CAMECO CORP CCJ S
February 28, 2017 - 10:01pm EST by
Veritas500
2017 2018
Price: 11.09 EPS 0.19 0
Shares Out. (in M): 396 P/E 59.6 0
Market Cap (in $M): 4,389 P/FCF 33.0 0
Net Debt (in $M): 882 EBIT 242 0
TEV ($): 5,271 TEV/EBIT 21.8 0
Borrow Cost: Available 0-15% cost

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Description

Description
I wrote this up for my admission to Value Investor Club, but have since uncovered significant additional info to substantiate my thesis.
 
Cameco's share price has rallied by 40% off the lows of C$9.95 established in early
November.
We view this bounce as a valuable opportunity to short the stock, given the precarious
outlook for the company. The traditional valuation metrics (above) look very stretched, while our rudimentary SOTP valuation points to a negligible value per share at the current uranium price. The de facto option value ascribed to the stock appears out of all proportion to the weak fundamentals and the likely need to place paper if the tax cases with the CRA and IRS go against the company.
 
The uranium industry is one of the most forecastable industries, due to the long lead times in permitting and building nuclear power stations and uranium mines. (typically >8 years). The industry runs an excellent PR campaign, making it surprisingly hard to ascertain the simple numbers that we present below.
These show that nuclear power generation peaked in 2006 and that for every new reactor being built, almost one reactor is scheduled to shut down over the next 10 years. From a short seller's perspective, any possible shift in the market will therefore be well sign posted months or years in advance.
 
The narrative that China and India etc. are the saviours of nuclear, is numerically inaccurate. In the 10 years from 2005 to 2015, the Non-OECD countries grew their power generated from Nuclear by only 183TWh p.a., compared to their growth of 331TWh for Wind and Solar and 934TWh for Hydro. In other words they voted with their feet for renewables in preference to nuclear, even when renewables were still much less competitive than today. Nuclear in the Non-OECD also constituted only 4.5% of electricity generated in 2015 vs. 18.3% in the OECD (2015). In the next 10 years all the new reactors currently under construction in the world will only add a combined 71,000MW of new capacity vs. the 58,000MW of currently known shutdowns. Given the age of >30 years of the OECD nuclear fleet, it's a given that a significant number of additional plants will become uneconomical to maintain during this coming decade. 
 
Generally, the reactors shutting down are in the OECD countries and are actual or potential clients of Cameco, whereas the new reactors are in the non-OECD countries and are often built or owned by state-owned corporations who mostly have their own closed-loop fuel supplies as part of the deal. (Nespresso model).
These shifts are far from benign for Cameco and other independent uranium miners and fuel service providers.
The de facto bankruptcy of Westinghouse (Toshiba) and Areva, who between them built more than half of all nuclear power stations in the world, are therefore not coincidental but symptomatic.
 
Cameco has long been viewed as the blue chip among pure-play uranium miners.
This reputation was previously well deserved, based on its high grade mines,
ostensibly prudent management and continued dividend payments all through the lean
years of the late 1990's and early 2000's up to the present day.
 
As I detail below, several key drivers of the group's business model are now either
broken or under structural threat.
The current stock price of C$14.70 equates to a trailing pe of 41 times, making the
shares vulnerable to a resumption of their downtrend.
 
The Spot price of Uranium dropped to US$18.00/lb (U3O8) in November from its
peak of US$137/lb in June 2007. The Contract price likewise dropped to US$30/lb in
December vs. US$95/lb in June 2007. Cameco is temporarily insulated from this
dramatic erosion in the market, thanks to its very large book of long-term sales
contracts entered into in more prosperous times. At end 2015, the group had 190m lbs
of U3O8 under contract until 2025. This was split as to 135m lbs for the 5 years from
2016 - 2020 and 55m lbs for the following 5 years. Because the group has a policy of
structuring these contracts on a blended basis consisting of 60% of the volume linked
to spot prices ruling at date of delivery and 40% at a pre-determined fixed price, it
boils down to an actual forward book of 40% x 190m lbs = 76m lbs sold at a fixed
forward price.
 
Cameco's disclosure on this forward book is fairly opaque, but using their illustrative
tables we derive an implied forward price of US$60/lb for the 40% of their contracts
that are fixed. In other words, the remaining forward book at end December 2016
amounted to 50m lbs and has an embedded value of US$1.7bn at the end December value of
US$26/lb (current spot price = $24.50/lb).
 
