Interim Financial Report 31 March 2020

30 June 2020

GEIGER COUNTER LIMITED
(THE "COMPANY")

RELEASE OF INTERIM REPORT AND FINANCIAL STATEMENTS
 

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The Directors announce the release of the Interim Report and Financial Statements for the Six Months to 31 March 2020.

Chairman Statement

The Company had a difficult six-month period from 30^th September 2019 to 31^st March 2020. The Uranium spot price in the market remained in a narrow range between US$24 to US$26/lb for most of the period and equities came under severe pressure in February and March 2020 as the initial market panic from the onset of Covid-19 was felt.  For the six months to 31^st March 2020 the Company's net asset value fell by 35.4% and the Company's ordinary share price fell by 41.6%.

Since the end of March 2020 there has been a strong recovery in the Company's net asset value and share price. We believe there have been two major factors behind this; firstly, uranium production at many significant mines around the world has been suspended due to Covid-19 and secondly the US Government has begun to acquire a strategic stockpile of Uranium recognising the importance of nuclear energy in maintaining a stable and secure energy supply. The spot price of uranium has increased to US$33/lb at the time of writing. The investment adviser's report on the following pages provides more details on these factors.

At the time of writing the Company's net asset value stands at 14.56p and the ordinary share price is 16.15p with the ordinary shares trading at a premium of 9.85%.  The Company's subscription shares expire at the end of November this year and are currently trading at 1.20p per share.

The impact of the Covid-19 pandemic has been dramatic across the world and we still face a very uncertain time ahead of us all as we work through the various opportunities and threats to the Company.  The Board and I would like to thank all of the Company's service providers for working so diligently in these difficult circumstances.  We would also thank shareholders for their continued support for the Company and we look forward to a continued period of growth.

George Baird

Chairman

June 2020

Investment Adviser's Report

Since the fund's year-end in September 2019 there has been a considerable improvement in the spot uranium price which has increased from US$25.65/lb to around US$33/lb at the time of writing. In particular, substantial COVID19 supply curtailments and the Trump Administration's desire to build a strategic reserve, which demonstrates a clear commitment to the nuclear industry, point to a brightening outlook for the sector.

Supply curtailments outpace expected declines in nuclear power generation

The most significant factor behind the uranium price rise has been yet further curtailment of supply as a result of the COVID19 pandemic which has required many producers to suspend operations. Given the highly concentrated nature of production, the uranium sector has seen the largest proportion of supply outages of any commodity due to COVID19 related closures. Production constituting approximately 50% of global supply has been suspended for 3 months or more as a result. Curtailments by the two largest producers Kazatomprm and Cameco constitute the bulk of this reduction though Chinese owned operations in Nambia have also been suspended. Mined output is therefore expected to decline by over 13% globally this year.

In contrast global electricity demand has fallen significantly less. Data collated by the US based Energy Information Administration (over the 70 day period of lockdowns to mid-May), indicates declines in seasonally adjusted demand for major economies at up to 13% in areas of the US, between 10-15% in China, and broadly between 10-20% in both Europe and India though demand trends across all these regions is now improving. As a result, the EIA is forecasting a 6% decline in global electricity demand this year. Crucially, nuclear power output has been far less affected with the EIA predicting a lesser 3% decline globally for 2020. Declines measured for coal fired power generation confirm that this sector has borne the brunt of demand reductions.

Major mines suspended

Cameco's March announcement of a 4 week suspension at its Cigar Lake was subsequently extended indefinitely in April. With approximately 18-19Mlbs of production (100% basis) each month of closure will reduce global supply of U3O8 by ~1%. In addition, with a 50% JV share in the mine, alongside Orano of France, Cameco will lose ~750klbs per month of attributable production from this mine. This will increase its need to either deliver inventory (last reported at 6.1Mlbs) or purchase more spot market material into sales contracts this year. There is also good reason to believe that the reopening of Cigar Lake will need to incorporate improved pricing of sales contracts, an already stated requirement for the reopening of its mothballed McArthur River mine.

Coinciding with the extended Cigar Lake closure, Kazatomprom announced a temporary halt to uranium mining operations in the country for an expected three-month period. This is forecast to reduce production by 10Mlbs from the region this year and will increase the use of its inventory (last reported at 22Mlbs) to meet sales commitments. In addition, Kazatomprom ceased drilling wells for their ISR production, which will cause output to decline, and also highlighted their expectation of a three-month lag to recover production to pre-suspension levels once activity is allowed to resume.

Outcome of extended US industry investigation demonstrates nuclear commitment

Prior to March, uranium prices were range bound between US$24-26/lb. Subdued sentiment resulting from the extended US investigation into the country's nuclear power industry by the Nuclear Working Group weighed on sentiment. However, the outcome from the NFWG review provided a much more positive indication of the nuclear industry's importance. A recommendation that the US accumulate a strategic stockpile was followed by appropriation of US$150m pa funding between 2021-2030 to purchase U.S.-origin uranium to provide some supply security in the event of market disruption providing a clear commitment to the nuclear power industry.

Utilities cognisant of future requirements.

The recent "Uranium Market Report", published by the US Department of Energy in May, indicates US utilities acquired 48.3Mlbs U3O8 during 2019, a rise of 20% on the prior year, following two years of reduced purchasing during the extended US assessment of its security of supply. Despite the pick-up in purchases, uranium inventories held by US utilities declined 3% to around 113Mlbs U3O8 at the end of the year, equivalent to approximately 2.5 years of normal fuel consumption. The inventory reduction was led by a fall in semi-processed uranium product which declined to the lowest levels seen over the last 5 years. The overall decline suggests interest for fuel and services could again pick-up, sustaining support for the uranium market, once utilities look through disruption caused by COVID-19 and other considerations ahead of the forthcoming coming US Presidential elections.

The DoE report also showed material originating from Canada remained the largest source of supply to the US, representing 21% of the country's 2019 imports. This was followed by Kazakhstan at 18.1%, Australia at 17.6% and Russia at 15.2%. Uzbekistan and Africa supplied 9% and 7.1% respectively. US sourced uranium remained insignificant at just 4.2Mlbs, with only 0.2Mlbs produced domestically in 2019. This US supply imbalance highlights the rationale behind both the Fund's exposure to lowest cost domestic producers, such as UrEnergy, which collectively represent around 20% of NAV, and the US move to secure strategic stocks, which will also support activity from next year.

Short-term price dislocations may cause some short term volatility

One less obvious factor that has become noticeable in energy markets, including uranium, are price differentials depending on product location. Of note, the quoted spot uranium price of US$33.95/lb, which is currently benchmarked at Cameco facilities, stands at a US$4/lb premium to alternative locations such as Converdyn and Eurodif facilities, an historic high. As a result, while the Fund benefitted from useful inflows, deployment of these is being undertaken cautiously. The Fund increased its exposure to NexGen and Kazatomprom. It also acquired shares in Uranium Participation which traded at a near 20% discount to the quoted benchmark price. 

Private investments coming to fruition

Prospects for the Fund's holding in private company HPX, which was spun out of uranium explorer Goviex, have recently shown significant improvement. As well as owning diverse technology related to battery storage and mining exploration the company recently acquired a controlling interest in a major iron ore asset located in West Africa. Institutional funding has latterly been received by the group to take this project forward on the understanding that there is a public listing. Progress on this offers significant upside to investors, notwithstanding longer-term potential from its other technology interests

Robert Crayfourd and Keith Watson

New City Investment Managers

June 2020