Third Bridge: Uranium demand growth and capacity - Feb 2023

• For the time being, nuclear powerplants (NPPs) are accepting deliveries under existing contracts from Russia but not adding on additional contracts for uranium conversion and SWU (separative work unit)
• Out of the 3 components, uranium, SWU and conversion, uranium is probably the least problematic for utilities. They're more concerned about conversion and enrichment because Russia holds 40% of global enrichment capacity
• How do you get more enrichment out of the existing capacity of western suppliers?
  • One way you can do that is using more uranium
  • Think of the enrichment as an orange juice squeezer. You could slowly squeeze every drop out of an orange, with each squeeze producing less juice
  • Or you could use more oranges
• If there was a situation where sanctions were enacted and some existing contracts with Russia were cut, that would really accelerate all this pressure on western suppliers and could have a really significant impact on uranium prices
• We need to see price levels significantly above the current $50 level to stimulate meaningful new production
• The most growth in demand comes from China and India
• Japan is going to have to start buying uranium before too long as they're restarting NPPs. They still have significant inventory they can work through but once we see more reactors, maybe 25, they're going to need to be back in the market purchasing again. That's certainty a positive development for uranium in the next few years
• NPPs are paying more attention to the source, looking at ESG and geopolitically stable environments
• Utilities generally cover ~90% of their requirements under LT contracts
• If we see further geopolitical risk, the spot price of uranium is quite susceptible to very radical price movements. We definitely could see some significant volatility on the upper side of uranium in the coming months
• In the pricing mechanism of contracts, the 2 basic categories are market-related (determined by the published spot price at the time of delivery) and base-escalated (price set at the time of contract and escalated based on some inflationary index)
• Typical contracts are 5-7 years
• It takes a long time from exploration to identifying a property, approving of the resources, getting it licensed and permitted and production. We're talking years, and since Fukushima, there's been a real lack of investment in exploration

Segra Capital: The turning of a cycle

https://segracapital.com/commentary/you-say-you-want-a-revolution-spot-sput-the-turning-of-a-cycle/

KTAs

• In many markets inventory management is countercylical, stocking up on something when prices are low and draw down that inventory during periods of high prices
• If history is any guide, inventory management for uranium is pro-cyclical
  • As fuel cost is a relatively small portion of total cost for nuclear power plants (NPPs) between 3-20% vs 60-80% for coal, 40-60% for LNG and 70-90% for petroleum
  • Therefore, uranium buyers have historically increased inventories when they are nervous about securing supply, even if it means at much higher prices
  • This means that the value of uranium is driven more by availability than price
• However, there are 2 large pools of inventory that bears always reference as market overhangs - Japan and China
• In the case of Japan, they are well in excess of historical levels
  • After Fukushima, utilities continued taking delivery of pricey contracted materials despite having most reactors offline for the decade, resulting in an inventory of ~100m lbs
  • Small amounts have found their way into the market through traders but it hasn’t been significant as majority of the inventory are held at cost on Japanese utilities B/S so a sale would lead to a loss recognition, potentially impacting leverage requirements
  • At the government level, we continue to see a recommitment to a LT target which includes nuclear as alternatives are limited
• China is in the process of the most successful nuclear rollout of all time and the CCP recommitted to a national program centred on domestic reactor technology
  • While Chinese inventories may seem large compared to current consumption levels, they're quite small in relation to the country's plan of 70 NPPs by 2025, 180 by 2035 and 327 by 2050
  • We view Chinese inventory levels as strategic in nature and unlikely to be sold into a rising market
  • In Nov 2021, Kazatomprom and China announced a series of term contracts, the first time Chinese have entered the term market in years and a sign they're buyers rather than sellers today

Segra Capital: The advanced nuclear fuel cycle

https://segracapital.com/commentary/the-advanced-nuclear-fuel-cycle-we-can-work-it-out/

KTAs:

