Uranium Update from Adam Rozencwajg - Sept 14

[dan_s]

Why has uranium rallied while every other energy commodity has collapsed?

Over the past twelve months, spot uranium advanced 12% while oil, natural gas, and coal all fell anywhere from 30-70%. Our models suggest uranium’s strong performance has just started.

Uranium has likely reached a pivotal inflection point that could force the price higher by as much as three- to four-fold over the next several years. For the first time in history, uranium supply has slipped into a persistent and widening deficit. We believe the results will be dramatic. Uranium is much less transparent than other commodity markets; in this essay, we will help shed light on the forces driving uranium over the course of the decade.

From the start of the nuclear age in 1945 until 2019, the uranium industry has gone through four distinct periods. Each period has been unique in terms of supply and demand, leading to wild price swings that lasted decades. The market has now definitively entered its fifth major period, likely defined by persistent severe deficits.

Period 1: 1945-1969
The first period took place between the mid-1940s and the late 1960s. Governmental stockpiling, for both weapons programs and nuclear power advancement, drove demand. Following the Trinity test in Los Alamos and the subsequent bombings of Hiroshima and Nagasaki in 1945, attention quickly turned to nuclear’s commercial applications. The USSR and England inaugurated the first two nuclear power stations in 1954 and 1956, with England’s being the first truly commercial reactor. Despite these early reactors, commercial demand remained extremely low. Throughout the Manhattan Project, a persistent shortage of uranium (along with enrichment bottlenecks), presented ongoing challenges. Protection of supply remained a pivotal point of national security after the war as first the US and then the USSR built up their atomic arsenals. Between 1945 and 1969, Nuclear Engineering International estimates global uranium mine supply totaled 900 mm lbs of triuranium octoxide (U3O8). Roughly half of this material was purchased by the US Atomic Energy Commission (AEC), while 40 mm lbs was purchased by the nascent commercial nuclear energy industry. Although the remaining 226 mm lbs was officially unaccounted for, it likely made its way to a combination of American, British, French, and Soviet government stockpiles.

Period 2: 1970-1983
The uranium market began to change in the early 1970s as commercial nuclear power gained adoption. Private sector utility buying became a dominant source of demand. Total installed capacity grew from 1 GWe in 1960 to 10 GWe by 1970 and 100 GWe by 1980. The arrival in earnest of the nuclear age also stoked a speculative boom in uranium mining. Production in the US peaked in 1980 at nearly 45 mm lbs of U3O8 per year. Despite the widespread adoption of nuclear power, mine supply actually grew faster than reactor demand throughout the decade. The 1970s were a period of rolling energy crises and insecurity. As a result, commercial buyers were more than happy to build up excess uranium inventories. From 1970 to 1983, mine supply exceeded reactor demand by 450 mm lbs of U3O8, all of which ended up in commercial inventories. Adding to the glut, the AEC reclassified approximately 100 mm lbs of its stockpiles from “governmental” to “commercial,” making it available to the nuclear power industry. By 1983, commercial inventories were 550 mm lbs – enough to cover reactor demand for nearly eight years. Prices peaked in 1982 at nearly $40 per pound and started a decades-long collapse.

Period 3: 1983-2010
Uranium mine supply peaked in 1982 and fell modestly during the decade. Reactor demand meanwhile grew robustly and finally exceeded mine supply in 1991. For the first time since the days of the Manhattan Project, uranium entered into a primary supply deficit. The deficit would persist for the next twenty-seven years, until the Fukushima incident. Unlike during the Manhattan Project, however, secondary sources of uranium filled the shortfall. Between 1983 and 2010, Nuclear Engineering International estimates reactor demand exceeded mine supply by an incredible 1.1 bn lbs of U3O8. Mine supply fell by nearly half from 170 mm lbs in 1982 to a plateau of 75 mm lbs by 1995. Reactor demand was nearly the mirror image, growing from 65 to 175 mm lbs over the 27-year period. Secondary supply made up the shortfall.

In 1993, Russia and the US entered into the so-called “Megatons for Megawatts” program, through which Russia pledged to decommission 20,000 nuclear warheads and convert the highly enriched uranium into 15,000 tonnes of low-enriched uranium suitable for manufacturing into reactor fuel. Russia also sold additional material outside of the program to provide much-needed funding following the collapse of the Soviet Union. Fuel recycling became widespread in the UK and France during this period as well, as did enrichment-tailing reprocessing. Secondary sources supplied a combined 630 mm lbs of U3O8-equivalent between 1983 and 2010. Commercial inventory destocking contributed another 500 mm lbs. The Department of Energy (the successor to the AEC), reclassified another 75 mm lbs of U3O8 from governmental to commercial, adding more material to the commercial market. All of this secondary supply put extreme downward pressure on uranium. Prices bottomed at $7.10 per pound in 2000.

