Annual Financial Report

RNS Number : 7272V

Geiger Counter Ltd

04 December 2019

 

4 December 2019

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 2019.
http://www.rns-pdf.londonstockexchange.com/rns/7272V_1-2019-12-4.pdf

CHAIRMAN'S STATEMENT - FOR THE YEAR ENDED 30 SEPTEMBER 2019

It has been a disappointing year for followers of the uranium market. After a promising 2018 where spot prices of uranium rose and uranium focussed equity prices recovered both the spot price and uranium equities have fallen sharply in 2019. There have been a number of setbacks as we have seen increased uranium production despite lower spot prices and regulatory delays in the US where a government investigation into the uranium market has stymied market purchases as power utilities and investors await news.

For the year under review to 30th September 2019 the Company's net asset value fell by 27 per cent and the Company's ordinary share price fell by 26 per cent over the year and traded at a premium of 8 per cent at the end of September. The subscription share price was 2.50p at the end of September 2019.

Despite the frustration of falls in spot and equity prices both your Board and the Investment Manager remain confident over the long-term outlook for uranium.  Power output from nuclear generation continues to rise and governments around the world are looking to nuclear power to provide both a base load for energy to supplement renewable sources and to reduce more polluting energy generation such as coal.  The Investment Manager has a portfolio of leading companies involved in the mining and supply of uranium and firmly believes that prices will improve. I would urge Shareholders to read their report on pages 10 to 11 which goes into more detail on the prevailing market conditions.

Your Board is encouraged to see that the ordinary shares continue to trade at a premium to their underlying net asset value. We are working with our advisers to develop plans to grow the assets of the Company as we believe that a greater size of assets will attract more investors into the Company.

I would like to thank Shareholders for their continuing support and look forward to reporting improved results next year.

George Baird

Chairman

December 2019

INVESTMENT ADVISER'S REPORT - FOR THE YEAR ENDED 30 SEPTEMBER 2019

After a positive start to the year, 2019 has proved one of frustrating consolidation for the uranium sector. Following the prior year's strong 35 per cent uranium price increase, momentum remained positive into calendar 2019 with the price of promptly available material rising a further 6 per cent to stall just below US$30/lb between November 2018 and February 2019.

Unfortunately, momentum turned negative as the year-long US government investigation of low cost U₃O₈ imports, concluded in July, chose not to restrict overseas supplies and was subsequently widened into an assessment of the security of inputs across the entire nuclear fuel cycle. Uncertainty has understandably stymied utility demand for uranium, especially in the US. Set against reduced utility purchasing the announcement from Kazakhstan's state-run producer, that the country would proceed with plans to increase uranium production by 5 per cent had a disproportionate impact on sentiment, despite being in-line with guidance outlined at the time of Kazatomprom's November 2018 IPO. As a result, earlier price gains unwound and uranium closed the year to end-September approximately 7 per cent lower, at US$25.65/lb.

However, despite this year's disruptive developments, we believe the market fundamentals remain positive. This is perhaps best summed-up by the most recent biennial market update provided by the World Nuclear Association ("WNA") that highlights growth in uranium demand will need additional supply under all scenarios it considered. The WNA report concluded that "In all scenarios, the industry needs to at least double projected primary uranium production including current, idled, under development and planned prospective projects by 2040" as production from existing mines is expected to fall sharply from 2035 with one quarter of all mines considered exhausted by 2040. 

Notably, the introduction of more favourable government policies resulted in WNA projections for nuclear power generation being revised up for the first time in eight years. In its Reference Scenario, global nuclear generating capacity is expected to increase from 398GW in 2018 to 462GW by 2030 while its Lower Case Scenario was also revised up, with demand expected to remain flat over the same period. US state legislation to support continued reactor operation in tandem with extension of reactor operating licenses by US and French regulators, together with extensive nuclear expansion plans in China lie behind the improved demand growth assumptions.

Backing up the WNA's view, in 2018 nuclear power generated 2,563TWh of electricity, up nearly 2.5 per cent on the prior year, recovering to pre-Fukushima levels with the US accounting for 805TWh of this (at a competitive US$32/MWh) and France almost 380TWh. Against resilient nuclear power output in developed markets, Asia remains a driver of growth. The latest data from China's Nuclear Energy Association shows the country produced 253.5TWh of electricity between January and September 2019, up 23 per cent versus the same period in 2018, expanding its share of China's total power generation to 4.8 per cent from 4.2 per cent in 2017. Given China's clean air policies and low cost, replicable cookie cutter approach to reactor development the region remains a key driver of global demand growth with 47 reactors now connected to the grid, another 12 reactors under construction and 42 more at the planning stage. Elsewhere, competition from LNG should lessen as suppliers have reduced gas output to focus on profitable oil-linked contracts and recent Asian LNG price falls are reversing.

