Uranium Update from Per's Cabin - The Sequel

Podcast Transcript

Ed Coyne: Hello and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott. I'm excited to have one of our longstanding returning guests, Per Jander from WMC, who is the Director of Nuclear Fuel, which is probably one of my favorite titles out there today. Per, good to see you. Great to have you back. How are you doing?

Per Jander: Hi. It's great to be back. It's been a while. I am doing really well. I'm at my cabin up in Sweden. I'm hiding away in the Swedish forest, so staying away from the heat waves in Central Europe. It's been really hot down there, and here we're very comfortable, 22, 23 centigrade or mid-70s Fahrenheit and good weather. I just celebrated Midsummer and seeing family and having a really good time.

Ed Coyne: That's awesome. Yes, stay cool. It's actually a great segue. We've been talking for years now about what's going on in energy, specifically nuclear energy and the feedstock of uranium. With these heat waves, data centers and all these things that are consuming more energy, what's going on with uranium? At this point, with geopolitics or anything else, I would've thought it'd have been much higher than it is today. Let's unpack that and talk about the state of uranium in general.

Per Jander: There is a lot to unpack there. It is the best environment for nuclear I've seen in my 25 years in the industry. Demand just keeps coming out of the woodwork, whether it's big existing reactors, announced new ones, life extensions of restarted old ones, finishing construction on ones that have been under construction and then mothballed or smaller reactors. Demand is coming from everywhere. At the same time, we're seeing nothing but struggles more or less on the supply side.

The picture is certainly tightening up when you look at the supply and demand balance for uranium. At the same time, prices have stayed low. You would probably have expected them to be higher. I think one reason for that is that there has been a lot of distractions, at least on the investor side, when it comes to the conflict in the Gulf. Earlier this year, there was a big inflow on investor interest and there were a lot of utilities looking at contracting as well.

There were some enormous contracts done when India came out of nowhere and locked up two big contracts with the Kazakhs and Cameco. Then when everything looked constructive, the conflict in the Middle East happened. It feels like a lot of investors stayed on the sidelines. It was a lot of risk-off movement and a lot of equities were sold. Clearly, a lot of physical uranium that some of those investors held came into the market as well.

I don't know if they really came back yet. It feels like there's still a fair bit of money on the sidelines. People are starting to poke around a little bit and be more interested. It seems like things have gone from being maybe overvalued, and now it feels like things are undervalued, especially with all the good news over the last couple of months.

We're at a strange place. If you're a bull, you would probably see that as a good investment opportunity. But at the same time, I can see investors who've been banged up for the last five years or so are probably scratching their heads and wondering why it is not higher, or they're rather frustrated for the time being.

Ed Coyne: We did bust through $100 here early in the year, and I was like, "Here we go. The world's waking up to this reality,” and then it has pulled back. Just to set that table, where are we sitting right now with the price?

Per Jander: We're around mid-$80s, so we're around $85. If we're looking at where the term price is and we're right at the end of the month now, it's like mid-year, and the term price in uranium is only published once a month. It's gone nothing but up so far this year, and it went up again yesterday. When the term price keeps going up, there is a limit to how low the spot price can go because, at some point, either a utility or a trader will just step in and buy in the spot and carry it either on their balance sheet or find someone to carry it for them.

I don't think it can go much lower, especially not when we're looking at the term price coming up. Can we dip down to $83? Unlikely, but sure, it may be possible. Also, this is a week when a lot of people are off. Utilities are taking a break from a rather busy spring, and some investors have already taken the week off with both holidays in Canada and the U.S. If there are some abnormal moves right at the end of the month, everybody might not be there to take advantage of that. It remains to be seen, but even if there is some disturbing bouncing up and down, in my view, it feels very constructive.

Ed Coyne: Where is the term price coming in right now? You said it moved up $1 or $2. Where is that price at?

Per Jander: Ux published $94, TradeTech is sitting at $95, but will likely be higher.

Ed Coyne: That's a good thing to stay on for a minute because in my travels this year, it feels like we're getting the next wave of investors showing interest. When I say investors, I mean the advisors who are looking to allocate capital to the space in general, not just uranium, but really the entire ecosystem of critical materials.

