Why I Remain a Uranium BullMonday September 21, 2015 14:48
My bullish views on uranium in the mid- to long-term are well-documented. That said, it has been 21 months since I formally wrote about my optimism regarding the uranium industry (Mercenary Musing, December 16, 2013). Today I elucidate my current thoughts on the sector.
Let’s review my history on the subject:
I first went public with contrarian views on uranium during the depth of the global financial crisis in the late fall and early winter of 2008-2009. In addition to speaking about the commodity in interviews, I initiated coverage of two Athabasca explorers and both were eventually acquired by major mining companies. One produced more than a double (Mercenary Musing, November 24, 2008) and the other a triple (Mercenary Musing, January 14, 2009) respectively for my portfolio and subscribers who chose to follow my lead.
Although I boldly predicted a rising uranium price in January 2009, it took over 18 months before that occurred (contrarianism always requires patience). In August I posted a piece entitled, “Uranium, the New Green Metal” (Mercenary Musing August 9, 2010). By November I was speaking on uranium as “the next big thing” and it veritably was, with the spot price going from $40/lb in July 2010 to $73 in early February of 2011.
Then a black swan event occurred on March 11, 2011, with the 9.0 earthquake in northeastern Japan (the fourth largest in recorded history), a subsequent tsunami, and the nuclear power plant accidents at Fukushima-Daiichi. Uranium stocks crashed in mass over a few market sessions, and I have argued that this event was the catalyst that roiled the Toronto Venture Exchange into the ongoing bear market (Mercenary Musing, December 15, 2014).
Over the subsequent three years, the spot price of uranium fell from that ephemeral high of $73 to a low of $28/lb, a loss of over 70%. Meanwhile the term contract price dropped from $75 to $40/lb.
The uranium price crash has been directly related to decrease in demand from Japan. Before the incident, Japan used about 12% of the world’s uranium in its 55 reactors and was the third largest consumer in the world behind the USA and France. For the past three years, the 48 remaining operable reactors have been shuttered for safety inspections, modifications, and new permitting. Five have been retired. One reactor restarted last month, another is scheduled to reach criticality this month, and two more should be online by year’s end. An additional 19 have applied for restart approval. It is generally thought that about 25 reactors will eventually generate electricity.
The effect of the Japanese shutdowns is striking:
According to the World Nuclear Association, Japan consumed on average nearly 22 million pounds per year from 2007 to 2010. Germany also shut down eight of its 17 reactors in the wake of Fukushima and that cut its annual demand by half.
The removal of demand from Japan and, to a lesser extent, Germany from 2012-2015 has been devastating to the uranium market. It has also been devastating to the Japanese economy, with an additional $40 billion per year in imported fossil fuel costs.
Although the spot market only represents 15-30% of sales on an annual basis, analysts, brokers, speculators, and investors see it as a strong proxy to the perceived health of the uranium mining business. Simply put, the uranium spot price drives the stock market:
The majority of uranium supplies are delivered via long-term off-take contracts that are generally priced much higher than the spot price. For example, the term contract price has ranged from $44 to $49/lb this summer, a premium of 18-35% above spot:
Despite a 30% rise in spot prices over the past year, the market remains depressed and is off about 50% from its high in early 2011. Therefore, it is of little surprise that uranium equities continue to lag behind the upward movement in the spot price.
Contract uranium deals are mostly done privately with only vague details and terms released in public documents. That said, transparency has improved considerably over the past ten years. Broker bid/ask spot prices are now tracked and posted daily. However, uranium trading continues to be a largely opaque market.
If the spot price is to increase in the near-term, here are some likely catalysts:
On that note, let’s take a look at the world’s 10 largest uranium miners in 2014:
(Charts Courtesy of Ux Consulting)
A quick perusal of these 2014 charts gives one pause with respect to the certainty and security of future Western World supplies of U3O8:
Yet the uranium story remains the same:
Analyst consensus projects a significant deficit for mined uranium and secondary supplies in the mid- to long-term. Opinions differ as to when the deficit will commence but are generally in the range of 2017-2018.
The sources of new supply are problematic because conventional underground uranium mining and milling requires significantly higher prices to be economic, generally estimated at $65-80/lb. Lower cost mines, either in-situ recovery (ISR) or open-pit heap leach, are at best breakeven at current prices.
The logical conclusion is that uranium prices must nearly double to meet projected demand by the later part of this decade.
