Antinuclear

Toro Energy faces a struggle to make Wiluna uranium project economic

Raising the $A269 million to build Wiluna is the obvious challenge at a time of an ultra-cautious stock market and with banking conditions as tight as anyone has seen in decades.

the question of the real cost of uranium at Wiluna because if you add 10% for other charges the $37/lb becomes $40.70/lb and an extra 20% lifts the full cost to $44.40/lb.

Equity investors and the providers of debt finance to the Wiluna project will want to see something far more concrete than investment bank estimates before they provide the capital to develop Wiluna. 

Dryblower on the obstacles awaiting Wiluna http://www.miningnews.net/StoryView.asp?StoryID=798350828, 8 April 2013 DIRECTORS and staff at Toro Energy had every reason to pop the corks on a few bottles of champagne last Tuesday when the Australian government provided environmental approval for its Wiluna uranium project in Western Australia, though Dryblower hopes it was just Jacob’s Creek and not Moet.

Keeping the good stuff on ice for a little longer is probably a good idea because even though one hurdle has been cleared Wiluna and Toro have a few more to clear before the serious celebrating can start.

Raising the $A269 million to build Wiluna is the obvious challenge at a time of an ultra-cautious stock market and with banking conditions as tight as anyone has seen in decades.

It means the first two questions from potential equity investors in Wiluna and bankers to the project will be: what price will Toro get for its Wiluna uranium and what’s the full cost of producing a pound of Wiluna uranium?

So far, the best production and cost information from Toro (as published on its website) is that Wiluna will yield 1.7 million pounds of uranium over 14 years at a C1 cash cost of $US37 a pound and that the average price for uranium in the 2014-15 period is expected to be $76/lb.

Said quickly and it might appear that Toro is looking at a profit margin of $39/lb which, when applied to the annual production estimate could imply a gross yearly profit of $66.3 million.

It will not, obviously, be anywhere near that if only because of the problem of C1 cash costs which have been troubling investors in the gold industry for years.

C1, as smarter investors know, does not include a raft of additional costs and charges, which can include royalties, marketing, exploration, financing, depreciation and the cost of simply running the head office.

In the gold industry the issue of C1 costs came to a head at the Mines and Money conference in London late last year when Evy Hambro and Catherine Raw, two of the senior executives at Black Rock, one of the world’s biggest fund management firms, savaged gold companies for not revealing their true (full) cost of producing an ounce of gold.

The problem, as Hambro and Raw pointed out, was not that investors were being kept in the dark but that governments were being misled into believing that the gold industry was more profitable than it really was and therefore it was okay to increase royalties.

C1, whatever the justification, really ought to be for internal use only because it means nothing to outsiders and might even be creating the wrong impression.

Which leaves open the question of the real cost of uranium at Wiluna because if you add 10% for other charges the $37/lb becomes $40.70/lb and an extra 20% lifts the full cost to $44.40/lb.

Even if lumping an extra 20% on Wiluna is unreasonable it is the sort of calculation that investors and bankers will make if they only have a C1 cost to work with.

And if they do boost the full Wiluna cost of production something rather unpleasant happens – the notional cost of production rises above the currently quoted short-term uranium price of $42.25/lb.

To save readers reaching for their calculators Wiluna’s full costs only have to be 14.1% higher than the quoted C1 cost to reach the spot-market uranium price.

It introduces the second part of the cost versus price issue: what price will Wiluna uranium fetch.

And that’s when you enter the long-term market where Toro has obtained a series of forecasts from investment banks for the 2014-15 year, ranging from a high of $85/lb to a low of $66/lb, with the average being the $76/lb mentioned earlier.

Equity investors and the providers of debt finance to the Wiluna project will want to see something far more concrete than investment bank estimates before they provide the capital to develop Wiluna.

They will require firm sales agreements at least and perhaps the participation of a cornerstone investor which can also provide an offtake agreement.

On the stock market, after an initial burst of enthusiasm, Toro retreated from its recent peak of A14c, to close on Friday at 11.5c, which is where it started the week.

The market reaction makes Dryblower’s point.

It is money, more than uranium, which will determine the next phase of the Wiluna project because even though Toro has done well to secure government approval the financing hurdle will be just as high as the government hurdle.

April 8, 2013 - Posted by Christina Macpherson | business, uranium, Western Australia