Thursday, 19 September 2013, 07h30

Challenges of the current global economy on Swakopmund

Members of NCCI

I am honoured to speak to you this morning about the global economy and the impact it has on Rössing and Swakopmund. I will, however, not be wasting your time with things that you already know.

Everyone in Swakopmund is well aware that the uranium industry is going through a particulary tough time internationally. It is only here in Swakopmund - an international uranium production hub - that we experience the peculiar situation of one of the world's largest uranium mines being constructed during an extreme downturn in the market. It is true however, that uranium - as a commodity - functions in an extremely long-term environment. The reason for that is mainly associated with the time and cost involved into getting new uranium demand into the market. From the concept phase of a new nuclear power station to actual construction and commissioning is usually in excess of 15 years. New nuclear builds require extensive regulatory approvals before the rest of the process starts.

The growth of the nuclear market therefore takes a long time before any progress is evident. The contraction on the other hand can happen in a really short period of time as was evident after the Fukushima incident. In a short period, the prices started to tumble. Currently spot prices are below USD35/lb and these are not sustainable levels. The bad news is that it will not improve overnight.

Other commodities on the other hand show a fairly quick response to global developments - whether positive or negative. But similar to the uranium scenario, the recovery takes longer than the contraction.

Since the middle 2000's the world has seen a commodity boom and it would seem that this boom is running out of steam. This has resulted in mining companies across the globe - in all commodities - starting to cut back on costs. The starting point on costs is usually with discretionary spend. Discretionary spend usually does not impact directly or immediately on production and would typically happen in areas such as:

• Employment - especially those employees associated with support and maintenance roles.

• Expansion capital - this is money usually spent on engineering and construction projects. These would typically be big ticket items that would have usually led to improved production.

• Sustainable capital - this is the capital that would be spent to replace existing equipment. A good example would the replacement of vehicles after a certain period of time or use and now extending those intervals of replacement.

• Maintenance - usually looking at ways to move towards less frequently planned maintenance intervals. This of course may have longer-term impacts, but the short-term objectives of survival will usually prevail.

Getting closer to home we should assess whether we can start seeing the same things happening and whether the trend confirms my claim that the mining sector is under stress - especially uranium mining.

In recent months we have witnessed the following:

• The retrenchment of workers at almost all of the uranium operators in the region, including significant reductions in their contractor numbers. The contractor numbers are usually not so widely reported on and in Swakopmund's case the most significant reductions have mostly happened in this area. Twelve months ago, we struggled to get any applicants for technical positions - most recently many people are applying.

• All the companies have announced that a freeze has been put on any expansion work totaling hundreds of millions of Namibia Dollar. Even smaller expansion and improvement projects have been cancelled.

• Companies have been looking at ways to use their assets for longer before replacing it.

• Routine work - especially major maintenance work - is being pushed out as far as possible.

All of the above mentioned do not only have an impact on the direct service and goods providers but also on the secondary and tertiary suppliers such as accommodation, tourism and other services.

Fortunately, for Swakopmund the huge Husab project was started at the same time that other companies reduced employment and spending in the wake of the market downturn.

Capital projects usually require major imports and fortunately Swakop Uranium (Husab) is on record confirming that they will use as many Namibian goods and services as possible.

The reality is that the spending cuts introduced by other operations amount to hundreds of millions and will be directly experienced by local businesses - the cut in employment spend especially will be directly felt. That is now, but most importantly - what about the future? I will start by talking about a few things I do know:

1. Economic growth in China is continuing, albeit at a slower pace.

2. China is continuing to aggressively expand its nuclear capacity.

3. The Japanese economy is suffering due to their nuclear reactors being shut down.

4. Once the capital has been sunk, nuclear reactors are more affordable than most other options to operate.

5. Nuclear energy is widely acknowledged as clean energy.

I also know that:

1. It has almost been three years since the Fukushima incident and no Japanese reactor is operating - ie using any fuel.

2. The current spot price of uranium is below US$35/lb - this is lower than the total production cost of any of the operations in Namibia. It is only because some of their sales are covered under term contracts that they have been able to realise higher averages. Heading into 2014 that will change because buyers are reluctant to enter into longer term agreements at the moment due to the overhang on supplies.

3. Even more suppliers are coming into the market with the development of Husab in Namibia and Cigar Lake in Canada. Kazakstan is also continuing to expand.

4. Shale gas is cheap and abundant.

Is there hope then?

Different agencies, including the International Atomic Energy Agency (IAEA) and World Nuclear Association (WNA) continue to issue forecasts and demand estimates. Although they differ in timing and extend, they all agree that the industry would recover over the next five years or so.

Where does Rössing stand in all of this?

We have significantly reduced the number of permanent employees and contractors on site.

This has allowed us the opportunity to significantly improve the productivity of our operation. There is still much to do in this area to be an internationally competitive producer.

Spending in various fields has been cut, without severely impacting our ability to function.

There have been a few good things coming from this business improvement process, such as the acid supply agreement that was signed with Dundee Precious Metals.

Rössing's current mine life extends up to 2023. The original mine life was 20 years from 1976.

Work is continuing around options to expand Rössing's life, even beyond 2023. Improved prices will obviously assist such options.

Rössing is also looking at innovative ideas in this regard.

Rössing continues to align with national objectives as expressed in Vision 2030 and NDP4. Huge focus is put on further improving local spend - the Dundee deal is a very good example of this.

Our Namibian employment now stands at 98.37 per cent and I believe that this is good considering our industry and the continuous need for cross-pollination. There are also Namibians working elsewhere in the world for Rio Tinto - even heading up some of their businesses.

In conclusion, I would like to say that my immediate thought is that within three to five years we should start to see improvements in the market, should we be spared any future Fukushima-like incidents.

 

Werner Duvenhage
Managing Director
Rössing Uranium Limited