Category Archives: uranium and nuclear
Cantor analyst: ‘This is the best uranium PEA we have ever seen’
The Energy Report
Aug 6, 2017
NexGen Energy Ltd. (NXE:TSX; NXE:NYSE.MKT) announced its maiden preliminary economic assessment (PEA) of the “basement-hosted” Arrow Deposit on July 31. In its press release, the company outlined the following highlights:
- After-Tax Net Present Value (NPV8%) = CAD $3.49 Billion
- After-Tax Internal Rate of Return (IRR) = 56.7%
- Average Annual Production (Years 1-5) = 27.6 M lbs U3O8
- Average Annual Production (Life of Mine) = 18.5 M lbs U3O8
Based on a uranium price of $50/lb, the company anticipates Saskatchewan royalties over the life of the mine of CA$2.98 billion.
The PEA “is based on the mineral resource estimate announced by the Company in March 2017. . .that comprised an Indicated Mineral Resource of 179.5 M lb of U3O8 contained in 1.18 M tonnes grading 6.88% U3O8, and an Inferred Mineral Resource of 122.1 M lb of U3O8 contained in 4.25 M tonnes grading 1.30% U3O8,” the company stated. “The PEA does not include the results of the Company’s winter or summer 2017 drill programs, which will total over 66,000 m of additional drilling.”
“The maiden PEA confirms our view that Arrow is a once-in-a-generation type of deposit.”
Reacting to NexGen’s announcement in an Aug. 1 research report, Cantor Fitzgerald analyst Rob Chang declared, “This is the best uranium PEA we have ever seen. Moreover, the forecast annual production rate of 27.6M lbs U3O8 over the first five years would place Arrow as the largest uranium mine by production in the world and make NexGen the second largest producer behind only Kazatomprom. We are reiterating our Buy recommendation and increasing our target price to $5.65/share, or by 9%.”
NexGen stock currently trades at ~CA$3.06 per share.
Chang also commented on the fact that the 2017 drill results have not been included in the PEA. “Note that thus far in 2017, approximately 66,000m of drilling (producing numerous high grade assay results) has been conducted at Arrow and a new discovery (South Arrow) has been recently detected. None of this data has been included in the PEA,” he wrote.
“Despite the high per tonne cost of Arrow, the deposit characteristics (high grade, vertical orientation, and competent bedrock) have led to industry-leading costs. . .for the first five years of production, only ISR production from Kazakhstan is expected to have a lower cost profile than that of Arrow,” Chang continued. “The per pound cost is seen as the lowest of any conventional mine globally.”
Looking to the future, Chang wrote, “By 2018, NexGen expects to update the resource model and continue with the engineering and environmental baseline studies. A maiden pre-feasibility study is expected to be completed, followed by a project proposal submitted to the EIA Board. Following the recent financing with CEF Holdings, the company has nearly $200M in cash on the Balance Sheet.”
In conclusion, Chang stated, “The maiden PEA confirms our view that Arrow is a once-in-a-generation type of deposit.”
Eight Capital analyst David Talbot views the NexGen PEA as “a major de-risking event. While looking past obviously impressive economics backed by a deposit that is likely unlike any other, completion of the PEA might just kick-start the M&A process. We speculate that Arrow could end up in the hands of a uranium producer or company looking to enter the sector.”
Furthermore, because “start-up is likely to correspond with a dramatic uranium supply vacuum mid-next decade, timing is good,” Talbot stated. While acquisition may be in the wings, “meanwhile management will be moving forward as if it plans to do it alone. And why not? Each successive milestone such as PEA, PFS, FS and permitting helps de-risk Arrow while potentially providing all that much more value.”
Going forward, Talbot anticipates that the company’s focus will “continue on Arrow with mid-2018 PFS planned. Another $35 MM of its $200 MM may be spent to upgrade resources by then. Developing a potential exploration shaft may run in parallel to permitting. It may help confirm resources and feed into final permits. Management suggests permits will be influenced by Arrow’s strong technical characteristics and sound environmental planning including clean metallurgy, 100% land-based, basement host rocks, and plans to return all tailings underground in a paste backfill.” If NexGen continues on its present course, Eight Capital predicts “start up in 2025.”
All this confirms Talbot’s belief that NexGen’s Arrow represents the “world’s largest uranium mine potential,” as he stated in a July 31 research report.
“Shares of NexGen were glowing on Monday after the company reported positive results of its independent Preliminary Economic Assessment (PEA) of the basement-hosted Arrow Deposit, located on the company’s 100%-owned Rook I project in Saskatchewan’s Athabasca Basin,” Canaccord Genuity stated in its Aug. 1 Morning Coffee update.
