November 2022 Uranium Update
Just back from the NEI's International Uranium Fuel Seminar in Las Vegas, Per Jander tackles the latest uranium market news with Ed Coyne and John Ciampaglia. The trio covers uranium spot price action, the doubling of Cameco's YoY uranium production targets and the increased flow of new nuclear reactor announcements from governments worldwide.
Ed Coyne: Welcome to Sprott Gold Talk Radio, Season 2, Episode #9. I'm your host, Ed Coyne, Senior Managing Director at Sprott Asset Management. With me today are two returning guests, Per Jander of WMC Energy and John Ciampaglia of Sprott Asset Management. Per, I'd like to start with you. Much has happened in the world of uranium in the last 30 days, whether it's been announcements of deals or just the uranium spot price moving around quite a bit. I think it'd be helpful for our listeners to hear from you directly on what's going on in the spot market today and what it means for some of these deals to start happening within uranium.
Per Jander: Thanks for having me on again. It's great to be back. It's funny; we recorded our last session about a month ago when I had just attended the World Nuclear Symposium 2022, the big conference in London which kicks off the fall season. And just a week ago, we had the U.S. equivalent in Vegas [the Nuclear Energy Institute's (NEI) International Uranium Fuel Seminar], where everybody met up for the first time in three years. In London, it's a bigger conference. You cover broader topics, reactor technologies, licensing and all sorts of things. In the U.S., the conference is much more focused on uranium procurement and nuclear fuel procurement, and it was a tangible difference. I wouldn't say it was tense. Everybody's happy to see each other again. And, of course, you're in a location like Vegas, where everybody relaxes a little bit. But you can tell in the air that a lot of contracting is going on right now. It started in the summer with enrichment and conversion, and it's rolling into U308 (yellowcake), and everybody is running around having meetings. There's not much attendance in the sessions because all these side meetings are going on. People hold their cards close to their chests and don't want to say too much about what's happening.
On the public side, there are a bunch of tenders coming out and more are getting announced in the coming weeks. On Cameco's big earnings call last week, it said a lot of the talks they’re having are off-market, basically bilateral. They don't necessarily come up for tenders. These are ongoing, long relationships, and the deals are getting longer. As for the contract numbers, I think Cameco said they were 77 million pounds, the biggest on track for this year, and could potentially be even more. It's the biggest contracting year since Fukushima. There are definitely things going on right now, and you can tell it will continue for the next few months.
The Uranium Spot Price is Firming Back Up
Do you think part of that is because the uranium spot price is moving around, or do you think it's just the general narrative of governments worldwide talking about the future of nuclear power? And John, what are you seeing from a market standpoint about the spot price right now?
John Ciampaglia: It's been very buoyant the last couple of months. We went through a very quiet summer doldrums period, during which the price of uranium just meandered around $48 for weeks. In the last couple of weeks, it's come back to life, and the price has gone up $4-$5 a pound, which is good. But I think the activity level is more interesting than the price appreciation. We've seen a lot more activity in the spot market in the last few weeks in terms of different parties coming in and buying material. We've seen some utility buying, we've seen some trader buying and I think it's very healthy that market activity has come back to life, which is helping to put in some support around the price. I'll also note that the price of uranium right now is around $52 to $53 (per pound), which is where we were in the springtime, right before speculation about sanctions against Russia was the catalyst to move the price from $53 to $63 in just a very short time.
We obviously saw a downturn in the uranium price along with the decline in just about every asset class in the world. But I think it's very healthy to see the price return to the low $50 range. The price is not only being supported by our buying for Sprott Physical Uranium Trust, but many more parties are active daily. I think that bodes well in terms of finding a support level.
Ed Coyne: One of the things I think you've both mentioned in the past is at what uranium price do a) existing dormant uranium mines come back online, or b) new mines get built? At what uranium price do you think you'll see existing mines start to turn back on? Are we already seeing that? And then the second point, which I think is probably the one that more people are paying attention to, particularly those looking at the uranium equities market — at what point would you see additional mines start to be built?
Per Jander: I don't think we're at the price where you'll see new mines being built just yet. And the big suppliers will be the first ones to say that we don't necessarily look at the uranium spot price. We need an incentive price in our long-term contracting. Cameco is turning some of its mines back on. But when you look at the Kazakhs, the mines there are still producing below approved levels. They go from -20% to -10%, so sure it's an increase, but it's not at all at full capacity because they just don't see the incentive there yet. But in speaking to price reporters and other consultants in the area, the term is getting longer. And traditionally you had quite a lot of flexibility in these prices. It could be volume flexibility that you can flex up or down. You can have ceiling prices that cap your exposure to whatever price indicators you have. There's location flexibility. There are all sorts of added-on little bells and whistles on main contracts that have been very favorable for utilities.
