15 December 2017
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 2017.
CHAIRMAN'S STATEMENT - FOR THE YEAR ENDED 30 SEPTEMBER 2017
I am sure shareholders need no reminder about the frustrations of investing in this unique asset class. When I last wrote to shareholders in June this year we had seen some earlier remarkable rises in the Company's net asset value and share price and then a period of falling equity prices which had dampened enthusiasm. Since then uranium equities have continued to come under pressure as the market has believed that there remains a situation where short-term excess supply is weighing on prices. This was shown by the spot price of uranium (as measured by the U308 price) falling over the Company's financial year from US$22.38 per pound in September 2016 to US$20.25 at the end of September 2017. Subsequent to the year end, however, the spot price has risen to US$25.00 at today's date.
For the year to 30th September 2017 the Company's net asset value fell by 7.3 per cent which was in line with the fall in the spot uranium price. The Investment Advisers' report on the following page details the background to the supply and demand factors in the uranium sector and notes the future imbalances as China and other emerging market economies continue to build new nuclear power stations. As stated in the opening paragraph of the investment adviser's report "given significant market developments in terms of supply and favourable governmental policy shifts, we believe the sector offers potential rewards for investors and we look forward in 2018 with confidence".
The Company's share price rose by 15.9 per cent over the year with the discount being 3.3 per cent at the end of September. As at today's date the share price stands at 26.13p compared to the net asset value of 23.85p.
Your Board is supportive of a potential long-term uptrend in the uranium market and subsequent to the year-end the Company has published a Listing Document setting out details of a proposed bonus issue of subscription shares. The resolutions to issue the new subscription shares were passed by shareholders on 13 December 2017 and the new subscription shares will start trading on 14 December 2017.
Shareholders have the opportunity each year to vote on the continuation of the Company. Your Board is recommending that shareholders vote in favour of continuation as we believe that the uranium equity market will benefit from recently announced production cuts and a strong pipeline of future demand.
Finally, I would like to thank our shareholders for their continued support over recent years and my Board, investment manager and administrators for their sterling efforts over the last twelve months.
George Baird Chairman December 2017
INVESTMENT ADVISER'S REPORT - FOR THE YEAR ENDED 30 SEPTEMBER 2017
The uranium market has seen major supply adjustment over the last 12 months. Given significant market developments in terms of supply and favourable government policy shifts, we believe the sector offers substantial potential rewards for investors and we look forward into 2018 with confidence.
Swing producer drives rebalance The most significant influence on the sector was the mid-January announcement by the Kazakh state-owned uranium mining company, Kazatomprom, that it would cut production during the calendar year 2017 and that it was willing to make further cuts if necessary to rebalance the market. We believe this telling shift to a more commercially minded value over volume strategy by the world's lowest cost producer, with a market share of approximately 40%, represents a fundamental turning point to allow the oversupplied market to rebalance.
The news from Kazatomprom provided strong initial impetus to the uranium spot price which rose from a low of approximately US$18/lb in December 2016 to over US$26/lb in Q1 2017 though the move was viewed as insufficient by market participants and spot price gains subsequently unwound, retracing to around US$20/lb at the end of September. While the Company's NAV gained a substantial 70% on the year after the Kazakh announcement, outstripping sterling returns from the Solactive Uranium Index and URA uranium ETF of 62% and 52% respectively, sector performance subsequently reversed. As a result the Company NAV ended the year down 7%, versus a 4% gain and a 1% decline for the Solactive Index and URA ETF.
However, the decline drew a further more pronounced response from Kazatomprom and also from Cameco. In November Cameco announced plans to mothball its largest McArthur River mine, removing around 14Mlb of forecast output in 2018 (equivalent to 8% of global production). Cameco also stated that the operations would only be reopened when it was able to sign higher priced contracts, a level we would infer to be around US$40/lb. Kazakhstan then announced, in early December, that it would extend its production cuts to over 11Mlbs pa (approximately 20%) for a sustained three year period commencing January 2018. Following these supply reductions the market is now projected to be in deficit. As a result the spot uranium price at the time of writing has risen 31% to US$26.55/lb, above the previous peak achieved earlier in the year, and we believe the Company NAV can garner further performance having only risen 18% since the September year end.
