GoviEx pitches Madaouela uranium project in Niger

Before listing on the Canadian Securities Exchange in June, the small corporate team at GoviEx Uranium (CSE: GXU) raised over $100 million privately to advance their Madaouela uranium project in Niger.

Over seven years, the company put the money to work on completing between 10,000 and 20,000 metres of RC drilling a month. It defined probable reserves of 25.3 million tonnes grading 0.098% uranium oxide (U3O8) for 54.9 million lb. U3O8, completed a preliminary economic assessment in 2010, an integrated development plan (the equivalent of a prefeasibility study, the company says) in September 2013 and got cracking on an environmental and social impact study, which it intends to submit in January.

“We have worked tirelessly in the background … and done a lot of work with the money,” Daniel Major, the company’s CEO, told a small group of fund managers and brokers over lunch in Toronto on one of his first major marketing trips since joining the company two years ago. “We have probably got one of the most advanced and best uranium projects around and we’ve just gone and done it as a private company.” 

As Major tells it, there are a number of reasons why GoviEx had little trouble raising money privately from the likes of Cameco (TSX: CCO; NYSE: CCJ), which invested $28 million for a 12% stake in 2008, and Toshiba, which pumped in US$40 million via two loans in 2012.

Near the top of the list he says is its location in Niger, the fourth-largest uranium producer in the world. The African nation produces between 6% and 8% of the world’s uranium supply and has produced the fuel for nuclear power plants since the French started mining there in the 1970s. Today Niger churns out half of the U3O8 needed to turn the lights on in Paris.

“We’re in the right district,” Major says, noting that the Madaouela project is 10–15 km from two of Areva’s producing uranium mines (Somair and Cominak) in the prolific Arlit uranium-mining district of northern Niger, and a power line runs right through its property.

Political risk, he adds, is tempered by the fact that uranium production makes up 50–70% of Niger’s revenue. “Niger has two things: uranium and aid, and those are the two things that drive that country,” he says. “The government needs its revenue.”

Niger also has one of the longest running democratic governments in Africa, Major points out, and is a matriarchal Islamic society in which education for girls is supported [“when you’ve got a government supporting women’s rights, you know you’re on the right path”] and where 16% of parliament is made up of women. “There are not many Western nations that can say that,” he adds.

“It’s very mild Islam here,” he continues. “You can buy alcohol anywhere you go. I never know if my secretary is going to show up in jeans or the full outfit. I have no idea. Every day is different. So you’ve got a different culture in Niger. They do not like extreme Islam.”

For Major, political risk comes down to permitting risk, and in Niger, he says, permitting is straightforward. In order to get a mining licence, companies must submit an approved environmental and social impact study (EIS) along with a feasibility study, and under the mining code the government must decide within six months whether it will grant a mining licence.

(In May 2013, Paris-based uranium giant Areva suffered a deadly suicide car bombing attack at its Somair mine, with one worker killed and 14 more injured. The attack left the Somair facility badly damaged, with the crushing and grinding units taking the majority of the blow. All production was temporarily halted as a result. The attack was carried out in concert with a car-bomb assault on a military base in Agadez, 240 km away, with 25 people — all Niger nationals — killed in the two attacks, plus 10 terrorists killed.)

GoviEx began work on its EIS two years ago and plans to submit its application to the Niger government in January 2015. Approval should be received by March or April, Major predicts, which will enable the company to complete and submit its application for a mining licence in June. Once the mining licence is approved (“either in late 2015 or early 2016”), GoviEx has two years to start construction and then another two-year window before the company is required to start production.

By that time, Major expects better uranium prices. He forecasts that uranium will move from US$40 per lb. to US$50 per lb. in 2015 and that the industry will see the spot market overrun the term market by 2017 — just three years ahead of the major uranium supply deficit he sees emerging after 2020.

“I can get a mining licence to fill that market, whereas if I look at the majority of projects, they can’t get their mining licences for a lot, lot longer,” he says. “So when 2020 comes and that gap needs filling, I’m one of the few companies that can be filling the gap … and the price has to be there, otherwise nobody can build the projects.” 