By the mid-2000s, commercial inventories had fallen dramatically. The Russian disarmament program was due to expire in 2013, threatening to reduce secondary supplies materially. Uranium began to firm in 2003; by 2005 the price had tripled from $7 to $21 per pound. By the late 2000s, commercial inventories had fallen nearly 70% and stood at only 200 mm lbs. Commercial inventory coverage went from eight years in 1983 to less than two years by 2007. Utility buyers scrambled and speculators swooped in.

Spot prices reached a high of $136 per pound in June 2007, with long-term contracts settling at $95 per pound: an increase of between twelve- and eighteen-fold in seven years. Uranium collapsed during the Global Financial Crisis, but resumed its rally in 2010. By February 2011, uranium was once again over $70 per pound and commercial inventories stood at a mere 150 mm lbs.

Period 4: 2011-2020
On March 11 2011, the Tohoku earthquake and tsunami led to a partial meltdown of Japan’s Fukushima Daishi reactor. Japan shut down all its nuclear reactors over the next several years. European demand, led by German decommissioning, fell by 25%. Global reactor demand fell sharply from 182 mm to 150 mm lbs between 2010 and 2012 before beginning a slow recovery. Meanwhile, responding (with a lag) to the prior uranium boom, primary supply grew for the first time in decades. In-situ leach production in Kazakhstan grew by nearly 50%, or 20 mm lbs, between 2010 and 2016. Primary production nearly satisfied reactor demand in 2015 – a first in over twenty-five years.

Secondary supplies weighed on the market as well. Although the Russian disarmament program ended in 2013, tailings reenrichment, DOE surplus sales, recycling and underfeeding continued to contribute as much as 40 mm lbs of U3O8-equivalent by 2016.

Between 2011 and 2018, the uranium market was in surplus by 265 mm lbs., all of which ended up in commercial inventories. Commercial stockpiles, which started the period at a record-low 150 mm lbs., reached 415 mm lbs. by 2018, covering reactor demand for three years.

We became interested in uranium producers this cycle in late 2017, when Cameco announced they would curtail production at its flagship MacArthur River Mine. Kazatomprom followed suit, announcing it would curtail production. Our models told us these cuts would push reactor demand firmly above total supply, including secondary sources. In retrospect, we were correct. Commercial inventories peaked in 2018 and declined slightly in 2019 and 2020. The era of persistent deficits had started.

The uranium price meanwhile remained depressed, averaging less than $25 per pound between 2016 and 2020.

Period 5: 2021-Present
Uranium’s structural deficit has accelerated dramatically since 2021. Reactor demand bottomed in 2020 at 161 mm lbs of U3O8 and is expected to reach 188 mm lbs this year. After spending a decade decommissioning its nuclear reactors, Europe and the US appear to have finally reversed course. We have long argued that wind and solar simply cannot provide efficient base-load carbon-free electricity. We warned that grid instability and energy insecurity would soon follow. Russia’s invasion of Ukraine in 2022 put Europe’s natural gas supply at risk, bringing renewables’ shortcomings to the fore. Primary uranium production remained depressed through 2022 at 120 mm lbs – a multi-decade low. Secondary supply averaged only 22 mm lbs. leaving a deficit of nearly 30 mm lbs in 2021 and 2022.

A new source of demand burst onto the scene in 2021 as well: the financial buyer. Led by the Sprott Physical Uranium Trust, financial vehicles have acquired between 25 and 30 mm lbs each year in 2021 and 2022. Unlike open-ended funds such as the GLD, the financial uranium vehicles are closed-ended, meaning the material cannot readily flow back into the commercial market. Once material is purchased it is permanently locked up.

As a result, the uranium market experienced a deficit of nearly 180 mm lbs between 2020 and 2023. The deficit was met by materially depleting the commercial inventories that had accumulated following Fukushima. By the end of this year, we expect commercial inventories will be back to 250 mm lbs, covering reactor demand by less than 18 months. The last time commercial inventories reached these levels in the mid-2000s, prices spiked to their all-time highs of $145 per pound. We expect the same now.

Looking to the end of the decade, global uranium markets are set to tighten to unprecedented levels. Looking only at nuclear power plants that are currently under construction, reactor demand is set to grow from 188 to 240 mm lbs by 2030. If every uranium-producing country gets back to its maximum output (a big if), primary production will only grow from 140 to 174 mm pounds by 2030. Assuming secondary supply stays flat at 20 mm lbs per year, the annual uranium market deficit will grow from 27 to 45 mm lbs by the end of the decade, before factoring in further financial buying. The cumulative deficit between 2023 and 2030 will likely exceed 250 mm lbs, completely depleting all commercial stockpiles.