For new listeners on this podcast, can we go back a step and define the difference between term and spot? Then the comment you made earlier about contract pricing, where does that sit in that? Is that basically just another way to talk about term, or is that another layer to the pricing mechanism? Can we talk about all three of those again, just to educate some newer people to the space?

Per Jander: Let's focus on uranium in specific here because that is the most commoditized part of the fuel chain. Uranium itself, if you are a utility, I would say that the way you contract normally is that you find a supplier, a miner, an intermediary, a trader or a bank. Then you approach them and say that I would like to write a five-year contract with certain amounts of delivery every year. It's starting a few years out because you normally don't buy just in time with uranium. You have a fairly long fuel cycle. It takes you a few years to run through. Normally, you keep buying for things you get delivered a few years out in time.

The way it works is that the absolute majority of the market for utilities contract directly with miners or intermediaries, and it is not done through the spot market. Say you split that 85% through this term market and 15% is then procured in the spot market, because there's some uncertainty whether when you're going to need it and how much you're going to need and where are you going to need it, but the majority is contracted in this term market.

Part of the term market, when you write a contract for that, what you normally see is that part of the contract is delivered according to this base price that then escalates over time. That's what we call a term price that now is around $95, which is the highest it's ever been. We were at $95 back in 2007, which was a big spike in uranium, but since then, it's never been that high, and it's never been that high before that time either. We're at an all-time high, more or less, now.

That base part is one portion of the contract, and the other portion is what's called the market-related. Whenever you take delivery a few years from today, that's going to be delivered at the spot price of that day. The spot price will matter to you, but it might not matter what the spot price is today. It's just whenever you take the delivery, you're going to pay whatever the price is for that day.

You can negotiate to have a floor and a ceiling around that, too, but then you're getting into the weeds of it. Overall, it's a very opaque market. If you're a new uranium investor, you're going to think that the spot price itself is very opaque, but the underlying, bigger market is more opaque because you simply don't see what happens in that market very much.

Ed Coyne: Five or six years ago now, wasn't it subscription pricing where the spot price was figured out once a month? You didn't have any transparency to anything that was going on. It wasn't that long ago that that was the case. Is that true?

Per Jander: It was certainly on a weekly basis, At least one of the price reporters only reported price once a week. It clearly has changed a lot over the last few years. The advent of a lot of investors into this space has changed the market, and in my view, for the better.

We're seeing new actors come in again. Banks and new trading houses are starting to look back into it. They see this as a very interesting market to be in, not just because the thesis for nuclear energy in general is looking very constructive, but it's also a market that's not really correlated to anything else. From a diversification standpoint, it's a really interesting commodity.

Ed Coyne: You mentioned this a few times, utilities versus the investors and so forth. Are you seeing the investors starting to have more influence on the price? Are the utility companies still driving the primary price of uranium today?

Per Jander: That's a very good question. Let's go back five years ago again Following Fukushima, there was such a big overhang of material in the spot markets sloshing around that the spot price was way below what any mine could produce at.

A lot of the big miners shut down their mines because they simply couldn't produce at those levels, or at least they thought, "We have long-term contracts we're delivering into that's a lot higher than whatever the spot price is, so we're just going to shut down the mine and start buying in the spot market instead." That happened in 2018. That took care of some of that overhang, but there was still a fair bit around.

When investors started coming in in a much bigger way, starting in 2021, that big overhang really was tightened up and, to an extent, disappeared completely. Now we have a much healthier market where it's more driven by the cost of getting the uranium out of the ground and are we motivating new mines to come on or certainly the mines that were shut down to restart again. Overall, the market is a much healthier place right now.

If you're a pension fund or retirement fund, you obviously can sit on a position for a decade or two. If you're a hedge fund with a quarterly target, you're probably not going to sit on it that much if it doesn't look fun. You're probably going to get out of position and into something else, and then you maybe come back when the fundamentals look better to you.

