Uranium Update

Podcast Transcript

*This episode was recorded prior to the Russian invasion of Ukraine

Ed Coyne: Hello and welcome to Sprott Gold Talk Radio. Today we are pleased to have our first returning guest to the show. I'm happy to welcome back Per Jander from WMC Energy, which is Sprott's strategic partner for all things Uranium. Hello, Per and thank you for joining us today.

Per Jander: Thanks a lot. It's great to be back.

Ed Coyne:  I want to jump right into this for those who have been following Sprott since July of last year, when we really dove into the uranium market. With over $2 billion in Sprott Physical Uranium Trust today, it's fair to say that we've made an impact in the space. More investors are looking at us as a solution for exposure to uranium and also for education on the space in general, whether it's nuclear energy or uranium itself.

Global sentiment surrounding nuclear energy appears to be changing from negative to positive. Given the perspective from your position within this industry, what do you see happening and what's going on in nuclear today? Is that negative view truly turning positive or are we just hoping that's happening?

Per Jander:  I've been in the nuclear industry for 20 years now and I'm not exaggerating when I say that it's actually never been brighter. I started right around the nuclear renaissance in the early 2000s when there was quite a lot of hope. Then the Great Financial Crisis of 2008 came and climate change took a back seat. A few years later we had Fukushima and it was really a low point, but it's coming out of that now. Looking at China, they've been very consistent over the last ten to fifteen years on their new build program. Europe is really coming around in the last couple of years and with the bipartisan support in North America, I think the next big push is probably going to be over here.

Ed Coyne: Recently the UK announced that homeowners can expect up to a 50% increase in their energy bills. Here in the U.S., there is talk of dwindling heating oil reserves and lost refining capacity. And, of course, the dirty word out there today is inflation. How are these issues likely to affect energy security policies? More specifically, how is that going to affect people's needs, interests or dependencies on nuclear?

Per Jander: That's a great question. The energy and electricity issue is something you don't really care about until it starts hitting your wallet or you don't have any electricity at all. And now, people are starting to see the change on their energy bill and informing themselves; they’re looking into it. They read up on what the energy system is and how it works. Geographical constraints can have an effect in a country that is very narrow. You might have the electricity production in the northern part and the need in the southern part and there's going to be a big change in electricity prices between those two. There is intermittency. If you have renewable energy and the wind is blowing you have very low prices. The wind stops and all of a sudden the prices skyrocket. Foreign policy issues can obviously have an effect especially with the exposure to gas shortages driving up the prices. And then you have the current situation in Europe where you actually have the global security situation affecting that, too. I think people increasingly look to policymakers; what are they actually doing and what are the policies here?

From an energy security standpoint, nuclear energy brings stability to the grid. It's very reliable. It's a predictable cost. You refuel these stations once a year and then you have enough storage on site for a reload at least. You're not really held hostage to any supply issues and you have a very good line of sight to your future fuel costs. First, you have the uranium price locked in for a few years in the future. As an operator, the uranium price is only about five percent of the entire fuel price. Uranium is probably half of the entire operating cost. When you have a gas power station, that's about seventy percent - really a big difference. What you're seeing now in some countries that have had questionable energy policies, obviously pointing to Germany which is a bit of a debacle in itself and in other countries such as my home country of Sweden, is that there's been a red-green coalition that has been anti-nuclear. They’re shutting down nuclear power stations. Lo and behold, energy prices are skyrocketing this winter. The green parties have left the government since and there are consumer handouts because of the federal energy policy.

As a taxpayer, you're obviously not going to be too impressed and with an election year coming up as it's one of the biggest issues. It’s definitely coming to the forefront.

Ed Coyne: The term you use, which I think was a great one, is stability to the grid. I think that's a great way to think about nuclear. It's a baseload to hydro. It's a baseload to wind. It's a baseload to solar. It gives you that 24/7 dependency on making sure you have the ability to turn your lights on. I think that's a great way to think about it. Let's shift gears for a minute and talk about geopolitical issues. How do you think that's going to play in the uranium market longer term? How big of an impact could that be in the next couple of quarters or years?