The PEA announcement was the latest in a string of reports updating NexGen’s progress. On July 25 the company announced that assays on step-out drilling during the winter drilling program at Arrow had confirmed “high grade uranium mineralization” in a new area on the property.
“Step-out hole AR-17-136c2 which intersected a new area of semi-massive to massive pitchblende mineralization in the A3 shear has returned high grade assays,” the company reported. “This high grade uranium mineralization was intersected 40 m outside the current resource, and 70 m outside the current A3 High Grade Domain.”
In addition, “first pass drill testing of the Southwest Gap intersected numerous lenses of high grade uranium mineralization that has connected the 180 m Southwest area with the Arrow Deposit. The Southwest Gap represents a material resource expansion opportunity as it was not included in the March 2017 updated mineral resource estimate,” the company stated.
In a July 27 research report, Haywood analyst Colin Healey commented on results the company had announced that same day with regard to its Rook 1 project.
“NexGen has announced that the first two exploration holes of the summer drill campaign at its 100%- owned Rook 1 project have resulted in a new discovery zone, which includes narrow high-grade intercepts of uranium mineralization 400 metres south of the Arrow Deposit on a parallel structure that was previously almost entirely untested,” Healey wrote. “The rocks reportedly exhibit many of the same characteristics of the main Arrow deposit including ‘dense massive pitchblende veins’, occurring ‘within at least three stacked high strain or sheared intervals, which is a common characteristic of the Arrow Deposit.'” Healey noted.
In its release, the company reported, “The first two exploration holes of the summer drill program have resulted in the discovery of a new zone of off-scale radioactivity approximately 400 m south of the Arrow Deposit. This new area of mineralization has been named the South Arrow Discovery and is located on an Arrow-parallel structure that remains almost completely undrilled.”
“This new discovery further highlights the potential for additional discovery at Rook 1,” Healey wrote. “We expect NexGen will continue to deliver positive news flow as its seven-rig, 25,000 m summer drill program progresses in preparation for the PFS due in early 2018 . . . We continue to believe NexGen is significantly undervalued given its comparative deposit scale (global resource >300 Mlb U3O8), grade (165 Mlb U3O8 grading 18.8%), and quality (entirely hosted within competent basement rock).”
Haywood also believes that “NexGen is peerless in the Athabasca Basin and globally as an exploration/developer play, as it controls a large, world-class, high-grade uranium deposit in a proven operating district, with the scale (301.6 Mlb U3O8) to be standalone economic right from the maiden resource.”
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Mining industry can now predict opposition to projects before it’s too late
August 7, 2017
It’s sounds too good to be true, but a new company is proving miners they can foresee opposition or any other form of social conflict related to their projects, before they even attempt going through a licencing process.
Chalkstone, a UK-based company founded by Donald Bray, a political anthropologist and academic at the University of Cambridge, bases its success in a very unique method, applying what’s known as “granular social intelligence.”
“We take a systemic approach and mix methodologies, combining big data and quantitative analysis with ethnography, qualitative interviews and focus groups, all of which help us dig deep into particular issues and accurately define the social stance of a target group,” Bray explains on the phone from his home in Paris.
“We are not interested if the community is, in any way, being taken advantage of” — Donald Bray.
Before going further, he’s quick to note that the goal of his company is not just to help mining companies get what they want, but to assist them in building mutual trust with the groups living in the areas in which they operate.
“We are not interested if the community is, in any way, being taken advantage of,” he says. “Our due diligence runs in a number of different directions.”
The expert, with more than 15 years of experience working across the globe, particularly in conflict zones, is not saying mining companies are the “bad guys” in the story.
“It’s not that firms don’t care about CSR [corporate social responsibility] or don’t want to invest in it. The problem is that most tools currently available don’t really help them grasp the human aspect of their projects,” he says.
Donald Bray, Chalkstone founder.
Half of all risks faced by extractives companies are non-technical ones, which in turn account for nearly 75% of all projects delays. “For a mid to large sized mining company, the costs of these delays (socio-political and community risks) can add up to some $20 million a week,” says Bray. “This is huge and it deserves far more attention than mere box-ticking or forms of corporate philanthropy.”
Chalkstone already has a known success story under its belt. After an intensive study on a ruby mine and a copper deposit in Afghanistan, applying counter-insurgency tactics used by deployed troops, Bray was hired in 2015 by Gemfields (LON:GEM), the world’s largest emerald and ruby miner. At the time, the precious gems firm had committed to building an emerald mine in Colombia.
Part of Chalkstone’s work to help Gemfields enter the market was the creation of a communications platform based in text messaging, which allowed the mining company and local communities to talk freely to one another.
Named by the community as “Suna Verde” (meaning “Green Pathway” in the Muisca aboriginal language), the system kept locals updated on everything from job-training initiatives to when the “health brigade” (a team of doctors and nurses that travel around the countryside) would be in each village. Soon, says Bray, Suna Verde was rivalling the radio as the region’s main source of news and other information.
