I have been betting for a while now that the price of Uranium is set to rise substantially. Finally the spot price has started to move in the right direction, which I believe will eventually set off the long term contracting phase that sets miners up for a profitable future.
My pure play bet on Uranium is Cameco (TSX: CCO; NYSE: CCJ), but it announced mine closures as a result of Covid-19 virus. In fact, it is not alone. I read that Olympic Dam was the only top 10 uranium mine still producing at this time. So I thought I would do a little digging to see if I should invest.
First I wondered if Olympic Dam would close soon as well. I was reassured by "The Yellowcake Advocate":
I also wondered if their production was locked already committed at low prices, but apparently they sell mostly into the spot market at the moment:
A little further digging revealed:
Olympic Dam is one of the world’s most significant deposits of copper, gold, silver and uranium. According to Wikipedia, Olympic Dam is "the largest known single deposit of uranium in the world." (I have not confirmed that - but am willing to believe it is a big producer of Uranium). It is owned by BHP Group (NYSE: BHP) who says:
Olympic Dam operates a fully integrated processing facility from ore to metal. Ore mined underground is hauled by an automated train system to crushing, storage and ore hoisting facilities, or trucked directly to the surface via declines.
The processing plant consists of two grinding circuits in which high-quality copper concentrate is extracted from sulphide ore through a flotation extraction process. Olympic Dam has a fully integrated metallurgical complex with a grinding and concentrating circuit, a hydrometallurgical plant incorporating solvent extraction circuits for copper and uranium, a copper smelter, a copper refinery and a recovery circuit for precious metals.
Now BHP is a large diversified resource company. Like Cameco it focuses on Tier 1 mines with a low cost of production. However even though it owns Olympic Dam 100%, Uranium makes up only a small percentage of its revenue. So if you are looking for maximum bang for your buck in terms of Uranium exposure, BHP is probably not for you.
However I am sure BHP has all the expertise to maximize the profits available in a rising Uranium price environment, especially since its production seems to be uncommitted and is flowing into the spot market. With most of the other large producers closed due to CoronaVirus, BHP would appear to be is a nice position to ride the spot price up and transition into long term contracts at much higher prices.
Why did I mention oil?
Well I told you they were diversified. Last year they sold off their onshore oil assets to BP and others (nice timing given the current price). But they still have substantial offshore oil production.
With oil prices $19 hitting a barrel today, I was amazed to see BHP could still make money from oil at these prices:
Conventional unit costs are expected to be between US$10.50 and US$11.50 per barrel (based on an average exchange rate of AUD/USD 0.70) in FY2020 reflecting the impact of lower volumes, partially offset by lower maintenance activities at our Australian assets. In the medium term, we expect an increase in unit costs to less than US$13 per barrel (based on an average exchange rate of AUD/USD 0.70) as a result of natural field decline.
Here is a little more info from their annual report:
BHP also has the financial strength to snap up Tier 1 assets should they go on sale at distressed prices due to the economic disruption caused by the CoronaVirus
Higher Uranium prices will really only add a touch of spice to this great mining company - but I liked what I saw and decided to add it to my portfolio anyway.