|Shares Out. (in M):||396||P/E||59.6||0|
|Market Cap (in $M):||4,389||P/FCF||33.0||0|
|Net Debt (in $M):||882||EBIT||242||0|
|Borrow Cost:||Available 0-15% cost|
|Entry||02/28/2017 11:36 PM|
very interesting. thank you. I was bullish on uranium back in 2010 (see writeup) and did fairly well with it, but had I not sold 3/4 of my position by the time Fukushima happened it would have been a different story. I took another look recently when spot prices hit $18/lb and concluded that the outlook was bleak. the elimination of Japanese demand, kazakh low-cost supply (in no small part due to depreciation of the Tenge vs USD), and the plummeting cost of solar power have dramatically changed the dynamics of this market.
cash costs >$30/lb?!? wow. five years ago, cash costs at McArthur were sub-$20 and Cigar Lake was still not in production due to the previous flooding. Is Cigar Lake production the reason costs have risen so much?
60% of contracted pricing lined to spot? yikes! back in 2007 I'm sure a tilt to more spot-based pricing sounded like a good idea, but if they're signing deals today with 60/40 spot/fixed pricing that just seems reckless to me.
I know the Russians sell reactors bundled with supply agreements and the Russians have their own supply. But the other countries active in building new reactors (mainly China and South Korea) don't really have much domestic supply. So even if these guys also sell bundled supply agreements, don't they have to look to folks like Cameco for supply?
Be careful in comparing uranium inventories today to those of other commodities today. Better to compare to uranium inventories today to those of the past. Uranium stocks-to-use rations are naturally among the highest of any commodity due to the long-lives of reactors, the fact that fuel cost of nuclear power is a small % of total, and the fact that many countries reliant on nuclear energy must source fuel from somewhere else. all that said, inventories are indeed high vs history right now. Japan has historically had the highest levels of stocks-to-use, and to the extent its reactors don't come back on line, I suppose that's another supply overhang on the market.
|Entry||03/01/2017 12:14 AM|
by the way, I would respectfully disagree with your statement that uranium is one of the most forecastable industries, but I'm not sure it hurts your thesis as so many of the surprises tend to be negative for pricing. consider:
-- demand shocks - e.g. Three Mile Island, Chernobyl, and Fukushima. also, back in the late 1990s, many smart observers predicted - quite logically - that a jump in the uranium price was imminent due to years of underinvestment in supply, cash burn at producers, low inventories, etc. but then a wave of utility mergers in the U.S. lowered the required inventory levels for nuclear plant owners and kept prices depressed for another 3-4 years.
-- supply shocks - e.g. Cigar Lake Flooding (great for miners unless it's their own mine that goes off-line). note that the top 10 or so mines make up a very large % of supply, so problems at just one mine can be significant for the market as a whole.
-- cost overruns on new reactors (endemic in the Western world, while Asian countries somehow keep costs under control ... I've never figured out how or why)
-- threat of substitutes - e.g. the plummeting cost of natural gas in North America has killed the nuclear renaissance there more than any other factor
|Subject||Re: good writeup|
|Entry||03/01/2017 07:10 AM|
Thank you for your kind comments and great questions.
I also used to be a uranium investor, when the sector offered unusually sweet rewards.
Agree on Japan. they used to have 53 reactors before Fukushima, now they have 10 compliant with the tighter safety regulations, of which only 3 are operational. To provide some context, there are 58 plants currently under construction world wide. Tim Gitzel, CEO of Cameco, estimates that roughly half of the original Japanese fleet will eventually return to service. Japan's hiatus is a problem for the mines and enrichment plants, not only as a significantly absent customer, but also because the Japanese were/are accepting delivery of fuel post the general 2012 shutdown, so adding to their already vast reserves of material throughout the supply chain stretching from yellowcake to fuel bundles. With 13 of the original reactors officially shut down and a further 12 or more unlikely to return (Gitzel), it might be possible that they are in the market as sellers of fuel and enrichment services in an already over-supplied market. If they entered the crisis with 5 years of fuel, they would now probably have 10 years, except with the fleet halving the stocks equal 20 years of use for the remaining (smaller) fleet. I must stress that I have no proof for this view.
