Annual Financial Report 30 September 2024
17 JANUARY 2025
GEIGER COUNTER LIMITED
(THE "COMPANY")
RELEASE OF REPORT AND FINANCIAL STATEMENTS
The Directors announce the release of the Annual Report and Financial Statements for the year ended 30 September 2024, which are included as an attachment to this announcement.
http://www.rns-pdf.londonstockexchange.com/rns/7790T_1-2025-1-17.pdf
CHAIRMAN'S STATEMENT - FOR THE YEAR ENDED 30 SEPTEMBER 2024
The broader uranium market has performed strongly over the last few years as nuclear's vital role in the carbon-free energy mix continues to be widely acknowledged. Supply-side concerns persist, which has put pressure on the price of uranium and driven returns in the sector.
After a promising start to the Company's financial year in which the net asset value rose from 64.66p to a figure of 71.30p at the end of March 2024, the second half of our financial year saw more market conditions ease as the spot price for Uranium (U3O8) declined from its rapid rise to US$107/lb in January, although it still retained an increase of 10% by the end of the period under review. The net asset value of the fund ended the year at 53.93p, representing a decline from 2023, and the Company's share price return was also negative as the share price fell from 52.0p on 30 September 2023 to 44.25p at the end of September 2024.
Despite this decline, global support for nuclear energy combined with a palpable lack of supply suitable for Western markets coming online is supportive of long-term demand strength. Nuclear energy has become the basis of carbon emission reduction strategies across the world. Recognition by global governments - from the US, China, Japan and across Europe - of nuclear power's pivotal role in reaching net zero, due to the fact it produces zero carbon emissions and does not produce other greenhouse gases through its operation, has seen it included in green policy frameworks the world over.
More recently, commercial power agreements signed by big tech companies (including Amazon, Microsoft and Google) validate the core role of nuclear power within global energy policy amid seeming western utility complacency to manage fuel inventories which are rapidly approaching critical levels, especially in the US, which is currently the largest consumer of nuclear fuel.
The discount to net asset value for the fund was 17.9% at the end of September 2024, and remains a primary focus for the Board and portfolio managers alike. Through consistent and meaningful action, we believe we are now, finally, on the path to slowly correcting this imbalance. The section below titled Share price discount to NAV provides more details on this.
Investment
The early part of our financial year from September 2023 to Spring 2024 marked a very buoyant period in the uranium sector following a successful COP28 conference which showed strong international support for nuclear energy. Spot prices for uranium surged during this period and reached a high point of $107 per lb in January 2024. Prices and enthusiasm ebbed away however and following the peak in January 2024 the price per pound fell to $81.75 per pound at the end of September 2024. Interestingly, global support for "base-load" power provided by nuclear energy extrapolated, as the only feasible source for powering national grids worldwide. The US voting to restrict the importation of Russian-sourced material at the end of April and a number of other countries such as Japan, France, Sweden and South Korea agreed to further extend existing reactor lives and expand generating capacity. In Asia, China nuclear roll-out continues apace. With 15 reactors currently already under construction, China's total nuclear power generation capacity is on track to exceed 100GW before the end of the decade, with the region overtaking the US as the largest nuclear power market.
The UK, perhaps more determinedly post-period end, is also investing heavily in nuclear power, with Hinkley Point C and Sizewell C on path to become Britain's first new nuclear reactor in 30 years. Your investment managers and Board of Directors remain optimistic that the portfolio is positioned appropriately to benefit from continued support for uranium. The investment managers report on pages 11 to 17 sets out the investment position more fully.
Share price discount to NAV
The Directors and Manager remain concerned about the wide discount to NAV, and have implemented a strategy to mitigate this trend.
The discount has widened significantly since 2022 when the shares were trading at a premium and the Company was issuing new shares. Following the subscription rights exercise in April and May 2024 the discount has remained at a fairly wide level and thus, in response, we have engaged in a program of buy backs to provide liquidity, increase the NAV per share and ideally narrow the discount. The narrowing is of course not guaranteed as the provision of liquidity can of course create new sellers. Although a challenging balance to attain, we are actively monitoring this and are optimistic that this will benefit.