If you add up the value of these things, they can easily add $10 a pound to the uranium price. Now, that flexibility is disappearing, and it's going back to the bare bones contracting, and you’re going to start seeing the term price coming back up. That’s what I think we’re going to keep an eye out for in the next few months.
Long-Term Uranium Contracts with Utilities/Producers Drive the Market
Ed Coyne: That’s interesting for the market watchers out there saying, “OK, what is that price?” John, maybe you could shed some light on that? Are we seeing a magic number or a price that the market watchers or potential investors should be looking at? Is it $60 a pound? Is it $80 a pound? And is there a different price for the existing mines to come online versus the new mines? What number, if any, should investors be focused on or be thinking about as they watch this market continue to mature?
John Ciampaglia: We obviously see some very positive signs happening right now. As Per mentioned, long-term contracts with utilities and producers are going to drive this market, in our opinion. The recent announcement from Cameco is important to highlight for people, especially if they’re newer to the sector. Last year, in 2021, Cameco contracted a grand total of 30 million pounds for the calendar year. Those are pounds sold forward under various contract arrangements.
In February, Cameco shocked the world with a 40-million-pound number and added a couple of fives in Q2 and Q3, and then added another 27. Now they’re at 77 million pounds for the year. We’re talking about 77 million so far this year versus 30 for all of last year. They’re obviously a tier-one producer. They’ve got incredibly high-grade assets in the Athabasca Basin, and that pricing — somewhere between $50 and $58 — is a level that provides them sufficient incentive to reopen mines and meet long-term contracting requirements. If you think about the other mines around the world, yes, they are starting to come out of care and maintenance and put back online.
But when you're talking about greenfield production, we still have long ways to travel. If you look at some of the most developed next-generation uranium miners in the world from NexGen Energy or Denison Mines, they've just recently submitted environmental impact statements to obtain permits to build new mines. That's a two-year process. Supply response is going to come as the uranium price increases, but this sector was starved of capital for so long that its now playing catch up.
We definitely think that the incentive price needs to go up substantially from here in order for more uranium mines to actually be built. I'll also note that in the United States, which historically has been a uranium-producing region, we've still not seen any news flow in terms of restarting idle production, even when the uranium price briefly touched $60 a pound earlier in the year. That suggests to me that the incentive price to restart some of these U.S.-based operations has a way to go.
Uranium Demand Outlook is Positive for 2023
Ed Coyne: That brings me to the next point, which is looking forward. As we head into 2023, have you heard any projections on mine production from existing mines? What should we be looking for on that side of the equation?
Per Jander: I think the prediction of how many uranium pounds are produced is fairly stable. You don't have a lot of new uranium mines coming online. If anything, there have been some slight hiccups so they may have produced a little less than planned this year and could continue into next year.
I think the big uncertainty is on the demand side, where you have all different timelines. It ranges from immediate need, for example, the reactors that are staying online in California, potential restarts in Michigan, certainly in Europe with the Germans keeping plants online, and some of the other reactors that have life extensions approved. They need to buy for more or less immediate needs. Then, a few years further out in time, you have more life extensions, like the Japanese reactors that are coming back online. That certainly adds to the demand. Poland also announced last week that it is planning to build six new Westinghouse Electric nuclear reactors, which is fantastic news both for Westinghouse and Cameco, as a new part owner [of Westinghouse]. These reactors will stay online for 60 to 80 years.
We also had some great news in Canada, which announced that a reactor in Ontario got governmental support — I think it was just under a $C1 billion [Ontario Power Generation (OPG) in Darlington, Ontario, will be the first commercial grid-scale SMR in the Group of Seven wealthy nations (G7)]. That's a tangible project that's going to go forward now. And if it's going to come online in 2028, you're going to start making the fuel for it in only a few years. People think the SMR [small modular reactor] movement is 10 to15 years out in time. It turns out it's less than five. So that's something that's worth keeping an eye on because once that demand comes online, then it can definitely move pretty quickly.
Per, would you say 2028 is when those are expected to come online? Is it fair to say it typically takes five to six years to build a new reactor from the time it gets announced?
