Bannerman Energy (ASX:BMN) is a uranium developer that is part of my private portfolio and also part of the "Picks and shovels plays" wikifolio. They recently announced the acquisition of a strategic stake in the Rare Earths Elements project Namibia Critical Metals (TSXV:NMI). My initial reaction was "I don't like this distraction from developing their key uranium asset". I also have mixed feelings about REE stocks. However, upon diving deeper into the announcement and reading that the JV partner of NMI is JOGMEC (Japan Oil, Gas and Metal National Corp), made me rethink my initial reaction.
In this article I'll share my thoughts on the acquisition of a strategic stake in the Rare Earths Elements project by Bannerman Energy and why the acquisition could lead to a bidding war for this uranium developer.
Structure
Who is Bannerman Energy?
Bannerman Energy (ASX:BMN) is one of my high conviction stock holdings and is developing the Etango Uranium Project in Namibia. It possesses a World class uranium mineral resource endowment of 207 Mlbs of contained U3O8. The company is in the process of completing a definitive feasibility study (DFS) for the project. Brandon Munro is the CEO of Bannerman Energy and well respected in the uranium market. He chaired the Nuclear Fuel Demand Working Group of the World Nuclear Association (WNA) for more than 4 years and as such is better connected than most uranium company CEOs. His evangelism for the nuclear industry is impressive. I would recommend watching this video from 2018, which showcases how ahead of the curve he is. Remember that in 2018 EV was not as mainstream a topic as it is today.
Source: "Uranium Insights" YouTube channel
What are the news?
On May 19th 2022 Bannerman Energy announced the acquisition of a strategic stake in
Namibia Critical Metals (TSXV:NMI). NMI holds a diversified portfolio of critical metals projects in Namibia. Its focus has been to develop the Lofdal Heavy Rare Earths Project in northern Namibia. Particularly interesting about the project is its potential for dysprosium & terbium, and the crucial need for these specific REEs in the production of permanent magnets. The Lofdal Project is under a Joint Venture agreement with Japan Oil, Gas and Metals National Corporation (JOGMEC).
Rare-earth elements (REE) or rare-earth metals are a set of 17 nearly-indistinguishable lustrous silvery-white soft heavy metals. Despite their name, rare-earth elements are relatively plentiful in Earth's crust, with cerium being the 25th most abundant element at 68 parts per million, more abundant than copper. Because of their geochemical properties, rare-earth elements are typically dispersed and not often found concentrated in rare-earth minerals. Consequently, economically exploitable ore deposits are sparse (i.e. "rare"). The group of rare earth metals are made up of 17 elements which are used for a diverse range of applications. They are often broken up into two categories according to their atomic weight: light and heavy. 90% of the supply chain & market for light REE is controlled by China. Heavy rare earths are even more concentrated, China controls 99% of that supply chain/market. The reason for this is the same as in so many commodities and especially critical metals. Due to China's form of government and long term strategic planning, implemented in their 5 year plans, they are able to drive commodity prices down, leading to companies from other nations not being able to economically develop projects. When those commodities are in a bear market, China can buy up valuable projects strategically over many years and gain control over the whole supply chain. Based on the new market dynamic they are also able to control prices in case competitors want to re-enter the market. I had some investments in the REE space but based on the above it was always tough to get a read on the stocks, what made them go up or down and what could bring me to hold with conviction. My other challenge with REE is that there are too many different elements and it is hard to grasp which ones will be valuable, can be mined economically and who the buyer will be, as currently the whole supply chain to process REE is in China.
Just looking at this acquisition through the REE lens leads me to the conclusion that the money could be better spent on the Etango project. However, there is a reason why this actually could be a great acquisition for Bammerman Energy and lead to massive shareholder value.
The Japan connection
In Bannerman's announcement Japan Oil, Gas and Metals National Corporation (“JOGMEC”) is mentioned as other key investor in NMI. JOGMEC integrates the functions of the former Japan National Oil Corporation, which was in charge of securing a stable supply of oil and natural gas, and the former Metal Mining Agency of Japan, which was in charge of ensuring a stable supply of nonferrous metal and mineral resources and implementing mine pollution control measures. On 1/27/2020 NMI & JOGMEC announced that they had signed an agreement to jointly explore, develop, exploit, refine and/or distribute mineral products from Lofdal. The agreement provides JOGMEC with the right to earn a 50% interest in the project by funding $20,000,000 in exploration and development expenditures.
During the last uranium bull market in 2004 - 2007 buyers of uranium projects were mostly major commodity companies & integrated companies like Orano. However, times have changed and oil&gas/energy companies are at the start of a major transformation. Nuclear energy is now officially classified as green due to the inclusion in the EU taxonomy. As part of oil & gas companies pivot towards clean energy sources, nuclear energy will be an important energy source. JOGMEC is in the process of strategically shifting the focus of their business as evidenced by their "JOGMEC Carbon Neutral Initiative". They are also building a stockpile. It is focused on petroleum, gas and metals currently but as I will cover the Japan restarts below, one could imagine that one of the next stockpiles could be for uranium. They have done similar moves in the past. In 2008 they launched an uranium exploration joint venture in Australia. In 2009 JOGMEC signed a Memorandum of Understanding with Kazatomprom regarding a rare earth recovery project in Kazakhstan. For readers that are unaware, Kazatomprom is the world's biggest uranium producer today. Before Fukushima destroyed any traction in the adoption of nuclear energy, JOGMEC was already on the path to be involved in uranium and REE. The Japanese restarts make a continuation of this path very likely.