Unfortunately, we are not the only investment trust to experience this trend: the widening of discounts across the Investment Trust sector have created significant dislocations in valuation. The difficulties asset managers find when investing in niche sectors and the negative impact of passive investment, which is often just driven by momentum, are part of the reason for the lack of reaction to under valuation. We are very fortunate to have a broad retail base, helpful to a small trust and generates relatively good liquidity.
During the period under review the Board has utilised its share buyback powers to repurchase 11,469,543 ordinary shares at a cost of £6.07m. Since the end of September, the Company has continued to utilise the share buyback authority and has repurchased a further 1,687,405 shares at a cost of £869,275.
London listing
Further to the Company's announcement on 22 March 2024, the Board has determined to move the Company's admission to trading on TISE to admission to listing in the closed-ended investment funds category of the Official List of the FCA and to trading on the Main Market of the London Stock Exchange.
The Board firmly believes the Company is well placed to take advantage of investment opportunities in the uranium sector, and the exposure supplied from the listing will be of benefit to the Shareholders of the Company. In the coming year, we expected to see favourable supply and demand characteristics continue. Your Company is very well placed to exploit these unique conditions, not least because of the exceptional skill and expertise of the management team, whose strategy we wholeheartedly endorse. We are confident that the end result will justify a prolonged wait.
On behalf of the Board, I would like to thank shareholders for their continued support in the Company.
Ian Reeves CBE
Chairman
December 2024
INVESTMENT ADVISER'S REPORT - FOR THE YEAR ENDED 30 SEPTEMBER 2024
Summary investment thesis for Uranium miners
Nuclear power continues to grow globally, more recently accelerating given its benefits as zero carbon baseload power, whilst the supply of uranium to supply these has been constrained due to over a decade of low prices.
For Uranium, the demand side of the equation is the easiest to analyse, as there is a global fleet of 413 reactors, whilst the West is more a story of reactor life extensions to help meet carbon emission targets, China is the major source of fleet growth globally, adding ~10 reactors per year, with plans to add 100 of the next decade. Into the 2030's SMR's (Small Modular Reactors) will likely become the main source of growth in the west given their quicker construction times can better match end user demand and thus receive industry led financing. This is an incremental source of demand that has seen large progress this year, with big US tech companies such as Amazon, google, Microsoft and Meta (Facebook) all looking to nuclear as the power source for their new AI data centre plans.
The supply side of the equation is where recent developments have really shifted from a long-term structural shortage to nearer term supply risk for a major component of the West's electricity generation. Russia has banned exports to the US, whilst the US looks likely to enter a trade war with China under Trump. China and Russia control around 75% of nuclear supply chain from production via JVs and offtake with Kazakhstan, ownership of mines in Namibia, influence over Niger's production post their coup. By owning ~75% of the worlds conversion, enrichment and fabrication they control much of the supply chain in converting U3O8 in to nuclear fuel for reactors. China has already banned the exports of some rare earths used in chip manufacture to the US, so with the worlds largest stockpiles of uranium is likely to use uranium as a threat against Trump's intended tariffs if we see a wider trade war.
The conclusion of this is that with ~75% of the worlds nuclear fleet being in the West, we believe there is structural shortfall in western uranium supply today, not in 5-10 years as some global supply demand models assume. China will continue to build inventories for energy security and due these stockpiles being key in them expanding their nuclear power plant construction around the world. Russia will continue to sell to China. Kazakhstan's SOE Kazatomprom will continue to look to be a reliable supplier to western utilities, but given Russian control on some of their production via JV's and China having large offtakes on their supply, whilst both Russia and China share large borders, this will limit available material to western utilities.
The West's largest producer Cameco is largely sold out for the next 5 years and likely beyond, leaving limited spare supply for Western reactors to contract. Nexgen, the funds largest position, is the largest source of incremental supply, starting in 2029, with minimal contracts in place it is perfectly positioned to benefit from the upcoming contracting cycle, where it should capture most of the anticipated upside in the Uranium price. The funds positioning is heavily weighted to Western producers and developers, primarily through Canada's Athabasca basin, with the larger developer weight enabling them to benefit from higher priced uranium sales contracts and a materially improving regulatory backdrop as Western countries become increasingly aware of the energy security implications.