I wouldn't hang my hat on saying that the markets are completely dependent on the investors themselves, but they do certainly help. They bring volatility, but they also have increased transparency in the market. The uranium market itself is benefiting from that too because people are much more aware of where the price and transactions are happening. I think it benefited everybody, but overall, I would say the utility activity is what's going to drive the big price movements, certainly the price movements in the term price. That is what most of the time at least is the leading indicator: whatever happens to the term price, the spot price will follow.

It might be that it just takes up the floor, but in a situation we have now, and you're probably going to get to this, is where we have seen a lot of utilities coming into the market for term contracts. That will, at some point, start to spill over in not just intermediaries coming into the spot market to buy, to be able to offer into it, but some of the utilities themselves, once they see the offers that are being handed to them, if they're just like, "We can just go into the spot market and buy this ourselves instead." There is definitely an increase in activity from utilities over the last two weeks.

Ed Coyne: I love what you just said about so goes the term price, the spot price follows. The fact that term price is rising, that's a pretty good indicator that spot looks healthy right now.

Per Jander: I would agree with that. The way I see it is that wherever the term price is, you can’t have the spot price go too much lower than that in a way, because if you have a gap that's more than $15, at some point, that carry trade becomes a no-brainer. In that case, even if it's not the utility themselves, you can just buy it in the spot market itself, and then whatever your carrying cost is or whatever financing rate you can find, and then you can offer it to a utility a few years from now. That's going to look better than what they're seeing from the primary suppliers, and that tightens up wherever that gap is. The term price at least sets a floor on where the spot price can go.

Conversely, we've had this in other situations too. When the spot price shoots up, then there are companies who have these carry trades in place, and then they unwind it. They take the material they sit on today that they've committed to selling a few years out in time, and they sell it in the spot market right now, but at the same time they do that, they also lock in a future price so they can deliver for the future contract, and they arbitrage on that difference, the backwardation in the market.

That's something that we haven't really seen prior to 2021, but that is a dynamic that plays in. It's only really in those situations where you see the spot market lead the term price. We're certainly not in that environment right now because right now we're in contango. The term price is higher than the spot price.

Ed Coyne: It sounds like it's healthier than ever before. It's liquid, it's transparent. Those are all good things for everybody involved. That's a healthy thing, it sounds like, on my side of the table.

Per Jander: It certainly is. If I get to whine a little bit, then it's just that the activity has died down a little bit this year, but I think it's mostly because people have been distracted watching the Middle East, for good reason. I'm doing it too, even though it doesn't really affect anything I do on a daily basis. It is a big distraction, and I think it's certainly spilled over in pretty much any financial market as well.

Hopefully, they can come to some kind of resolution there and things will die down, and then I think we'll see investor funds in general just come off the sidelines and back into all markets. Nuclear energy and uranium is certainly going to be one of them because there is a lot of good news happening in this field.

Ed Coyne: Amen to that. Let's go over to the supply side, because we've touched on that a little bit so far in our conversation, but that's ever-evolving. Some of the biggest producers out there seem to be continuing to have challenges on ramping up. Are there new players coming in? What's happening on the supply side?

Per Jander: There have been some ups and downs over the summer. The large producers like Kazatomprom and Cameco are delivering. I think they're mostly meeting their targets. There's a little bit of acid shortage with the Kazakhs, and they flag that we may or may not meet our targets. We're certainly not looking at ramping up. Whether they can get the acid, don't want to pay for it or simply don't feel like ramping up or having any kind of other issues, they seem to be fairly level in their production. I think it's a part of their value-over-volume strategy, and I think they're executing it very well.

Then we have Cameco, which is the primary operator when it comes to uranium mining in the West. They had a short hiccup when a bridge was flushed out in some spring floodings when the snow was melting in Upper Saskatchewan, but that was remedied quickly. I think they're back on track now. Mining is not easy. There's always going to be some issues that you just simply can't foresee. On a little smaller level, then obviously there was more rains in Namibia where some roads for Paladin were flushed out there. That's remedied now. I think they're back up and running.