The sharp drop in the quantum of the forward book from 76m lbs (2015) to
50m lbs (2016) is only partially explained by normal sales during 2016 of 12m lbs at
fixed prices (18mlbs spot +12m lbs fixed). This suggests that the 2 settlements
Cameco entered into with restive clients during Q3 2016 involved no less than 12m -
14m fixed price lbs. for which it received a settlement of only C$59m (US$44m), vs.
a possible embedded value of US$576m.
 
Since year-end, Cameco announced that Tokyo Electric Power (Tepco), served notice of Force Majeure on its forward purchase from Cameco of 9.3m lbs at an eye-watering average price of US$108/lb. Using the December closing spot price of $26/lb, the dispute is worth US$758.2m or almost half Cameco's entire Forward Book. While Cameco believes that it will be vindicated in the expected arbitration of +- 2 years, the matter seems far from cut and dried.
 
The Tepco dispute illustrates a key vulnerability in Cameco's business model. Uranium is not an exchange cleared commodity, so contracts are principal to principal, with none of the usual marked-to-market margin requirements that helps to regulate normal futures. We estimate Cameco's Cash Cost of production at its 2 Canadian mines at US$32.58/lb, meaning that without the buffer of the Forward Book, it would be incurring cash losses of US$8/lb (US$216m p.a.) at current spot prices. The current approach to weather the storm by running down the embedded value in the Forward Book, can therefore come unstuck if other clients opportunistically following Tepco's example.
 
As a Uranium miner, Cameco has seen its competitive advantage on the cost curve
substantially eroded by Kazakhstan.
Kazakhstan's production has grown from 9m lbs in 2004 to 61m lbs last year, in a
market that has seen mined Uranium grow from 104m lbs in 2004 to 146m lbs
last year. In other words, Kazakhstan has gone from 9% to 42% of the market in just
over 10 years. What is more concerning from a Cameco perspective is that
Kazakhstan's production costs position it at the bottom end of the cost curve.
 
Uranium One (Rosatom), which owns around 25% of Kazakhstan's output on an attributable basis,
disclosed average total cash costs of only US$7/lb for Q3 2016. This drop from
US$10/lb a year earlier was helped in large part by the sharp depreciation of the
Kazakh currency the Tenge. Kazakhstan may have mined its best orebodies first, but
it has a further 40 years of minable reserves at the current run rate.
 
The announcement by Kazakhstan in January that it will curtail production by 10% might hold for a while, but Cameco's Inkai mine in Kazakhstan (40% Cameco, 60% Kazatomprom), plans to double production from 5.2m lbs to 10.4m lbs over the next 3 years, once the regulator approves the expansion into Block 3.
 
As mentioned, Cameco's cash costs exceed US$30/lb. The barriers to exit on the North American assets can be deduced from the C$60m of capex still going into the 2 mothballed operations, viz. Rabbit Lake and the ISR mines in the US this year.
 
Other notable players on the cost curve are the enrichment plants. As the enrichment
industry discarded the last gaseous diffusion plants (GDP's) in favour of using
centrifuges, the cash cost of enrichment has dropped dramatically. Today's centrifuges
consume less than 3% of the electricity used to perform a Separative Work Unit
(SWU) in a GDP and are 1400 times thriftier than the calutrons used in the Manhattan
Project. This has seen a constant decline in the price of SWU's from over $190/SWU
to recent lows around $50. At these prices, enrichment plants can "make" Uranium at
roughly $5/lb by simply underfeeding their processes by blending in previously
discarded tails.
 
With China and other countries committing to Nuclear in a big way prior to
Fukushima, they geared up massively on enrichment capacity from a strategic
perspective. With minimal long-term contracts being entered into in both 2015 and
2016 and low spot market activity, the enrichment plants that were already surplus to
market demand are now seriously under-utilised and have only one logical route to
recoup overheads. "Make" more Uranium. This material is then sold rather
indiscriminately into an already thin market, enforcing the vicious circle.
 
While Cameco management are fond of repeating the narrative that the market is
consuming 100m lbs more than it is contracting and hence storing up trouble for the
future, the truth might be somewhat different. The authoritative UX Consulting
released a report in late 2015 in which they averred that among the various players in
the Uranium market, there might be more than 1.1bn lbs of U3O8 equivalent of
inventories extant. Even more worrying, UxC believed that a significant chunk of this
material has already been enriched or even fabricated in market ready fuel assemblies.
 
Even if UxC are only broadly right, then these stock levels equal more than 6 years of
current demand leaving the Uranium market comfortably the most overstocked
commodity market since the collapse of the International Tin Council Buffer Stock in
1985. By comparison, stock levels in the Copper market seldom exceed 30 days’
consumption. The Buffer Stock operated from 1953 to 1985 and eventually held
roughly 15 months of global demand (including the ITCBS derivatives exposures). It
took the Tin market until 2007 to regain the nominal levels of 1985.
 
