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    Value Hive Podcast

    Mike Alkin: The Ultimate Uranium Crash Course

    Fri Jun 16 2023
    uraniumnuclear powerenrichmentminingsupply and demand

    Description

    The episode covers the uranium market, including its inflection point, the impact of the Fukushima incident, excess supply, and the bear market. It explores the demand for nuclear power in the East, the lack of financial incentives for uranium, and the importance of understanding enrichment math. The chapters discuss production cuts, the uranium value chain, investing in uranium mining, macro issues affecting uranium equities, transparency in mining companies' costs, and the spot price versus long-term contract market. The episode concludes with insights on supply gaps, pricing reporting issues, and the impact of programs like megatons to megawatts.

    Insights

    Uranium is at an inflection point after several years of anticipation

    The uranium market has reached a turning point after a prolonged period of anticipation.

    Understanding enrichment math is crucial for modeling uranium demand

    To accurately model uranium demand, it is important to have a deep understanding of enrichment math and the technological limitations of different centrifuges.

    The uranium market has shifted from a buyer's market to a seller's market

    The market for uranium has transitioned from being favorable to buyers to being favorable to sellers, leading to a tightening supply.

    Mining companies should be transparent about their real costs

    Mining companies should disclose their costs accurately and avoid hiding them from investors in order to maintain transparency.

    Higher prices are needed to incentivize development and capacity expansion

    In order to encourage development and capacity expansion in uranium enrichment and conversion, higher prices are necessary.

    China's appetite for nuclear power could impact future demand

    China's significant appetite for nuclear power and its long-term approach to inventory management could have a significant impact on future demand for uranium.

    The United States had a program called megatons to megawatts

    The United States previously had a program called megatons to megawatts, which converted nuclear missiles into low and rich uranium for civil nuclear power plants.

    Nuclear power has undergone significant safety upgrades since Fukushima

    Significant safety upgrades have been made in the nuclear power industry since the Fukushima incident, making it the safest form of electricity production per terawatt hour.

    Structural deficits exist in the uranium market

    There are structural deficits in the uranium market, with tens of millions of pounds needed to meet consumption through contracting.

    Pricing reporting in the uranium industry is broken

    The current pricing reporting system in the uranium industry is flawed, with spot prices being a small portion of what is consumed and long-term contract prices reported based on the lowest price someone was willing to sell at.

    Chapters

    1. TEGAS.co/valuehive offers a free trial of Teagas, which provides expert interviews on public and private companies
    2. 54 nuclear power plants were taken offline, creating a backup in the system.
    3. There was no financial incentive for people to call bottoms in the uranium market.
    4. The price of Uranium is currently quoted at 58, but it trades for more in long-term contracts.
    5. Understanding when the catalyst for change would occur was crucial in assessing the investment potential.
    6. Production cuts were needed for the market to balance.
    7. The uranium value chain consists of exploration companies, development companies, and producing companies.
    8. Investing in uranium mining carries more risk compared to other stages of the value chain.
    9. Macro issues like federalizing rates and debt ceiling concerns can cause small cap stocks to be thrown out with the bathwater.
    10. Mining companies should be transparent about their real costs and not hide them from investors.
    11. The spot price of uranium is a small portion of what's consumed, while the bulk of trading happens in the long-term contract market.
    12. The United States had a program called megatons to megawatts, where they converted nuclear missiles into low and rich uranium for civil nuclear power plants.
    Summary
    Transcript

    TEGAS.co/valuehive offers a free trial of Teagas, which provides expert interviews on public and private companies

    00:01 - 07:35

    • MIT Investment Management Company supports emerging manager stock pickers through emergingmanagers.org
    • The guest, Mike from Seichum Cove partners, is an experienced hedge fund investor
    • Uranium is at an inflection point after several years of anticipation
    • Mike started looking at uranium in late 2015 and spent the next few years researching the industry
    • The Fukushima nuclear power plant meltdown in Japan caused a decline in the uranium industry
    • Many investment banks stopped covering uranium due to lack of business
    • 54 nuclear power plants were taken offline after the Fukushima incident, creating excess uranium supply
    • The bear market in uranium lasted for several years before reaching its current state

    54 nuclear power plants were taken offline, creating a backup in the system.