“The experience showed us that communities want jobs, roads, hospitals and clinics, schools, and any other benefit offered by mining companies, but they want to be actively involved in their decisions. They don’t want to be just beneficiaries of someone else’s goodwill,” says Bray. “This is one of the most important lessons I’ve learned and which is transferrable to almost any community in the world.”
During the first months of work for Gemfields in Colombia, Chalkstone warned the company there was opposition brewing for another international mining firm in the region. Only four months later, that miner was hit by protests and even armed attacks.
“When you invite thousands of voices into a conversation, you need to be prepared for dissenting opinions (…) By listening to all of them, you’re able to get in front of the risks. That’s what happened in Colombia… we were able to see things that you wouldn’t normally see and we told Gemfields about it.”
While Gemfields decided in May to leave Colombia and Sri Lanka to focus on its African projects, the fact the company didn’t face hostility from community members is a testament to Chalkstone’s work, says Bray.
The company, currently involved in mining and oil and gas projects in East Africa, as well as a new venture in Colombia, believes its novel approach could also be useful to investors.
“Given that nearly 66% of shareholder value in a junior miner is linked directly to socio-political and community risks, according to some calculations, investing in understanding the social environment in which a miner will operate shouldn’t be an afterthought or something people turn their minds to only when times get tough,” Bray warns. “Trust is valuable,” he concludes.
These are a few examples of conflicts an approach such as Chalkstone’s could have prevented:
Cameco Corporation: The Bear Case From a Bull
The story behind uranium miners is a good one, even if the current market is bad. But what if things go wrong?
Reuben Gregg Brewer
Jul 27, 2017 at 5:11PM
Cameco Corporation (NYSE:CCJ) is the world’s largest pure-play uranium miner. That hasn’t been a great business to be in lately, but the outlook for uranium appears pretty enticing. For aggressive investors, Cameco’s nearly 80% price decline over the past decade could be a huge buying opportunity. But what if the bull case doesn’t pan out? While I’m optimistic, here’s what could go wrong from a bull’s perspective.
It’s been tough
The first thing to note about Cameco and uranium is that the miner has actually managed to weather a deep industry downturn pretty well. To give you a feel for the pain, uranium prices hit a 12-year low in 2016. But last year was the only year of the last 10 that the company dipped into the red. And that $0.16 per share loss was largely driven by one-time charges to adjust the business to the difficult market environment.
So even Cameco will tell you times have been tough. The outlook, however, remains bright. That’s because of increasing demand for power and the increasing preference for carbon-free energy sources. In fact, there are over 50 nuclear reactors being built right now. That should help to soak up the oversupply in the uranium market today. Add in Japan’s slow march toward restarting nuclear power plants shut after the Fukushima disaster and there’s even more reason to be positive.
In fact, if you are a uranium bull, Cameco could be a great buy today. But before you jump in, you might want to think like a bear.
A dour view of things
For example, look at Cameco’s impressive streak of profits in the face of a deep fall in the price of uranium. A big reason for that is the company’s use of long-term contracts. It’s a very big deal. The company’s realized price for uranium in 2016 was 60% higher than the average spot price for the year. Those contracts simply won’t last forever. If demand doesn’t pick up before its current contracts expire, it will be forced to sell on the spot market at much lower prices.
Demand growth is going to be important. Those 50 new plants being built and Japan’s push to restart its nuclear fleet are big positives. But there are plants being shuttered, too. For example, after Fukushima ocurred, Germany swore off nuclear power.It’s in the process of phasing nuclear out completely with little to stop the process because there’s virtually no support for nuclear in the country. Japan is feeling the heat of negative public opinion, too, which is one reason why the restarting process is taking so long. And never forget that just because someone says they are going to build a nuclear power plant doesn’t mean that they will. In the end, nuclear has a bad image and that could easily leave demand weaker than expected today.
Uranium prices, however, are a mix of supply and demand. And supply could be a bigger problem than you think. Cameco pulled back production in 2016 by 5% and is likely to rein production in even more this year. But money-losing Denison Mines and NexGen Energy Ltd.(NYSEMKT:NXE) are both working to develop new uranium mines from the ground up. In fact, NexGen could end up developing Canada’s largest uranium deposit. That means that even as Cameco is reducing production, new sources of uranium are looming on the horizon that could leave the nuclear power industry with more than enough supply to keep uranium prices low.
Food for thought
I tend to be an optimist, so I believe that carbon-free nuclear power will continue to be an important and growing part of the world’s power grid. That, in turn, will lead to higher prices for uranium as supply and demand balance out. I’m also of the opinion that Cameco’s management team will deftly handle whatever the industry dishes out.