Meanwhile, sovereign stockpiles are dwindling; higher cost mines continue to cut production or are being shuttered; major new projects have been and will continue to be delayed or shelved; and the Russia-USA supply deal thru 2023 is just half of the amount supplied by downgrading of weapons-grade to reactor-grade U3O8 from 1993-2013.
So where will new uranium supply come from to meet the growing demand?
Mined uranium and secondary supplies will both be parts of the solution. Recycling and reprocessing are increasing every year but they still produce only a minor amount of the world’s total uranium supply. Enrichment underfeeding will continue to contribute to supplies. Mining, however, will remain the major contributor to future supply and prices must increase for new mines to be developed and come on stream.
That said, every major established uranium district in the world faces unique challenges that make new developments problematic in terms of economics, sustainability, and/or timing to production:
As a patriotic American, I am very concerned that we produce less than 10% of our yearly demand for 99 operating nuclear power plants. It is hard to imagine, but over the past 30 years the United States has gone from being the world’s major producer, supplier, and exporter of uranium to a massive importer of nuclear fuel.
Although most of our imported uranium comes from Canada and Australia, our dependence upon unfriendly foreign sources is not only significant but increasing. Domestic demand will continue to grow with many older nuclear power plants being refurbished to produce more power more efficiently and five new plants are under construction.
We certainly have the uranium resources in the Western US to become self-sufficient again. But I doubt we have the political will. That said, where and what will be the new domestic sources when prices inevitably rise?
In order of projected time frame to production, here’s my short- to long-term list:
I remain a uranium bull imply because the mid- to long-term supply-demand fundamentals are compelling.
The current 20-30% shortfall of mined uranium versus annual demand will be exacerbated within the next 2-3 years unless prices rise substantially. There are now 66 new commercial-size reactors under construction; 166 are planned, and 322 are proposed. Uranium mining is largely unprofitable, utility and government stockpiles are dwindling, and the increase in recycling, reprocessing, and enrichment supplies cannot meet projected annual growth demand.
Despite the recent downturn in commodities demand, there is one energy resource that continues to grow worldwide: the demand for electricity. Much of that growth is coming from emerging market countries that are largely rural and not yet electrified in the Asia Pacific, Latin America, and to a lesser extent, sub-Sahara Africa.
Folks, there are 85 million more humans on Earth every year and 25% of them still go to bed at dark and rise at dawn. But that paradigm is changing rapidly, especially with urbanization in China and India.
For the next two to three decades and perhaps longer, nuclear energy will remain the planet’s only source of base-load electricity without a significant carbon footprint.
I maintain a contrarian speculating and investing philosophy and opine that now is an opportune time to take positions in uranium explorers in the Athabasca Basin of Canada and developers and producers in the United States. As always, contrarianism requires patience and a longer outlook. Over three decades of investing in the resource industry, I have learned to follow the smart money and those individuals and entities have been and are speculating in uranium equities.
That said, there are unique wild cards in the uranium game. They include the following:
For example: When the spot price reached $39/lb in late March to late April and briefly touched $40, the DOE immediately dumped three million pounds U3O8-equivalent on the market in conversion form (UF6). This resulted in the spot price dropping to $35 and change in little more than a week.
There is current legal action making its way thru the court system with US conversion company ConverDyn suing the DOE for its actions over the past seven years.
A significant amount of plutonium recovered from the used fuel is immediately recycled into mixed oxide (MOX) fuel, mainly in Europe. MOX supplies 5% of annual nuclear fuel demand; as of now, only a small amount of recovered uranium is recycled.
New reprocessing technologies are in development for fast neutron reactors, which will burn all long-lived actinides, including uranium and plutonium.
Now let’s switch gears and review the general performance of uranium equities since the business emerged from the 25-year doldrums in 2005:
So what does the future hold for contrarians like me that are committed to uranium stock plays? This song sums up my opinion succinctly:
The Future’s So Bright, I Gotta Wear Shades (Timbuk 3, 1986)
I study nuclear science, I love my classes
I got a crazy teacher, he wears dark glasses
Things are going great, and they’re only getting better
I’m doing all right, getting good grades
My future’s so bright, I gotta wear shades.
A list of uranium explorers, developers, and producers that I currently cover is available via this link:
I remind you to speculate at your own risk and when researching micro- to small-cap resource stocks, please beware of frogs masquerading as princes:
Ciao for now,