The latest in the list here is Lotus, which has the Kayelekera mine in Malawi. They're having some acid shortages, and they have about 1 million pounds they need to deliver to customers over the next six months. I think they're in talks of postponing that, or I don't know if they're going to have to come into the market or replace them or whatever they're doing. Add that to the list of hiccups because things are happening and the supply chain is fragile and the weather is not always cooperating. It's just life. That's mining for you.

Ed Coyne: On the mining side, those things go bump in the night all the time. What about on the enrichment side? It's one thing to mine it, pull it out of the ground, get it going, but then you have to get it enriched. Are there pinch points along the way, as well as just the mining side of it? What's happening on that side? How are we from a health standpoint there?

Per Jander: Over the last few years, since the Russian invasion of Ukraine, the pinch points certainly haven't been uranium. Uranium is the one that's been the healthiest out of these. Russia has 40% of the world's enrichment, so they were a big supplier to both Europe and the U.S., and they've been instructed to not buy enrichments from Russia anymore. That certainly had an impact on price immediately following the conflict when Russia went into Ukraine.

The step in between uranium and enrichment is probably the biggest bottleneck right now. That's the conversion, where you basically take it from a uranium oxide powder and convert it into uranium fluoride gas. It's a chemical process, but it's still uranium. It is Class 7, and that means that you need to have some radiological protection practices in place when you handle it. Then you're also dealing with fluoride, which is a very nasty gas. It's just a chemical step, but it's not as straightforward as it sounds. There's a lot of regulations around it.

There has been a lot of talk of where new conversion capacities will be built out, and it's part of beefing up the U.S. domestic supply chain for nuclear fuel. That doesn't happen overnight. It will be a few years before these new facilities and new capacity come online. If everything goes to plan, I think we're not going to see a shortage. It's not going to lead to demand destruction, but we've already seen a situation when the price of both the conversion and the enrichment services are up by almost a factor of five from when the invasion happened. Uranium has maybe doubled from those levels.

Ed Coyne: I can't be in a meeting and have someone not bring up the word "SMR." They want to talk about small modular reactors or even microreactors. I always say before we even go down that path, we have to talk about existing reactors and the life extensions we've put on all of our existing reactors.

Can you walk us through that? What do the supply-demand dynamics look like for the existing reactors we have that were supposed to be shuttered and are now having their life extended? What does the future look like as it relates to new demand coming online from the large reactors all the way down to the small modular and micro reactors? Can you walk us through that life cycle?

Per Jander: Traditionally, if you have a set fleet of reactors, we might be in the third or fourth inning of the contracting cycle. Then when you're looking at all this new demand from either life extensions or new reactors and we haven't even started talking about SMRs yet, that game hasn't even started yet. We're not even in inning one there.

You can track it on a monthly basis in some of the price reporters' report that comes out every month, but you don't really know when it showed up, because these two Indian transactions that I mentioned earlier, which are $1 or $2 billion worth of uranium over a decade or so, they're for very large volumes, but they haven't really been reported yet. They haven't shown up in numbers. That's one of those things that I mentioned that was not on people's radar screen. All of a sudden, this showed up, and they took up fairly sizable chunks of Cameco's and Kazatomprom's unsold material for the 2030s.

Then I started looking into the SMR space a little bit too, because I know I've been working with Sprott for five years now. In the beginning, I thought, "Everybody talking themselves blue over SMRs." I'm not necessarily brushing it off, but I've always been focusing on the existing fleet that we have, because that's always going to be the cheapest production: to extend the life as much as you can. It's great to see that we have 60 or 80 years. There's even companies talking about extending the life to 100 years on some of the reactors. It's great to see that happening.

Now the SMR development has gone so fast and so much has happened that I'm starting to be like, "All right, I actually need to spend some time looking into this now as well." I have traveled around and met with a few of the SMR players, and I'm genuinely impressed with what they're doing. They're looking at things in a completely new way. All the welding techniques are hard. The big cast iron ingots you need to do reactor pressure vessels and steam generators are complicated. There's no easy way or shortcuts for the deep forgings.