But that doesn’t mean you should go in blind to what could go wrong. A few of the big ones are Cameco’s contracts rolling off before it has a chance to replace them, the potential for continued weak uranium demand, and new uranium supplies creating a headwind to higher commodity prices. Even if you’re an optimist like me, these are issues you should be keeping an eye on, just in case.
Supreme Court of Canada confirms First Nations have no veto power over resource projects
By Nelson Bennett, Business in Vancouver
July 28, 2017, 2:45 p.m.
Image: Kinder Morgan Canada
Just days after the new NDP government said it would work to implement a declaration that ostensibly gives First Nations in B.C. a veto over projects like the Trans Mountain pipeline expansion, the Supreme Court of Canada ruled no such veto exists.
“Overall, the decisions are positive for project development in Canada,” said Robin Junger, an expert in aboriginal law for McMillan LLP and former head of the B.C. Environmental Assessment Office.
On one hand, David Eby, the NDP’s new attorney general, confirmed last week what Junger has previously said to be the case – that his government doesn’t have the legal authority to deny permits for the pipeline expansion.
Those are statutory decisions made by civil servants, not political decisions to be made by cabinet ministers.
On the other hand, last week Premier John Horgan issued a mandate to Scott Fraser, minister of Indigenous Relations and Reconciliation, to work with First Nations “to establish a clear, cross-government vision of reconciliation to guide the adoption of the United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP).”
That declaration has a clause that states that indigenous people have the right to “free prior and informed consent” on development projects within their asserted territory.
On the surface, that sounds like the NDP would be handing the Tsleil-Waututh of Burrard Inlet a veto, since they deny the federal government’s and Kinder Morgan Canada’s right to expand the pipeline in their territory – the Burrard Inlet in Burnaby.
But as the federal Liberals discovered when they too promised to implement UNDRIP, actually giving it legal force would require a constitutional amendment, which is why the federal Liberals abandoned it.
Two Supreme Court of Canada decisions issued on July 26 made it abundantly clear that, while the federal government has a duty to consult, that does not mean that First Nations can veto a project.
In one ruling, the Supreme Court of Canada ruled that regulators like the National Energy Board (NEB) can represent the federal Crown in executing the duty to consult First Nations, but that those consultations must be real, not lip-service.
In the Clyde River Inuit case, the Supreme Court ruled that the NEB has the authority to represent the Crown in executing its duty to consult, but that, in that particular case, it had failed to do so properly. The court ruled the NEB’s consultation failed to properly address the Clyde River Inuit’s concerns.
The other case, involving the Chippewas of the Thames First Nation decision, is particularly relevant to the Trans Mountain pipeline expansion. In that case, the court ruled that the consultation with the Chippewas had been adequate.
The Chippewas were objecting to a reversal and expansion of a pipeline owned by Enbridge. The Supreme Court ruled against the Chippewas in that case and in doing so affirmed that, provided consultations are adequate, First Nations don’t have the legal authority to stop developments in their territory.
“The duty to consult does not provide a ‘veto’ for indigenous peoples over Crown decision,” Blake, Cassels & Graydon LLP explains in a legal brief on the two cases.
So what does that mean for the NDP’s promise to implement UNDRIP? Junger said it is clear that it has no legal force.
“This is the law,” Junger said. “No elected person can change the law by statements.”
“Courts have interpreted Section 35 of our Constitution as saying there’s no veto. So I think don’t any government would have the power, even by legislation, to make that change. It would have to be a constitutional amendment. You can’t make it law by saying you endorse it.”
Uranium to stay weak for now but a ‘violent price increase’ is coming: Cantor
Michael Allan McCrae
Cantor Fitzgerald forecasts $22.14 spot uranium price for 2017 due to Kazakh producers being slow to implement planned production cuts.
“While a 10% reduction was guided by the state-owned organization [Kazatomprom] that by law has an ownership stake in every uranium mine in the country, we suspect that some operators may have dragged their feet in implementing these curtailments,” writes Cantor in a research note.
Cantor says that these prices are unsustainable and notes that some producers are buying from the spot market since to fulfill their deliveries since it is cheaper to buy in the market than to produce.
Another factor depressing prices is secondary supply.
“We currently estimate secondary supplies of about 48M lbs of U3O8 with 22M lbs coming from Russian sources such as enrichment providers via underfeeding. Our conversations with several industry participants leads us to expect continued high levels coming from Russia for at least through 2018.”
However, the research firm is optimistic over the long term.
“Our long-term price remains at US$80/lb, which begins in 2022, as we continue to believe that the supply and demand fundamentals of uranium will lead to a violent price increase, albeit further into the future than initially expected. We view US$80/lb as the long-term equilibrium price level that will incentivize production from the large, low grade African uranium mines, whose production we believe is necessary for future supply and demand to balance.”
