Uranium Case Study

By Jeffrey Schimmer   •   9/8/2021

The following is based on an evaluation SIAS conducted in 2020 in response to a client request.

Anyone involved in an acquisition knows how complicated the process can become. You can start with a few uranium sites in southern Texas and, before you know it, find yourself looking into Native American tribal claims in Arizona. In the extractive industry, one player involved in any acquisition is the surety provider. Environmental bonds — reclamation, closure, and post-closure — are necessary for almost every large-scale extractive site, which a third-party surety provider must underwrite in most jurisdictions. When assets are sold to a new company, the bonds are reviewed and need to be reissued. This provides an opportunity for the underwriter to reassess the risks involved and negotiate different terms with the prospective owner or even choose not to bond if the underwriter believes the financial exposure will be too high. However, choosing not to bond the prospective owner could raise other problems for an underwriter, as we shall see.

The year is 2020. Greenwood Resources is the current owner of three uranium mines in Texas and holds additional proven reserves in Arizona and New Mexico. Greenwood is seeks to sell these to the Eastbay Mining Company (EMC), an international company looking to increase its uranium resources in North America. The three Greenwood operations — El Sereño, Blanca, and Vista — are bonded by ABC Surety for a total penal sum of $18 million, with $7 million held in collateral. The Arizona and New Mexico properties are not active, so they do not require any financial assurance.

It came as no great surprise to ABC when Greenwood announced that it was in negotiations to sell its holdings in Texas, Arizona, and New Mexico to EMC. Yellowcake,^[1] the primary product of commercial uranium mining and used for fueling nuclear powerplants was in a down market, trading at less than $40 per pound of U₃O⁸e.^[2] For Greenwood to produce yellowcake at a profit, it would need domestic market prices to hit $45 per pound.

The depressed market price for yellowcake was further compounded with a specific problem that Greenwood had in Texas. Greenwood needed to keep its Texas operations in “care-and-maintenance status” with some minimal production. Otherwise, Texas regulations would require deactivating the sites. Deactivation would trigger closure and reclamation, a costly process. Care and maintenance is used to avoid this requirement. But care and maintenance is not cheap, as it requires cash flow to maintain staff and low-level operations without actual production revenue. And Greenwood was cash poor.

Meanwhile, ABC needed to determine its position in the proposed acquisition. Although it was currently underwriting the Texas sites under Greenwood's ownership, it was not legally compelled to continue bonding the sites under EMC ownership. But there might be strong incentives to do so, not necessarily to strengthen its position, but rather to avoid increasing its exposure because if EMC could not find another underwriter to bond the properties, the acquisition would more than likely fall through. So, ABC Surety turned to SIAS Global to get an evaluation of the situation.

The SIAS Global team first looked at the financial position of both companies. Given Greenwood’s position, EMC’s acquisition of these assets would likely reduce ABC’s underwriting risk. EMC has more cash than Greenwood, but the caveat remained — like Greenwood, EMC needed the domestic price of yellowcake to be in the range of $45 to $50 per pound to start producing. So, what was the likelihood of this happening within the next 2 to  3 years?

In 1996, 80% of delivered yellowcake in the United States was imported. By 2019, that number has reached 90%.^[3] During the Trump administration, the Department of Energy (DOE) stated its concern that the United States had lost its competitive edge in nuclear energy.^[4] One of the solutions that DOE proposed was to restrict imports from certain countries, namely Russia and China. However, restrictions on just these two countries wouldn’t necessarily have a major impact on imports, as the majority of imports come from other central Asian countries and Canada. And with the Presidential election only months away at the time, it was unclear what an incoming Biden administration’s stance might be on nuclear energy as part of a push for increasing electricity production while lowering greenhouse gas emissions.

Turning to demand, the price of yellowcake in the United States decreased between 2018 and 2019, despite a 20% increase of the amount of yellowcake purchased in 2019 compared with that in 2018.^[5] Given the location of Greenwood’s yellowcake processing facility in Texas and its proximity to commercial shipping ports, international markets might be an option. But recent demand for U.S. uranium overseas had been practically nonexistent, with nearly zero exports.^[6] Additionally, a report from the Energy Information Administration projected a 20% decrease in nuclear electric generating capacity in the United States by 2050.^[7] This is despite two new nuclear reactors under construction and eight more being planned, which would bring the national total to 106 reactors.