These themes are discussed in more detail below.
Long term supply shortage
Source: UxC, Company reports, RBC Capital Markets estimates
Performance
The first six-months of the financial year saw the net asset value of the Company increase from 64.66p as at 30 September 2023 to 70.74p at the end of March giving an overall return of 9.4%, as positive news flow from the uranium sector supported the underlying portfolio of equities.
After this strong first half the sector saw some weakness in with the spot Uranium (U3O8) price consolidating from its January peak of $107 per lb to end the financial year at $81.75 per pound, representing a respectable rise of 10% over the 12-months to end-September. The underlying equities followed a similar trajectory.
The Company's net asset value subsequently declined (including a 5.5% dilution effect from the issue of shareholder embedded rights) and against a backdrop of 6% appreciation of sterling (which reduced the value of its non-sterling assets) declined 23.5% to end the year at 71.3p, down around 16.7% lower on the year to end-September.
Nevertheless, though the uranium sector has shown considerable volatility over the year the fundamental outlook has strengthened. Most notably, recent commercial power agreements signed by big tech companies (including Amazon, Microsoft and Google) validate the core role of nuclear power within global energy policy amid seeming western utility complacency to manage fuel inventories which are rapidly approaching critical levels, particularly in the US, which is currently the largest consumer of nuclear fuel. This has simultaneously supported uranium prices and prompted a sharp recovery in sentiment towards uranium mining equities in recent months.
Volatility belies improving outlook
A number of factors have contributed to this recent volatility. Following a period of frenetic activity in early 2024, during which utilities "up-flexed" their contracted purchases, forcing producers to buy material in the spot market and reduce product inventories in order to meet their delivery obligations, they have since pulled away from the market.
Latterly, base-load hungry technology companies have stepped into the void, with a number of power purchase agreements signed by the likes of Microsoft, Amazon and Google. These companies that already have significant energy requirements, expected to increase further with the demanding proliferation of AI, are seeking their own clean energy sources, with nuclear energy proving the only feasible solution to meet these high energy demands. These investments will see several of the dozen previously abandoned nuclear reactors (including Three Mile Island) in the US restart, with some agreements also directed at encouraging deployment of small/advanced modular reactors towards the end of the decade. At over $100/MWh, Microsoft's fixed price agreement with Constellation, which will enable the restart of Three Mile Island, is priced at a level nearly twice that of comparable wind and solar PPAs.
This underscores the recognition in industry that nuclear power is the singular optimal solution for energy requirements of today whilst adhering to Net Zero targets, and underlines the crucial role of nuclear power in the energy mix. Naturally, this development supported uranium prices as the critical ingredient for nuclear energy, and prompted a sharp recent recovery in sentiment towards uranium mining equities.
Meanwhile, latest data from consultant UxC indicates that many western utility inventories remain at the low end of recommended levels coming into 2024. Those in the US are estimated to have around 110Mlbs, which is sufficient fuel for approximately 2 years of annual usage at today's levels. Given the lengthy process of mine to reactor for uranium, including the time it takes to mine, convert and enrich uranium, and then manufacture fuel bundles for use in reactors, Western utilities are seemingly unequipped for increased nuclear power consumption - or indeed maintained levels of power usage. As a result, there is an increasingly pressing need for US utilities to re-engage meaningfully in uranium contracting to avoid disruption to supply, which will fortify the uranium price.
Furthermore, geopolitical risks have also returned to the fore and at the time of writing have materially intensified, directly impacting the uranium supply chain in response to changes in US legislation aimed at phasing out the imports of Russian-sourced fuel by 2027 and linked with the use of US arms by Ukraine, Russia has taken retaliatory action implementing its own ban on export of fuel to the US in November. Such a backdrop may shake off many utilities' recent seeming complacency towards inventory management and prompt more action to secure fuel from alternate sources while substantially raising the probability of another round of contracting.
