2017 in review: Uranium is best left in the ground

"It is a misunderstanding that uranium mining can cause radioactivity. It is not true because uranium gets radioactive only when it is enriched. Otherwise, uranium is just like any other soil as it has got no radiation. But there is a popular belief that if uranium is there, radiation will also be there."
‒ T.P. Sreenivasan, former Representative of India to the International Atomic Energy Agency.

The Shillong Times, September 2017.¹

The uranium market is a curious beast at the best of times ‒ keen to spot a bargain, investors get more and more excited the further the uranium price and company stock prices fall. They've had plenty to get excited about in recent years. These days, the market exhibits multiple levels of weirdness, all stemming from the growing acknowledgment that nuclear power and the uranium industry face a bleak future.

The uranium market has a "subdued outlook" and Cameco's uranium is now "more valuable in the ground" according to Warwick Grigor from Far East Capital, because the cost of production is higher than the prices currently being offered.² Cameco CEO Tim Gitzel agrees, saying in January 2018 that at current prices "our supply is better left in the ground."³ So uranium industry executives and market analysts are finally coming around to rallying cry of the anti-uranium movement: Leave it in the ground!

We've also had the odd situation over the past year of nuclear lobbyists arguing repeatedly that the nuclear power industry is in "crisis"⁴ and wondering what if anything can be salvaged from "the ashes of today's dying industry".⁵ Usually such claims come from the anti-nuclear movement ‒ sometimes more in hope that expectation.

And we've had the odd situation of industry bodies (such as the US Nuclear Energy Institute) and supporters (such as former US energy secretary Ernest Moniz) openly acknowledging the connections between nuclear power and weapons ‒ connections they have strenuously denied for decades.⁶ Such arguments are now being used in an effort to secure preferential treatment for uranium mining companies in the US. In January 2018, Ur-Energy and Energy Fuels lodged a petition with the Department of Commerce under the Trade Expansion Act of 1962, the purpose of which is to protect national security industries that are under threat from imports.⁷ The companies want a mandated requirement for US utilities purchase a minimum 25% of their requirements from US mines.

Ur-Energy and Energy Fuels argue that over-reliance on uranium from Russia, Kazakhstan, Uzbekistan and China "threaten national security". Domestic production accounts for less than 5% of national demand, they state, and a "healthy uranium mining industry is vital to U.S. national security, because it supplies fuel for nuclear power plants that are a key component of the nation's critical energy infrastructure and essential defense needs." Uranium is "the backbone of the U.S. nuclear deterrent and fuels ships and submarines in the U.S. Navy", the companies state.

The arguments mounted by Ur-Energy and Energy Fuels might appeal to President Trump and they would dovetail neatly with his silly conspiracy theory about Hillary Clinton threatening national security by allowing the sale of a uranium mining company with US interests to Russia's Rosatom.⁸

But the arguments are likely to collapse under the weight of their own stupidity. They don't appear to enjoy any support ‒ none that we're aware of, at least ‒ from the US nuclear weapons complex despite a requirement for uranium used in weapons programs to be domestically sourced. It makes no difference to the nuclear weapons complex whether 5% or 25% of uranium is domestically sourced.

According to market analysts FNArena, the petition lodged by Ur-Energy and Energy Fuels has "brought the uranium market to a screaming halt" and US power utilities have warned that such a quota would force the early shutdown of some nuclear plants.⁹

Another miserable year for the uranium industry

Uranium mine production increased by 50% from 2007 to 2016.¹⁰ The increase was driven, initially at least, by expectations of the nuclear renaissance that didn't eventuate. Mine production plus secondary sources¹¹ have consistently exceeded demand ‒ 2017 was the eleventh consecutive year of surplus according to the CEO of uranium company Bannerman Resources.¹²

Stockpiles (inventories) have grown steadily over the past decade to reach enormous levels ‒ more than 1.4 billion pounds U3O8 according to Ux Consulting¹³ or 1.2 billion pounds according to the OECD's 2016 Red Book.¹⁴ Thus stockpiles alone would suffice to keep the entire global reactor fleet operating for around eight years. Supply from mines and secondary sources in recent years has exceeded demand by about 30 million pounds U3O8 per year or 18%.¹³

