Marin Katusa reports that the Russian Parliament is discussing banning all uranium trade with U.S. nuclear utilities (more). Katusa has written a lot about the American and Russian uranium dynamic in his NY Times Bestseller The Colder War. And as he stated in his book, the consequences of the [U.S. tariff braggadocio on Russian actions against U.S. utilities.]
One in every five homes in the U.S.(20%) is powered by nuclear energy. Because of the low cost of uranium, the U.S. utilities have been buying the majority of their nuclear fuel in the spot market, not the long-term contract which was the historical norm. The U.S. utilities are now caught in a position of being undersupplied in terms of long term contracts. The only result will be higher spot uranium prices. And if the Russian ban does go through, uranium investors that have their money with the right companies are positioned to profit from the situation.
So here’s what Katusa wants the reader to know…
- The U.S. imports 6.3 million pounds of uranium per year from Russia. This makes up 14% of U.S. demand. Kazakhstan (a former Soviet State and whose uranium is enriched by the Russians) provides 24% of U.S. uranium imports, to the tune of 10.8 million pounds, and
- Canada provides 11.3 million pounds (25%) to the U.S. and Australia provides 9 million pounds which is 20% of U.S. demand.
Another major issue the utilities will face is the source of enriched uranium (which the nuclear power plants can consume). Uranium is “enriched” by converting uranium oxide from the mine site to uranium hexafluoride via a conversion plant. Unfortunately for the U.S., local utilities are left exposed in a negative way. All U.S. domestic enrichment facilities have been closed due to poor economic conditions. In other words, they were losing money. The only non-Russian source of enriched uranium to the U.S. currently comes from URENCO (an operator of uranium enrichment facilities). URENCO is a complicated joint venture (JV) between the British and Dutch governments and a consortium of German utilities.
The French do have capacity but have a policy of enriching their own material. Russia has positioned itself in the center of the chessboard, and controls 45% of the global enrichment capacity. The U.S. domestic enrichment capacity cannot just turn on production overnight. Remember, these are radioactive facilities and long-term contracts will have to come into place for the capital to be invested to restart the U.S. domestic facilities and to put them back online. If the domestic U.S. nuclear utilities had any common sense, they would go to existing permitted U.S. production companies and sign long term offtakes to provide for the feed for the U.S. domestic enrichment facilities. These utilities do have common sense, and a doubling of the spot price from the current USD$20/lb to $40/lb would increase the electricity generation cost by less than 10%. The absolute critical factor for nuclear reactors is to stay online.
Katusa concludes that the spot price of uranium will have to increase to meet the demand of the nuclear reactors. Combine the Russian geopolitical issue with the Japanese reactors slowly coming online and the Chinese construction progress, the spot price of uranium will start its uptrend. The nuclear utilities don’t really care whether uranium is $20 or $40 per pound because once a reactor is up and running, the price of uranium makes up less than 3% of the operating costs. Unlike natural gas or coal which make up over 35% of the final cost. The only thing that matters for the nuclear facilities is to lock in a stable source of long term supplies.
Katusa warns that the Russians ability to fight back at the U.S. sanctions and tariffs are not to be underestimated. Based on Katusa sources, he has been told the Russians are already locking in long-term contracts with the Chinese and other emerging markets that have increased their nuclear power generation. But at the same time, expect trigger responses via Twitter by Trump, no less. This will only fuel the volatility in the uranium sector.
In the Katusa’s Resource Opportunities portfolio, he claims that we are exposed to what he believes is the best way to benefit from the coming geopolitical risk in the uranium sector. At the World Nuclear Fuel Cycle Conference in Spain this week (like the one Katusa gave the keynote address in Paris in 2015), the following was the talk of the conference. His contacts there have stated to him personally that the buyers have already been locking in uranium purchase contracts at higher prices than the reported spot price. Everyone at the nuclear fuel conference knows about this, and he is relaying this information to his readers before the media gets to the information.
In the case of uranium, the average all-in production cost of existing, permitted, U.S. conventional uranium mining is about $50-60 per pound. This is an “all-in” cost that takes into account the cost of capital, labor, equipment, fuel, and insurance. The highest grade uranium project in the world, the McArthur River project in Canada, needs about $30-35 uranium to break even. Kazakhstan’s ISR projects needs $30 uranium to be economic. But why is the spot price about $10 lower than the cost of production for the best uranium mines on the planet? Are these miners losing money on each pound of uranium?”
Uranium is sold in two ways. One is through the spot market. This is where an end user can buy uranium now. The second is through the long-term contract market. This is where end users enter into agreements with producers to buy set amounts of uranium over set periods of time. In mid-2017, the spot price of uranium traded below $20 per pound. At the same time, the long-term contract price was about $32.50 per pound. Historically, the majority of sales have been in the long-term market, but that has changed since Fukushima. Because of the flood of Japanese stockpiles, the spot market became more active. But that is now starting to change. This anomaly appears to have started to reverse, which is good news for the price of uranium. Both prices are well below the industry’s average cost of production.
Eventually, the laws of capitalism will exert themselves. If the Russians bring in a law not to sell uranium to the U.S., neither Canada nor Australia can make up the difference at current prices, but Russia is in serious economic trouble and may act irrationally to solve apparent programs (more). As a result, the price of uranium must rise or other sources of uranium will be developed, or the lights will go off. The cost of 1 out of 5 homes losing power is far greater than the uranium price doubling or even tripling. The lights will stay on. But, a transition from bear market to bull market won’t happen overnight. Nor will all uranium companies benefit. There are over 50 uranium companies listed on North American exchanges.
Just over 12 years ago, the price of uranium started on a climb that took it from $12 per pound to $137 per pound (a 1,041% rise) in just three years. Many uranium stocks climbed more than 3,000% during the rally. The world’s largest publicly traded uranium miner, Cameco, increased in value 20-fold. Some smaller, more speculative uranium stocks climbed more than 100-fold.
Uranium enjoyed that remarkable bull market for several reasons. Supply was constrained, demand was healthy, and fund managers were speculating that the end of the HEU agreement (Russian Highly Enriched Uranium ‘Megatons to Megawatts’ program where Russia sold its uranium from old nuclear warheads to the U.S) would further constrain supply. That’s the situation we have now as well, says Katusa.
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