John Borshoff Of Paladin Gives His Views On The Outlook For Uranium.
By Our Man In Oz
If you’re not a believer in the uranium boom, fear not. There’s time to be converted. The man who has forgotten more about uranium than many investors know believes that we are only at the start of a revolution which will rock the mining world. John Borshoff, chief executive of Australia’s outstanding uranium success story, Paladin Resources, believes most observers of the market are dramatically under-estimating the future of uranium for two very simple reasons – supply (of which there is not enough) and demand (for which there is serious under-counting). “No-one is really addressing the question of finding big new mines,” says Borshoff. “And there are two aspects to demand which can confuse. There’s topping up the existing fleet of nuclear reactors, and there’s filling the fuel demand of the new reactors being ordered now as part of the switch away from fossil fuels. It’s the new reactor fleet which is going to cause the biggest headache and the power utilities are just waking up to the problem they’ve got.” Borshoff’s opinions count. Not only has he played the lead role in driving the Paladin share price from A1 cent three years ago to recent sales at A$8.50, but he’s not one of the johnny-come-latelies to the uranium world having started just as a lot of other people were leaving, 1975. It was 32 years ago that Borshoff joined the German uranium company Uranerz in the search for uranium supplies in Australia. His timing then was horrible. Australia, with an estimated 30 per cent of the world’s uranium, was turning its back on the nuclear fuel cycle, manufacturing a “half-pregnant” political policy known as Three Mines, which permitted only three operating mines at any one time; slots taken by Ranger, Olympic Dam and Nabarlek.
By 1990 even Uranerz had lost faith, leaving Borshoff to sell its Australian assets, close the doors and turn off the lights. “I tried consulting for a couple of years, but that was tough,” he says. “In 1994 we floated Paladin, initially to look for copper and gold, but it wasn’t long before we were back hunting uranium.” Roll forward in the life of Borshoff to three years ago, a time when the uranium price had quietly clicked up from a depressing US$7 a pound to a slightly less depressing US$12/lb. It was a time when strategic stockpiles of ex-military material were running down, and the greenhouse gas debate was heating up. Borshoff could smell change in the air and when a small Australian rival explorer, Acclaim Exploration, decided to join the exodus from uranium he snapped up the dormant Langer Heinrich prospect discovered as far back as 1973 by the South African mining house, Gencor.
Just before Christmas Langer Heinrich produced its first yellowcake and Paladin entered the nuclear power industry with a mine that will yield an initial 2.6 million pounds of uranium (worth US$187 million at the current price of US$72/lb), rising to three million pounds over a 17-year production phase. Joining Langer Heinrich will be a second mine in Malawi called Kayelekera where construction is just starting and from which 2.3 million pounds of uranium will be produced over a 10-year campaign. It is these mines, plus two more on Borshoff’s drawing board, about which he will not disclose details, plus a plan to become a global uranium trader unburdened by any low-priced forward selling contracts which has made Paladin the world’s second highest ranked uranium stock by market capitalisation, and Australia’s 75th biggest company with a value of A$4.5 billion, an almost infinite percentage rise on the A$2 million value applied to the company in its penny dreadful days of just 36 months ago.
Orchestrating Paladin’s rocket-ride to the top of its industry is one part of Borshoff’s story, and at 61 years old, and after a near-lifetime of trying he’s just grateful to be alive to see success finally arrive. But, in harmony with the corporate success has come a very deep knowledge of where the world uranium market has been and, much more importantly, where he thinks it’s going. “Uranium has been hit by two critical developments that most of the industry, and outside observers haven’t analysed,” he says. “In 2002, when the price of uranium moved from US$7/lb to $US12/lb the reason was that inventories were running out. These had been the main suppressants on the uranium price and effectively used by the electricity utilities to kill the mining industry. We then saw the price go up to US$35/lb, but only because people were concerned about future supply for the existing fleet of reactors, and its modest demand growth.
“About 15 months ago a new factor entered the demand equation which has unleashed an unbelievable delta of growth. China has declared its nuclear power expansion plans, India has declared, Russia has declared, and the U.S. has declared. From 50 new reactors we were suddenly talking about 230 new reactors. People kept talking about the shortage, but they miss the point that there are two shortages. There’s a shortage of managing the existing fleet and now this question of how to handle this new growth.” As Borshoff explains the penny drops for Minesite’s Man in Oz, sparking a somewhat naïve analogy about an existing fleet of cars needing an occasional top up in the petrol tank versus a new fleet of cars needing their tanks filled for the first time. Thankfully, Borshoff agrees. “Precisely, it’s like a car fleet that you didn’t know about.”
If that’s the demand side of the equation, surely Adam Smith’s Invisible Hand would ensure a corresponding rise in supply. “No, there’s not,” says Borshoff emphatically. “What we’re really seeing is different stampede, one from the utilities suddenly discovering how out of touch they have become with the mines because they’ve been dealing with sophisticated transactions from ex-military inventories without encouraging new mine supply. It’s just dawning on them that low prices have killed exploration and new mine development, but here they are signing up for new reactors. Availability is clearly the question, and the stampede will come when one utility makes up its mind that uranium fuel is really such a small part of its running cost, and it has to pay a lot more than it has in the past, then it will make a run to capture what it can, and the others will have to follow.
Is that happening, asks Minesite. “It’s starting to happen,” says Borshoff. “It’s when the rest join in, that’s when you’ll see fireworks in the uranium market.” Minesite: So you’re saying we haven’t seen the fireworks yet? “No, no, not at all,” he says. “That’s why uranium which has been increasing steadily in price for about 70 weeks has prompted people to say, oh it’s got to be tired now, because we’ve seen copper and nickel tire out. But, we’re only just approaching the point where the big utilities start to chase future long-term supply and that’s when we’ll see a big new bounce in uranium. That’s also why you’re seeing dramatic reactions to supply shocks like the shortfall of production from Cigar Lake. Those events are acting as a catalyst and people are finally asking the question, where will future uranium supply come from and, quite simply, the mining industry hasn’t done the exploration, there is no pipeline of projects waiting to come on line.”
Borshoff’s surgical dissection of the uranium industry has one more telling aspect. It covers how the big uranium miners have reacted to the changes underway. “Imagine how the big companies reacted when the price effectively doubled from US$7/lb to US$12/lb,” he asks. “All of the sellers, Cameco, BHP, WMC, ERA and Rossing, had been so soul-destroyed by the depression in prices that as soon as the price doubled they locked in every pound they had because they were mesmerised by the bottom. The culture of those companies had become horribly introverted. All they could see was survival in a dismal environment where saving US50 cents on operating costs was seen as a significant profit. All of them were seeing the future of uranium as trying to reduce costs. None could see the growth potential.”
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