Those dynamics have put downward pressure on prices. Uranium prices were flat in 2017. The spot price as of 1 December 2017 was less than one-third of the pre-Fukushima price (and less than one-sixth of the 2007 peak-bubble price), and the long-term contract price less than half the pre-Fukushima price.¹⁵

Uranium Prices (US$ / pound uranium oxide)

Source: Cameco: www.cameco.com/invest/markets/uranium-price

Countless would-be uranium mining companies have given up. Some mines have closed, others have been put into care-and-maintenance, and others have reduced output. But mine production plus secondary sources have continued to exceed demand ‒ and to exert downward pressure on prices.

Very few mines could operate at a profit at current prices (US$21.88 spot price and $30 long-term contract prices as of 31 January 2018).¹⁵ Some mines are profitable because earlier contracts stipulated higher prices, while many mines are operating at a loss. Current prices would need to more than double to encourage new mines ‒ a long-term contract price of about US$70–$80 is typically cited as being required to encourage the development of new mines.¹⁶ Companies considering new mines also need to factor in competition from mines that have been producing at reduced output or put into care-and-maintenance.

Many companies have been loathe to close operating mines, or to put them into care-and-maintenance, even if the only other option is operating at a loss. They have been playing chicken, hoping that other companies and mines will fold first and that the resultant loss of production will drive up prices.¹⁷ "We have to recognise that we over-produce, and we are responsible for this fall in the price," said Areva executive Jacques Peythieu in April 2017.¹⁸

The patterns outlined above were repeated in 2017. It was another miserable year for the uranium industry. A great year for those of us living in uranium producing countries who don't want to see new mines open and who look forward to the closure of existing mines. And a great year for the nuclear power industry ‒ in the narrow sense that the plentiful availability of cheap uranium allows the industry to focus on other problems.

Cut-backs announced by Cameco and Kazatomprom

The patterns that have prevailed over the past five years or so might be changed by decisions taken by Cameco (Canada) and Kazatomprom (Kazakhstan) in late 2017 to significantly reduce production. Previous cut-backs in Canada and Kazakhstan have had little or no effect, and so far the late-2017 announcements have only resulted in a small, short-lived upswing in uranium prices. But the cut-backs are significant and their impact might yet be felt.

As a result of the decisions by Cameco and Kazatomprom (detailed in the following article), global production in 2018 will probably be reduced by 10‒15%.^3,19,20 After years of oversupply (including secondary sources), production and demand will be more-or-less equivalent in 2018.

A late-2017 report by Cantor Fitzgerald equity research argued that the decisions by Cameco and Kazatomprom could result in a "step change" for uranium prices.¹⁹ Rob Chang from Cantor Fitzgerald said he believes that a "violent" increase in the price of uranium is coming.³

But Chang's analysis was more circumspect than his choice of adjectives: "We expect these events to ultimately push spot uranium prices to the mid-high US$20/lb range and perhaps into US$30/lb. However, as seen so far, the degree of movement may be muted at first due to fact that there are a limited number of qualified purchasers of uranium – making it a less efficient market. Inventory levels are also a concern as we estimate that there are 800-1,200M lbs of total above ground inventory of which about 700-800M lbs are held by utilities. We do not believe that all of it is available for sale as significant portions are held for strategic purposes and necessary utility needs. Moreover there is the possibility of sales from distressed utilities and by utilities with reactors that are being decommissioned."¹⁹

TEPCO ‒ operator of the Fukushima plant in Japan ‒ is perhaps the most distressed of all utilities and is currently locked in a legal dispute with Cameco after declaring force majeure and breaking its uranium purchase agreement.²¹ Cameco is seeking US$681.9 million in damages from TEPCO.²¹

Warwick Grigor from Far East Capital was downbeat about Cameco's announcement. "I don't see this as a turnaround for the uranium price; at best they will stay where they are, but it doesn't signal a boom in price," he said in November 2017.²

BHP marketing vice-president Vicky Binns said in December 2017 that uranium markets would remain oversupplied for close to a decade, with "downward pressure" remaining on uranium prices despite Cameco's production cuts. She said that demand for uranium could outstrip supply by the late 2020s as consumption rises but that could change if developed nations close their nuclear reactors earlier than expected, or if renewables take a larger than expected market share.²⁰ BHP owns the Olympic Dam (Roxby Downs) mine in South Australia, easily the world's biggest uranium deposit.