 
Added to this price inelastic first quartile supply is material being sold by the US
military, normal reprocessing of spent fuel and the Uranium being produced as a by-
product, or by state-owned entities.
 
BHP’s Olympic Dam mine in Australia is a Copper, Uranium, Gold and Silver mine,
whose principal profits are derived from Copper. BHP is moving ahead with plans to
potentially double Olympic Dam’s Copper output to 450,000t p.a. by the mid 2020’s.
With Uranium production growing in lock step, this will see the mine producing 10m
lbs next year and potentially up to 22m lbs p.a. in the mid 2020’s vs. only 8m lbs last
year. With the mine’s Copper costs postulated in the first quartile of the cost curve,
the Uranium is clearly going to be produced regardless of price. The Resource hosts a
remaining 5.6 bn lbs of contained Uranium.
 
A further significant concern for Cameco, must be the new Husab mine in Namibia
(previously called Rossing South). This mine is expected to reach its nameplate
capacity of 15m lbs in 2017, or almost 10% of global demand. The owners, China
General Nuclear Power Holdings, paid $2.2bn to acquire the mine from Extract
Resources and a further $2.1bn to build the mine. They are unlikely to curtail
production at this shallow open pit mine due to short-term weakness in the Uranium
price. In fact it appears as though China is vertically integrating from mine to power
plant and that the entire demand that everybody pencilled in for China in their own
business models, will instead be satisfied by Chinese owned assets - be it yellowcake
or enrichment requirements.
 
Further, mines like Rio Tinto’s Rossing in Namibia or Ranger in Australia may be
high cost, but they still have meaningful long-term contracts against which to deliver
at break-even or better. Likewise for Areva’s Somair mine in Niger. These are large
corporates with long time horizons and triple bottom lines to consider. As Cameco
itself stated in a recent conference call, it costs significant money to mothball a mine
like Rabbit Lake, not to mention shutting it for good, i.e. real barriers to exit. It’s
therefore somewhat disingenuous of Cameco’s CEO, Tim Gitzel, to say that they have
been “surprised by how sticky the supply has been”.
 
The tax dispute with the Canadian Revenue Authority (CRA) and IRS in America has its roots in the premium price of long-term off-take commitments vs. the generally lower Spot price. The Nuclear industry has always attached a premium to supply certainty. This started
when the US and British Nuclear authorities offered soft loans and premium prices to
the South African gold mines to incentivise them to produce Uranium after WWII (78 shillings a pound ~$80/lb today).
In recent times, the premium has often reached 50% or more. (Currently US$32.50/lb for Contract vs.
US$24.50/lb. for Spot).
 
While the detail is not disclosed, it appears that Cameco formed a wholly-owned
Swiss entity, Cameco Europe Limited some 15 years ago, to which the Canadian
mines sell at Spot. This entity then sells to Cameco’s long-standing customers on
Contract, reaping an almost permanent and risk-free premium. The current extreme
weakness in the spot price not only threatens this neat little earner, it risks toppling
Cameco’s entire tax case with the CRA. The point is that the mines and offices in
Canada incurred a loss of C$464m in 2016, while the “Foreign”
subsidiaries (CEL and Nukem) earned C$310m in profits. The more the spot price
drops, the greater this farce becomes, not to mention the cost of paying Swiss and
German taxes on the notional foreign profits, while the group as a whole incurs losses at a pre-tax level.
 
Of further concern is that management suggested in a recent conference call that the
buyers’ strike of the past 3 years amounting to some 300m lbs of “under-contracting”,
might in fact be a strategy by Nuclear customers to “normalise” the unusually large
contango in the Uranium market. Given the hard times in the Nuclear power market,
this might not even be so much a strategy, as a result of banks reining in lines of
credit to an industry that is non-standard and perceived as risky under Basle III risk
weightings. The diamond cutting centres (especially in Antwerp) went through a
painful adjustment for these reasons over the past 5 years with decades old credit
facilities being cancelled.
 
Whatever the truth, the stock levels appear far out of line with normal requirements
and all those players long of Uranium in the past few years are nursing very serious
losses. Not least Cameco itself, which has seen its stock of 28 - 31m lbs of carry-over
Uranium drop by some C$650m in the past 12 months alone. It would be profoundly
ironic if at any time going forward, Cameco should become a forced seller of its own
inventory of Uranium in a weak market, thereby exacerbating
its woes. It’s also unclear to what extent Nukem’s significant trading book has
been impacted by market movements and whether they may or may not have residual OTC derivatives positions.
 