When there are smaller reactors, there's other ways you can do this. There are very novel welding techniques, for example, where a big steam generator might take a year or so, but with these ones, they can do several a week. Of course, you're going to need a lot more for the same amount of capacity, but they're using very novel manufacturing techniques. There's nothing really to do with nuclear. It's just that they're taking developments in other fields and bringing it into our nuclear field, and that's been really exciting to see.

One of the other advantages that people are touting with SMRs, is that you can have this conveyor belt manufacturing facility. Again, I thought, "I believe it when I see it," but now they're actually starting to show it, and they're making very good progress on that. I'm certainly not knocking it anymore. I never really was knocking it. I was just like, "I'll focus on the real one for now, and I'll deal with this whenever it happens," but now it seems like it's worthy of some attention. There's some very good companies out there with some very exciting developments.

Some of this demand will start to hit the market fairly soon. Will it swing the needle on a global scale? Not yet, but some of the reactors being built in Canada have already purchased their fuel. I'm talking to some of the enrichers who are looking at this higher enriched assay fuel for some of the advanced reactors, and they're starting to write contracts as well. It's starting to show up and taking people's time, and they're looking at building the designated facilities to make these kinds of fuels.

It's more than just talk now. We're starting to see facilities being built, and the rubber's hitting the road on that side too, which is extremely exciting. I think the rest of the nuclear field can learn from that because you have some of the new players with just a different way of thinking and challenging the old set ways. It's also very interesting to see how the regulatory bodies are on board with this as well. The U.S. Nuclear Regulatory Commission is a very impressive organization.

I listened to an interview with the chairman there, including his approach to it and how they're doing. They fully realized that the way it was set up before was almost to be a roadblock to new build and new developments in the nuclear field, and they have a much more proactive approach now. Obviously, they have a very important role to play, and no one's going to cut any corners, but it's just the way they approach the task is much more goal-oriented now than it perhaps was before.

Ed Coyne: Interesting. It clearly has your attention now. That was an awesome answer because it is something that people keep bringing up, and it's nice to dampen that a little bit and say, "Let's talk about what we currently have and the supply-demand dynamics there before we even get into this." What's happening in the geopolitical policy side of the world in uranium?

Per Jander: The Russia conflict is still there, so the West is moving away from Russian nuclear fuel. Again, it's not the uranium here. It's more the conversion and enrichment. I would say 40% of the world's uranium is coming from Kazakhstan today. Half of that is going into China, a third of it is going into Russia, so then you have, what, one-sixth left that could go to the West, but China is clearly indicating that they’re hungry and they’ll take whatever you have that's not spoken for.

Russia is still very successful in their international efforts of selling their nuclear power plants to other countries, and they offer up a life of planned supply of nuclear fuel if they want. I think the Russian needs are going to grow even if it's not for the domestic program. It's just going to be harder from a Western perspective to compete for the uranium that's being mined in Kazakhstan. I think we're going to need more in the West.

Canada and Australia are givens, and there's a bit of a tug of war going on in Africa. I think some of the main changes since last time we spoke was the construction permits that both Denison and NexGen in Canada have in their mines in northern Saskatchewan. Those can be very big. Denison is about 8 million pounds a year, and NexGen is 30 million pounds a year.

Say these come online 2030 or 2031, I don't think even with that supply that they're going to be the marginal mine. I think that's going to be another mine that sets the final price, but at least we know that there's significant supply coming online in the West. I don't think we're going to see any demand destruction whatsoever, but I do think there is some room for the price to move even further to incentivize more mines in the West.

Ed Coyne: We're talking on the short side, four to five years, maybe six years out before this even changes. I always tell people, "We're talking about how to invest over the next two to three market cycles." This seems to be a multi-decade opportunity as it relates to the supply-demand dynamics and so forth. These things, as you mentioned earlier, move very slowly. We're not making a new brand of sweaters or something. This is a very big complicated process, and I think patience will certainly pay off for the investors longer term on something like this.

Per Jander: Yes. I jokingly said that to some other investors I spoke to. I think the best thing you can do as a uranium investor is probably to get a hobby.