Per Jander: The unrest in Kazakhstan that happened in early January this year certainly got utilities’ attention coming straight out of the holiday period. It was a pretty crude wake up call for everybody in the industry. In Kazakhstan, I have some very good industry friends there and they obviously had their lives turned upside down around their Christmas which is two weeks after our Christmas. There was curfews in place. There was no Internet access whatsoever. We've been in frequent contact with them. As things started to calm down, from a physical uranium trust perspective they've made all the deliveries. They assure us that the situation is stabilizing. There were some potential supply issues we can look at because of their mining techniques. For recovery or leaching, you need a lot of piping, you need a lot of sulfuric acid for the particular kind they have in Kazakhstan. There could have been some supply issues, but again, those are resolved. They haven't had an issue so far. We're clearly closely monitoring it but as far as Kazakhstan goes, the situation seems to have stabilized.

You look at the current situation in Ukraine and the conflict with Russia. That’s a different story. While Russia is not producing much uranium itself, enrichment is a very big portion of what's coming from Russia especially for U.S. utilities: about 25% in the two coming years. Any strict sanctions on Russia could potentially have an issue. It’s definitely something worth keeping an eye on. Overall, as a sort of security safety precaution, I think U.S. utilities in particular are probably looking at a little bit of geographical diversification. It's only prudent.

Ed Coyne: We see that in many of the mines that we invest in, whether it's gold, silver, platinum and palladium and of course, uranium, that's a pretty common thing to keep an eye on. In fact, we even have a heat map for our gold team looking at safe zones or green zones versus yellow zones versus red zones. I think that's going to be a constant. I can't see that ever going away. You're going to have to deal with these issues regardless.

Let's shift gears a little bit and talk about the reactors. There's about 440 reactors or so currently running globally and I saw about 55 additional plants being built. Given the time it takes to build a plant, as well as bringing those reactors online, what is the life cycle of a plant? What does it actually typically look like once that plant is built? How long can we expect that plant to operate before we have to either renovate it or replace it?

Per Jander: Looking at the construction time, when you build something as complicated as a nuclear power station, a lot of work goes into it before you actually start to dig and pour concrete. There's going to be site permits and environmental permits. You need to choose the design and have all those negotiations. At the longest, it can be a fifteen year period but you can definitely shorten it down to ten years and potentially even less if you already have a site in mind, which is what a lot of countries are doing. They already have pre-picked sites, so they've already embarked on this. It’s not like they're starting completely cold. Once you start building the reactor, five to seven years is for something that's established and you have experience. If you look at the reactors currently being built in Finland and France and here in the U.S., it's obviously a lot longer. Those are first of a kind. Those are basically paving the way and bringing a lot of experience. Clearly it's not going to take that long next time.

Looking at how long they can operate, they were initially considered for forty years and then they realized that they can last much longer than that. There are some big pieces of equipment you have to replace and obviously you have continuous maintenance, but sixty years is more or less considered a standard now and even eighty years for some of the U.S. reactors. The reactor you built forty, fifty, sixty years ago and you considered written off completely, now it's going to give you twenty more years of 1,000 MW. This is extremely profitable and much more profitable than building a new reactor of any kind, I would say.

Ed Coyne: That's something people forget about. We're trying to produce more energy and we're trying to do it in a cleaner, safer way but these things also have to make some money, right? They have to be profitable. So it's in everyone's best interest to get this thing right out of the box and to get these things up and running while maintaining and keeping them in the quality that we expect them to be kept in. Let's shift gears again and go back to the market. In July 2021, when we went live with the Uranium Trust, from that time to now the Trust has gone from about $600 million in AUM to a little shy of $2 billion. And there's certainly been a lot of conversation around uranium which has coincided with the demand for nuclear energy and the demand for clean energy. How can we address the increased demand for uranium going forward? Is that going to be an issue or is there enough uranium out there to meet that demand?

Per Jander: Because the demand is not coming all at once, there is enough time for producers to prepare and start to look at new mines and how to ramp up the existing ones. I'm not too concerned that we won't find the uranium, but looking at the cost picture is a completely different story. Say it was five years ago, then new mines may have needed $55 or $60 a pound to come on line. Today, and certainly going the next couple of years, everything is going to be getting more expensive. That number is definitely going to change going forward. As far as the uranium market itself, I would say the entrance of SPUT has completely changed the market. Fifty percent of the spot purchases over the last six months have been from the Sprott Physical Uranium Trust.

Ed Coyne: Wow.