The broader outlook for Nuclear power looks very weak, with smaller Nuclear plants
in the US operating at $44/MWh according to the Nuclear Institute. This is now
frequently below actual Wholesale Power Prices received, caused by the fact that
Renewables have “right of way”. This and the median age of 30+ years has seen 5
closures announced in the past 3 years, completely balancing out the 5 new plants
being built. The forecasts of a growing Nuclear industry somehow always assumed
that the existing fleet would continue operating for ever thanks to uprates and permit
extensions from 40 to 60 and even to 80 years.
 
The recent problems at San Onofre in California and at a number of French nuclear
plants tell a more sobering story. With the tender awarded at $4.4bn to close and
rehabilitate San Onofre, the full cost of the life cycle of a Nuclear power plant is moving
from the realms of theoretical calculations to current numbers. The cost seems to
approximate $2m/MW of generating capacity (roughly the cost of building a new gas
plant in its entirety).The cost also excludes the cost of spent fuel disposal In an era of IFRS accounting standards this can lead to significant upward revisions in
the closure liabilities of power companies.
 
In the same vein, should the Trump administration revive Yucca Mountain as a
repository for spent fuel, it will likely see the re-imposition of the Fuel Storage Levy
per MW of Nuclear Power generated, with negative cash flow impacts for the
industry. While being “a good thing”, it might nonetheless hasten the closure of
further smaller nuclear plants.
 
The United States generated 32.6% of the global output of nuclear power in 2015 so going forwards, it will play a major role in shaping the future of the traded uranium market. In our view nuclear can only regain its previous viability in America if electricity demand starts growing again, or a carbon tax is introduced, or renewables lose their subsidies and right of way, or capacity auctions and congestion levies are structured to specifically favor nuclear. These scenarios are possible but not probable.
 
In summary, I don’t believe that Cameco can continue paying C$160m of dividends
while running at barely better than break-even, incurring accounting losses of
C$400m in its Canadian subsidiaries, having an unsustainable net debt to Ebitda ratio
and facing the real likelihood of a C$2.2bn adverse ruling on their CRA court case.
 
On a sum of the parts basis, the group is potentially worth as little as C$1bn or less, due to
the barriers to exit in its marginal mines and nuclear processing facilities. As the
group’s shares are restricted in terms of foreign ownership and voting rights, Cameco
does not have the same ability to raise capital, dispose of assets or enter into corporate
transactions as would otherwise be the case. I therefore see a strong likelihood of a
further derating to C$2.50, especially when the dividend is inevitably passed, the tax
case goes against them and the group seeks to shore up its balance sheet.
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

 
First Catalyst : Expect the 4x quarterly dividend of 10c (C$160m p.a.) to be
cancelled in 2017.
Second Catalyst : While well documented, Cameco risks an adverse judgment of up to
C$2.2bn in its 8 year long dispute with the Canadian and US Revenue Authorities. Judgement
is expected in the 2nd half of 2017. The amount due in cash might be between
C$1.5bn and C$1.7bn, with some of the balance lodged in cash but mostly only by way of letters
of credit with the CRA.
Third Catalyst : The full implications of the withdrawal by Westinghouse (Toshiba) from the nuclear construction industry, will only become apparent in the next few years. It might have a lasting impact on the ability to finance new nuclear plants globally, with the UK and India's new-builds the first to be impacted directly.
1       sort by    

    Description

    Description
    I wrote this up for my admission to Value Investor Club, but have since uncovered significant additional info to substantiate my thesis.
     
    Cameco's share price has rallied by 40% off the lows of C$9.95 established in early
    November.
    We view this bounce as a valuable opportunity to short the stock, given the precarious
    outlook for the company. The traditional valuation metrics (above) look very stretched, while our rudimentary SOTP valuation points to a negligible value per share at the current uranium price. The de facto option value ascribed to the stock appears out of all proportion to the weak fundamentals and the likely need to place paper if the tax cases with the CRA and IRS go against the company.
     
    The uranium industry is one of the most forecastable industries, due to the long lead times in permitting and building nuclear power stations and uranium mines. (typically >8 years). The industry runs an excellent PR campaign, making it surprisingly hard to ascertain the simple numbers that we present below.
    These show that nuclear power generation peaked in 2006 and that for every new reactor being built, almost one reactor is scheduled to shut down over the next 10 years. From a short seller's perspective, any possible shift in the market will therefore be well sign posted months or years in advance.
     