It's not all you do because things are glacial. First, it’s changed and then it hasn’t. It also means that you can see something a mile away, and we can see a mile away that this supply-demand gap is just growing. Find something else to do. To sit and stare at uranium graphs day in and day out will probably drive you nuts.

Ed Coyne: That sounds like a director of nuclear fuel problem and not a regular person problem.

Per Jander: It definitely is.

Ed Coyne: I know we just said don't look at your screen every day, but what should be some things you should have on your radar as you look at this space?

Per Jander: If you can find reports or you just hear more of what utilities are doing in the contracting activity, because that tends to be a leading indicator, and we are seeing a very constructive environment for that right now. A week ago, the DOE said that they're putting $17.5 billion towards loans for nuclear reactors, AP1000s in the U.S. Canada mentioned that they're going to have 10 large reactors operational by 2040.

These are pretty significant news announcements, and they went on the radar completely. Sweden decided to build Rolls-Royce three reactors on the west coast of Sweden. It really is just a lot of good news. Just scan the news. Put in the keyword “nuclear” and see what comes up. You're almost blown away by all this good news that shows up every day.

Even the V.C. Summer, I mentioned that some reactors starting being built about 2013 or so, I think, and then halted 2017. They're looking at firing those projects back up again and finishing those reactors that's just been standing there for 10 years. This is obviously extremely constructive. There's no way you would've thought that was possible just a few years ago.

One of the Three Mile Island reactors has started up again as the Chris Crane Center, and California's extended life of their reactors, and Palisades is coming back on. Every reactor that can be restarted in the U.S. is now, in some way, shape or form, in a phase where they're going to do that. That's as constructive news as you can see anywhere.

Ed Coyne: Yes. I think a few years ago, we talked about Diablo Canyon out in California, and that was really an “aha” moment that this is real, that this is not going away anytime soon. Then, of course, Three Mile Island was the next “aha” moment. These seem to be happening in a more repeated pattern than ever before. That's very exciting for this space.

Per, I tried to think of everything to ask you today. I know I always miss something. Anything you want to leave the listeners with so they can go off and enjoy the rest of summer, but still be thinking about uranium in the background? Anything that we missed that you'd like to talk about?

Per Jander: Something that it's a bit of a side project of mine that I just started on that's quite interesting, is starting to look at nuclear applications in the maritime space. That basically means that either you build a floating reactor, and you just move it to wherever it's needed, and you don't have to worry about cooling it down because it's sitting in water. You have complete access to water whenever you need it. Then even propulsion and fueling the ships themselves with reactors.

There already was a beautiful U.S. ship built in the '60s that went the equivalent of 10 laps around the world or more on one single reload. It was a cargo ship, but you also had some luxury cabins in it. It was a dual cruise ship/cargo ship. It's in Baltimore Harbor, and you can go visit it. It's open once a month to the public. I went to see it about a month ago, and it's extremely fascinating. I have a big interest in the ocean in general. Now, when I can work both with nuclear energy and the ocean space, it's very exciting. There's some exciting news happening in that field as well, and I think that's going to drive the acceptance of the SMR technologies even faster than what we're seeing today. That's a bit of a side project of mine, and that's something that if you want to go down a rabbit hole, there's a lot there.

Ed Coyne: When you were in Baltimore looking at that, you should have also swung by, I think it's called the Battleship New Jersey, but it's in the Philadelphia Harbor, or it was. That was one of the last diesel-fuel battleships out there before they went to nuclear power, and it used to get 3 feet per gallon. You think about the power of nuclear doing 10 laps around the world, I can only imagine what that would've cost before we got into nuclear. That's something that you should put on your list because it's pretty cool to see the last one before it went to nuclear.

Per, it's always great to catch up to you. I might be calling you and come to visit you if this heat wave continues, because I think you said it's around 70, 80 degrees there, and it's certainly getting warmer here up in New York as well. Always good to see you. Thanks again for the intel. When we're all back to school in the fall, maybe we'll touch base again and see where we are.

Per Jander: That sounds great, Ed. You're always welcome over here, and it's always great to catch up with you.

Ed Coyne: Awesome. Thanks again, and thank you all for listening to Sprott Radio.