Harmony’s new uranium play will be costly

[miningmx.com] — [miningmx.com] — HARMONY’S uranium joint venture with the Pamodzi Resources Fund may create a major new South African uranium producer, and the biggest to be black-empowered, but it certainly won’t be the most profitable.

Despite Harmony acting CE Graham Briggs waxing lyrical on this morning’s conference call about how the venture (unoriginally dubbed Newco, for now) will be able to make use of substantial existing infrastructure that will enable it to reach full production within three years, he also conceded that the cash operating cost will be between $30-$35/lb U3O8, or more specifically, about $31.50, before taking into account any gold credit from the tailings dams that form part of the resource.

But as these have a grade of 0.8g/t, that isn’t likely to have a major impact.

By contrast, of South Africa’s other two producers, actual or projected cash costs at Uranium One’s various properties range from $10-$14.13, while First Uranium, in spite of its name, is still as much a gold mine as a uranium mine.

The world’s biggest producer, Cameco, does not seem to provide a similar figure in its latest annual report, but I calculate its total costs, which obviously include hefty non-cash and other items, at about $17.40.

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Unlike some producers – notably Cameco – Newco won’t be depressed by historic contracts entered into when the uranium price was much lower than it is today.

But its operating margin will be considerably lower, making it that much more vulnerable to any further sharp decline in the uranium price, however unlikely that may be.

Moreover, though Newco claims a total resource of 108m lb uranium, only 39m lb classify for the reserves – probable category. As Briggs says, an immediate task will be proving up the balance.

On the other hand, present resources and reserves are calculated from data that treated uranium as a byproduct of gold. Taking uranium as the main product and gold as the byproduct could significantly enhance the uranium resource. So projecting the life of the venture is imponderable, but it should be at least 15 years.

And Harmony has several other mines with known uranium potential, which could in due course find their way into Newco. So could other uranium ventures, as it’s clear that Newco intends to pursue an entrepreneurial policy. The link with the Pamodzi Resource Fund means that financing further acquisitions should not be a problem.

Pamodzi Resources, to which South Africa’s Pamodzi group is an adviser, has raised $1.3bn, mainly in New York, and the $420m it is paying is its first investment. So it still has plenty of fire power, and further deals by Newco or Pamodzi Gold are obvious candidates for deployment.

For that matter, Newco itself will have to fund R2.3bn capex over the next three years on its present projects alone.

Meanwhile, Harmony has accrued a comfortable R1.6bn to repay debt or fund other projects, and retains a 40% stake in the uranium assets. Pro forma 207 EPS would have risen from 43c(SA) to 63c, and tangible NAV (whatever that’s worth in a mining company) from 5,325c to 5,714c. A good deal all round.

Still, taking 108m lb and a price of $420m, Newco is implicitly capitalised at about $3.90/lb.

Uranium One, on the other hand, has 593m lb reasonably confidently classified reserves, and another 260m lb less rigorously measured.

Taking just the 593m lb and a market cap on the JSE of R27.7bn, Uranium One’s implicit market cap equates to about R46.70/lb, or $6.78. Cameco’s share of its total reserves is 513m lb and market cap $12.5bn, or about $24.40/lb.

Such comparisons are never straightforward apples vs apples, if only because they ignore potential expansion, but former Harmony CE Bernard Swanepoel would no doubt adduce them to justify his tardiness in appreciating the company’s uranium potential.