Uranium: the metal and the market

At the recent Mining Indaba in Cape Town, South Africa, we spoke to industry experts about the big issues, including uranium and the nuclear sector. Watch mining analysts and Yellow Cake Ordinary Shares (LSE:YCA) chief executive Andre Liebenberg explain how the industry works and their view on future performance.

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John Meyer, head of research, SP Angel:  The uranium price is being driven higher by new funds coming into the market. Particularly the Sprott fund in Canada. But there's also the Yellow Cake fund in the UK. They've been buying up physical material. At the same time, we're not buying fissile material or, shall we say, reprocessed uranium from Russia because of the Ukraine situation. We simply don't want to buy that, although it may be coming to us from other sources. So that's led to a bit of a shortage. Various funds are bigging up the price. But at the end of the day, everybody's looking to build new nuclear power stations, except for the Germans, of course, because we need the power.

Sheldon Modeland, mining analyst, Shore Capital: It's like any commodity, it's just supply and demand. Uranium right now is used, obviously, for nuclear power reactors. And the recent price wise, there's a lot of physical buyers that basically buy physical uranium and hold it. And they're expecting the price to go up. The utilities are the main users, so they have long-term contracts. There's basically two prices. There's a spot price, that's the one that's been rising quickly, and there's a long-term price, a contract price.

That's what the utilities use for the three-, four- or five-year outlook. So, that's a lot different. Spot right now is probably $106 per pound and long-term price is about $65. Since Fukushima was 12 years ago, it's been basically $20 or $30, the spot price. So, it's gone up a lot. There’s two, Sprott Physical Uranium Trust Units (TSE:U.UN), they have £60 million, I think, store it. And then Yellowcake, probably about £23 million.

Andre Liebenberg, CEO, Yellow Cake:If we look at the supply side, there are essentially five producing countries. Kazakhstan is the biggest producer, it produces just over 40% of the world's uranium. Then Canada, then Namibia. Namibia has two operating mines, both owned by the Chinese. All the Namibian product goes to China. There's a mine in Australia owned by BHP Group Ltd (LSE:BHP) called Olympic Dam and uranium is a by-product from copper production. It's a very concentrated supply side. If you just look through uranium and how it goes all the way through into nuclear fuel.

The first stage, the mines produce what we call uranium oxide, U308, and that's what we own. We own physical barrels of uranium, and it’s stored in 55-gallon drums in warehouses in France and Canada. Those warehouses are the first stage or step in the nuclear fuel cycle. The oxide gets converted into a gas, UF6. It then gets enriched with a [separating out of] the 238 and 235 isotope. It goes from a natural 0.7% grade to between 3.5% and 5% grade, and that's ultimately what goes into the nuclear plants.

People often say, “What about weapons?” Weapons grade uranium is 95%. It's a completely different process, different technology, the bulk of the world's uranium goes into the nuclear fuel cycle. A very small proportion goes into the medical industry for radiation, cancer treatment. So that's fundamentally what uranium gets used for.

From U308 to fuel bundles going into a nuclear reactor can be up to two years, it’s 18 months to two years of fuel cycle. At any one time, whatever's being consumed on an annual basis in the nuclear industry, about 1.5 times that is sitting in working capital. So, when utilities buy uranium, they buy it for delivery in the future and then it gets converted and enriched into nuclear fuel.

No one will buy uranium and burn it, consume it tomorrow. So, it's very different to a gas or a thermal plant. In that sense, a nuclear reactor only refuels every 18 months to 24 months. If it runs out of fuel, it's an absolute disaster. It's hundreds of millions of dollars to restart a nuclear reactor. They have to run 24/7. So, the procurement function in the nuclear reactor is critically important to make sure the fuel is on site when it needs to be refuelled.

So, if the price is $100 today, that will only show up in the cost base of a reactor in four years’ time. They buy the uranium today, it gets converted into the fuel. So it sits in working capital for 18 months to two years. Then it gets consumed over an 18-month to two-year time frame. It's not like coal or gas, you buy it today, you burn it tomorrow. Utilities rely on long term contracts to contract for their fuel needs. They go to reliable producers and they spread their risk because they cannot be without fuel.

That's why I think where we are now with supply looking [challenging] in the near term, three to five years, and demand looking better, it's a supplier's market, it's a seller's market. The producers are holding the upper hand at the moment.

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Sean Heathcote, Neo Energy Metals: The bulk of it is China and India. I'd say between the two, they've got 65% of the new reactors or planned reactors that are going to be built. So, the bulk of it comes from those two regions. The biggest current consumer of uranium is the US. They've got more reactors than anyone else, even though the proportion of what they generate from a nuclear perspective is much lower than, say, somewhere like France, where it's 70%.

So, they've got a much lower proportion. I think it's about 12% or 14% in the US at the minute, where that's the nuclear power generation. But they've got the biggest installed fleet of reactors. It's also the oldest, and so they've got to go through quite a significant investment profile to put new reactors into the marketplace. With that, each new reactor that goes into the marketplace, will take anywhere from two to three years of feedstock to actually start it up. So, you've got to buy that in order to get a reactor up and running.

Andre Liebenberg: This industry is really supply stretched. The two big producers, Kazatomprom, Kazakhstan as a country and Cameco Corp (NYSE:CCJ), between them produce two-thirds of the world's uranium. We saw Kazatomprom last week come out with an announcement that they are basically cutting their guidance for 2024 by 10%. So, you've got an industry that is supply challenged and the big guys are struggling to produce. Kazatomprom have got a sulphuric acid issue. They need more sulphuric acid because they have an in-situ leach mining method.

