Sa Sachem Co Cove ve Pa Partners Essential Facts Needed For - - PowerPoint PPT Presentation

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Essential Facts Needed For Price Discove very y in the Uranium Market NEI Nashvi ville - Oc October 2019 2019

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Disclaimer

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The information in this document is qualified in its entirety by the terms and conditions in such documents. Certain of the information in this document is confidential. Please do not distribute this material or copies of it to any third parties other than your own professional advisors. The information contained herein is current as of its date. Therefore, this document may only be relied upon as of the date hereof, is subject to modification, change or supplement without prior notice to you (including without limitation any information pertaining to portfolio composition), and does not constitute investment advice or recommendations. Opinions and estimates offered herein constitute SCP’s judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. The information in this publication has been obtained from sources believed to be reliable but SCP does not represent or warrant that it is accurate or complete. SCP does not accept any liability for loss arising from use of this document or its contents. Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter have been prepared, written, or created prior to the creation of this document and may not reflect current, up-to-date, market or economic conditions. SCP disclaims any responsibility to update such information, opinions, or commentary. To the extent views forecast market activity, they may be based on many factors in addition to those explicitly stated in this document. It is not possible to list all assumptions that may be relevant to understanding the forecast. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Sachem Cove Partners

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What Do Financial Analysts Do?

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Ø Analysts compare consensus estimates and current prices to their view of the future. Ø Investment opportunities with large gaps between consensus expectations and reality, often prove to be the most successful over time. Ø Contrarians tend to be most successful in under-followed,

• paque industries where group-think is driven by a just a few

data sources or worldview (Uranium!).

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What is Consensus Saying About the Uranium Market?

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Ø Demand is dropping through the 2020’s. Ø Supply is not price sensitive. Ø No near-term price spike risk.

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What is Consensus’ Track Record in Uranium?

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Ø Did it forecast peak or trough prices last cycle? No Ø Did it predict supply cuts this cycle? No Ø Did it forecast the 5x increase in conversion prices? No Ø Did it forecast the recent 40% rise in SWU prices? No

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How Does Sachem Cove’s View Differ From Consensus? Glad You Asked!

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You Can’t Run A Mine if You Can’t Afford to Run A Company

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Ø Consensus “Full Cost” of mining is only representative of the cash and capital costs to break-even in the current market. It excludes sunk costs and corporate costs such as G&A, Finance, Exploration and other potentially significant costs. Ø Consensus does not calculate any incentive price needed to keep mines running. Ø That’s why it didn’t forecast the supply cuts that have

• ccurred - ~25% of global supply.

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Consensus “Full Cost” Doesn’t Capture All Costs – Cameco

Source: Company Reports/SCP estimates

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Nor Does It for Kazatomprom (and Most Other Miners)

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Source: Company Reports/SCP estimates

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And That’s Why It Failed To Forecast Supply Cuts

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90 100 110 120 130 140 150 160 170 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Consensus Primary Pr Consensus Primary Production For

• duction Forecast 2019

ecast 2019-2030 2030

1Q17 Primary Production 1Q18 Primary Production 3Q19 Primary Production

3Q 3Q19 19 Fo Forec ecast

1Q17 A 1Q17 Avg. . 150M 150M l lbs./ ./yr. 3Q19 A 3Q19 Avg. . 131M 131M l lbs./ ./yr. Lb

• Lbs. Cut: -229M

229M/ -19M 19M/yr.

1Q 1Q17 17 Fo Forec ecast 1Q 1Q18 18 Fo Forec ecast

Source: Consensus estimates

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But New Projects Will Fill Any Supply Shortfall, Right?

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Ø Consensus largely ignores the financing costs, timing & permitting

issues of new projects.

Ø $ Billions in projects needed ON-LINE by middle 2020’s to avoid a

nuclear power crippling supply shortfall – for context, these companies have been living hand to mouth for a decade with minimal access to the capital markets.

Ø Prices must at least double from here and miners must have contracts

in hand before they can even begin to have financing discussions, let alone build a mine.

Ø Window for required contracts and needed mines is almost closed

and markets are telling us that at these prices, none of these projects are getting built.

