trends in uranium spot pricing (july 2013)
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Trends in uranium spot pricing vs the long term supply contract price in the context of nuclear power's place in the World's electricity supply of the future. By Thomas S. Drolet (July 2013)TRANSCRIPT
Trends in Uranium Spot Pricing vs. the Long Term Supply Contract price in the context of Nuclear Power’s place in the World’s electricity supply of the future.
By: Thomas S. Drolet 15 July 2013 President, Drolet and Associates Energy Services, Inc. [email protected]
Vivien Dizil's article in Uranium Investing News of 4 July 2013 accurately and succinctly captures the short-‐term low U3O8 spot price situation of the moment. Currently Long-‐Term Supply Contract (LTSC) pricing is steady in the $ 57/lb. range. Specifically she said;
"Sellers are reluctant to sell large quantities at such depressed prices; however, they are willing to sell smaller quantities at this lower price of $39.50 US/lb. Accounting for the majority of the purchases were utilities, who bought from producers and traders. The 2 major reporting firms (UxC and Trade Tech) indicate that utilities are still on the lookout for low-‐priced sales."
First of all the whole question of what will happen to the original 54 nuclear reactors in Japan is a key point in understanding this price of future U3O8 issue. It deserves some special attention as to what may happen with spot and long-‐term pricing in the future.
Drolet Energy believes that some industry spokesmen are somewhat aggressively hyping the recent major media focus on reactor restart potential in Japan. The Japanese Government, the 9 Nuclear Electrical Utilities together with big business are all united in wanting as many as possible of those reactors back up ASAP due to the horrendous increase in costs for importing LNG, coal and diesel gensets required for replacement electricity generation. Counteracting that goal is the Japanese public's fear and distrust of Nuclear Power and leaders in Government, several Utilities and Big Business. The methodical and somewhat pedantic approach of the newly empowered Japan Nuclear Regulatory Authority (NRA) will, on its own, slow the desired restart schedule. The NRA, the general public and the local Prefecture Government sentiments will, in the end, in our opinion, slow the restart program down considerably.
Not to be underestimated is the very important issue of the extent in time (~20 years) and cost (estimated at $150 Billion +) to return the Fukushima Dai-‐ichi site and the exclusion zone to some stable state of decommissioning and final clean up. The April 2013 IAEA report detailed their recommended complex path to final restoration. The public is focusing on this issue and will maintain its heightened vigilance and concern for years to come.
Today, because of the original shutdown of all 54 reactors for some 22 months, Japan's nine (9) Nuclear Utilities have a lot of inventoried nuclear fuel from long-‐term supply contracts (LTSC) signed prior to the March 2011 major accident at Fukushima Dai-‐ichi. Some of those arrangements could not stop supply under 'Act of God' contract considerations while all of the original 54 reactors were shut down in the immediate aftermath of the accident. There are currently 48 reactors shutdown with some probability of restarting at some future date. Drolet Energy’s guess is still that the Japanese electricity supply system will end up permitting the restart of 5 more reactors this year, 10 in 2014 and 10 more in 2015. That leaves the eventual fate of another approximately 21 reactor units still shut down up in the air. Only two of the original 54 reactors are up and running as of today.
Drolet Energy believes that the majority of the 1960’s designed Mark 1 GE BWR's (like Fukushima Dai-‐ichi) will not see the light of day again on technical and safety grounds. The remainder of the 21 reactors that are not of this early design will also not likely make it back for a variety of other reasons (fault lines, location, local Prefecture Government restrictions and general public opposition).
As a result, under the above scenario, there will be available a reasonably major surplus of enriched uranium fuel inventory whose uranium content can be reconstituted into fuel configurations for reactors that do make it back into production in Japan. The end result; Japan's enriched uranium needs will have permanently reset to a lower level of uranium feed demand.
Meanwhile, Japanese society, which pre March 2011 already had one of the most well developed conservation and energy efficiency cultures in the industrialized world, has since doubled down in those areas by necessity. Furthermore, even more aggressive conservation and energy efficiency standards have since taken hold with a vengeance. At the same time, some energy intensive industries have been lost to other Asian countries post Fukushima.