On Solar. The recent bids to supply solar in Abu Dhabi and Chile for less than $30/MWh (no subsidies), will result in more peak shaving, as well as more frequent downward spikes into negative pricing in the large OECD power markets. This wreaks havoc with the economics of nuclear and the only ray of hope is for nuclear to get paid more for capacity.
On Cash Costs. It depends how one defines Cash Cost. They talk about a figure as including D&A and Royalties. So I couldn't square the circle as to why the pre-tax IRR on Cigar Lake is only 9.5%, using a U3O8 price of US$58.69/lb and exchange rate of C$1.16/USD (43-101 dated March 2016). I ran the numbers, using their Gross Profit for the Uranium Division, using the realized price and deducting the Hedge Profit (C$557m). I also allocated their pro-rata share of Head Office costs (C$157m). Finally, to arrive at the Canadian figure, I assumed the Inkai operating cost as $15/lb, yielding the final figure of US$32.57/lb.
On Reactor bundles. The Chinese now have the 15m lb p.a. Husab mine in Namibia, plus the massive stockpiles that they bought so aggressively in the past 15 years. (Gitzel mentioned on the Q4 call how the Chinese bought a year of global demand in a single afternoon in 2010). On South Korea, you're 100% correct. The Koreans have no in-house supplies. However, the likes of Kepco offer an all-in deal, meaning they "own" their clients and will increasingly be able to square off against the miners. In the past the utilities were the prey and the likes of Cameco could dictate rules. It used to not only be a case of price, but also of scarcity of supply. Looking forwards, the demise of Westinghouse means an increasingly concentrated industry wherein the Kepco's will potentially be able to demand very generous floors and ceilings and other bells and whistles to their long-term contracts.
On stocks-to-use. Fully agree. Uranium has a history of very large stockpiles, such as in the 1990's. (Saw mention of 2bln lbs at the peak, not sure if accurate). The exploration boom of the mid-2000's has, however, removed any notion of scarcity with 94 years of sub-US$50/lb mineable Resources available ("Uranium 2016" : NEA). Also several mines in mothballs can be reactivated at short notice and low cost, with several known shovel-ready projects waiting in the wings at sub-$40 costs. With the quality of post-Bre X disclosure, buyers of fuel can easily compile their own realistic assessments of the likely Supply and Demand patterns.
Thank you once again for the great questions and comments.
|Entry||03/01/2017 07:38 AM|
I agree that nuclear is not immune from demand and supply shocks. However, one must unpack the picture a bit. Any demand shocks are per definition price negative so supportive to a short seller. Supply shocks used to be much more of a reality, when production was lower in absolute terms and a single mine like Cigar Lake constituted 15% of global supply. There also wasn't the number of new/modern, yet mothballed mines around that could be restarted in a short time frame.
On new reactor cost overruns. It's really a case of the regulators approving one set of blue prints at the original licensing application and then revising their demands during construction, based on redrafted safety regulations after say Fukushima or just a general tightening in regulatory oversight. The industry accuses the NRC and other regulators of being pedantic in their oversight, such as causing a 6 month delay (at Vogtle?) for a dispute on how a tiny section of concrete should have been poured. Such changes clearly mess with the time lines and costs, but yes I agree it's a mystery why the cost overruns are as dramatic as they are.
Fully agree on Natural Gas. Those turbine plants have all but eliminated the valuable price peaks that underpinned the nuclear (and coal) business model. Likewise the Combined Cycle Gas plants challenge the nucler plants head-on in the capacity auctions.
|Subject||Re: Re: good writeup|
|Entry||03/01/2017 06:31 PM|
sorry I didn't catch that part about the Chinese buying Husab the first time around. anyway, just one more big picture musing and hopefully later I'll have more company specfic questions.
was there ever really any concern about scarcity of resources in the ground? certainly there were concerns about medium-term supply given underinvestment and long lead-times for new mines, and the price spike of the mid-2000s kick-started much development. but my observation back in 2010 was that - of all the deposits likely to become producing mines by 2016 - Husab seemed to be the only one discovered in the recent exploration cycle. seemed like all the others had been discovered in the previous cycle.