In addition, in the context of limited western conversion and enrichment capacity, Russia's actions may prompt enrichers to increase centrifuge throughput which would incrementally tighten the market for U3O8:faster centrifuge throughput increases the input of U3O8 at the front end, while the more rapid processing also reduces the yield of fuel grade product per unit of input. Any move to speed up centrifuge throughput will shift the market from so called "underfeeding" to "overfeeding", acting to increase upfront demand for uranium and therefore reducing secondary source of unenriched uranium supply. At present, unenriched uranium available for re-sale by enrichers equates to the annual output of a major uranium mine, at around 15Mlbs U3O8.
It is notable that, while U3O8 prices have retraced from their Q1 peak, conversion and enrichment prices have seen a largely uninterrupted upwards trend to current highs (see below) and recent events point to little let up in this regard. Higher prices are now belatedly increasing investment in western conversion and enrichment capacity to accommodate rising fuel demand and improve security of supply, as highlighted by Urenco which has commenced construction of new enrichment capacity, as previously discussed in our Interim Report. Importantly, sustained conversion and enrichment price environment is seeing the market tilt back towards the use of more U3O8. following its recent price pull-back, contributing to support for pricing.
U3O8 is converted into HF6 and then enriched to higher U235 content, before being fabricated into fuel rods for reactors. The below chart shows how conversion and enrichment has already materially increased in price following Russian and Chinese tensions. This is positive for U3O8 and suggests that it should follow suit.
Demand outlook positive as governments reiterate growth ambitions
Consistent with the COP28 targets set out in late 2023, the countries in attendance at the Nuclear Power Summit, organised by the International Atomic Anergy Association earlier this year, all backed plans for a wider adoption of nuclear power as a key source of base load power. This sentiment has largely been repeated at the current COP29 confab in Baku. Here 6 other nations signed up to target a tripling of global generating capacity by 2050 while the outgoing Biden administration put forward plans to add 200GW to its nuclear fleet.
While it remains to be seen whether the incoming Trump government will stick with such goals it has campaigned on policies which will "unleash" energy production from all sources, including nuclear power, to provide affordable and internationally competitive energy prices.
Central to Trump's plans is energy security and supply chains independent of Russia and China, thus yielding power to Western suppliers of energy, and subsequently uranium. Furthermore, the appointment of Chris Wright who has links with oil and gas industry and reactor developer, Oklo, to head up the Department of Energy provides some indication of the direction of travel with less emphasis seemingly placed on more variable forms of renewable power. Other sources forecast less ambitious scenarios with the most recent update by the International Atomic Energy Agency provided scenarios ranging from 40% growth in generating capacity up to 2.5 times by 2050. Encouragingly, the primary message is one of widespread bi-partisan support for nuclear power.
China National Nuclear Power Corporation provided 2024 investment targets indicating a +52% year-on-year increase. With 15 reactors currently already under construction, China's total nuclear power generation capacity is on track to exceed 100GW before the end of the decade, with the region overtaking the US as the largest nuclear power market. India Atomic Energy Commission announced plans to expand nuclear output to 100GW by 2047, from around 8GW today. While extremely ambitious, it indicates the potential growth in nuclear in emerging economies, which will drive fuel demand exponentially.
Meanwhile, dovetailing with its restricted exports of uranium to the US, Russia has also opened a public consultation into plans to construct as many as 34 new nuclear power plants over the coming two decades which would nearly double its current fleet of 36 reactors.
Reactor restarts also continue to offer support for future fuel demand. France's state-owned utility EDF has increased its estimate for domestic nuclear power generation to 340-360TWh this year, up from a previous estimate of 315-345TWh, as reactors are brought back online following stress corrosion investigations. The Japanese utility Chugoku Power announced the gradual restart of a reactor at Onagawa, with power generation scheduled to commence in late December 2024 and commercial operations expected in January 2025. As a reminder, latest WNA data indicates less than 6% of Japan's electricity is generated from nuclear, down from around 30% pre-Fukushima. Of Japan's 33 operable reactors, 12 are approved to operate, another 16 are progressing through the restart process, and two are under construction as the government targets nuclear to generate a 20-22% share of electricity. The message is clear: nuclear energy is the sole solution for a clean baseload power, and states are now waking up to this reality, resulting in meaningful developments in the sector across the globe.