Building beyond that capacity depends on social and political factors: the general public’s concerns about the safety of nuclear powerplants; environmental advocacy groups’ advocacy for solar and wind energy, rather than nuclear energy, among fossil fuel alternatives; and most States’ reluctance or adamant rejection to storing nuclear waste within their respective jurisdictions.

SIAS Global then turned its attention to the three Texas sites that ABC was underwriting at the time and whether ABC should continue to underwrite them if Greenwood sold them to EMC. Remember, ABC had the option not to underwrite them for a new owner. However, this could cause problems in completing the acquisition because, without another underwriter committed to bonding the sites, EMC would not be able to renew the permits on the sites and, thus, would have no incentive to purchase them.

Meanwhile, if Greenwood lacked the cash flow to keep the properties in care-and-maintenance status, the company would face closure and immediate reclamation of the properties. Worse, they could file for bankruptcy, leaving ABC to pay for the closure, reclamation, and post-closure costs from the bond, incurring an $11 million loss (the full $18 million penal sum minus the $7 million collateral held).

Thus, using SIAS Global’s Kairos Database™, the SIAS team searched for the current and past regulatory information on the three Texas sites, including permits and any violations issued by State or Federal agencies. With these records and additional direct inquiries to the applicable regulatory agencies, the team established the regulatory context before applying SIAS Global’s proprietary Advanced Analytics™ technology to analyze each site. SIAS Global’s Advanced Analytics™ evaluate numerous characteristics of extractive sites to assess, for example, site disturbances and overall management and to track reclamation progress over time by determining the stage of reclamation and evaluating the success of revegetation, both of which are needed to estimate reclamation costs.

Using these analytical tools, the SIAS team checked Greenwood’s assertion that it had submitted a request to regulators for a $4 million bond reduction (although Greenwood did not specify at which site and the nature of the reclamation). The team also estimated the current cost of reclamation by comparing SIAS imagery analyses with the regulatory reclamation requirements and estimates. As a result, the team's findings suggested that Greenwood had done very little, if anything, in terms of observable reclamation and nothing that would justify a $4 million bond reduction. The team concluded that the sites were at full penal sum exposure and would likely cost more than the penal sum for full reclamation and post-closure monitoring.

In addition to the Texas assets, the SIAS team also had to evaluate the potential future value of the Arizona and New Mexico assets because these sites could leverage the EMC’s value when raising needed capital on the equity markets. Exploration surveys contracted by Greenwood indicated considerable reserves of uranium located at the company’s holdings in both States. Having the rights to mine them could be immensely valuable in a futures market that sees growth in uranium demand. But there is also a long, complicated history in both States involving Native American rights to the lands on which such reserves are located.

In the case of Greenwood’s reserves in Arizona and New Mexico, the SIAS team found that a large portion of the tracts were indeed on Tribal lands. Developing mines to exploit these valuable reserves would require a good working relationship with local Tribes. According to a SIAS Global contact at EMC, the company was confident that it could foster a good relationship with the Tribes and develop these sites, which was a key component of the company’s growth strategy. Thus, these reserves became an important factor in evaluating the short-term potential cash flow available to EMC. If the company convinced the markets of the viability of these reserves, EMC’s short- and long-term financial viability would be more promising and particularly appealing to ABC’s decision to underwrite the required Texas bonds as part of the acquisition package.

After considering these and other factors, SIAS Global's final report concluded with several key findings. First, all three sites— El Sereño, Blanca, and Vista—had been well maintained. Still, there was no observed evidence of any extensive reclamation that would satisfy a sizable bond release, as was verified by regulators. Thus all three sites were at full bond exposure. Second, EMC had a stronger financial position in both cash flow and the potential for future capital raises of the two companies. Thus, EMC edged out Greenwood in terms of its ability to endure another couple of years or more of waiting for a market uptick in uranium demand and price. Lastly, the final report established that the Arizona and New Mexico holdings were key to sustaining cash flow for the short- and mid-term. These prospects could be used to leverage operating capital if the viability of their extraction in the mid-term was persuasive to investors. Armed with this information, ABC could negotiate its part of the acquisition with confidence.

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