... which is not to say there haven't been any surprises to the upside on supply. The world has long known of the resources in Kazakhstan, but I know of noone who ever suggested that Kazakh production would grow to be as large or low-cost as it has become. Forex has had a major impact, but maybe ISL technology has gotten better at the same time? And as you note, the enrichment biz is now a bigger factor as well.
|Subject||Re: Re: Re: good writeup|
|Entry||03/02/2017 06:24 AM|
You're right about Husab being the only notable mine to have gone into production based on a discovery in the 2000's exploration cycle. Even Husab ought to have been a mere brownfields expansion of Rossing, but Rio Tinto's geologists simply overlooked this zone - within sight of the mine - during 50 years of regional exploration.
What the 2000's exploration boom did succeed in doing is to almost double the quantified resource base of economically extractable uranium. Using the NEA's 2015 survey, the Identified Resources with an extraction cost below $50/lb (2015 money), now stands at 14.9bn lbs, which can be roughly compared to the figure of 8bn lbs of their 1997 survey, based on an extraction cost at the time of $30.77/lb. Applying the Minneapolis Fed's US CPI deflator of 1.477, the 1997 cost figure rises to $45.43/lb in 2015 money terms, so just 9.8% below the 2015 figure. The 2015 Resources are also stated after depletion from 18 years of mining, so I think the small gap of 10% between the 2 cost bases is reasonable - the more so given the superior quality of the mined ore vs. the resource ore being quoted.
So yes, while the exploration boom yielded few large, greenfields discoveries that entered production, the quality of information and consistency with which the resources are calculated has improved immeasurably. The boom also provided cheap risk capital to existing operators (such as Kazatomprom), without which the production base would not have grown as it has.
The nearly doubled resource base of 14.9bn lbs provides the industry with 94 years of notional production visibility at the current run rate. Realistically that's probably closer to 40 years of quality, minable ore, though I'm impressed with the conservatism with which the NEA figures are compiled.
On Kazakhstan. Agree, the Kazakh phenomenon stumped every single expert. My guess is that nobody appreciated the power of incremental innovation in ISL - somewhat similar to what we've seen in the fracking. Sulphuric Acid has also become much cheaper.
Thank you once again for your excellent questions and observations.
|Subject||Re: awesome call|
|Entry||11/09/2017 08:24 AM|
Thank you. The new all-time low of $40 in the SWU price suggests U3O8 could drop to $15/lb.
|Subject||great call - any update to the thesis?|
|Entry||04/23/2018 11:18 AM|
Hi Veritas - this was a great thesis and call. I was wondering if you had any update on the global supply/demand situation and how that affects Cameco. I am still quite confused as to why spot prices have remained stubbornly so high in the face of the global over-capacity, coming supply (from Olympic Dam, etc) and worsening picture for nuclear's future by the day (as renewable costs go ever lower).
|Subject||Re: great call - any update to the thesis?|
|Entry||04/24/2018 03:32 AM|
Thank you for the kind comments and question. The price would have been lower if it wasn't for the significant closure of mines by Cameco and curtailment of production by Kazatomprom. Cameco has also been buying uranium from the Japanese utilitites to deliver into their contractual commitments, rather than running down their 30m lbs inventory.
But the real issue is that the pricing formula of most long-term contracts is structured with say 40% fixed and 60% the spot price ruling at the time of delivery. Producers are therefore heavily incentivised to ensure that the spot price of uranium remains above $20/lb, almost regardless of the underlying supply/demand trends (potential for a LIBOR-type game).
Kazatomprom has likely also been stockpiling, judging from their massive shift in marketing away from a purely spot sale policy to a sophisticated marketing channel, resembling that of Cameco. Either way, the listing of Kazatomprom in the next 12 months will provide a fascinating insight into the market and how much they've stockpiled as well as how much they've been able to build their long-term sales book.
For me the new threat in the uranium market that all the bullish punters don't get, is the relentless building of new enrichment capacity based on technology that is vastly more efficient than before. (See UIEP's Generation 10). The impact of this can be seen in the price of SWU's (Separative Work Units). This price has dropped to the lowest on record ($36/SWU) and has not had a single up-month in 2 years. (The price can be followed on a monthly basis on UXC's website).
In short, there is an ocean of canisters filled with Uranium hexafluoride gas all over the world, grading ~0.30% U235. These can be easily "re-mined" by these new, super efficient enrichment plants to ~0.10% U235, thus creating fresh supply. This is a potential supply of 6 - 8 years of uranium demand. It's a basic mathematical formula whereby the break-even price of reprocessing these tails keeps dropping and based on the SWU price, suggests a "correct" Uranium spot price of less than $15/lb. This formula excludes the benefit from the reduced environmental obligations of the depleted uranium (as much as $5/lb).
