be tempered with grade, costs and flow capacity.
For discussion: each well in the wellfield is connected to a header house. Each header house has approximately 60 wells. The header house sends the solutions from the wellfield down to the processing plant, where the uranium is collected on a resin. The water is then sent back up to the header houses for injection back into the wellfield.
How much incremental capital would be required to reach the top end of the ranges of annual production from 2015 on?
It is principally the cost of drilling and header house construction. The plant, as it is currently configured would not require any upgrades nor would it impact our toll processing agreement with Cameco.
Please comment on the pros and cons of doing business in the State of Wyoming.
Wyoming is considered a mining-friendly state, and recently ranked as the second best state, in the 50 states, to do business.
- tax friendly; no corporate income tax, low sales tax and property tax rate;
- for employees, Wyoming ranks 49 out of 50 States with the lowest individual taxes;
- public support of uranium mining (continuous mining of uranium since 1958);
- well defined state mining regulations;
- good access to the state mining regulators;
- full support of the state Legislature and the Governor;
- Counties cannot impose reclamation rules on top of the state rules;
- state willing to loan money to uranium mining companies at favorable rates for construction of commercial mining facilities.
- currently dual state and federal regulation of uranium mining; Wyoming is not yet an Agreement State with the NRC;
- timeframe for state to process the first three ISR applications was not much better than the federal timeframe; the state timeframe for processing more recent applications is much improved and is expected to continue with future applications.
Would Uranerz consider making acquisitions? If so, what types of companies or assets?
Yes; we are always on the lookout for quality uranium properties or for companies that have quality uranium properties. Under the right technical and business parameters, Uranerz would consider acquisitions, mergers and joint ventures to expand its portfolio of quality uranium properties; preferably that are mineable by the ISR mining method in jurisdictions of low political risk.
Thank you Mr. Higgs for taking a considerable amount of time to answer my questions in great detail.
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