Uranium 2022 review and update 4
Looking back, and looking forward
Recapping 2022
2022 has been a year of frustration for Uranium investors. This is not merely because of disappointing stock action (URNM declined from US$49.78 on 12 Nov 2021 to US$30.46 on 16 Dec 2022, a decline of 38.9% vs ~35% for the Nasdaq composite), but because it has happened against a backdrop of unanticipated bullish developments:
Global energy crises with the price of fossil fuels spiking, reducing the relative cost of nuclear energy.
A nuclear renaissance as Europe, US, India, Japan, South Korea, China and many others commit to restarts and expansions.
Rising resource nationalism as countries scramble for natural resources in a more fractured world. This refers to both hoarding resources (e.g. India buying Russian oil) and rejecting resources from hostile nations (e.g. Russian sanctions).
Of particular note is the Russia Ukraine war that has made Russia a pariah state in Europe. In Uranium, Russia holds ~40% of global enrichment supply and 8% of global uranium supply. If Russian enrichment is locked away, this means a much tighter enrichment market and a flipping from underfeeding to overfeeding.
The launch of Sprott Physical Uranium Trust, which has sequestered ~59.5M lbs of Uranium (~1/3 of global supply) since inception (July 2021). Other funds, like Kazatomprom’s ANU, were also started.
Reiteration of supply discipline from Kazatomprom and Cameco.
Largest contracting volumes of 114M lbs (as per UxC) in a decade.
Tightness across the nuclear fuel supply chain (prices quoted from December 2022)
U3O8 spot price +13.3% YoY to US$48/lb
U3O8 contracting price +27.8% YoY to US$51/lb
Conversion spot price +150% YoY to US$40/kgU
Conversion long term price +47.2% YoY to US$26.50/kgU
Enrichment spot price +123.2% YoY to US$125/SWU
Enrichment long term price +105.5% YoY to US$136/SWU
This is against a backdrop of an already impending long term deficit in the market, before demand increases from nuclear restarts/extensions, financial demand and overfeeding.
Why has the sector disappointed? In my view, it is due to the following reasons:
The sector ran ahead of itself: For reference, Global Atomic had a market cap of ~C$800M in Mar 2022. The net NPV at US$70 per lb, as calculated here, is ~C$841M. While price can rise, we aren’t even at US$60 yet, and multiples also tend to compress through a commodity cycle. Global Atomic is also a pre production asset. I would not buy Global Atomic at 1x NPV. So the equities had a lot of embedded expectations going into the year.
One of these expectations was that the entry of SPUT would dramatically shorten the bull market, squeezing the uranium price higher. URNM rose from US$25.69 in 20 Aug 2021 to US49.78 in 12 Nov 2021 after the entry of SPUT, which drove up the spot price. Whether due to fading enthusiasm or simply broader market weakness, the momentum stalled. With that, the forward pricing of the uranium equities adjusted downwards accordingly.
Many (including me) underestimated the amount of time it would take for overfeeding to manifest. Fuel buyers did not act immediately after the war’s outbreak (reasonably, because many thought the Russian incursion would be short lived). Importantly, uranium sanctions have not taken place and Russian enrichers continue to deliver product into existing contracts. Even as fuel buyers swapped to western enrichment, conversion was a key bottleneck stalling the expansion of demand for U3O8. There simply isn’t enough in the immediate future (until 2025) to wean off Russian supply completely.
Broader market weakness has affected all assets. Many things are cheap.
Even if uranium has the best setup of any commodity out there (which I believe to be so), your entry point absolutely matters, and it will take time. And while I remain heavily invested, I think the narrative of inevitability in uranium needs to be more nuanced. Uranium is a bet with a good baseline outcome and a high probability of a great outcome, but great outcomes are not assured. I’ll detail some thoughts on some of the factors this bull market hinges on below:
Supply deficit into the late 2020s based on pre-covid projections: The math from from CGN shows a deficit in excess of ~30M lbs per year in the late 2020s. Mike Alkin pre-Covid showed that only 140M lbs have an AISC below US$50 per lb. And with a nuclear renaissance and insufficient exploration, there may simply be not enough lbs, period. This is critical because when a market switches from surplus to deficit, it is not the cost of the marginal seller, but the marginal buyer, which determines the price. And utilities are relatively price insensitive buyers.
This forms the bedrock of the uranium thesis, and forms an extremely strong base case, because it is only a matter of time before we run into deficit. And contracting happens 3-5 years in advance due to the nuclear fuel cycle.Flipping from underfeeding to overfeeding: Even before the Russia Ukraine war, enrichment prices had already been recovering due to excess supply being retired. The war has already shifted some demand to western enrichers. But I would also caveat that one shouldn’t take the “security of supply” narrative too far. The EU delayed their Russian oil sanctions, and is buying Russian oil indirectly through Asian refiners and reblending oil cargoes to dilute their origin. Sanctions may not materialize, especially if the war ends. Hence, while Russian enrichment will probably be discounted and hence supply will decrease, we can’t know for certain just how much.
