Let’s start by talking about your investment strategy at Queen’s Road Capital and where your current focus is at the moment.
We’re an investor in the mining sector, a sector that is absurdly risky. You can lose your shirt by investing in the mining sector. So, what do we do? We mitigate risk. That’s the most important thing that we do.
How do we mitigate risk? First thing we do is we don’t buy mining equities. Mining equities go up and down, and you can lose money. I’m all about not losing shareholders’ money. So, we buy debt. We’re top secured in the capital structure, we’re ahead of the common shareholders. Hence, in that way, we protect the downside, but all our debt is convertible into equity. We have unlimited upside exposure to those equities when they take off and that’s what you want, you want all the upside, and not the downside. So, we protect ourselves through structure.
We do two other things: we protect ourselves by investing in only the best quality mining assets around the world. So, as you know, commodity prices go up, down, up, down, and there’s good times and bad times. When you have a high-quality ore body, you’re always going to make money. It’s just a question of how much money you’re going to make. If commodity prices are down, you make less, and if commodity prices are up, you’re going to make a lot of money. But the most important thing is we want to be in investments that always make money. The third thing we do to mitigate risk, is we invest in countries that will allow you to continue to own the mine that you’ve built. There’s no sense in owning a great ore body, if 10, 20 years from now, someone decides to take it from you. You want to own it, not only for your lifetime, but for your children’s lifetime. And the only way you have a hope of doing that is by investing in relatively safe countries.
Can you elaborate on those safe jurisdictions that you mentioned?
Everything in mining is relative. I used to invest Mr Li Ka-shing’s money in the mining sector. And Mr. Li is renowned for being geopolitically risk averse. You look at his order of a trillion dollars of assets all over the world. Where are they? They’re in Australia, they’re in the UK, they’re in Canada, they’re in OECD countries. It’s quite something to have a quarter of a trillion dollars of assets and a global operation in multiple industries and have it all in OECD countries. When I was investing his money, he said, “Warren, I understand you’re in the mining business and you must go where the mines are. There aren’t many mines in London or in Hong Kong. So, I understand you can’t put your money here, but stay on the safe side and don’t go to any, as he called them, funny countries.” So, we avoid the funny countries.
What does that mean in the mining context? There are several places that we just won’t go, and I probably don’t need to name them. Everyone in the industry knows where the far end of the risk curve is. We just simply don’t even look at ore bodies there. We do not look at opportunities there. We take a good hard look at ore bodies in Canada, the US, and Australia. And even then, we’re very selective. There are places in Canada I won’t go. There are places in the US we won’t go, there are places in Australia we won’t go. Likewise, there are even more places in Africa and South and Central America where we just won’t go. We’re pretty selective.
There’s been a surge of interest recently in uranium, with prices reaching a 16 year high. What are the drivers of this? And is this likely to continue?
First of all, surge of interest? You’re absolutely correct. What explains this surge of interest is two words: climate change. Climate change is the overwhelming driver of the resurgence of interest in nuclear. If we’re going to have carbon free power, there are only a couple of sources. One is nuclear, and one is renewables. Of those two, nuclear is the only reliable 24/7 available, non-carbon source of power. Renewables, as we all know, are great, and they’re becoming more and more economically feasible. But, it requires the wind to blow and the sun to shine. Even hydropower is no longer reliable. In fact, due to climate change and changing weather patterns, the level of water in dams is no longer reliable. So, even hydro, which used to be considered highly reliable, is not. So, nuclear is a very elegant solution to the challenge of climate change.
We’re seeing more governments accepting uranium, though there are still a few that aren’t on board. Are we seeing the public perceptions of uranium evolving?
One of the articles in the FT today addresses that very fact. The US is the largest producer of nuclear energy, the largest single consumer of uranium to feed that nuclear fleet, with China quickly catching up to them. A recent survey in the US had 60% of the population in agreement. 60% of the US population doesn’t agree on anything! Yet they agree on one thing, supporting new nuclear builds, not just refurbishment and continuing the ones that exist. They’re supportive of new nuclear builds in the country. Both the Democrats and the Republicans — we have bipartisan support in the US for nuclear, there is not bipartisan support in the US for anything. And yet they both agree that for the US to go forward and meet its climate objectives, nuclear power has to be part of the solution.
So, that’s just one indication. And that’s in the biggest market in the world. Obviously, that is being reflected in other parts of the world. The EU has gone nuclear, with the one glaring exception of Germany. But the rest of Europe has adopted nuclear as part of their green platform. And Asia obviously has massively adopted nuclear, with China leading the charge. Also, in South Korea and India, it’s widespread, it is truly a nuclear energy renaissance.
What is your outlook on supply? A few big players have announced that they’re likely to fall short. How do you think that will play out?
Now we’re getting into the supply demand discussion for uranium, which is the reason why we’re such a big investor in uranium. I’ve outlined that demand looks pretty healthy and it’s transparent. You can’t hide a nuclear reactor. All the uranium goes to feeding nuclear reactors, and everyone knows exactly how many there are, and we all know how much they consume. So, the demand side of the equation is quite transparent and is supportive of growth, not just extending the lives of existing reactors, but massive new growth, especially in Asia. So, demand is looking quite healthy.
Supply is quite problematic. It takes a very, very long time to bring a new uranium mine into production. Our biggest investment NexGen Energy (TSX: NXE) is the highest grade, simply the best undeveloped uranium project in the world. We discovered that in 2014, which is 10 years ago and we’re still not permitted. Despite there being no question of the economic viability, it’ll be the richest uranium mine on the planet, one of the richest mines of any kind on the planet. So, economics are not a problem. Jurisdiction is not a problem, it’s in Saskatchewan, surrounded by half a dozen other uranium mines. The market is not a problem, with growing demand for the product. It just takes a long time for governments to approve new uranium mines. If all things go as planned we’ll be in production by 2028, that’s 14 years from discovery to production. That’s a long time for a supply response.
There is some new supply coming online, but those are all restarts of old mines and a relatively small amount of production. The two big producers, Kazatomprom in Kazakhstan, and Cameco in Canada, have both announced that they see tremendous growth in demand and have gone back to full production. Both are now targeting full production by 2025/2026. The challenge is that uranium mining is not that easy. And saying that you’re going back to full production and then actually achieving it are two different things.
All of that to say that demand is healthy and growing, supply is difficult, and takes a long time to come onstream. What does that mean? That translates into high prices for a long period of time. High prices for a long period of time means a good investment environment, which is why we have 70% of our asset basically in uranium.
And just to follow on from that, are you seeing any shifts and government policies to accelerate this?
We’re not seeing any shifts in government policy regarding permits. The permitting process is taking a very long time, and I don’t anticipate that it’ll speed up anytime soon. Where you are seeing policy shift is in the support of the industry, in terms of willingness to approve new nuclear reactors. You see that constantly. But the timeframe doesn’t change.
Do you have any final insights you’d like to add?
I just want to emphasize that Queen’s Road, although we’re discussing uranium, is not all about uranium, we’ve got 30 to 40% of the rest of our portfolio in gold, which hit an all-time record high this morning. So, we’re going well on two fronts.