Per Jander: It depends on the size of the nuclear reactor. There have been some significant delays on the big reactors that have been built, but the reactor vendors have gained a lot of experience that they can use going forward. The ones in France and Finland have dragged on, the Vogtle reactor in Georgia — it’s the same thing. But now you have the building experience from that. At the same time, you have good success stories. In the United Arab Emirates, for example, the Korean reactors have turned out more or less on time.
But these new nuclear reactors that we're talking about in Canada, for example, are the smaller kind, SMRs or small modular reactors, and the licensing has been in the works already. The one I mentioned in Darlington, Ontario, is with OPG and GE Hitachi Nuclear Energy, and I believe Rolls-Royce is working on some of the others as well. They're going to be much, much quicker to build because they're not prefabricated, but they are modular, so modules are prefabricated at different sites. The assembly is going to take less time as well. Now we're looking at the very most, I think five years. It's a very exciting development, and it’s changing every day.
In the background, you of course have the big stable reactors that underpin the national grids that are going to be around. They’re going to come online, and they’re staying online once they’re built. There is just so much going on. The landscape changes on an almost daily basis.
Ed Coyne: It seems like a very exciting time. Probably, for the next 2-10 years, we’re going to remain in the first innings of this development, even though it’s been around for a long time. I suspect by 2030, investors will look back and think that they had overnight success after a decade of planning. The lifecycle is typically about 60 to 80 years once these reactors are built and functioning. Is that correct?
Per Jander: Yes, some can even last longer. Obviously, some mines are going to run out well before that, so that’s why we need new mines as well.
Ed Coyne: John, before we wrap up, let’s shift back to you for a second and talk about how investors can participate in this. What should an investor be thinking about today? What should they be concerned about? What should they be excited about? And how should someone think about allocating or participating in the uranium market as they look to make this part of their portfolio? What are some of the things they should think about or consider before they make that leap or add to it if they’re currently investing in it?
Sprott Uranium Thesis is Still Intact
John Ciampaglia: I would first start off by saying that 2022 has been an incredibly challenging year across just about every financial market in the world. Uranium has been a kind of star standout performer this year. The price of uranium has gone from about $42 to $52 this year. Yes, it did hit $63 at one point in the spring, but just about every commodity has seen a significant pullback. Uranium is behaving this way because of the fundamentals. We still believe the long-term structural supply deficit that the uranium market is currently in is going to be solved with higher prices over time. I think the thesis is still very much intact. From the investors we’ve talked to, I think the price behavior of uranium clearly reflects that. Yes, they all acknowledge that their portfolios are having lots of pain, mostly inflicted by the Federal Reserve. But most of the institutions we’ve talked to have said, “Uranium is the one thing that’s actually working in my portfolio this year, so I’m not selling.”
We are still long-term believers. It’s working. The fundamentals have never been better. I think with respect to the physical uranium side, people are holding the line. Now, does that mean institutions are putting massive amounts of capital to work in the sector? I would say no, absolutely not. There’s money coming back into the sector, I would say in the last couple of months, but it’s been at a much more moderated level.
Now, on the uranium equities side, these are equities, and equities — irrespective of what kind of equity it is — behave with general equity markets. And equity markets around the world have been incredibly challenging. Uranium stocks are down about a single-digit percentage, which is still much better than the broad indexes out there. But they've been very volatile. They had a good pop in July and August and sold off in September. I think you have to remind people that these are stocks. Some of these stocks are smaller-cap in nature and are more prone to this kind of general equity market volatility. It's something you have to be diligent about in terms of your exposures and what's happening with the individual companies.
But many investors that we talk to like to hold some proportion of the physical uranium as well as some of the uranium equities. Uranium miners can provide that operating leverage and optionality because many of these companies are developing the mines of tomorrow, and it will take a long time to bring these deposits online. But they will create tremendous value if they can successfully bring these mines to the market. Investors are clearly frustrated, not with uranium, but with the general macro headwinds that everybody is dealing with. I think you have to take a step back and look at the relative performance. It's been a very challenging year across just about every asset class in the world.
Ed Coyne: It seems to me that if an investor thinks more about uranium as a long-term investment and not a short-term trade, and they're patient, over time potentially some real benefits can be had there. This is certainly a very dynamic market, and we appreciate you taking the time to join us today. Once again, my name is Ed Coyne, and you're listening to Sprott Gold Talk Radio. Thank you for listening.
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