• Almost every credible study targeting net-zero and optimising for system level cost of decarbonisation include a significant increase in nuclear power
• The more complex and developed a study's parameters on generation deployment, the more models tend to favour new nuclear over competing options
• Important to note that new uranium mines often take 10+ years from discovery to production, and once it's mined, it needs to be transported, converted, enriched, fabricated, and delivered to the customer before it can enter a reactor, often taking up to 2 years
• We have seen that procurement supporting a new reactor often takes place several years before startup to minimise market risk
• Once a reactor is operational, a sure way to destroy plant economics is to face unforced outages due to fuel availability issues
• While many see the demand profile of advanced nuclear as some distant factor, we see its incorporation into LT forecasts as a key variable impacting models today
  • Procurement of HALEU will clearly impact uranium and conversion markets, but also the enrichment for LEU. While HALEU production facilities will be built, those projects will start with LEU rather than uranium, meaning the entire fuel cycle will tighten
  • New designs mean that procurement cadence for advanced reactors could look quite different from the way fuel buyers operate today as they require more front-loaded fuel than traditional LWRs (10-20 years of fuel upfront)
• How are forecasters modelling it today? Not in any concrete way

Mike Alkem (Sachem Cove): How the uranium market really works - June 2023

https://www.youtube.com/watch?v=tmO2-jUvCIY

KTAs

• 80% of uranium are transacted through LT contracts
• The difference between this cycle and the last cycle is that even forecasters are saying there's a deficit
• Cigar Lake's flood was the catalyst for the previous spike, but even before that, the price went up 7x in a period where forecasters were saying there was an oversupply
• It's very opaque which adds to the mystery around it but we think that drives asymmetry
• If you look at a normal supply and demand, people consider supply and demand
• But for uranium, forecasters simply plug the undersupply gap with inventory drawdowns but there's a finite life to that inventory and a price associated with that inventory
• In 1Q17 at $20 per pound, the industry forecasters were saying it would be $32 at the end of 2022. At that time, there was around 30m surplus and 8m inventory drawdown
• If you went to sleep and woke up today, the price is 175% higher at $55. What I do know is that when there's too little of something, prices go up. Yet all you year is that there's too much of uranium
• Looking back ex-facto, we see a market that is under contracted since 2012 and the actual inventory drawdown on average was 31m pounds a year vs 8m pounds that was forecasted in 2017
• Don’t forget there's a price associated with the inventory which increases if held longer
• The floors and ceilings for contracts are going up. In a buyer's market with a lot of supply, utilities will take market contracts and producers will take anything
• In today's market which is a seller's market, producers want to price contracts at the market but buyers will want a cap
• The reported price of contracts are reported at the lowest price. If a utility puts out a RFP and there's 5 bidders and average buying price is in the mid-60s, the association will report the lowest priced contract, maybe $50 even if they're buying from 3 suppliers are different prices
• Headwinds for uranium?
  • The nuclear accident risk you have to learn to live with. I wake up every day to prove ourselves wrong because we don’t have to invest in uranium. We look at supply, demand and inventory to search where we're wrong
  • Many people point to Kazakhstan and say they produce 40% of uranium and crush the market. Their costs were in the mid-30s at some mines
  • We spend a lot of time looking at the cost curve, are there SOEs that could bring on a lot of supply but we feel there's a lot more tailwinds than headwinds
  • China has a lot of inventory but we think they're playing the long game and they're net buyers not sellers
  • We feel very comfortable with those risks, not that they're not there, but China is playing a multi-decade game and are net buyers
  • The thing we avoid is industry narrative and this industry is very disconnected from the actual math
  • Have to stay on top of uranium enrichment, underfeeding and overfeeding can swing the demand by 30m pounds
• For equities you need to be able to stomach swings
• You're looking at the spot price which is 15% of the volumes so term contracts carries the stock price
• Our game is to figure out where term contracts will price when contracting = consumption and that's what the equities will depend on
• Physical traders are playing another game, getting pounds and selling into the market, so trying to predict the spot price isn't really our job
• We strongly think it'll move higher, and maybe there will be some inventory that will come out at $70-75
• With more financial vehicles coming into the market buying physical uranium, the market will be healthier as more demand should lead to upward pressure