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Some of the New Mines Needed After Restarts of C & M Mines

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$0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 Dasa Goviex Phoenix Mulga Rock Norasa Etango Gryphon PLS Arrow

Capital Requir Capital Required USD ed USD

$4.6 4.6 Bi Billion t n to b bui uild th the mines is needed

Source: Company Reports/SCP estimates

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Some of the New Mines Needed After Restarts of C & M Mines

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$1,056,000 $4,597,000

$0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 $4,500,000 $5,000,000

Market Cap of Greenfield Developers Capital Required

$ in Billions

Market Caps and Capital Requir Market Caps and Capital Required ed

De Developers need 4.5x their cu current marke ket ca capit italiz lizatio ion to to build th the mines s needed to to meet t demand Good Lu Luck With That!

Source: Company Reports/SCP estimates

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The Market is Saying The Mines Will Not Get Built

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Source: Bloomberg, Solactive Global Uranium Pure-Play Index

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It’s A Scary World If Miners Are Not Incentivized to Produce

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Ø State-owned Chinese and Indian production isn’t being sold to the

West.

Ø That leaves State-owned Russian, Uzbek and Kazakh production. That

doesn’t meet half of world demand.

Ø Imagine a geopolitical event like Iran sanctions or the RSA sealing off

access to production.

Ø Imagine a flood, fire, or other disruption – Concentrated supply

should always heighten awareness of tail risks to price.

Ø Currently there is little-to-no concern.

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If Nothing Changes – What Does The World Look Like In 2028?

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50 100 150 200 250

Demand Supply

Million Lbs. Uranium

2028 Supply / Demand For 2028 Supply / Demand Forecast ecast

Pr Primary Sup Supply Sec Second ndary Sup Supply

DE DEFICIT: 58M 58Mlbs per er yea ear!

Source: SCP estimates/Consensus estimate

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And Only 16% Of Global Supply Will Come From The West

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2028 Global Primary Pr 2028 Global Primary Production

• duction

Vaal Rivers Arlit Husab Rossing China (Various/Export) Semisbai Irkol

• N. Kharasan 2 (Baiken-U)

Western Mynkuduk (Appak LLP)

• N. Kharasan 1 (Kyzylkum LLP)

Kazatomprom-SaUran + RU-6 Budenovskoye 1,3,4 (Akbastau JV) Central Mynkuduk (JV Ortalyk) South Inkai Inkai Budenovskoye 2 (Karatau LLP) Muyunkum Dalur Khiagda Priargunsky Lance Four Mile Olympic Dam Other Countries

Ka Kazakhstan co controlled (51.8%) Ch Chinese Co Controlled (1 (18.2%) %) Ru Russi ssia Con

• ntrol
• lled (7

(7.7%) %) US USA, A, Au Austral stralia a an and oth ther r (15.8%)

• f
• f which 10.5%

% is s by prod

• duct at Olympic Dam

Source: SCP estimates

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We Differ From Consensus On Demand, It Is Way Below WNA and SCP

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160 170 180 190 200 210 220 230 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Million lbs. Uranium

For Forecasted Base Demand 2019 ecasted Base Demand 2019 - 2030 2030 Sachem Cove WNA Consensus

Consensus ~ 14M lbs./yr. below WNA and SCP

Source: WNA 2019 Fuel Report, Consensus estimates, SCP estimates

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And Curiously, Declined Materially After Supply Cuts Announced

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150 160 170 180 190 200 210 220 230

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Millions lbs. Uranium

Consensus Demand For Consensus Demand Forecast 2019 ecast 2019-2030 2030 4Q16 1Q18 Q After McArthur Suspension 3Q19

4Q 4Q16: 16: Avg.

• g. lbs

bs./yr. 194M 194M 3Q 3Q19: 19: Avg.

• g. lbs

bs./yr. 169M 169M

• 25M

25M lbs bs./yr. dem demand nd reduc eduction

• Source. Consensus estimates

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While WNA Increased Its Forecast

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165 175 185 195 205 215 225

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Million Pounds Uranium

WNA Requir WNA Requirements 2019 VS. 2017 Fuel Report For 2020 ements 2019 VS. 2017 Fuel Report For 2020-2030 2030 WNA Nuclear Fuel Report Requirements 2017 WNA Nuclear Fuel Report Requirements 2019

+ + 7M lbs bs. 2017 2017 Avg.