A big reason is that there simply isn’t enough capacity in the west to replace Russian capacity. This is changing, as the West is committing to building it’s own capacity. The US DoE awarded US$14M to US uranium converter for reserve program. The UK is also developing a nuclear fund to build up conversion capacity. But it will take time, but I anticipate more switching in the future.
Overall, I think some level of demand shifting has happened, will continue to happen, but more will happen in time, but I won’t bank on a total switch yet.Financial demand: I think no one can really say when and how much SPUT will matter (it has mattered a lot already). And do note SPUT becomes a supply overhang over the market too. So while I think SPUT enhances the bull case, it’s really more of a wild card at this moment.
Nuclear renaissance: The translation of words into actions may be messy, not merely because politicians are lying, but simply due to operational issues, such as those in France’s nuclear sector now. I think nuclear will become an increasing part of the energy mix, but expect delays, reversals and frustration along the way.
Supply discipline from producers: While it is encouraging to see supply discipline from Cameco and Kazatomprom, the flip side of this is that these producers can flex up, forming a supply overhang that must be worked through.
At risk of sounding like a broken record, I am still very bullish on the sector, and I think the probabilities of the factors above skew to the upside, but I think not everything* is imminent and inevitable. That said, I expect 2023 to be a very good year, for the following reasons:
We are starting with way less hype than 2022.
We are one year closer to the shortage from 2025 onwards. That is tomorrow in uranium contracting terms, due to the 18-24 month fuel cycle.
Things move slow in nuclear, but when they move, they can move violently and quickly. 2023 sees many of the developments that incubated in 2022 maturing, in my opinion:
The contracting cycle has already begun, with 2022 marking a decade high in contracting volumes and prices. Utilities spent a significant part of 2022 stuck in deliberation (over both Russian sanctions, as well as the prospect of prolonged plant lives) and fuel cycle bottlenecks (evidenced by extreme price spikes in conversion and enrichment). It was premature to expect an immediate response in 2022, but as the developments get absorbed into utility plans, I expect 2023 to be a year of higher volumes, and higher prices.
Conversion is expanding in 2023 and beyond. The backdrop was that UF6 inventories had been in drawdown since 2017, and many facilities had been shut. As ConverDyn’s Metropolis restarts in early 2023, conversion supply will equal “base” demand. Orano’s Philippe Coste is expanding capacity, which is expected to complete by April 2023. The bottleneck will ease.
The flip from underfeeding to overfeeding is happening. Contractual tails assays, which is the % uranium in the feedstock supplied from utilities to enrichers, has risen from 0.2 to 0.3 - 0.5 range. Operational tails, which is the % uranium that enrichers actually use, have already risen to mid 0.2s. As existing contracts with Rosatom expire, I expect to see more switching and overfeeding. The impact on U3O8 lbs demanded is estimated to be ~10M-20M lbs per year.
Sanctions are still on the table, although the path is uncertain. On Feb 7 2023, US House Energy and Commerce will consider legislation to ban the import of uranium from Russia and provide US$1.5B to fund the development of US LEU/HALEU. In a vote of 489 to 36, the European Parliament has passed a resolution that ’calls for an immediate and full embargo on EU imports of fossil fuels and uranium from Russia and sanctions on Rosatom.
Financial players are continuing to squeeze the market. $SPUT has had a strong start to the year, raising more than US$100M in 7 consecutive sessions, and Yellowcake has also raised US$75M (oversubscribed from initial round of US$50M) to fund purchases of uranium from Kazatomprom.
Signs of shortages are already appearing, and this will reinforce procyclical utility behavior. Grant Issac of Cameco states in a February call that contracts now have a floor of US$45-50 and a cap of US$75-80, vs early 2022 where contracts had a floor of US$25-30 and a cap of US$45-50. TerraPower announces two-year delay of Wyoming nuclear project due to lack of HALEU.
SPUT volumes may return if the Fed eases, but more importantly, if the fundamentals start to manifest. I think the sector weakness was a bigger factor for SPUT weakness than the broad market (we have seen sectors like tankers go up in the bear market).
Also, the uranium sector has strong reflexivity to the upside. This is due to the intrinsic characteristics of fuel buyers (who value security of supply greatly relative to other industries, and hence buying is procyclical when there is general fear that lbs cannot be secured), the characteristics of the fuel sellers (there is significant concentration across mining, conversion and enrichment and hence greater market power in a seller’s market) and because financial speculation amplifies bullish developments.
Demand update
Europe
German lawmakers vote 375-216 to delay closure of all 3 nuclear plants.
French nuclear output is beginning to recover, after operational issues in 2022.
