Uranium: a tale of tails
September 02, 2005
In the uranium market the tails wag the dog. If you
don’t understand tails assays you will have a tough time understanding
the uranium price. I used to be extremely bullish on uranium, believing
that the current primary supply deficit, in conjunction with rising
demand as new nuclear reactors come online will lead to much higher
uranium prices. But after I gained a better understanding of how
uranium is processed and how those processes impact the uranium
price, I have become much less sanguine about the prospect of a
further, near-term increase in the uranium price.
The bullish case for uranium stems from the fact that
the world consumes in the order of 180 million pounds of uranium
(U3O8) per year while mines supply only about half of that. The
balance comes from secondary supplies such as utility stockpiles,
the blending down of highly enriched weapons grade uranium and reprocessing
of spent fuels and tails. Military and civilian inventories are
by far the largest source of secondary uranium supply.
Because uranium consumption is so much greater than
mine production, and because inventories are finite, it can be argued
that the uranium price has to increase until mine production more
closely matches demand. I agree, which is why I own uranium companies
and am interested in the uranium sector, but that is a long-term
view. Markets seldom move up (or down) in a straight line. The question
is whether the uranium price will continue its rise from here or
whether we could be due for a correction.
Uranium bulls argue that the squeeze has only just
begun because the market is already tight (as shown by the increase
in price) and, depending on who you believe, that there could be
as many as three new reactors built every year for the next twenty
years. Therefore, the demand is going to increase.
There are about thirty new reactors under construction
in twelve different countries at the moment with announced plans
for 15 to 20 more. Current estimates of supply and demand show that
there is already a shortage of uranium to meet the increasing demand.
In anticipation of a supply shortage investment funds
have been buying physical uranium with the intent of hoarding it
and selling it later at a profit. The recent increase in the uranium
spot price from $22 a pound to $29 a pound can be attributed to
purchases by a single investment company in Canada called Uranium
Participation Company (UPC).
In light of such bullish fundamentals it is easy to
see why some investors are optimistic about the uranium price. I
was very optimistic too, until I started understanding uranium tails.
There are three natural isotopes of uranium: U(234),
U(235) and U(238). The natural abundance of U(234) is so small that
we can ignore it. For our purposes natural uranium contains 99.29%
U(238) and 0.71% U(235). Both uranium isotopes decay very slowly
by emitting an alpha particle; however, if U(235) captures a neutron
it rapidly splits in two, releasing a large amount of energy and
more neutrons. This is called fission and it is the process that
generates energy for nuclear power plants.
With the exception of CANDU reactors used in Canada
and the smallish pressurized heavy water cooled reactors (PHWR)
used in India, most nuclear reactors in the rest of the world are
light water reactors (LWRs). LWRs cannot operate with natural uranium
because the abundance of U(235) is too low. The natural uranium
therefore has to be enriched in U(235) so that the “fuel”
contains between 3% and 5% U(235) and enrichment is the next key
to understanding the uranium price.
Enrichment services are sold in separative work units,
or SWUs, and now you have to pay attention.
When you create uranium fuel enriched in U(235) you
generate uranium waste that is depleted in U(235). This depleted
uranium is called the tails. The further you drive the enrichment
process -- in other words, the more SWUs you use -- the less U(235)
is left in the tails. The amount of U(235) left in the tails is
called the tails assay.
As you can imagine, there is an optimal amount of
enrichment a utility fuel buyer should use depending on the price
of SWUs, and an optimal amount of uranium he should use depending
on the price of uranium. If the price of uranium is low then a nuclear
fuel buyer will typically use less SWUs and more uranium to make
his fuel. But when the price of uranium is high, as it is now relative
to two years ago, he will use less uranium and more SWUs to make
fuel. How much SWUs he uses is specified by the tails assays, in
other words he tells the enrichment company by how much to deplete
the tails in U(235). If he specifies a high tails assay (lots of
U(235) left in the tails) he uses more uranium and less SWUs. If
he specifies a low tails assay (very little U(235) left in the tails)
he uses less uranium and more SWUs. The "optimal tails assay"
is that which gives the lowest overall, combined, cost for the uranium
and SWUs in his finished fuel.
There is another intermediate process that we do not
need to concern ourselves with right now called conversion. Conversion
is necessary before we can enrich the uranium but all we need to
know is that the price of conversion is about $11.50 per kilogram
SWUs cost about $113 right now and so here is what
you need to understand.
In the past, because the uranium price was much lower
than it is today, analysts constructed uranium supply and demand
curves based on a tails assay of about 0.33%. That is a relatively
high tails assay, meaning there is a lot of U(235) left in the tails.
Assuming a conversion price of $12 a kilogram and a SWU price of
$110 (essentially current prices) a uranium price of $25 per pound
would imply an optimal tails assay of 0.27%. At a uranium price
of $30 a pound (the current price) the optimal tails assay would
Decreasing the tails assay from 0.33% to 0.25% implies
a 15% decline in the demand for uranium (U3O8).
Right now, most analysts are still looking at supply
and demand curves based on tails assays of 0.33%. At some point
those demand curves will have to be updated for lower tails assays
and when we drop demand by 15% the uranium market is no longer in
deficit. Sure, primary supply is still less than demand but instead
of a crunch developing in the near term, it is delayed by up to
Now the question becomes, what will investment funds
such as UPC do when the uranium they bought does not appreciate
for five to seven years? Will they be patient and hold onto it,
or will they sell it? If they sell it, the uranium spot price could
easily collapse since it’s a thin market.
The other thing you have to realize is that the uranium
price will not continue to rise and rise and rise. The higher the
uranium price gets the lower the tails assays become and the less
uranium is required to make fuel.
Since 2001 the price of uranium has increased by over
300% (from $7 a pound to $30 a pound) but the price of SWUs has
hardly budged. That means we do not have an enrichment capacity
constraint in the uranium market yet and until we do you should
expect lower tails assays in response to higher uranium prices.
I don’t pretend to know how high the price of
uranium will go, or when it will correct, or even if it will correct.
What I do know is that there is systemic risk in the uranium market
that very few people seem to understand. When you invest without
understanding your market you are taking more risk than what is
necessary, or prudent.
I will be in Las Vegas for the Gold and Precious
Metals Investment Conference next week, so there will be no commentary
next Friday. I hope to see you there.
Paul van Eeden
Paul van Eeden works primarily to find investments
for his own portfolio and shares his investment ideas with subscribers
to his weekly investment publication. For more information please
visit his website (www.paulvaneeden.com)
or contact his publisher at (800) 528-0559 or (602) 252-4477.
Paul van Eeden works primarily to find investments for his
own portfolio and shares his investment ideas with subscribers to his weekly
investment publication. For more information please visit his website (www.paulvaneeden.com)
or contact his publisher at (800) 528-0559 or (602) 252-4477.
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