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)

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)

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    Trends in Uranium Spot Pricing (July 2013) Trends in Uranium Spot Pricing (July 2013) Document 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.   tdrolet@tsdenergy.com       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   tdrolet@tsdenergy.com