    07:08 - 15:05

    • The price of Uranium peaked at $137 per pound in 2007 and declined to the low 20s by 2016.
    • There was excess supply in the market and little institutional investment.
    • The demand for nuclear power was growing in the East, not the West.
    • The market might be living off recency bias and ignoring important information.
    • The cost of uranium is a small percentage of operating a reactor, but there is no substitute for it.
    • There was apathy towards the price of uranium due to lack of financial incentives and no active futures market.

    There was no financial incentive for people to call bottoms in the uranium market.

    14:37 - 22:03

    • The uranium market lacked an active futures market and had little price discovery.
    • 85% of uranium purchases were made through long-term contracts.
    • Excess supply had besieged buyers since 2011, leading to apathy towards purchasing uranium.
    • A report stating there were 1.4 billion pounds of uranium available was not relevant as it included non-mobile inventories.
    • Understanding the cost curve convinced the speaker that the supply side of uranium was unsustainable at low prices.
    • 70% of uranium consumption occurred in the West, while only 30% was produced in the West.
    • State-owned entities and low-cost producers accounted for a significant portion of global uranium production.
    • The lack of senior mining companies in the industry meant that pure play uranium miners needed to make money to survive.
    • In early 2018, a significant amount of world supply came offline due to uneconomical prices.
    • The price of Uranium has tripled since early 2017, with quoted prices at $58 per pound in long-term contracts.

    The price of Uranium is currently quoted at 58, but it trades for more in long-term contracts.

    21:43 - 29:47

    • Building a supply-demand model for Uranium involves gathering data from various sources like the World Nuclear Association and trade publications.
    • Uranium goes through several stages in the nuclear fuel cycle, including mining, conversion to yellow cake, conversion to UF6 uranium hexafluoride, and enrichment.
    • Enrichment separates the U-235 isotope from U-238 in natural uranium.
    • The feedstock for enrichment is uranium hexafluoride (UF6) obtained from a conversion plant.
    • Enrichment is measured in terms of separate work units (SWOOM).
    • Operating tails and assay levels are important factors that determine demand in the uranium market.
    • Technological changes have led to lower operating costs for newer centrifuge plants, creating artificial demand by allowing enrichers to keep some feed for themselves and put excess UF6 into the market.
    • Understanding enrichment math and technological limitations of different centrifuges is crucial for modeling uranium demand.
    • Different scenarios need to be considered when estimating pounds of uranium per reactor based on capacity in the market.

    Understanding when the catalyst for change would occur was crucial in assessing the investment potential.

    29:23 - 37:25

    • The demand story for uranium seemed reasonable, and supply had to come offline due to cost constraints.
    • Nuclear power is necessary for decarbonization as wind and solar are intermittent sources of power.
    • Major countries like the US, France, South Korea, and the UK showed declining attitudes towards nuclear power.
    • However, growth in nuclear power consumption was coming from China and Russia.
    • Despite negative narratives, enrichment math showed that growth was still occurring.

    Production cuts were needed for the market to balance.

    36:57 - 44:39

    • Utilities buy uranium every few years and draw down inventories.
    • From 1993 to 2004, utilities replaced about a third of their annual consumption of uranium.
    • In 2005, utilities started overcontracting to restock their inventories.
    • From 2011 to 2021, utilities drew down excess inventories and contracted at about 37% of annual consumption.
    • The cost curve for major miners moved down dramatically due to a change in accounting methodology by a consulting firm.
    • Pure play uranium miners cannot operate below their cash cost.
    • Buyers were told there were surpluses of uranium based on flawed cost curves.
    • Supply needs to be cut and demand is not the main focus for this thesis.

    The uranium value chain consists of exploration companies, development companies, and producing companies.

    44:15 - 52:22

    • Narratives drive investment decisions in the uranium sector.
    • Kazakhstan is the largest supplier of uranium with a 41% market share.
    • Canada has the highest grade uranium deposits in the world.
    • The United States used to produce uranium but now produces zero.
    • Conversion facilities are owned by Converdine, Orano, and Cameco.
    • Enrichment is dominated by Rosatom and Eureko.
    • Fabrication involves turning enriched uranium into pellets and fuel rods for reactors.

    Investing in uranium mining carries more risk compared to other stages of the value chain.