Cameco is ramping up. Its mine was on care and maintenance for a number of years, and that hasn't gone as smoothly as they'd hoped. So, you've got a supply side that's dominated really. I think there are five mines that produce 50% of the world's uranium. There are four countries that produce 75% of the world's uranium. On the demand side, you've got 32 countries, 430 odd reactors producing 10% of the world's electricity. So, you've got a very distributed demand side that's growing, probably 3% to 3.5%, and you've got a supply side that's extremely challenged.

What could happen in the next three to five years, if you have a weather event or a strike or something on the supply side? I think it's going to have an acute impact on the industry. We saw last week Kazatomprom’s announcement, a 10% guidance downgrade for this year and the uranium price went from 100 to 107 overnight. So, we are that supply challenge in this industry in the near term. I think in the long term, supply always comes, in the long-term supply will come. The price will moderate back to inducement pricing, but in the next three to five years, there's no meaningful supply that looks like it could come on stream.

I guess one way of looking at attitudes is looking at surveys and increasingly you’re seeing surveys supportive of nuclear. Japan is now over 50% support for nuclear. Even Greta [Thunberg] supported nuclear. I was at the World Nuclear Association (WNA) conference in London in September last year. It's the biggest conference. Just as an aside to talk about, to [show] you how nuclear has become much more mainstream. When we IPO'd in 2018, I went to the first conference, the first WNA, not the first WNA, but our first WNA. I think there were 50 people in the room. In London, in September last year, it was 750 people, so it's become much more mainstream.

But I digress. The point is at that conference in the opening session, there was the head of the South Korean utility and he said, “Renewables are interesting, but in South Korea, we don't have any wind and we don't have any space and we import 92% of our energy. We have to look at nuclear.” If you take a one-gigawatt nuclear power station, it probably takes up one square kilometre. If you look at the equivalent size for solar, it's 450 square kilometres and it's probably 50 square kilometres of wind turbines.

People just think it's renewable, so it's applicable everywhere in the world. It's not. The wind doesn't blow everywhere. The sun doesn't shine everywhere and some people don't have space. So nuclear is increasingly seen as a contributing technology towards a cleaner future. It’s not the only technology, but it can certainly contribute towards wind and solar as stable generation and possibly backup.

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Sean Heathcote: So it's been a mindset change. You've got people like Patrick Moore, the former head of Greenpeace and founder of Greenpeace, who was anti-nuclear like you wouldn't believe. Now he is 100% pro-nuclear in every way, shape or form. And you've got people like Michael Schellenberger, the economic activist journalist, historically who was really anti-nuclear. Now he walks around and tells Jimmy, “No, you've got to keep your reactors on. You've got to put more nuclear reactors in place.”

So, there's been a big shift in a positive sweep towards where nuclear sits as that transition or fuel before the small grids come in and renewables become the best way forward. If you look at where the UK sits, it has turned around. I think Sellafield 3, that's another one that's coming online. That's reached the next stage of permitting. Rolls-Royce Holdings (LSE:RR.) have now got the next stage of permitting in terms of where their SMRs [small modular reactors] sit. Small modular reactors can be built faster, cheaper, [have] a lower operating cost, and tend to be like regionally specific.

So, you can have a localised geographic generation of power, which works really well if you've got a whole city to power, as you can power the whole city on a small modular reactor. Similarly, for Africa or for anywhere else that's got power shortages, you can put a small modular reactor in, [and] lower transmission ratios because you're putting the power close to where it's going to be used. The footprint is much smaller as well.

Andre Liebenberg: If you go back to 2019, 2020 where the uranium price started moving in a meaningful way. It was driven principally by the US government or by [Joe] Biden putting the US back into the Paris Agreement. That almost kick-started a host of low-carbon or zero-carbon commitments. The UK was 2050, the US, 2050. Some countries said 2040, India was 2060, but you had a host of nations committing to carbon neutrality and that was policy driven. So, we had a massive policy tailwind, supportive of nuclear, really starting at the back end of 2019 into 2020. And that continued with the small modular reactor story. And then when Russia invaded Ukraine, that fundamentally changed the industry.

Russia accounts for 35% of the world's conversion. That's the conversion of U3O8 to UF6 and 45% of the world's enrichment. So, 20% of enriched fuel into the US today comes from Russia, and in Europe it's 30%. It's the only thing that's not sanctioned. So, that fuel is still flowing from Russia to the US. And that invasion really placed an emphasis on energy security and independence. We had the policy tailwind supportive of carbon-zero goals, and then energy independence became a huge, huge issue.

We've had policy tailwinds for nuclear across the globe outside Germany, be it France, Norway, Finland, the Netherlands, or Belgium. Japan is restarting reactors. China's building like crazy, so a big policy tailwind. In the US specifically, it's interesting. It's the one area, one topic where there's agreement across both parties. There's broad bipartisan support for nuclear in the US. So, with the Inflation Reduction Act, something like $40 billion is available for nuclear.

The incentives now given towards producing nuclear fuel for these small modular reactors is getting government support, and it's cross-party. So, I think in the medium term, I don't see any headwinds, but probably more tailwind support in terms of policies.