Per Jander: It really has a dramatic impact on the market. There were a lot of complaints beforehand about the market. If you looked at how market participants viewed the market, it was fairly illiquid, not very transparent and it was kind of unclear how the price was set. There are some price reporters and while they have procedures on how to form the price, it's not an easy job. It's probably one of the hardest jobs you have and to come up with a fair price is not necessarily easy. What we've been trying to do is report every transaction and every price to these reporters to help them in the process of making it a more transparent market. This has been well over 150 transactions.

It is a lot and our cooperation with the price reporter is working very well. They're happy with our entrance. It definitely brought some liquidity to the market. Overall, I think it's quite a positive view. Obviously, price has gone up a little bit but while some utilities might complain about this, others are quite encouraging about it and saying it’s actually good. It gives miners the confidence to reinvest in their mines and to see that there's investor support out there.

Ed Coyne: Okay.

Per Jander: And that means they are ramping up their mines before it might actually be needed from a utility perspective. Overall, I would say the entrance of SPUT in the market has had a fairly positive impact.

Ed Coyne: Often we think about the U.S. as always driving policy and driving the way consumers react and so forth. In this case, nuclear in general seems to be global but also outside the U.S. It seems like areas like Asia and areas like Europe have embraced it in a way that maybe we haven't and that change could be happening. What does that look like from a production standpoint, both here and abroad, as more people wake up to nuclear energy as a solution? Have we ever seen uranium over $100 dollar per pound, let alone being inflation adjusted? Have you ever seen it at that level before? Have you seen those spikes in the past? Do you see something like that potentially happening going forward as the world wakes up as this being one of many solutions for green energy?

Per Jander: We have seen uranium prices above $100 per pound in 2007. It went up to about $130.50, the highest transaction price. Now, bear in mind, that was a very sharp spike and it was not sustainable at those prices. It was not sustained at that level. It wasn't really driven by longer term demand from utilities building reactors. It was more driven on speculative demand from hedge funds.

Ed Coyne: So more of an investment.

Per Jander: It really created a crunch. What we're seeing now is that the fundamental demand is starting to be built up by new reactors being announced and new policies being put in place. You can see the story and the case for a much longer-term sustained increase in nuclear energy is definitely starting to take shape. That's what I think and it's a much healthier market now. What I think we will see happen is that you will have a sustained price increase. Overall and over time there will be a gradual increase in price. There's certainly going to be swings. It will saw-tooth up and down but the sustained increase is what the industry needs both from a mining standpoint, to put mines back on line and also from a utility standpoint to invest in nuclear energy. That sustained demand and the sustained policy support is so important. If you build a reactor, you're going to run it for at least forty to sixty years. You can’t have the policy change every five years, right?

Ed Coyne: Well, it certainly seems as you read more and as we all move towards a cleaner footprint from an energy standpoint, I suspect you'll get more people to get on board. I think you mentioned something earlier today that even organizations like Greenpeace have started to rethink their view on nuclear. I do think that we're going to see this become the forefront as one of many solutions to have a carbon neutral footprint and create green energy. With that, before we close, are there any last words of wisdom, any comments you'd like to leave the listeners with, how to view this space or how to even participate in this space? Any last words of wisdom you want to leave us with?

Per Jander: That's a tall order but as we're looking today, about one third of the production is low carbon. We need to get to eighty percent by 2050. That's assuming that you don't have an electricity demand increase. On top of that, there may be at least fifty percent electricity increase in that period, probably even more as electrification of the transport sector occurs. That’s going to drive a huge electricity demand just from that alone. Adding all those things together, we really need to look at every potential technology we have at our disposal. It's going to be every renewable you can imagine. There's going to be lots of different nuclear energy technologies, such as SMRs and large scale nuclear reactors. There are advanced new reactor types as well. For a transition period, certainly in Europe, there's going to be some natural gas in there too. We need to use everything. As far as the outlook for uranium, it really hasn't been any better before. It's starting to grow stronger every day. I looked at news announcements over the last two weeks and it's more frequent than ever. Nuclear bans are being revoked, there is money allocated in certain states to build SMRs and it really is as bright as it's ever been.

Ed Coyne: Well, Per, thank you so much for joining us today on Sprott Gold Talk Radio. For our listeners who would like to learn more about Per and WMC Energy and what we're doing at Sprott, we encourage you to visit us Sprott.com. You can also learn more about how Sprott can advise you on all things precious metals and real assets whether it's uranium, gold, silver, platinum, or palladium. Thank you again. I'm your host Ed Coyne and you're listening to Sprott Gold Talk Radio.