Decisions by the Trump Administration not to restrict U₃O₈ imports and instead conduct a wider Nuclear Fuel Working Group review, has frustratingly lengthened the period of uncertainty for utilities and been taken negatively by market participants.

While there is clearly logic to the US undertaking a full review across the entire uranium fuel cycle in the US, which remains dependent on imported material and services for its fuel needs to generate 20 per cent of its electricity, a month's extension to the review process announced in mid-October took a further toll on the industry and market sentiment. As a consequence of the ongoing uncertainty, substantial spot market purchases of circa 6-7Mlbs U₃O₈ by Cameco (approximately half its guided 2019 activity) have yet to materialize as expected having been deferred

into calendar Q4, equivalent to approximately 5% of volumes traded globally year-to-date. While this has contributed to the 5.6 per cent slip in the spot uranium price since end-September, which at the time of writing stood at US$24.05/lb, we nevertheless believe the prospect of such activity reflects current utility paralysis and that restocking by utilities will be an important near-term catalyst that can restore positive momentum into 2020. Latest data of the US Energy Information Administration for 2018 showed utility inventory levels had fallen 10% year over year to ~112Mlb U₃O₈, equivalent to a typical 2.5 years of demand. This run down in inventory, occurring despite a pick-up in broader uranium buying that year, provides some confidence that the limited purchasing seen this year will reverse as inventories shrink further.

Crucially, and as previously stated, policies already implemented in the US and France, two of the largest nuclear power markets globally, provide evidence of the continued need to retain nuclear in the energy mix. Indeed, despite France's previous suggestions that it would de-emphasise nuclear power, press commentary this October (Le Monde) indicated the government had asked its major utility EDF to draw up plans to build three new facilities, having committed to reduce carbon emissions by 50 per cent by 2050. Such decisions remain at the heart of the nuclear debate and indicate a softening of the firmly negative investor sentiment that continues to overshadow the sector. There has also been helpful commentary regarding the increasing need to decarbonise, with specific focus on the need for encourage nuclear as part of the energy mix in the UK as government outlined plans to reduce its carbon footprint.

The performance of related equities has largely tracked that of uranium with a 28 per cent reduction in the Fund's NAV in the year to end-September while further assessment of security across the broader industry has seen prices decline another 11 per cent since then. The majority of the Fund NAV pull back over the period discussed has primarily resulted from sharp falls in the share prices of companies with assets located in the US, notably the two petitioning groups Energy Fuels and Ur-Energy. These fell back to levels seen prior to their lodging of the 232 Petition which had raised expectations for an increase price and volumes of domestically sourced material. Though Fund exposure to such equities was reduced over the March quarter, following their strong performance prior to the final 232 decision, their declines dragged on performance. Nevertheless, having reverted to prior valuations we believe these lower cost, in-situ operations remain attractively positioned and at the time of writing such equities represent around 18% of NAV. Nexgen's Tier 1 Arrow project, located in the established uranium district of Canada, remains a stand out investment within the sector and is still the largest individual position in the Fund despite some recent technical slippage in the share price following its removal from a Canadian equity index.

Focussed on the uranium sector, we believe the Fund is well placed to benefit from improving prices necessary to bring required supply into production, as highlighted by the WNA demand outlook.

The Fund's position in private company High Power Exploration (HPX), a vehicle backed by mining developer Robert Friedland, saw some positive news post the end of the financial year, as it agreed to acquire the Nimba high grade iron project in Guinea, from BHP, Newmont and Orano. Subsequent to this the company raised $88m in a an equity placement at a higher valuation than we had the position marked which led to a material NAV uplift at the end of November, when the HPX information was made available. This sets the HPX on a planned IPO timeline, which could provide greater liquidity in 12 months. Whilst the position size is large, this is due to strong performance and does not mark any intentional deviation from the Uranium focus of the fund.

Robert Crayfourd and Keith Watson

New City Investment Managers

December 2019

For further information, please contact:

Craig Cleland - CQS (UK) LLP - 020 7201 5368

Jane De Barros-Sousa- R&H Fund Services (Jersey) Limited - 01534 825 259

 

END

 

 

ACSUSVBRKAAURAA