Cameco settles U.S. tax dispute; narrows loss
SASKATOON — The Canadian Press
Published Thursday, Jul. 27, 2017 8:09AM EDT
Last updated Thursday, Jul. 27, 2017 8:11AM EDT
Cameco Corp. says it has settled a tax dispute with the U.S. Internal Revenue Service that will see it pay far less than was originally proposed.
The uranium miner says it is required to pay $122,000 (U.S.) instead of an originally proposed charge of $122-million.
Cameco disclosed the settlement as it reported a loss of $2-million (Canadian) for its latest quarter compared with a loss of $137-million a year ago as it continued to face difficult market conditions.
On a per-share basis for the quarter ended June 30, the company said it broke even compared with a loss of 35 cents per share in the same quarter a year ago.
On an adjusted basis, Cameco says it lost $44-million or 11 cents per share for the quarter compared with a loss of $57-million or 14 cents per share in the same quarter last year.
Revenue in the quarter totalled $470-million, up from $466-million.
To save the planet, we must ignore anti-nuclear ideologues
The Globe and Mail
Published Thursday, Jul. 20, 2017 5:01PM EDT
Last updated Thursday, Jul. 20, 2017 5:44PM EDT
There might be a way for the world to meet its carbon-reduction targets that does not involve building more nuclear power plants. The problem is, no one has come up with one. Until that happens, politicians need to get real about nuclear energy’s essential role in saving the planet.
Unfortunately, most of them still have their heads stuck in their solar panels.
The latest greener-than-thou politician to make the perfect the enemy of the good is France’s awkwardly titled Minister for the Ecological and Inclusive Transition, Nicolas Hulot. This month, Mr. Hulot announced the shutdown of as many as 17 of France’s 58 nuclear reactors over the next eight years as part of President Emmanuel Macron’s promise to cut his country’s reliance on nuclear-generated electricity to 50 per cent from 75 per cent by 2025.
Mr. Hulot says he has “absolute faith” in renewable power sources, mainly wind and solar energy, to fill the gap. But as Germany shows, closing emissions-free nuclear power plants, more often than not, leads to burning more fossil fuels to produce power. That’s because wind and solar remain intermittent power sources, while nuclear, coal and natural gas plants can run full-steam 24/7.
In a report last month, the International Energy Agency said “premature closure of operational nuclear power plants remains a major threat to meeting targets,” set under the 2015 Paris climate agreement, to prevent global temperatures from rising more than two degrees above preindustrial levels by the end of the century.
But don’t try telling that to Mr. Hulot. A former star television journalist tapped by Mr. Macron to boost his credibility with environmentalists, Mr. Hulot is France’s version of David Suzuki. In 2012, he sought the presidential nomination for France’s anti-nuclear Green Party. He appears unmoved by expert warnings that France will pay a heavy environmental and economic price if he sticks to his nuclear-reduction plan.
France has long been at the forefront of nuclear research and its nuclear industry, led by state-owned Areva and Électricité de France, is a global leader. But just as some Canadian ideologues want to shut down the oil sands, France’s green ideologues want to shut the country’s reactors.
This promises to be hugely expensive and, ironically, make it much harder for France to meet its greenhouse gas reduction targets under the Paris climate agreement. Wind and solar are unreliable power sources, so “we are obligated to have something else to take over” from nuclear, French climate scientist François-Marie Bréon told Agence France-Presse following Mr. Hulot’s announcement. That “something else” is inevitably fossil-fuel-generated electricity.
The French paradox is being repeated across Europe, where Germany, Spain, Belgium and Switzerland have committed to phasing out nuclear power. This will not only prevent the closing of the continent’s coal plants, it will also increase Europe’s dependence on Russian natural gas, making Vladimir Putin even more powerful than he is now.
In the United States, nuclear power is up against not only opposition from environmentalists but also against fierce lobbying by the powerful American Petroleum Institute. Without a carbon tax, cheap natural gas has hurt the competitiveness of existing nuclear plants. The API, which represents natural-gas producers, seeks to quash the financial incentives that some states provide to enable existing nuclear plants to stay open. Wind and solar power are heavily subsidized. So, the reasoning goes, why shouldn’t emissions-free nuclear power plants be similarly rewarded?
Keeping existing nuclear power plants open is only half the battle. The world needs more nuclear. China and India are adding nuclear power capacity but not fast enough to replace plants being closed in the developed world. Even Britain’s Hinkley nuclear station, set to open in 2026, won’t make up for British capacity reductions before then.