Sweden makes a regulatory push to allow new nuclear reactors.
The Dutch government has confirmed plans to build two large reactors at the existing Borssele nuclear power plant by 2035.
The UK Department of Business, Energy and Industrial Strategy announced plans to provide £77 million in government funding to support nuclear fuel production and advanced reactor development.
Poland is constructing it’s first nuclear plant.
Cameco and Brookfield Renewable Partners announced a strategic partnership to acquire Westinghouse for approximately US$7.9B.
China
China moves ahead with SMRs, installing it’s first ACP100 unit.
India
India has announced plans to build 10 more 700MW nuclear plants with goal to more than triple its nuclear power capacity from 22 reactors of 6780MW today to 22,480MW over the next 8 years.
Japan
Japan's nuclear regulator approves rule to allow reactors to operate for more than 60 years. This is important because 15 of Japan's operable 33 nuclear reactors would have hit that 60-year limit by 2050.
Korea
Nuclear energy to become Korea’s largest energy source by 2036.
Rest of World
Turkey in talks with US to buy up to 35 SMRs.
Supply update
Miners
Kazatomprom production volume in 2022 fell by 3%, as Covid affected wellfield development in 2021 and this has had a lagged effect as there is a 8-10 month delay between wellfield development and in situ recovery. But average realized price rose to US$42.51 per lb instead of US$32.33 per lb. Production guidance for 2023 is guided down by 1.3M lbs due to supply disruptions. But I don’t think this guidance downwards is a structural issue, as the reasons cited seem to be related to supply chain issues.
Cameco: Cameco signed contracts for 80M lbs of uranium and 17m kgU of UF6 conversion in 2022. On Feb 2023, it signed a contract with Energoatom for 67.3M lbs of uranium and 25.7M kgU of UF6. Cameco is also restating it’s mines to tier one run rate. McArthur River/Key Lake will produce 18M lbs (100% basis) starting in 2024. Cigar Lake will continue at its licensed capacity of 18M lbs per year (100% basis) in 2024. At Inkai, production will continue to follow the 20% reduction planned by KAP until the end of 2023. With annual licensed capacity of 25M lbs (100% basis) at McArthur River/Key Lake, Cameco will be able to expand production from existing assets. They are looking to expand Port Hope conversion facility UF6 production to 12000 tonnes by 2024 (2020 utilization was 9000 tonnes). They have also increased ownership of Cigar Lake mine from 50% to 54.5%. They have also completed a deal with Brookfield to acquire Westinghouse, moving into the utility business. Overall, the strong contracting volume, increase in mine production, and critically, the expansion of conversion, are all bullish signals for the market going ahead.
Encore Energy buys (for US$120M) the Alta Mesa ISR project with measured and indicated resources of 3.41M lbs plus inferred resources of 16.79M lbs at an average grade of 0.120% (high grade). The AISC is estimated to be ~US$36 per lb. It also has a fully permitted processing facility with capacity of 1.5M lbs per year.
Encore Energy has also been awarded a US$7M contract by US Department of Energy to supply 100k lbs at $70.50 per lb.
Encore Energy also raised C$30M, with up to 9.74% dilution. Not great terms, for those invested (me).
Global Atomic also raised C$100M, with up to 18.22% dilution. Not great terms, for those invested (me).
Consolidated Uranium acquires Virginia Energy in an all-shares deal at 40% Premium valued at US$32M, securing the Largest Undeveloped Uranium Deposit in the US (historical indicated resources of 132.9M lbs at average grade of 0.056% and inferred resources of 30.4M lbs at average grade of 0.042%).
Anfield Energy acquires Artillery Peak Properties in Arizona, adjacent to Anfield's Date Creek Basin, with historical resources of 2.8M lbs.
Uranium Energy Corp Wins Award from the U.S. Department of Energy to Supply 300k lbs U3O8 at US$59.50/lb. to the strategic uranium reserve.
Market update
Spot price still around US$50 per lb. Other prices discussed above.
Equity update
URNM has gone up quite a bit, from US$29.84 on 19 Dec 2022 to US$36.89 on 27 Jan 2023.
SPUT has also gone up quite a bit, from C$14.51 on 9 Dec 2022 to C$17.22 on 27 Jan 2023. It now holds US$43.9M in cash.
Will I be buying at these levels? Note that I am mostly invested in miners and I can’t value the ETF, but considering the bullish view for 2023, it seems like an alright time to start DCAing. That said, I’m far more interested in looking at specific miners. I’ll just caution that volatility is a feature, especially the risk of being whip sawed by broader markets.
Summary
2022 was a disappointing year in terms of performance, but that is because we entered the year with inflated expectations, and because many of the bullish developments take time to incubate. But 2023 looks to be a year where much of the seeds that were planted in 2022 start blooming, and in a multi year trend. I’m looking forward.