These figures are likely too conservative. There are presently fifty-nine reactors under construction with a total capacity of 66 GWe. Every new reactor requires three years of uranium fuel for its initial core loading. We believe this will consume an additional 60 mm lbs of U3O8 between now and 2030. Over the past twenty years, new reactors have been mostly offset by retirements. When a reactor is decommissioned, it is able to harvest its final core loading without requiring a replacement. Therefore, new reactor loadings have been offset by retiring old reactors. This will not be possible going forward.

Furthermore, financial accumulation is likely to accelerate once speculators realize the small size of the market and the precarious commercial inventory situation. How large financial buying can get is an open question, however adding another 100 mm lbs of U3O8 would only cost $6 bn and would dramatically tighten balances even further.

Utilities remain dramatically under-contracted post-2025. Fuel buyers have been very complacent in recent years, due to the persistent commercial inventory overhang following Fukushima. Simply put, it has paid to wait to secure supplies. That dynamic is quickly changing as fuel buyers feel insecure and under-covered for the first time in nearly fifteen years. Although it is an opaque market, all signs point to uranium entering into a sustained and frenetic bull market. Prices have rallied from a 2018 low of $18 to nearly $60 per pound already. However, even at these prices, it is unlikely many new greenfield uranium deposits can be economically developed.

The uranium industry has been dramatically starved of capital for many years. In our view, the persistent bear market – in many ways present since the 1980s with only a single reprieve – is over. Investors should act accordingly.
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MY TAKE: Listen carefully to Adam's forecast. Uranium and crude oil are now in big supply deficits and there is no Quick Fix.
Thanks to the Climate Change Wackos, the U.S. will keep throwing money at wind and solar, which will NEVER cause oil demand to decline. Nuclear power plants are the only thing that have the scale to significantly replace large amounts of coal demand. EVs will not have the impact on oil demand that the Wackos are hoping for. I am very bullish on rechargeable batteries, because they have a huge market beyond EVs.

[ChuckGeb]

Sprott Physical Uranium Trust SRUUF up 5% today.

[mitchl]

Interesting recent news: https://www.cameco.com/media/news/cameco-provides-production-and-market-update

Earlier this month Cameco (CCJ) lowered guidance on uranium production over issues at their Cigar Lake Mine.

I’m bullish in the space and have been building a position primarily in the Sprott Uranium Miners ETF ticker URNM over the last two years.

[ChuckGeb]

Interview Justin Huhn, Uranium Insider

Very informative piece.

https://www.youtube.com/live/FSZEpzX6Zj0?si=D36Ac5dKoXh072hy

Adam’s write up is great as well. G & R are very bullish gold as well and generally all hard commodities including oil & gas.

[mitchl]

Chuck, Justin Huhn is a wealth of knowledge in uranium. Thanks for the link.

Other interesting commentary I stumbled upon today:

Kuppy and Mike Alkin “Uranium” Interview at the 2023 World Nuclear Association Symposium

https://pracap.com/kuppy-and-mike-alkin-uranium-interview-at-the-2023-world-nuclear-association-symposium/?_hsmi=274338179

According to Kuppy and Mike Alkin from what they gather talking to folks on the ground at the World Nuclear Association Symposium, nuclear fuel buyers are very functionally short uranium.

[ChuckGeb]

Great perspective and fascinating discussion. This is consistent with Doomberg on the matter.in a nutshell after Fukushima the physical market got slammed and the miners closed up shop in response. The cost of uranium to the operators is irrelevant and a very small cost in the scheme of a nuclear plant. They will pay anything for uranium when they need it. The industry is picking up while supply cannot respond as fast as demand. Doomberg has written extensively as this is an area he understands.as they are building their substack subscriber base the green chicken has appeared frequently as a guest on YouTube talk shows. Search Doomberg and take your pick.

[Lbark]

Uranium and Oil and Gas are both way overweight in my portfolio. Own CCJ and SRUUF and EU, URA, URNJ, URNM and smaller miners. Subscribe to Uranium Insider Justin Huhn who is great. He is like Dan and doesnt pull his punches. Very knowledgeable and pokes fun at Newsom and other bozos who are climate change wackos. Huge supply deficit. Think uranium is just getting started so between OG and Uranium hope to have good next couple of years.

[ChuckGeb]

Agree totally. Its a new dawn in Uranium. For me, I'm just getting started.

[ChuckGeb]

Thanks guys for your posts inspiring me to spend some time on uranium this weekend. The Kuppy Mike Alkin interview opened my eyes to the bull market just getting started in uranium. Watched several more of Justin Huhn and Doomberg videos. Unbelievable fundamentals exist likely for the next 4 years if not for my duration. My plan is to exit all of my underperforming oils on Monday and redeploy to URUUF, urnj, and urnm this week. This market opportunity will not go unnoticed too much longer and the returns are certain to draw a lot of investors in over the balance of year.