The IEA projects that nuclear capacity additions of 20 gigawatts annually are needed to meet the Paris accord targets by the year 2100, but the world is far off the mark. Nuclear “retirements due to phase-out policies in some countries, long-term operation limitations in others, or loss of competitiveness against other technologies” mean that as much as 50 GW of nuclear capacity could be lost by 2025 alone. Politicians who cave to the anti-nuclear lobby are deluding themselves or misleading voters when they insist wind and solar can make up the difference.
“Increasing nuclear capacity deployment could help bridge the [two-degree scenario] gap and fulfill the recognized potential of nuclear energy to contribute significantly to global decarbonization,” the IEA report said. It called for “clear and consistent policy support for existing and new capacity, including clean-energy incentive schemes for development of nuclear alongside other clean forms of energy.”
Vous écoutez, Monsieur Hulot?
Forecasts for uranium price all point up
July 13, 2017
Uranium was the glaring exception amid a broad-based rally in metals and minerals in 2016. The price of U3O8 fell 41% in 2016 with the industry tracker UxC’s broker average price hitting 12-year lows below $18 per pound in November.
After top supplier Kazakhstan announced in the second week of January that it’s cutting output by 5.2 million pounds, equal to 3% of global production, the price rallied, hitting $26.75 a pound by mid-February.
But Japanese utility TEPCO’s declaration of force majeure on a key uranium delivery contract from Cameco Corp. (CCO-T), the world’s top listed uranium producer, dampened enthusiasm.
And news in April that the US dept of Energy is making cuts to the amount of uranium that it disperses into the market (as much as 1.1m pounds per year less) did little to buoy sentiment, not to mention bad news surrounding nuclear power including the first new reactor to be built in the UK in a generation and risks to the US industry.
Last week Russian state nuclear corporation Rosatom suspended its Mkuju River uranium project in Tanzania for at least three years due to depressed uranium market.
Spot uranium rose to $20.75 this week but remains technically in a bear market, trading down more than 20% from its February peak. Despite the current negativity analysts surveyed by FocusEconomics in July predict a steady increase in the price from today’s levels rising by 40% by the end of next year and over $40 a pound in 2020:
Why Commodity Traders Are Fleeing the Business
The number of trading houses has dwindled, and the institutional, pure-play commodity hedge funds that remain are few.
By Shelley Goldberg
July 12, 2017, 3:00 AM CST July 12, 2017, 11:32 AM CST
Copper, the “beast” of commodities.
Photographer: John Guillemin/Bloomberg
Profiting from commodity trading often requires a combination of market knowledge, luck, and most importantly, strong risk management. But the number of commodity trading houses has dwindled over the years, and the institutional, pure-play commodity hedge funds that remain — and actually make money — can be counted on two hands. Here is a list of some of the larger commodity blow-ups:
The largest and most successful commodity trading house in its day caved, triggered by copper trading
The New York branch of this large German conglomerate lost $1.5 billion in heating oil and gasoline derivatives
Yasuo Hamanaka blamed for $2.6 billion loss in copper scandal
Dissolves after misreporting natural gas trades, resulting in Arthur Andersen, a ‘Big 5’ accounting firm’s fall from grace
Energy hedge fund folds after losing over $6 billion on natural gas futures
One of the best-performing hedge funds in 2011, closed its doors in 2012, shrinking from $2 billion to $1.2 billion on crude oil bets
Brevan Howard Asset Management
One of the largest hedge funds globally. Closed its $630 million commodity fund after having run well over $1 billion of a $42 billion fund
The sister and energy trading arm of Phillip Brothers, ranked (1980) the 15thlargest U.S. company, dissolves
Vermillion Asset Management
Private-equity firm Carlyle Group LP split with the founders of its Vermillion commodity hedge fund, which shrank from $2 billion to less than $50 million.
Amid the mayhem, banks held tightly to their commodity desks in the belief that there was money to be made in this dynamic sector. The trend continued until the implementation of the Volcker rule, part of the Dodd-Frank Act, which went into effect in April 2014 and disallowed short-term proprietary trading of securities, derivatives, commodity futures and options for banks’ own accounts. As a result, banks pared down their commodity desks, but maintained the business.
Last week, however, Bloomberg reported that Goldman Sachs was “reviewing the direction of the business” after a multi-year slump and yet another quarter of weak commodity prices.
In the 1990s boom years, commodity bid-ask spreads were so wide you could drive a freight truck through them. Volatility came and went, but when it came it was with a vengeance, and traders made and lost fortunes. Commodity portfolios could be up or down about 20 percent within months, if not weeks. Although advanced trading technologies and greater access to information have played a role in the narrowing of spreads, there are other reasons specific to the commodities market driving the decision to exit. Here are the main culprits:
- Low volatility: Gold bounces between $1,200 and $1,300 an ounce, WTI crude straddles $45 to $50 per barrel, and corn is wedged between $3.25 and $4 a bushel. Volatility is what traders live and breathe by, and the good old days of 60 percent and 80 percent are now hard to come by. Greater efficiency in commodity production and consumption, better logistics, substitutes and advancements in recycling have reduced the concern about global shortages. Previously, commodity curves could swing from a steep contango (normal curve) to a steep backwardation (inverted curve) overnight, and with seasonality added to the mix, curves resembled spaghetti.