Policy shifts improve demand outlook Kazatomprom's behaviour is particularly important given the sluggish pace of Japanese reactor restarts since the Fukushima accident in 2011. Latterly, however, news from Japan has been encouraging and momentum for restarts in the region is improving. Notwithstanding the re-election of pro-nuclear Abe government price increases for Asian LNG, a preferred substitute for out of favour nuclear generation, have had accelerated rising over 50% since summer. The rise in LNG input costs for gas fired power improves the competitive position of nuclear in the region and provides further incentive for the country to switch reactors back on.
Prior to Abe's re-appointment Japan's Atomic Energy Commission expressed support for retaining nuclear power as a significant contributor to the nation's grid. The Commission issued a report calling for nuclear power to supply at least 20% of Japan's electricity by 2030, which compares to a 30% market share prior to 2011. Abe's success, against anti-nuclear opposition, indicates Japan's electorate may be well attuned to the advantages of restarting it's installed nuclear capacity rather than relying on developing more costly alternatives such as LNG.
Policy shifts improve demand outlook (continued) This should help reduce industry uncertainty and in the near-term Japanese utilities Kansai Electric Power Company and Kyushu Electric Power Company each expect to restart two units during the first half of 2018, increasing the number of operating reactors to 9, of the 42 operable facilities post Fukushima. The restart of Japanese reactors should also help reduce spare uranium enrichment capacity which indirectly supplies over 20Mlb pa of U3O8 into the market.
Favourable government policy changes in the US are also encouraging for the nuclear power industry. Of note, Federal regulators have been requested to make allowances to struggling nuclear and coal base load power stations in recognition of their zero carbon emissions and benefits to grid stability, particularly against subsidised renewable sources that produce more variable power output. Also helpful to the outlook for the region's nuclear industry, the head of the US Environmental Protection Agency stated that tax incentives for the wind industry should be eliminated and that they should "stand on their own and compete against coal and natural gas". As with Japanese government policy, we believe these initiatives provide recognition of the inherent value of the installed nuclear generating capacity for developed economies more broadly. This seemingly rational behaviour offers an alternative path to the politically expedient approach taken by Germany and France to prematurely close nuclear facilities. Indeed France's attitude to early reactor closures has softened with the target date for reducing nuclear power's share of the country's generating capacity from the 75% currently to 50% by 2025 being delayed. Reasons cited for the delay include increased vulnerability to electricity shortages and higher greenhouse gas emissions.
Elsewhere, China's focus on air quality remains a key long-term driver for uranium demand, as a meaningful source of zero carbon base load power. China's initial drive on closing inefficient coal power stations and metal smelters to reduce chronic air pollution emissions is likely to be a multi decade theme extended by an emerging middle class seeking better health and quality of life. Given the population's sensitivity to this issue political impetus to the industry's expansion is likely to remain high. Importantly, in addition to the political motivation to develop nuclear generating capacity, China's replicable reactor design provides significant potential to reduce operating costs comparable to coal fired power stations fitted with scrubbers and flue gas desulphurisation to reduce emissions. This is will provide an important competitive foundation for China's future domestic and international expansion plans.
China currently has 36 operating reactors, 21 in construction and more expected to start construction shortly and remains the primary growth driver for nuclear power. China expects to generate 58GWe by 2020-21 and 150GWe by 2030, with 6-8 reactors being approved for construction each year. These are predominantly going to incorporate latest Generation III technology that have longer lives and improved security features relative to previous reactor models that make up the majority of the current global reactor fleet. In addition, China is seeking to establish international export credentials for its sector capability. For example, China National Nuclear Corporation has now signed contracts to build reactors in Pakistan, Argentina and the UK.
We believe the Fund is well positioned to capitalise on the improving fundamental backdrop following huge strides taken in recent months.
Robert Crayfourd and Keith Watson New City Investment Managers December 2017
For further information please contact:
Craig Cleland - CQS (UK) LLP - 020 7201 5368
Lisa Neil - R&H Fund Services (Jersey) Limited - 01534 825 336
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