Challenging supply growth remains supportive for prices
Supply side challenges have also surfaced which act to support U3O8 prices Kazakhstan, which produces around 40% of uranium mined globally, revised its Mineral Extract Tax code with the result that tax rates in the country will rise from around 6% to 9% for 2025 and thereafter up to 18% depending on the quantity of uranium mined. In addition, Kazakh authorities also introduced a price related tax contribution varying from 0.5% of the uranium value above $70/lb rising to 2.5% at prices above $110/lb. This represents an additional cost on regional production which has been struggling to reach production targets.
Increased capital costs is inhibiting the potential for new supply in the short to medium term. The Langer Heinrich project in Namibia, which is targeting steady state production of approximately 5Mlbs is proving slower and more costly to bring online.
Development of the most advanced and strategically important greenfield asset, Nexgen's Rook I project, has also seen its expected capital cost increase from C$1.3bn to C$2bn, with the increase reflecting some upward cost pressure but also increased scope of water and underground tailings management. Nevertheless, the group will seek to recover these costs in any prospective sales agreements as it takes financing discussions forward. Crucially in November, Nexgen announced that it had received official Federal Approval for its project, representing a considerable de-risking. In a broader context, economic softness may also affect BHP's proposal to move ahead with its Olympic Dam expansion.
Elsewhere, the newly installed military government in Niger revoked the uranium mining licenses of France's state-owned Orano, which was in the process of resuming development of the Imouraren project, as the country aligns with nations such as Russia and Turkey. Although Niger's share of uranium production has been declining, the action will further encourage Western buyers to source supply from less risky jurisdictions.
Cameco, however, announced that it had added 2 years' worth of reserves to its Cigar Lake mine, extending the reserve life from 2034 to 2036.
Portfolio activity and positioning
As previously discussed, the Company is well placed to benefit from such developments with holdings primarily focused on assets located in western regions. There is a heavy weighting to Canada's Athabasca basin which currently hosts some of the best geology globally in politically secure regions. With Cameco's uranium supply largely contracted for the next 5 years and beyond, we believe utilities will increasingly need to diversify their supplier base. Near-term mine restarts by UR-Energy, Paladin and Uranium Energy, and the medium-term greenfield developments of Nexgen will figure highly in the minds of utility companies.
Importantly, since end-September Nexgen received Federal Approval for its Environmental Permit, the final permit required for project go-ahead. This paves the way for official government sign-off in the near future and represents a considerable step forward for the group.
We reduced some exposure to Paladin following its all-share approach to acquire Fission Energy, although Canadian approval for the merger is proving protracted.
During the year the Fund participated in a placing by Ur-Energy, which is in the process of ramping-up production at its US operation and has converted some in-the-money warrants in explorer Cosa Resources. Ur-Energy was one the main detractors to Fund performance over the year with its shares declining nearly 30% in sterling terms in the second half of the year ahead of a placing which was undertaken at a discount of over 20% to the prior closing price.
Elsewhere the group also retains exposure to projects that may benefit from more favourable government policy. Illustrating growing need to access secure sources of supply, there have been calls for a relaxation on the uranium mining ban in Western Australia by Australia's Chamber of Commerce which could be a precursor to a potential change in state policy that currently prevents uranium project being developed. Relaxation of such policies would benefit investments, such as Laramide that owns the Westmoreland project.
It is possible that such moves could also be adopted by other countries, such as the US, that are seeking to encourage much needed domestic production and to reduce nuclear fuel supply chain risks. This would impact the likes of IsoEnergy which, in addition to an interest in one of the highest-grade projects in Canada, own the Coles Hill project, located in the state of Virginia where uranium mining is currently prohibited.
Robert Crayfourd and Keith Watson
New City Investment Managers
December 2024
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