Moreover, Japan isn't the only country which is shifting their strategic focus to nuclear energy and security of energy supply. There are many other (growing) nations that are in the process of massively building out their nuclear energy capacity. Below I will briefly touch on the current nuclear energy developments in China, India, South Korea and Japan.
Uranium companies based in Africa and specifically Namibia are perfect acquisition targets for Asian based bidders as projects located in Canada/USA are unrealistic to acquire for them due to geopolitical reasons. Namibia is in good relations with the west and east. My speculation is that Bannerman's move to acquire a "strategic" stake in NMI is Brandon Munro's way to form a relationship with JOGMEC for future transactions and also signal to other interested nations that the "negotiation phase" has begun. It could very well happen that companies from the countries mentioned below will bid against each other fiercely for a stake in Bannerman Energy. This in turn should lead to shareholder value as a higher valuation is more likely. Realistically we could see more hints to this after the DFS is completed.
It is important to highlight again, that this is just my speculation and I don't have any facts to prove if one or any acquisition will happen. Please don't make any financial decisions based on this article alone. Always do your own due diligence.
Nuclear energy developments/restarts
China's ever growing ambitions
China’s nuclear reactor construction pipeline is as big as the rest of the world's combined! The country has 19 reactors under construction, 43 reactors awaiting permits and 166 reactors that have been announced. The combined capacity of these 228 reactors is 246GW, It is a figure close to the 289GW of new nuclear capacity the rest of the world has in the pipeline.
Source: Energymonitor.ai
There are two major nuclear power companies in China. China National Nuclear Corporation (CNNC) is operating mainly in north-east China, is not publicly listed and not as focused on commercial activities as China General Nuclear Power Group (CGN Group), which is operating mainly in south-east China. CGN Group is the largest nuclear power company in China and the third largest in the world. CGN Mining is part of the group and publicly listed on the Honk Kong stock exchange. I shared my investment thesis for CGN Mining here. Through CGN Group CGN Mining has access to supply from the Namibia Husab mine. 90% of Husab is owned by CGN Group and Epangelo (a Namibian state-owned mining company) owns 10%. The investment not only marked the biggest in Namibia since the country’s independence, but also by far the single biggest investment by China in Africa. CGN Mining recently raised money for further M&A activities and could very well be on the lookout for further opportunities in Namibia.
India's nuclear ambitions
India couldn't really progress the development of civil nuclear energy until 2009 because India is outside the Nuclear Non-Proliferation Treaty due to its weapons programme.
In his National Statement to the COP26 climate conference in Glasgow India's Prime Minister Narendra Modi committed to a target of reaching net-zero carbon emissions by 2070. This target is only achievable by increasing the nuclear energy capacity. Something the Indian government already committed to by growing its nuclear power capacity as part of its massive infrastructure development programme. According to the World Nuclear Association, the country has 23 reactors currently in operation, with 7 under construction and ambitious targets to grow nuclear capacity.
South Korea's embracing of nuclear power
South Korea is an interesting case study as it shows how drastically the sentiment towards nuclear energy shifted from negative to positive during the last two years. Even though South Korea is among the world's most prominent nuclear energy technology exporters and is currently involved in the building of the UAE's first nuclear power plant ($20 billion contract), in 2017 a policy to phase out nuclear energy over some 45 years was introduced. However, in March 2022 the new president, Yoon Suk-yeol, pledged to scrap this policy. 25 reactors provide about one-third of South Korea's electricity. Since the U-turn towards a pronuclear energy policy even the construction on two new reactors has resumed.
Big in Japan
Nuclear energy had been a national strategic priority in Japan since 1973. It was expected that electricity generation from nuclear reactors would increase to at least 40% by 2017.
Japan's point of view on nuclear energy was naturally questioned and changed following the 2011 Fukushima accident. 11 years after this accident Japan is in the restart phase of its nuclear reactors and the plan is now for at least 20% electricity generation by nuclear reactors by 2030. 10 reactors had been restarted since 2015 and 16 reactors are currently in the process of restart approval. Japan's Prime Minister Fumio Kishida is an advocate for nuclear energy and is on record saying "We'll utilize nuclear power to the fullest extent possible".
Legendary speculator and uranium bull Rick Rule had always mentioned Japan restarts as one of the key catalysts to ignite the new bull run in uranium stocks. The reason for this is the instant disappearance of available supply and the addition of forward demand that is not part of any major forecast model.
Conclusion
In conclusion, based on the positive sentiment shift towards nuclear energy and the growing need for affordable and clean electricity, the demand for uranium out of Asian countries is increasing steadily. It is safe to say that nuclear energy is a key energy source for Asian countries like China, India, South Korea and Japan. At the same time, these countries usually only have limited local uranium production, if any. Namibia is a great jurisdiction for uranium mining based on its history with uranium mining and its positioning in the geopolitical landscape. The acquisition of a strategic stake in NMI is likely the first step in negotiations between Bannerman Energy and JOGMEC. It is my speculation that bidders (from the countries mentioned above) will want to throw their bid in the ring as well.
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Bannerman Energy is part of my private portfolio and also part of the "Picks and shovels plays" wikifolio, which is traded on the German Stock Exchange. Sign up here for free to learn more about wikifolio:
Sources:
https://www.jogmec.go.jp/english/carbonneutral/carbonneutral_15_00003.html
Disclaimer: This blog post is purely my personal opinion and is not financial advice. Please do your own research, before taking investment decisions. I am long ASX:BMN. No payment or other incentives were received in exchange to write this article.