This tension between the SWU price and the spot price of uranium cannot be sustained and it seems likely that uranium will drop below $15/lb, rather than the SWU price going back above $50/SWU.
Just on Olympic Dam. This is the largest single resource of uranium in the world, mined as a by-product of copper, gold, silver etc. Based on BHP's expansion plans, the copper output could rise from sub 200kt p.a. to 500kt p.a. over the next 12 years. The interesting bit is that they forecast their implied cost of uranium at the halfway mark of this trajectory at $0.10/lb. They also say that the orebody lends itself to selective mining, whereby they can prioritise lenses of higher grade uranium ore, to compensate for any weakness in the spot price. This appears to be what they did in the March quarter, when the Uranium grade jumped to over 1.4 lb/ton. Taken to its conclusion, this could see Olympic Dam producing well in excess of 20m lbs p.a. - regardless of price.
|Subject||Re: Re: great call - any update to the thesis?|
|Entry||04/24/2018 05:28 AM|
thank you very much for the comprehensive update. Just on the Olympic dam extra volumes - where do these end up going, actually? As it seems that since most of the market trades on long-term contracts (for both uranium concentrates, hexafluoride, and SWUs), that the spot price is less driven by annual supply/demand dynamics (and the desire to game it as you mentioned).
I am just wondering where BHP ends up dumping the additional volumes in a market that is already so over-supplied.
As an aside - do you think Urenco gets sold? I am surprised they haven't tried to sell it yet, given the longer-term picture and that earnings remain healthy for now due to back-book legacy pricing that they are still enjoying.
|Subject||Re: Re: Re: great call - any update to the thesis?|
|Entry||04/24/2018 01:44 PM|
BHP sells all material in the spot market and appears committed to this approach. It will therefore be the most visible player in the spot market going forward, as;
1. Rio Tinto sells forward, but ERA and Rossing are closing down in the next 4 - 8 years and Roughrider has been written off
2. The Chinese are a closed loop : what gets produced inside their assets stay there, with the exception that they will market NPP's to other countries with fuel included
3. Rosatom operates across the spectrum, but are modest players in the U3O8 spot market.
4. Cameco hates selling in the spot market unless it can clinch a large deal at a hefty premium. It's now buying in this fashion for hefty discounts (providing liquidity at a price). Its subsidiary - Nukem - is an active trader in the spot market, but is a market maker rather than a net buyer/seller. It previously took on chunky positions, but seemingly burnt its fingers and pulled back. (see Goldman/Deutsche below)
5. Orano (Areva) are vertically integrated from yellowcake to fuel assemblies (broadly a closed loop)
6. Kazatomprom are now embarking on a process to emulate Orano and piece by piece achieve vertical integration all the way to fuel assemblies, interestingly with the help of Orano, the Chinese and others.
Over time that will leave the spot market in U3O8, conversion and enrichment bereft of several of the traditional players. Which may explain why Goldman and Deutsche took the significant write downs and simply walked away from what they must have deduced to be a sub-functional market, with limited scope for improvement.
Which brings us to Urenco.
This industry had its birth in the quest for a military solution and then evolved to fulfill the promise of Eisenhower's "Atoms for Peace".
Urenco may be a commercial enterprise, but I doubt it would ever be for sale to outside parties. The contracts and treaties are too complex and rationality dictates that short-term commercial considerations feature pretty low on the agenda when one starts to talk about a change of control of such a strategic enterprise. The environmental liabilities are almost impossible to accurately quantify, implying that you could soon end up in the circular corporate processes that BNFL / BNF PLC went through from the Thatcher era to today.
|Subject||Re: Re: Re: Re: great call - any update to the thesis?|
|Entry||04/25/2018 12:35 PM|
thanks again for such a comprehensive response. I have done some preliminary work on Olympic Dam and the initial read seems to be production growth could be a fair bit tougher than perhaps you imagine. the issue is that they cant ship uranium ore along with the copper, so it needs to be all processed on site; clearly this is more costly and will require significant investment to ramp up. I am trying to figure out what the latest plans are, but my impression was this would be incremental, rather than gargantuan, supply growth in the medium term (beyond the 3k t or so of material they produce already). I will update more once i have completed the work.