    51:58 - 59:36

    • Different categories of uranium investments have varying evaluations.
    • The Sprout Uranium Trust is one way to invest in physical uranium.
    • The fund manages volatility by investing at different levels throughout the cycle and keeping cash reserves.
    • Exploration projects in Canada and the US are part of the portfolio.
    • The fund also invested in development companies transitioning from cash consumers to cash producers.
    • Nuclear energy has gained momentum globally due to decarbonization efforts and security concerns.
    • Uranium equities have outperformed other metals and energies over the past year.
    • Macro issues can impact uranium equities, especially during times of concern about interest rates and debt ceilings.

    Macro issues like federalizing rates and debt ceiling concerns can cause small cap stocks to be thrown out with the bathwater.

    59:10 - 1:06:36

    • Investors can express their view on uranium through individual equities, ETFs, or physical vehicles like Yellow Cake and Sprot Physically Uranium Trust.
    • The market for uranium has shifted from a buyer's market to a seller's market, leading to a tightening supply.
    • The cost curve for uranium mining is difficult to assess due to the lack of standardized calculations for all-in sustaining costs.
    • Some companies have been reporting low costs that do not accurately reflect the true cost of running their business.
    • Inflation and rising input costs are impacting uranium miners, but some technical reports have not been updated to reflect these changes.
    • Overall, costs have increased in the uranium industry, but there is still a supply gap that will require utilities to pay higher prices.

    Mining companies should be transparent about their real costs and not hide them from investors.

    1:06:09 - 1:13:51

    • There is a supply gap in the primary supply of uranium, leading to higher costs for utilities.
    • Investors should carefully analyze mining companies' technical reports and check if their costs have been inflated over time.
    • If a mining company hasn't inflated its costs from its last Preliminary Economic Assessment (PEA), it may be fraudulent.
    • Budget estimates in PEAs often come in above the guidance range, so it's wise to add an additional percentage to the cost estimate.
    • Mining companies should disclose their costs accurately in a seller's market.
    • Uranium has a strong CapEx story compared to copper, making it more actionable.
    • Producers of uranium aim to be good partners to utilities and avoid taking advantage of them like utilities did during low-price periods.
    • The US is working on legislation to reduce dependency on uranium imports from Kazakhstan, Russia, and Uzbekistan.
    • Pricing reporting in the uranium industry is broken, with spot prices being a small portion of what's consumed and long-term contract prices reported monthly based on the lowest price someone was willing to sell at.

    The spot price of uranium is a small portion of what's consumed, while the bulk of trading happens in the long-term contract market.

    1:13:22 - 1:21:29

    • Price reports in the contract market are based on the lowest price someone was willing to sell for, not where the last trade took place.
    • Higher prices are needed to incentivize development and capacity expansion in uranium enrichment and conversion.
    • The price of conversion has increased from $4 to over $40 per kilogram in five years, while the price of enrichment has increased from $35-$40 to over $140 per separate work unit.
    • Different stages of the fuel cycle move together price-wise, but there is more panic at stages with higher Russian market share due to geopolitical concerns.
    • There are significant deficits expected in the next several years, leading to drawing down inventories and rising prices.
    • China's appetite for nuclear power is immense, and they play a long-term game with decades of inventory rather than just a few years like Western countries.
    • Signs that China may change its view on nuclear power or security of supply could impact future demand.
    • Other potential factors that could impact supply include programs like megatons to megawatts, which converted highly enriched uranium into low enriched uranium for civil nuclear power plants.

    The United States had a program called megatons to megawatts, where they converted nuclear missiles into low and rich uranium for civil nuclear power plants.

    1:21:00 - 1:29:00

    • US utility inventories are currently low but were higher in the past due to the off-balance sheet asset of assured pounds coming in.
    • There is no indication of another program like megatons to megawatts on the horizon.
    • Hidden pockets of inventories entering the market are unlikely given the increase in uranium price.
    • There is no political motivation among major consumers of nuclear power to close reactors and cause a decrease in demand for uranium.
    • New technologies or advancements in fusion are not expected to impact the current cycle of uranium demand.
    • Underfeeding, driven by technological changes in enrichment processes, was not discussed as a factor affecting uranium prices in previous bull cases.
    • Nuclear power has undergone significant safety upgrades since Fukushima, making it the safest form of electricity production per terawatt hour.
    • Structural deficits exist in the uranium market, with tens of millions of pounds needed to meet consumption through contracting.
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