• g. 196M

196M lbs bs. 2019 2019 Avg.

• g. 197M

197M lbs bs.

Source: WNA 2017 and 2019 Fuel Report

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WNA - First time in 8-Years Nuclear Projections Increased

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Source: WNA 2019 Fuel Report and Consensus estimates

Ø Reactor Requirements: Expected growth 2019-2030 +26% (1.9% per year). Ø France: Energy policy modified. 50% target from 2025 target to 2035, and allowing operating lifetime extensions of existing reactors beyond 40 years. Ø United States: State legislatures starting to pass measures that support continued operation of reactors. Also, second operating license extensions has begun. Ø China and India: Massive nuclear expansion plans. WNA reference scenario expects China to grow four times to 179 GWe and India four times to 179 Gwe. Ø New Countries: Reactor construction in Turkey, Bangladesh, Egypt and several demonstrating a clear interest in developing nuclear programs (eg, Uzbekistan, Kazakhstan, Poland)

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WNA Fuel Report vs. Consensus 2019 vs. 2017 Forecast Changes

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• 40
• 35
• 30
• 25
• 20
• 15
• 10
• 5

5 10 15

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

WNA vs. Consensus Reactor Requir WNA vs. Consensus Reactor Requirements Change 2019 vs. 2017 ements Change 2019 vs. 2017

Consensus Requirements Change 3Q19 vs. 1Q17 WNA Nuclear Fuel Report Requirements Change '19 vs. '17

Source: WNA 2019 Fuel Report and Consensus estimates

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Which Pushed out Consensus Expected Deficit 3-years

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• 60
• 50
• 40
• 30
• 20
• 10

10 20 30 40 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Millions Lbs. Uranium

Consensus’ Expected Deficit Timeline

Surplus (Deficit) 3Q19 Surplus (Deficit) 1Q17

Prior Consensus Deficit Start Current Consensus Deficit Start

Consensus estimates/SCP estimates

SCP thinks we are in a structural deficit now

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And Now U.S Inventories Are Actually Below Normal

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During 2006 – 2019E: US Commercial Average = 2.57 years We are below 2.5 today US Utility Average = 2.1 years We are below 2.0 today

Source: EIA

Consensus’ view that inventories are too high is incorrect

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History Rhymes - The Survey Says…

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• Sept. 1, 2003 Spot $11 Price in 5 Years? $15 Actual $53

Source: UxC

• Sept. 6, 2004 Spot $20 Price in 5 Years? $23 Actual $43

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Back to Today...

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October 2019? Spot $25 Price in 5 Years? $30-$35? Actual? Stay Tuned...

Source: UxC

At these levels you don’t bring back C&M assets, much less new projects…

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Ø Demand is dropping through the 2020’s. Ou Our v vie iew: : Nuclear IS a growth industry. Consensus forward estimates were conspicuously dropped in 2017 and 2018 while the WNA just reported best growth environment in 8 years. Ø Supply is not price sensitive. Ou Our v vie iew: : Price DOES matter. Consensus failed to anticipate any of the significant supply cuts enacted since 2017 because its methodology excludes appropriate economic analysis. Ø No near-term price spike risk. Ou Our v vie iew: : Prices in the fuel cycle are hyper cyclical. As the conversion and enrichment markets have recently proved, dramatic price moves can happen overnight. Consensus’ View vs. Sachem Cove’s View

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Ø A few pounds floating around in spot and a small amount of pounds being committed to in the carry-trade market are no reflection of today’s supply/demand situation. Ø Prices need to go much higher today to incentivize production. Ø Mines take time, investors require returns, etc. Ø If mines aren’t financed and construction started yesterday, there will be a crippling supply shortfall far sooner than you think. Ø Today’s market applies zero premium to the inherent risks in mining and the geopolitics that influence the uranium market. It’s Perilous To Apply Today’s Perceived Market to Tomorrow

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