    The narrative that China and India etc. are the saviours of nuclear, is numerically inaccurate. In the 10 years from 2005 to 2015, the Non-OECD countries grew their power generated from Nuclear by only 183TWh p.a., compared to their growth of 331TWh for Wind and Solar and 934TWh for Hydro. In other words they voted with their feet for renewables in preference to nuclear, even when renewables were still much less competitive than today. Nuclear in the Non-OECD also constituted only 4.5% of electricity generated in 2015 vs. 18.3% in the OECD (2015). In the next 10 years all the new reactors currently under construction in the world will only add a combined 71,000MW of new capacity vs. the 58,000MW of currently known shutdowns. Given the age of >30 years of the OECD nuclear fleet, it's a given that a significant number of additional plants will become uneconomical to maintain during this coming decade. 
     
    Generally, the reactors shutting down are in the OECD countries and are actual or potential clients of Cameco, whereas the new reactors are in the non-OECD countries and are often built or owned by state-owned corporations who mostly have their own closed-loop fuel supplies as part of the deal. (Nespresso model).
    These shifts are far from benign for Cameco and other independent uranium miners and fuel service providers.
    The de facto bankruptcy of Westinghouse (Toshiba) and Areva, who between them built more than half of all nuclear power stations in the world, are therefore not coincidental but symptomatic.
     
    Cameco has long been viewed as the blue chip among pure-play uranium miners.
    This reputation was previously well deserved, based on its high grade mines,
    ostensibly prudent management and continued dividend payments all through the lean
    years of the late 1990's and early 2000's up to the present day.
     
    As I detail below, several key drivers of the group's business model are now either
    broken or under structural threat.
    The current stock price of C$14.70 equates to a trailing pe of 41 times, making the
    shares vulnerable to a resumption of their downtrend.
     
    The Spot price of Uranium dropped to US$18.00/lb (U3O8) in November from its
    peak of US$137/lb in June 2007. The Contract price likewise dropped to US$30/lb in
    December vs. US$95/lb in June 2007. Cameco is temporarily insulated from this
    dramatic erosion in the market, thanks to its very large book of long-term sales
    contracts entered into in more prosperous times. At end 2015, the group had 190m lbs
    of U3O8 under contract until 2025. This was split as to 135m lbs for the 5 years from
    2016 - 2020 and 55m lbs for the following 5 years. Because the group has a policy of
    structuring these contracts on a blended basis consisting of 60% of the volume linked
    to spot prices ruling at date of delivery and 40% at a pre-determined fixed price, it
    boils down to an actual forward book of 40% x 190m lbs = 76m lbs sold at a fixed
    forward price.
     
    Cameco's disclosure on this forward book is fairly opaque, but using their illustrative
    tables we derive an implied forward price of US$60/lb for the 40% of their contracts
    that are fixed. In other words, the remaining forward book at end December 2016
    amounted to 50m lbs and has an embedded value of US$1.7bn at the end December value of
    US$26/lb (current spot price = $24.50/lb).
     
    The sharp drop in the quantum of the forward book from 76m lbs (2015) to
    50m lbs (2016) is only partially explained by normal sales during 2016 of 12m lbs at
    fixed prices (18mlbs spot +12m lbs fixed). This suggests that the 2 settlements
    Cameco entered into with restive clients during Q3 2016 involved no less than 12m -
    14m fixed price lbs. for which it received a settlement of only C$59m (US$44m), vs.
    a possible embedded value of US$576m.
     
    Since year-end, Cameco announced that Tokyo Electric Power (Tepco), served notice of Force Majeure on its forward purchase from Cameco of 9.3m lbs at an eye-watering average price of US$108/lb. Using the December closing spot price of $26/lb, the dispute is worth US$758.2m or almost half Cameco's entire Forward Book. While Cameco believes that it will be vindicated in the expected arbitration of +- 2 years, the matter seems far from cut and dried.
     
    The Tepco dispute illustrates a key vulnerability in Cameco's business model. Uranium is not an exchange cleared commodity, so contracts are principal to principal, with none of the usual marked-to-market margin requirements that helps to regulate normal futures. We estimate Cameco's Cash Cost of production at its 2 Canadian mines at US$32.58/lb, meaning that without the buffer of the Forward Book, it would be incurring cash losses of US$8/lb (US$216m p.a.) at current spot prices. The current approach to weather the storm by running down the embedded value in the Forward Book, can therefore come unstuck if other clients opportunistically following Tepco's example.
     
    As a Uranium miner, Cameco has seen its competitive advantage on the cost curve
    substantially eroded by Kazakhstan.
    Kazakhstan's production has grown from 9m lbs in 2004 to 61m lbs last year, in a
    market that has seen mined Uranium grow from 104m lbs in 2004 to 146m lbs
    last year. In other words, Kazakhstan has gone from 9% to 42% of the market in just
    over 10 years. What is more concerning from a Cameco perspective is that
    Kazakhstan's production costs position it at the bottom end of the cost curve.
     
