Uranium, why do we hold?

To invest in the uranium sector you need a bare minimum of conviction. If not you will be thrown off the investment by the violent corrections we see at regular intervals. We are in one of these now, and there are more to come moving forward. I am of the opinion that if you are not holding strong now, you will leave a lot of money on the table.

Disclaimer: nothing of what I say here can be interpreted as investment advice.

Going back to basics

Before you invest there are a minimum of questions you have to answer. John Polomny challenged you to do this in one of his videos a couple of months back. If you can’t answer these, you should maybe do more research before you increase your exposure to the sector. The most fundamental of them are:

  • How many nuclear reactors are operating in the world? 
  • How many are under construction? 
  • How many are planned?

As of September 2021 there are 443 operating reactors in the world. (The US has the most with 93, followed by France and China with 56 and 51). The last couple of years we have seen the number of reactor closures roughly match the new reactors coming online. The only difference being the new ones have a higher output than the old ones.

The more encouraging statistics are the 57 nuclear plants under construction. (18 of these are in China, with India and South Korea next with 7 and 4 under construction). If you dare to hope, we can at least expect some of the 101 planned nuclear plants to become a reality. (38 of them in China, 25 in Russia and 14 in India. The future growth is mainly in South East Asia). By the latest developments we are looking at a healthy growth for the sector. You can find all of this information after five minutes visiting the World Nuclear Association.

Growth in a sector is not a must to get a higher price. Even a sector in decline can experience periods with higher prices, or spikes in price. Look to the coal sector. In the West we have said we will stop using coal entirely by a certain date, and the Norwegian Oil Fund sold itself out of its coal investments. (Something I, as an indirect investor of the fund, do not like). Still, even if we have decided to stop using coal in the West, reality is completely different. Recently renewables have really shown how unreliable they are with the weather we have seen the last couple of months. The developing world is completely dependent on fossil fuels to cope with their increasing energy needs. There is an ethical argument for coal. If you look at the chart of Peabody, the most popular coal miner, you see a sector that has been oversold and left for dead, but suddenly sees an increased demand. (This is what we look for with our uranium investments).

You just need a couple of years with low demand, leading to lower production and inventories. When just about everyone needs your product at once, and there is not enough to go around, the price goes up. Sometimes violently. 

WNA expects modest growth for uranium demand in the coming years. We have gone through years of lower production, and drawdowns of inventories. There have also been encouraging developments, where it seems that nuclear has become more of a palatable political solution for phasing out fossil fuels in the West. With the energy spikes in Europe in the last weeks, because of the low winds, the case for steady baseload power from nuclear power is even more evident. 

When did the last uranium mine come online? 

This has not been as easy to find as I thought, but I got some great help from John Quakes who pointed me to the “Uranium 2020: Resources, Production and Demand” report. Also called the “IAEA NEA/OECD Uranium Red Book”. In that report I found what I was looking for: The Husab mine in Namibia started up production in 2016. After that there has been no new major developments completed in the sector. The 2020 report also mentioned the possibility of expanding Olympic Dam, but those plans were scrapped late 2020. Low prices do not tempt new production to come online.

I also looked to Kazatomprom, the company that has increased their production the most over the last 15 years. They actually increased production on their Inkai mine by 20% as late as in 2019. (This mine is a joint venture with Cameco (who owns 40%) and production went from 2,643 tonnes to 3,209 tonnes in 2019). This is the last big production increase I have found in the sector. This increase was in the very middle of the bear market.

How many mines have come offline and how many pounds have left the market?

In 2021 we have seen two mines coming offline in Cominak and Ranger. Cominak is located in Niger and it had been in operation since 1978. The mine was approved to produce 5,2 mlbs per year, even though the last couple of years the production was about 3 mlbs. Together with the closing of Ranger in Australia, about 5 Mlbs has been removed from the market in 2021. This has to be sourced from somewhere else.

Ranger Uranium mine

Before this we have seen mines like McArthur River, ​​Langer Heinrich and Honeymoon go on care and maintenance. This has helped deal with the oversupply we saw after 2011. None of these will come online before they get long term contracts. Preferably in the $50-70 range. They will not start up production to sell into the spot market.

We also have the entry of the Sprott Physical Uranium Trust that has already removed about 10 Mlbs from the market in 2021 so far. A total higher than the two mines that closed down production in 2021. SPUT will continue removing available supply from the spot market if they trade at a premium.

How many mines can we see come online in the next few years? 

In the next 2-3 years we expect mainly that the care and maintenance mines will come back online. We have many previous producers around the world, and all of them are saying they can get their mines up and running quickly. In a sector where a lot of knowledge has left, and workers have gone elsewhere, getting into production can take a lot longer time than most people think. What we have seen from the presentations is the company putting their best foot forward. (Correction 27.09.2021: There is one mine on track to come online the next 2-3 years. ARMZ Uranium Holding Co. (owned by Rosatom) is on track to come into production with its Mine no.6 in Siberia in 2023, and fully operational by 2024-2025. The assumption is that CNNC would take 49% of the output (maybe 1250t/year), with ARMZ taking the rest).

We can also not expect that all the near term producers will have a smooth ride into production. There are always obstacles that make things take longer than expected. Getting hold of equipment will for many be a challenge with all the supply chain problems we have seen around the world. The companies also have very different levels of expertise at running a mining site. As John Borshoff says, many companies are in the market to sell flights, but they do not have a pilot to fly the planes. 

I do not agree that “all in” sustaining costs (AISC) are as low as many of the companies say. They are at least not accounting for all the costs they need to cover. We have several mines, McArthur River being one of them, who have been on care and maintenance for years. This comes at a cost and when it comes back online it will have to cover this cost, and produce at a profit. The company needs profits so it can buy new assets and give something back to its shareholders. The higher costs you have up front, before you produce a single pound, the higher price you need for starting up the project.

Even Kazatomprom has a coming production gap. They need to increase CAPEX by a lot to close this. That equipment is most likely not produced in Kazakhstan and does not benefit from a currency that is devalued. They are also committed to a 20% production cut out 2023. If they break this commitment they will be punished by investors selling out of the company.

Conclusion

These investments are burning matches. They will probably peak out a very long time before supply can cover demand. Just as the market anticipated a rising spot price months before even the announcement of SPUT, the market will anticipate lower prices when the market seems to get closer to an equilibrium. Investment returns are made on expectations of the future, not on today’s situation.

With a price far under the costs of the marginal producer, we are no way near a solution for the supply/demand imbalance. For me this means we are a long way from selling or trimming for my part. I will use Rick Rule who has said: “The uranium juniors have gotten ahead of themselves.” By mid September they were closer to pricing in the spot going to $70 than $50. I would say that today they are pricing in spot going towards $30 again. If you sell now, I believe veteran players like Rick Rule can be on the other side of the trade. The coming months ahead have a lot in store for us, and one has to be prepared for anything, positive and negative.

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