On the supply side, he says that “you’ve got declining existing production around the world — there are only two major projects [Husab in Namibia and Cigar Lake in Canada] in the supply pipeline now, and in 2020 there’s nothing, there are no big projects coming on stream,” he says. In addition, more than 60% of the world’s uranium supply comes from six major projects, so when one of them has a problem, he says, “like we saw at Cigar Lake in 2007,” there’s a “massive shock to the market.”

According to GoviEx’s Integrated Development Plan for Madouela, the break-even uranium price the company needs for the project is US$50.5 per lb. U3O8. (“Between US$50 and US$65 is the price we need to make this happen.”)

At a uranium price of US$70 per lb. and an 8% discount rate, the integrated development plan showed a pre-tax net present value of US$251 million and a 21.9% pre-tax internal rate of return. Cash-operating costs were estimated at US$26.39 per lb. U3O8, with total operating costs, including royalties, of US$33.10 per lb. U3O8.

Under Niger’s mining code, companies enjoy a three-year tax holiday and pay income tax at a rate of 25–30%. In addition there is a revenue royalty based on profitability. The higher the profit margin the higher the royalty. If the profit margin is over 50% the royalty is 12%; if the profit margin exceeds 40% the royalty payable is 9%; and if the profit margin surpasses 30% the royalty is 5%.

The government receives a 10% free-carried interest and can pay to raise that stake as high as 40%. (Major says the government has never gone higher than 26%.)

GoviEx plans to start with an open-pit mining operation and move to underground mining, and estimates capex of US$340 million. Of that, US$270 million is for the processing plant and the rest to build the open pit and the underground development work — all the tunnelling, equipment and conveyors.

As soon as GoviEx submits its application for a mining licence next June, the company plans to start to look at financing the project. It already has an offtake agreement with Toshiba for 600,000 lb. of U3O8, which is index-linked to the term market and the spot market (on a fifty-fifty basis). They’ll also start looking at the other offtakers on the equity side and have already started discussions with most of the African and European banks for debt financing.

The company had intended an in
itial public offering (IPO) in early 2011 and filed its listing documents with the stock exchange on March 17 — three days before the Fukushima nuclear disaster rocked Japan and sidelined the company’s plans.

“At that point we had 100 million lb. uranium in the ground — 50 million lb. indicated and 50 lb. measured,” Major says. “So the company looked at its strategy and said: ‘Look, at 100 million lb. we have met the avarice of a major, there is no point in having much more than this, it won’t really change the project, so we will start de-risking the pounds.”

The company has 146 million shares outstanding (150.8 million fully diluted). GoviEx executive chairman Govinder Friedland  (son of Robert Friedland) owns 20.99% of the company; Toshiba holds a 19.2% stake (the Japanese company originally came in because it owns Westinghouse, the third-largest producer of nuclear reactors in the world); Cameco Global Exploration owns 8.6%, THL Resources Investment, 6.8%, and Semafo (TSX: SMF; US-OTC: SEMFF), 6.7%.

“I was left with only 12 million shares after the IPO that were actually tradable, that weren’t locked up — that’s less than 10% that were physically tradable with anybody,” Major says. “Of the ones coming back — of the 88 coming back — 60 are tradable. We’ve been off restriction for three weeks.”

“Most of my shareholders have no interest in selling at the moment, so I’m trying to create some interest on the other side,” Major says of his marketing trip to Toronto. “Also people didn’t know we existed, and that’s an opportunity as well. We have done nothing publicly since we started the project.”

As of Sept. 30 the company had US$9.3 million in debt and cash, and US$5 million in equivalents.

In Major’s view, the uranium story and the future of GoviEx Uranium is all about the urbanization rate and rising pollution levels, and the imperative countries like China have to improve the air quality. He cites figures from the World Health Organization showing that 7 million people in the world died of pollution-related diseases in 2012. “The only way to fix this is clean energy,” he says. “China has a massive problem … expats are now leaving in droves because they can’t stand the pollution any longer. When China held the recent APEC meetings it turned the industry off three days before everybody turned up to clean the air up a little bit.” China now has the most ambitious nuclear program in the world, he says, with plans to increase the number of its reactors to 132 by 2030, up from 13 in 2010. “Robert Friedland would always say: ‘If you’re going to sell something, sell something the Chinese want.”