    Uranium One (Rosatom), which owns around 25% of Kazakhstan's output on an attributable basis,
    disclosed average total cash costs of only US$7/lb for Q3 2016. This drop from
    US$10/lb a year earlier was helped in large part by the sharp depreciation of the
    Kazakh currency the Tenge. Kazakhstan may have mined its best orebodies first, but
    it has a further 40 years of minable reserves at the current run rate.
     
    The announcement by Kazakhstan in January that it will curtail production by 10% might hold for a while, but Cameco's Inkai mine in Kazakhstan (40% Cameco, 60% Kazatomprom), plans to double production from 5.2m lbs to 10.4m lbs over the next 3 years, once the regulator approves the expansion into Block 3.
     
    As mentioned, Cameco's cash costs exceed US$30/lb. The barriers to exit on the North American assets can be deduced from the C$60m of capex still going into the 2 mothballed operations, viz. Rabbit Lake and the ISR mines in the US this year.
     
    Other notable players on the cost curve are the enrichment plants. As the enrichment
    industry discarded the last gaseous diffusion plants (GDP's) in favour of using
    centrifuges, the cash cost of enrichment has dropped dramatically. Today's centrifuges
    consume less than 3% of the electricity used to perform a Separative Work Unit
    (SWU) in a GDP and are 1400 times thriftier than the calutrons used in the Manhattan
    Project. This has seen a constant decline in the price of SWU's from over $190/SWU
    to recent lows around $50. At these prices, enrichment plants can "make" Uranium at
    roughly $5/lb by simply underfeeding their processes by blending in previously
    discarded tails.
     
    With China and other countries committing to Nuclear in a big way prior to
    Fukushima, they geared up massively on enrichment capacity from a strategic
    perspective. With minimal long-term contracts being entered into in both 2015 and
    2016 and low spot market activity, the enrichment plants that were already surplus to
    market demand are now seriously under-utilised and have only one logical route to
    recoup overheads. "Make" more Uranium. This material is then sold rather
    indiscriminately into an already thin market, enforcing the vicious circle.
     
    While Cameco management are fond of repeating the narrative that the market is
    consuming 100m lbs more than it is contracting and hence storing up trouble for the
    future, the truth might be somewhat different. The authoritative UX Consulting
    released a report in late 2015 in which they averred that among the various players in
    the Uranium market, there might be more than 1.1bn lbs of U3O8 equivalent of
    inventories extant. Even more worrying, UxC believed that a significant chunk of this
    material has already been enriched or even fabricated in market ready fuel assemblies.
     
    Even if UxC are only broadly right, then these stock levels equal more than 6 years of
    current demand leaving the Uranium market comfortably the most overstocked
    commodity market since the collapse of the International Tin Council Buffer Stock in
    1985. By comparison, stock levels in the Copper market seldom exceed 30 days’
    consumption. The Buffer Stock operated from 1953 to 1985 and eventually held
    roughly 15 months of global demand (including the ITCBS derivatives exposures). It
    took the Tin market until 2007 to regain the nominal levels of 1985.
     
     
    Added to this price inelastic first quartile supply is material being sold by the US
    military, normal reprocessing of spent fuel and the Uranium being produced as a by-
    product, or by state-owned entities.
     
    BHP’s Olympic Dam mine in Australia is a Copper, Uranium, Gold and Silver mine,
    whose principal profits are derived from Copper. BHP is moving ahead with plans to
    potentially double Olympic Dam’s Copper output to 450,000t p.a. by the mid 2020’s.
    With Uranium production growing in lock step, this will see the mine producing 10m
    lbs next year and potentially up to 22m lbs p.a. in the mid 2020’s vs. only 8m lbs last
    year. With the mine’s Copper costs postulated in the first quartile of the cost curve,
    the Uranium is clearly going to be produced regardless of price. The Resource hosts a
    remaining 5.6 bn lbs of contained Uranium.
     
    A further significant concern for Cameco, must be the new Husab mine in Namibia
    (previously called Rossing South). This mine is expected to reach its nameplate
    capacity of 15m lbs in 2017, or almost 10% of global demand. The owners, China
    General Nuclear Power Holdings, paid $2.2bn to acquire the mine from Extract
    Resources and a further $2.1bn to build the mine. They are unlikely to curtail
    production at this shallow open pit mine due to short-term weakness in the Uranium
    price. In fact it appears as though China is vertically integrating from mine to power
    plant and that the entire demand that everybody pencilled in for China in their own
    business models, will instead be satisfied by Chinese owned assets - be it yellowcake
    or enrichment requirements.
     