thanks for the comments on Urenco - makes total sense. In general, how do you get to the ~45mm lbs of secondary supply number from your cost curve below? is this simply from third party consultants? i imagine you build into this number from calculating the implied cost based on SWU cost, tail grade assumptions, etc, that you mentioned, but do you know exactly how much secondary 'installed capacity' there is worldwide?
the final question I guess is, is there any way to work out with any degree of precision what the global inventory position is? Should we simply add up the global production, less annual consumption, for each of the last 20yrs and make some assumption for secondary supply in the market?
sorry to keep going back to the well on this, uranium is a bit of a niche commodity and new to me.
|Subject||uranium in the news|
|Entry||06/06/2018 06:36 AM|
paladin shut in last week.... grants feature over the weekend... and fin times today...
|Subject||Re: uranium in the news|
|Entry||06/06/2018 11:39 AM|
grants is wrong (it blatantly ignores the issue of stockpiles and enrichment improvements in global supply, and it gets basic facts about things like Japanese nuclear usage wrong). So is this new IPO (yellow cake) based around stockpiling uranium that the FT wrote up- they are buying a huge stash from Kazatomprom, the world's largest producer, which is selling 25% of their annual production at a 7% discount to spot - how is that a good sign for the market?
cnm - it is only below the marginal cost if you think newly-mined uranium is the marginal source of nuclear fuel. the whole point is that this is clearly not the case, and will not be the case for a long, long time, because of the stockpiling issue primarily but also because of enrichment. A lot of the comment thread discussion was making the point that a) a decent amount of Uranium is mined at negative implied cost (as a by product); or that enriched tails effective cash cost is much, much lower than the lowest cash cost miners (maybe $30/t today).
On the other hand it is true that a lot of mine supply has come out of the market - but since the market is over-supplied in inventories i am not sure this matters.
i am willing to concede uranium may simply stop going down, or drift back up to cash costs for Tier 1 producers (maybe shut ins of mines ultimately have an effect in a couple of years when stockpiles run down). but literally every other day either an existing plant (in the US, primarily) or a planned project seems to be being cancelled or pulled for cost overruns (the FT did a huge feature on it). Forget the rest of the world, just think about the US. there are 99 reactors in the US (out of 450 globally, so ~25% of global demand). The average age of the fleet is 38yrs - when original design capacity for many reactors was something like 40-50yrs. Many of these plants are uneconomic today and are becoming more and more so (due to ubiquity of gas, and spiralling maintenance/remedation costs for nuclear). Japan has another 45 reactors or so but many of these will never restart (let alone the 17 new fictitious reactors Grant's somehow thinks get built).
I would be shocked if more than a handful of reactors ever get rebuilt in the developed world (think Europe, the US, and Japan). That's about half the global fleet right there that needs to be replaced by China/Russia/India, which - even if it happens - likely takes multiple decades and will be les uranium intensive (due to more enirchment, and more efficient reactor designs).
I want to be short more Uranium names but outside of Cameco there aren't many; on the other hand I want to be long enrichment (the cheapest producer) and also long maintenance names - although there aren't any good plays here really.
|Subject||Re: Re: uranium in the news|
|Entry||06/06/2018 06:03 PM|
How much excess uranium do you believe is stockpiled at utilities and in government reserves?
Also, you mentioned enrichment as the marginal source of nuclear fuel. could you elaborate on the economics of that and the magnitude of the potential impact?
|Subject||Re: Re: Re: uranium in the news|
|Entry||06/09/2018 06:11 AM|
UXc regularly publish their estimates for stockpiled uranium.
The gist of the uranium story is that most observers are either not intelligent enough to comprehend what is a very complex subject, or don't have the patience to read through the vast body of knowledge to form their own informed views.
That explains why the same factually inaccurate arguments appear again and again ad nauseam.
The industry lobby groups are well funded and keep producing a heavily skewed to grossly inaccurate narrative, which is then copied and pasted by the TLDR unintelligentsia.
A single questions for the uranium bulls;
1. Why is a producer of reference, with access to a sovereign balance sheet such as Kazatomprom, willing to sell 25% of their annual production at an 8% discount to spot, when in theory they can sell the same material at a 28% premium by selling it at the published UXc / Tradetech contract forward price? https://www.cameco.com/invest/markets/uranium-price