- Correlation: Commodities have long been considered a good portfolio diversifier given their non-correlated returns with traditional asset classes. Yet today there’s greater evidence of positive correlations between equities and crude oil and Treasuries and gold.
- Crowded trades: These are positions that attract a large number of investors, typically in the same direction. Large commodity funds are known to hold huge positions, even if these only represent a small percent of their overall portfolio. And a decision to reverse the trade in unison can wipe out businesses. In efforts to eke out market inefficiencies, more sophisticated traders will structure complex derivatives with multiple legs (futures, options, swaps) requiring high-level expertise.
- Leverage: Margin requirements for commodities are much lower than for equities, meaning the potential for losses (and profits) is much greater in commodities.
- Liquidity: Some commodities lack liquidity, particularly when traded further out along the curve, to the extent there may be little to no volume in certain contracts. Futures exchanges will bootstrap contract values when the markets close, resulting in valuations that may not reflect physical markets and grossly swing the valuations on marked-to-market portfolios. Additionally, investment managers are restricted from exceeding a percentage of a contract’s open interest, meaning large funds are unable to trade the more niche commodities such as tin or cotton.
- Regulation: The Commodity Futures Trading Commission and the Securities and Exchange Commission have struggled and competed for years over how to better regulate the commodities markets. The financial side is far more straightforward, but the physical side poses many insurmountable challenges. As such, the acts of “squeezing” markets through hoarding and other mechanisms still exist. While the word “manipulation” is verboten in the industry, it has reared its head over time. Even with heightened regulation, there’s still room for large players to maneuver prices — for example, Russians in platinum and palladium, cocoa via a London trader coined “Chocfinger,” and a handful of Houston traders with “inside” information on natural gas.
- Cartels: Price control is not only a fact in crude oil, with prices influenced by the Organization of Petroleum Exporting Countries but with other, more loosely defined cartels that perpetuate in markets such as diamonds and potash.
- It’s downright difficult: Why was copper termed “the beast” of commodities, a name later applied to natural gas? Because it’s seriously challenging to make money trading commodities. For one, their idiosyncratic characteristics can make price forecasting practically impossible. Weather events such as hurricanes and droughts, and their ramifications, are difficult to predict. Unanticipated government policy, such as currency devaluation and the implementation of tariffs and quotas, can cause huge commodity price swings. And labor movements, particularly strikes, can turn an industry on its head. Finally, unlike equity prices, which tend to trend up gradually like a hot air balloon but face steep declines (typically from negative news), commodities have the reverse effect — prices typically descend gradually, but surge when there’s a sudden supply shortage.
What are the impacts? The number of participants in the sector will likely drop further, but largely from the fundamental side, as there’s still a good number of systematic commodity traders who aren’t concerned with supply and demand but only with the market’s technical aspects. This will keep volatility low and reduce liquidity in some of the smaller markets. But this is a structural trend that feasibly could reverse over time. The drop in the number of market makers will result in inefficient markets, more volatility and thus, more opportunity. And the reversal could come about faster should President Donald Trump succeed in jettisoning Dodd-Frank regulations.
(Corrects attribution of Goldman’s review of commodity operations in third paragraph.)
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Fear of radiation is more dangerous than radiation itself
By David Ropeik:
He is an instructor in the environmental programme of the Harvard Extension School, and an author, consultant and public speaker who focuses on risk perception, communication and management. His latest book is How Risky Is it, Really? Why Our Fears Don’t Always Match the Facts (2010). He lives near Boston, Massachusetts.
Photo by Gregg-Webb-IAEA
The fear of ionising (nuclear) radiation is deeply ingrained in the public psyche. For reasons partly historical and partly psychological, we simply assume that any exposure to ionising radiation is dangerous. The dose doesn’t matter. The nature of the radioactive material doesn’t matter. The route of exposure – dermal, inhalation, ingestion – doesn’t matter. Radiation = Danger = Fear. Period.
The truth, however, is that the health risk posed by ionising radiation is nowhere near as great as commonly assumed. Instead, our excessive fear of radiation – our radiophobia – does more harm to public health than ionising radiation itself. And we know all this from some of the most frightening events in modern world history: the atomic bombings of Japan, and the nuclear accidents at Chernobyl and Fukushima.