    Further, mines like Rio Tinto’s Rossing in Namibia or Ranger in Australia may be
    high cost, but they still have meaningful long-term contracts against which to deliver
    at break-even or better. Likewise for Areva’s Somair mine in Niger. These are large
    corporates with long time horizons and triple bottom lines to consider. As Cameco
    itself stated in a recent conference call, it costs significant money to mothball a mine
    like Rabbit Lake, not to mention shutting it for good, i.e. real barriers to exit. It’s
    therefore somewhat disingenuous of Cameco’s CEO, Tim Gitzel, to say that they have
    been “surprised by how sticky the supply has been”.
     
    The tax dispute with the Canadian Revenue Authority (CRA) and IRS in America has its roots in the premium price of long-term off-take commitments vs. the generally lower Spot price. The Nuclear industry has always attached a premium to supply certainty. This started
    when the US and British Nuclear authorities offered soft loans and premium prices to
    the South African gold mines to incentivise them to produce Uranium after WWII (78 shillings a pound ~$80/lb today).
    In recent times, the premium has often reached 50% or more. (Currently US$32.50/lb for Contract vs.
    US$24.50/lb. for Spot).
     
    While the detail is not disclosed, it appears that Cameco formed a wholly-owned
    Swiss entity, Cameco Europe Limited some 15 years ago, to which the Canadian
    mines sell at Spot. This entity then sells to Cameco’s long-standing customers on
    Contract, reaping an almost permanent and risk-free premium. The current extreme
    weakness in the spot price not only threatens this neat little earner, it risks toppling
    Cameco’s entire tax case with the CRA. The point is that the mines and offices in
    Canada incurred a loss of C$464m in 2016, while the “Foreign”
    subsidiaries (CEL and Nukem) earned C$310m in profits. The more the spot price
    drops, the greater this farce becomes, not to mention the cost of paying Swiss and
    German taxes on the notional foreign profits, while the group as a whole incurs losses at a pre-tax level.
     
    Of further concern is that management suggested in a recent conference call that the
    buyers’ strike of the past 3 years amounting to some 300m lbs of “under-contracting”,
    might in fact be a strategy by Nuclear customers to “normalise” the unusually large
    contango in the Uranium market. Given the hard times in the Nuclear power market,
    this might not even be so much a strategy, as a result of banks reining in lines of
    credit to an industry that is non-standard and perceived as risky under Basle III risk
    weightings. The diamond cutting centres (especially in Antwerp) went through a
    painful adjustment for these reasons over the past 5 years with decades old credit
    facilities being cancelled.
     
    Whatever the truth, the stock levels appear far out of line with normal requirements
    and all those players long of Uranium in the past few years are nursing very serious
    losses. Not least Cameco itself, which has seen its stock of 28 - 31m lbs of carry-over
    Uranium drop by some C$650m in the past 12 months alone. It would be profoundly
    ironic if at any time going forward, Cameco should become a forced seller of its own
    inventory of Uranium in a weak market, thereby exacerbating
    its woes. It’s also unclear to what extent Nukem’s significant trading book has
    been impacted by market movements and whether they may or may not have residual OTC derivatives positions.
     
    The broader outlook for Nuclear power looks very weak, with smaller Nuclear plants
    in the US operating at $44/MWh according to the Nuclear Institute. This is now
    frequently below actual Wholesale Power Prices received, caused by the fact that
    Renewables have “right of way”. This and the median age of 30+ years has seen 5
    closures announced in the past 3 years, completely balancing out the 5 new plants
    being built. The forecasts of a growing Nuclear industry somehow always assumed
    that the existing fleet would continue operating for ever thanks to uprates and permit
    extensions from 40 to 60 and even to 80 years.
     
    The recent problems at San Onofre in California and at a number of French nuclear
    plants tell a more sobering story. With the tender awarded at $4.4bn to close and
    rehabilitate San Onofre, the full cost of the life cycle of a Nuclear power plant is moving
    from the realms of theoretical calculations to current numbers. The cost seems to
    approximate $2m/MW of generating capacity (roughly the cost of building a new gas
    plant in its entirety).The cost also excludes the cost of spent fuel disposal In an era of IFRS accounting standards this can lead to significant upward revisions in
    the closure liabilities of power companies.
     
    In the same vein, should the Trump administration revive Yucca Mountain as a
    repository for spent fuel, it will likely see the re-imposition of the Fuel Storage Levy
    per MW of Nuclear Power generated, with negative cash flow impacts for the
    industry. While being “a good thing”, it might nonetheless hasten the closure of
    further smaller nuclear plants.
     