[ChuckGeb]

Oops.

[mitchl]

Chuck, make sure to leave some dry powder for big pullbacks. As they mention in the interview, Uranium sector is very 2 steps up 1 step back in terms of volatility. While nuclear is more base load power oriented it should be recession proof but it doesn’t always trade that way in the short term.

I would want some exposure if I didn’t have any yet but here specifically I would also be waiting for a pullback.

[ChuckGeb]

I reached same conclusion. Significant moves up last week. Miners are overbought according to all sources I reviewed and you have confirmed. I received some good guidance on entry points from Uranium Insider. SRUUF is another matter. I think some hedge funds are getting into this space and will be drawing a lot of attention. I expect small dips if any on physical uranium. At any rate as this is new territory for me I intend to carefully build a position over the next couple of months when buy opportunities are presented. I am assuming with shaky economic news the market will provide plenty of openings. In the meantime even my planned exits on some underperforming oils will nudge up a bit with rising oil prices. Thanks for your input.

[Lbark]

Justin Huhn of Uranium Insider is always preaching to buy on pullbacks. One of my largest holdings is EU, Encore Energy . I rode it up and way down with 2 financings and he thinks there may be another one soon since they are so close to production. That could hit the stock which would be a good entry point. SRUUF seems more stable since it is not a stock but the commodity itself. There are a few other funds devoted to buying uranium. There is a good chance a new one will come online in next few months between 100m to 500m. All these funds buying in a market like this and since spot market is very very small should drive price up. Huge supply deficit and growing.

[ChuckGeb]

That's what I was thinking. Have been pondering the thought of fund holding physical uranium that they never sell and never gets used. Yellow cake doesn't seem much like gold bullion but then the gold just sits in a vault. It seems like a heavy influx of financial buyers could really drive the price of uranium up as demand is well in excess of available supply a couple of years out. This could really cause a huge problem for the nuclear power plants. Listening to the Kuppy/ Alden chat really said a lot about the state of the industry.

All of these brilliant nuclear technical people seem to think you can just buy the uranium when they need it, Just pay a little more. Kind of like our energy department that believes electricity comes from a plug in the wall. Will be interesting to see how it develops but it seems to me the only direction for the price is up. Like Alden and Kuppy said if you can do simple math you can see what lies ahead.

The mining sector is a whole lot more complex issue but I intend to study it and of course diversify my portfolio. Not ready to go all in but enough to make it interesting and hopefully make some money in the process. What got me hooked was a tip from David Hay in mid August who I believe was citing G & R and he had a position in SRUUF as his top idea at the time. Put some money down i and was up 25% last Friday.

I like the concept which hopefully doesn't get too crowded by Wall Street. Was listening to podcast earlier and it was mentioned that Goldman was doing some transacting on behalf of some hedge funds. i am tucking in my shirt.

[Lbark]

When you look at supply you can see Kazatomprom is the largest but they just cut a deal with Russia for a large interest and they are offloading lots of their production to China so that will be offline for Western utilities. GLATF Global Atomic had a near term mine in Niger but with the coup that is going to be delayed which is more inventory off line. SRUUF has not bought hardly any uranium since February but now if they start selling at a premium they could start to reaccelerate the market. All these increases in spot is withOUT SRUUF. Kuppy said his largest position is SRUUF and he just bought some Nexgen which has a fantastic potential mine but no output until later in the '20s. Seems like supply demand for uranium is even better than oil and gas and of course very illiquid market. I think total market cap of entire uranium universe if 40 or 50B or so less than many of our oil and gas companies.

[dan_s]

Good looking chart: https://tradingeconomics.com/commodity/uranium

Trading Economics:
"Uranium soared to over $60 per pound at the start of September, extending gains for an eighth week to levels last seen in April amid persistent supply risks and bullish long-term demand. Canada’s Cameco, the world’s second-largest uranium miner, reduced its production guidance for the current year due to challenges in its Cigar Lake mine and Key Lake mill. The events exacerbated existing supply risks for Western utilities amid political uncertainty in major producer Niger. Western nuclear fuel producers also grapple with tight supply amid heightened uncertainty over imports of nuclear fuel from Russia, exacerbated by halted shipments of uranium bound for North America in the port of St. Petersburgh. Such developments stress the limited capacity of local production streams as Russia is responsible for nearly half of the world’s share of uranium conversion and enrichment, according to the latest data. Meanwhile, the steady construction of Chinese mega power plants supported demand."

Eventually, even the idiots we have in Washington DC will realize that wind and solar is a waste of money. Nuclear Power plants are the only primary energy source that can compete with fossil fuels.