Much of what we understand about the actual biological danger of ionising radiation is based on the joint Japan-US research programme called the Life Span Study (LSS) of survivors of Hiroshima and Nagasaki, now underway for 70 years. Within 10 kilometres of the explosions, there were 86,600 survivors – known in Japan as the hibakusha – and they have been followed and compared with 20,000 non-exposed Japanese. Only 563 of these atomic-bomb survivors have died prematurely of cancer caused by radiation, an increased mortality of less than 1 per cent.
While thousands of the hibakusha received extremely high doses, many were exposed to moderate or lower doses, though still far higher than those received by victims of the Chernobyl or Fukushima nuclear accidents. At these moderate or lower doses, the LSS found that ionising radiation does not raise rates of any disease associated with radiation above normal rates in unexposed populations. In other words, we can’t be sure that these lower doses cause any harm at all, but if they do, they don’t cause much.
And regardless of dose, the LSS has found no evidence that nuclear radiation causes multi-generational genetic damage. None has been detected in the children of the hibakusha.
Based on these findings, the International Atomic Energy Agency estimates that the lifetime cancer death toll from the Chernobyl nuclear accident might be as high as 4,000, two-thirds of 1 per cent of the 600,000 Chernobyl victims who received doses high enough to be of concern. For Fukushima, which released much less radioactive material than Chernobyl, the United Nations Scientific Committee on the Effects of Atomic Radiation (UNSCEAR) predicts that ‘No discernible increased incidence of radiation-related health effects are expected among exposed members of the public or their descendants.’
Both nuclear accidents have demonstrated that fear of radiation causes more harm to health than radiation itself. Worried about radiation, but ignoring (or perhaps just unaware of) what the LSS has learned, 154,000 people in the area around the Fukushima Daiichi nuclear plants were hastily evacuated. The Japan Times reported that the evacuation was so rushed that it killed 1,656 people, 90 per cent of whom were 65 or older. The earthquake and tsunami killed only 1,607 in that area.
The World Health Organization found that the Fukushima evacuation increased mortality among elderly people who were put in temporary housing. The dislocated population, with families and social connections torn apart and living in unfamiliar places and temporary housing, suffered more obesity, heart disease, diabetes, alcoholism, depression, anxiety, and post-traumatic stress disorder, compared with the general population of Japan. Hyperactivity and other problems have risen among children, as has obesity among kids in the Fukushima prefecture, since they aren’t allowed to exercise outdoors.
Though Chernobyl released far more radioactive material than Fukushima, fear caused much more health damage still. In 2006, UNSCEAR reported: ‘The mental health impact of Chernobyl is the largest public health problem caused by the accident to date … Rates of depression doubled. Post-traumatic stress disorder was widespread, anxiety and alcoholism and suicidal thinking increased dramatically. People in the affected areas report negative assessments of their health and wellbeing, coupled with … belief in a shorter life expectancy. Life expectancy of the evacuees dropped from 65 to 58 years. Anxiety over the health effects of radiation shows no signs of diminishing and may even be spreading.’
The natural environment around the Chernobyl and Fukushima Daiichi accidents adds evidence that ionising radiation is less biologically harmful than commonly believed. With people gone, those ecosystems are thriving compared with how things were before the accidents. Radiation ecologists (a field of study that blossomed in the wake of Chernobyl) report that radiation had practically no impact on the flora and fauna at all.
The risk from radiophobia goes far beyond the impacts in the immediate area around nuclear accidents. Despite the fact that radiation released from Fukushima produced no increase in radiation-associated diseases, fear of radiation led Japan and Germany to close their nuclear power plants. In both nations, the use of natural gas and coal increased, raising levels of particulate pollution and greenhouse gas emissions.
Neither country will meet its 2020 greenhouse gas emissions-reduction targets. Across Europe, fear of radiation has led Germany, France, Spain, Italy, Austria, Sweden and Switzerland to adopt policies that subsidise solar, wind and hydropower over nuclear as a means of reducing greenhouse gas emissions, despite the fact that most energy and climate-change experts say that intermittent renewable energy sources are insufficient to solve the problem. In the United States, 29 state governments subsidise wind and solar power, but only three offer incentives for nuclear, which produces far more clean power, far more reliably.
Fear of radiation has deep roots. It goes back to the use of atomic weapons, and our Cold War worry that they might be used again. Modern environmentalism was founded on fear of radioactive fallout from atmospheric testing of such weapons. A whole generation was raised on movies and literature and other art depicting nuclear radiation as the ultimate bogeyman of modern technology. Psychologically, research has found that we worry excessively about risks that we can’t detect with our own senses, risks associated with catastrophic harm or cancer, risks that are human-made rather than natural, and risks that evoke fearful memories, such as those evoked by the very mention of Chernobyl or Three Mile Island. Our fear of radiation is deep, but we should really be afraid of fear instead.