    The United States generated 32.6% of the global output of nuclear power in 2015 so going forwards, it will play a major role in shaping the future of the traded uranium market. In our view nuclear can only regain its previous viability in America if electricity demand starts growing again, or a carbon tax is introduced, or renewables lose their subsidies and right of way, or capacity auctions and congestion levies are structured to specifically favor nuclear. These scenarios are possible but not probable.
     
    In summary, I don’t believe that Cameco can continue paying C$160m of dividends
    while running at barely better than break-even, incurring accounting losses of
    C$400m in its Canadian subsidiaries, having an unsustainable net debt to Ebitda ratio
    and facing the real likelihood of a C$2.2bn adverse ruling on their CRA court case.
     
    On a sum of the parts basis, the group is potentially worth as little as C$1bn or less, due to
    the barriers to exit in its marginal mines and nuclear processing facilities. As the
    group’s shares are restricted in terms of foreign ownership and voting rights, Cameco
    does not have the same ability to raise capital, dispose of assets or enter into corporate
    transactions as would otherwise be the case. I therefore see a strong likelihood of a
    further derating to C$2.50, especially when the dividend is inevitably passed, the tax
    case goes against them and the group seeks to shore up its balance sheet.
     
     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

     
    First Catalyst : Expect the 4x quarterly dividend of 10c (C$160m p.a.) to be
    cancelled in 2017.
    Second Catalyst : While well documented, Cameco risks an adverse judgment of up to
    C$2.2bn in its 8 year long dispute with the Canadian and US Revenue Authorities. Judgement
    is expected in the 2nd half of 2017. The amount due in cash might be between
    C$1.5bn and C$1.7bn, with some of the balance lodged in cash but mostly only by way of letters
    of credit with the CRA.
    Third Catalyst : The full implications of the withdrawal by Westinghouse (Toshiba) from the nuclear construction industry, will only become apparent in the next few years. It might have a lasting impact on the ability to finance new nuclear plants globally, with the UK and India's new-builds the first to be impacted directly.

    Messages


    Subjectgood writeup
    Entry02/28/2017 11:36 PM
    Membermpk391

    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.

    some thoughts:

    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.

     


    Subjectforecasting
    Entry03/01/2017 12:14 AM
    Membermpk391

    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

     


    SubjectRe: good writeup
    Entry03/01/2017 07:10 AM
    MemberVeritas500

    Hi mpk

    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.


    SubjectRe: forecasting
    Entry03/01/2017 07:38 AM
    MemberVeritas500

    Hi mpk

    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.  

     


    SubjectRe: Re: good writeup
    Entry03/01/2017 06:31 PM
    Membermpk391

    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.


    SubjectRe: Re: Re: good writeup
    Entry03/02/2017 06:24 AM
    MemberVeritas500

    Hi mpk

    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.


    SubjectRe: awesome call
    Entry11/09/2017 08:24 AM
    MemberVeritas500

    Thank you. The new all-time low of $40 in the SWU price suggests U3O8 could drop to $15/lb. 


    Subjectgreat call - any update to the thesis?
    Entry04/23/2018 11:18 AM
    Memberpuppyeh

    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).

    thanks


    SubjectRe: great call - any update to the thesis?
    Entry04/24/2018 03:32 AM
    MemberVeritas500

    Hi puppyeh

    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.

     


    SubjectRe: Re: great call - any update to the thesis?
    Entry04/24/2018 05:28 AM
    Memberpuppyeh

    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.

     


    SubjectRe: Re: Re: great call - any update to the thesis?
    Entry04/24/2018 01:44 PM
    MemberVeritas500

    Pleasure.

    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. 

     

     

     

     


    SubjectRe: Re: Re: Re: great call - any update to the thesis?
    Entry04/25/2018 12:35 PM
    Memberpuppyeh

    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.


    Subjecturanium in the news
    Entry06/06/2018 06:36 AM
    Membermack885

    https://www.ft.com/content/4ce3889e-6897-11e8-b6eb-4acfcfb08c11

    paladin shut in last week.... grants feature over the weekend... and fin times today... 

     


    SubjectRe: uranium in the news
    Entry06/06/2018 11:39 AM
    Memberpuppyeh

    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.


    SubjectRe: Re: uranium in the news
    Entry06/06/2018 06:03 PM
    Memberrhubarb

    Puppyeh,

    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?

     


    SubjectRe: Re: Re: uranium in the news
    Entry06/09/2018 06:11 AM
    MemberVeritas500

    rhubarb,

    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 

     

     

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