In other words peak and chronic electrical load demands in Japan will be lower in the post Fukushima era. This despite 'Abenomics' in all of its forms, which are collectively trying to reinvigorate GDP and, through lower FX manipulation, increase exports from Japan to the world.
But, let's balance off this rather depressing Japanese situation in a very different worldwide context. Factoring out approximately 21 reactors (above rationale) in Japan has reduced the likely current total of world production reactors down to approximately
414 reactors from the currently listed 435 reactors listed in many totals by the IAEA and other authourities. That figure may be slightly lower with a few shutdowns in the USA, Germany and Switzerland, but offset on the upside a bit by some recent announcements from Pakistan, the Czech Republic and the UK. As a result, in the next few years, and until new build reactor programs start to put generators on-‐line, world uranium supply needs will likely lower to the 155 Million lbs./year range from the approximate 170 + Million lbs./ year in 2011. In this mix of issues we have the fact that most major Nuclear Power nations have substantial strategic inventories of enriched uranium that can be made available to their own nation state nuclear power reactors if the need arises. We also have the end of the Megatons to Megawatts program (M2M). Despite the above ending of M2M in 2013, Drolet Energy’s opinion is that we will have enough uranium available to supply existing reactors and the few new reactors for the next ~2+ years. Now for the good news for the overall world uranium supply industry. Over the next 3 decades, with the massive new reactor build programs on-‐going in Russia, China, India, UAE, Saudi, some South American countries etc., (some 67 under construction today with a further potential of 250 + more over the next 3 decades), the demand for new mined supply will gradually sky rocket towards ~ 300 Million lbs./year by 2040. The future does indeed look very good for new uranium mine supply and attendant prices—both spot and long-‐term contract. It’s just that Drolet Energy’s definition of 'future price increases' as being defined currently as later this year of 2013 by some writers, is, in fact, 'that future plus a few years' (mid-‐late 2015 and beyond). The good news is that the new mine supply industry has a few more years of needed breathing space to reopen shuttered mines and bring on new mines of all types in many countries. The future for uranium pricing (spot and LTSC) post mid to late 2015 and beyond looks very promising. With the above thoughts taken into account, there is a chance for 2013-‐2015 spot or LTSC price movements to be in either direction. We should play close attention to what is happening with Kazakhstan’s move from a reliance on spot pricing sales towards long-‐term supply contracts (especially with Russia) and the speed of bringing on reactors in China. Both of these major supply and demand issues could affect pricing issues almost overnight. There are basically 3 types of uranium extraction techniques:
• In situ recovery in shallow to mid depth formations (per USA, Australia etc.) • Conventional Open Pit and Underground Shaft mining (per Athabasca Basin etc.)
in sallow to semi deep formations. • Very near surface trenching deposits (Argentina, Australia etc.)
In the near term, companies using in situ recovery (ISR) techniques (example; USA, as in
Texas, Colorado, New Mexico, Wyoming etc.) have much lower capital cost structures operating on lower concentration uranium deposits. The time to production is relatively fast with low CAPEX requirements. Some 42 percent of today's worldwide U3O8 production comes from ISR operations. Companies like Ur-‐Energy (URE: TSX) come to mind. By the way, the reason URE's share price is up so much lately is that they have a well managed dispersion of long term supply contracts with reliable off -‐takers like USA Nuclear Utilities. A well managed company. There are many other ISR companies that will benefit in the short term for the same reasons (examples; Uranerz URZ: TSX, Energy Fuels Inc./Strathmore Minerals Corp…EFR and STM on the TSX). I will also mention one progressive ISR company listed on Australian ASX; Peninsula Energy – (PEN.ASX) – PEN which owns two advanced projects – the Lance ISR in Wyoming, and the Karoo in South Africa – both with a solid resources of about 50 million lbs., and both with some blue sky upside. For instance, in our own back yard of southern Alberta Canada, there is a very innovative new private start-‐up company (Ualta Energy Ltd.) that has uncovered major deposits of uranium in the mid shallow ground SE of Lethbridge. The company is currently in the market for funding. The company will use the twin technologies of ISR and oil and gas industry horizontal drilling techniques. The combination of these technologies means fast time to production, low CAPEX and the use of tested, tried and proven horizontal drilling techniques used throughout the oil and gas industry. The main economic potential of the twin Ualta properties are considered to be two giant uraniferous bone phosphate deposits hosted in two large sandstone repositories. For the longer term requirement for massive new quantities of uranium needed over the next 3 decades, we have the much higher-‐grade uranium deposits in hard rock areas such as the eastern ridge zone of the Athabasca Basin. There are also major new E&P activities and finds in the western and northern ridge zones of the Athabasca as well. The downside of Athabasca’s new production capability, in the short term, is that the E&P time and high mining capital costs will mean more time and much higher CAPEX is required to bring these much needed deposits on-‐line. That said, the major supply capability from these high grade deposits in the Athabasca will be sorely needed for the major reactor build out programs in so many of the worlds nations. The majors in the Athabasca, like Cameco (Cigar Lake intended commissioning and opening etc.), Areva and Denison (DML and its recent acquisition of Fission Energy FIS: TSXV), and the up and coming E&P Juniors (just a few of many examples; Alpha Minerals AMW: TSXV, Athabasca Uranium UAX: TSXV, and Lakeland Resources LK: TSXV) may end up eventually being acquired by these same majors or being partnered during the E&P stages with reactor end user corporations. Collectively, the major portion (~ 60%) of the base long-‐term North American and World uranium supply will have to come from these new conventional open pit and underground shaft mining discoveries. New shallow trench supply from South American countries like Argentina will round out new uranium supply capability (example: U3O8 Corp: UWE: TSX—they also have a multi
mineral [Uranium, vanadium, phosphates] opportunity in Columbia—the Berlin Project). On the issue of U3O8 spot vs. Long Term Supply Contract (LTSC) price question, the determining factor to watch closely will be the LTSC price. Yes, the low spot prices of today may mean short to mid-‐term sweat and stress to investors and to the overall industry, but the LTSC is what should be watched carefully. Various reporting agencies (UxC etc.) do put out an estimate of the current average long-‐term price occasionally. However, for obvious competitive reasons, the pricing and duration of these contracts is a fairly closely guarded data point. For sustainable major new supply from new mine sources to be committed and big money spent, we will need the world LTSC price to be seen to be rising and maintaining a level of the mid $70’s/lb. of U3O8. Finally, a big picture comment based on Drolet Energy’s background in the large Electrical Utility reactor user world. Reliable and sustainable electricity generation in any country needs a balance of many generating sources in our ever-‐increasing urbanization of the world’s populations. We need more near baseload ‘dense’ energy supply systems like new and better designs of Nuclear, more Hydroelectric (mostly run of the river ROR), more Natural Gas, and “yes” more efficient Coal generation and some Geothermal. Until economic and reliable energy storage systems are available, renewables like wind and solar will remain a relatively small component of supply systems on a worldwide averaged basis. However, should economic renewable energy storage systems be developed for wind and solar, then Drolet Energy expects these systems to quickly ramp up from the current ~2 % of electricity to ~ 8 % of electricity generation supply on a world averaged basis. Large Generation 3+ Nuclear reactors (1000-‐1400 MWe) will dominate in nuclear supply near-‐term (examples; Toshiba/Westinghouse, Hitachi/GE, Areva, Russian VVER’s, new Chinese systems etc.,). In the longer term, uranium fueled Small Modular Reactors (SMR’s—approx. 150-‐300 MWe) and Molten Salt Reactors (MSR’s -‐-‐-‐approx. 100-‐300 MWe) will take their emerging place based on safety and perceived (not yet proven) economic grounds. SMR’s will enable electrical utilities to better match grid growth needs with annual demands. Also, though in the very early stages of development, as MSR’s progress through the R&D, demo and prototype stages, we would have available a system that is conducive to supplying a very high thermal heat source required by some large industrial concerns as well as being a safe and proliferation resistant electricity supply system to the grids of the world. Some future versions of the MSR may use thorium in some cases… but most will concentrate on uranium as the base fuel source. Thomas S. Drolet. 1-‐828-‐493-‐1523 [email protected]