Equally downbeat comments have been made by other industry insiders and analysts in recent years. Former Paladin Energy chief executive John Borshoff said in 2013 that the uranium industry "is definitely in crisis" and "is showing all the symptoms of a mid-term paralysis".²² Former World Nuclear Association executive Steve Kidd in May 2014 predicted "a long period of relatively low prices".²³ Nick Carter from Ux Consulting said in April 2016 that he did not see a supply deficit in the market until "the late 2020s".²⁴

Perhaps a price increase is on the way due to some combination of production cut-backs, the nuclear power micro-renaissance (discussed in the last issue of Nuclear Monitor²⁵), and long-term contracts needing to be renegotiated. But in all likelihood, any uptick won't be soon and it won't be violent (or if the bubble that peaked in 2007 is a guide, a violent upswing will be followed by a violent downswing).

Moreover the market is imperfect and increasingly fragmented. Arguments advanced by Steve Kidd in 2014 still hold.²³ He argued that "the case made by the uranium bulls is in reality full of holes" and that a new era is emerging with the uranium market split into three:

• The Chinese will favor investing directly in mines to satisfy their requirements; they are not going to 'play ball' with the established uranium market.
• The Russians will continue to be significant nuclear fuel exporters but their own market will remain essentially closed to outsiders. They still have secondary supplies to tap into (plenty of surplus highly-enriched uranium remains to be down-blended) and they will follow the Chinese and invest directly in uranium assets if their own domestic production remains constrained.
• The established uranium producers will have the remainder of the market to satisfy and that will likely be declining in magnitude.

References:

1. The Shillong Times, 25 Sept 2017, 'IAEA Allays Fears Over Uranium Mining Effects', www.theshillongtimes.com/2017/09/25/iaea-allays-fears-over-uranium-minin...

2. Cole Latimer, 9 Nov 2017, 'Uranium shares spike as Canadian giant Cameco suspends production', www.theage.com.au/business/mining-and-resources/uranium-shares-spike-as-...

3. Micah Lance, 10 Jan 2018, 'Cameco Corporation: Short-Term Pain For Long-Term Gain', https://seekingalpha.com/article/4136580-cameco-corporation-short-term-p...

4. Nuclear Monitor #839, 'Is nuclear power in crisis, or is it merely the END?', www.wiseinternational.org/nuclear-monitor/839/nuclear-power-crisis-or-it...

5. Ted Nordhaus, 27 March 2017, 'The End of the Nuclear Industry as We Know It', https://thebreakthrough.org/index.php/voices/ted-nordhaus/the-end-of-the...

6. Nuclear Monitor #850, 7 Sept 2017, 'Nuclear power, weapons and 'national security'', www.wiseinternational.org/nuclear-monitor/850/nuclear-power-weapons-and-...

7. Energy Fuels, 16 Jan 2018, 'Energy Fuels and Ur-Energy Jointly File Section 232 Petition with U.S. Commerce Department to Investigate Effects of Uranium Imports on U.S. National Security', www.energyfuels.com/news-pr/energy-fuels-ur-energy-jointly-file-section-...

8. Dan Friedman, 31 Oct 2017, 'The Clinton-Uranium "Scandal" Is Right-Wing Nonsense. Here's Everything You Need to Know', www.motherjones.com/politics/2017/10/the-clinton-uranium-scandal-is-righ...
9. Greg Peel, 30 Jan 2018, 'Uranium Week: Ground To A Halt', www.fnarena.com/index.php/2018/01/30/uranium-week-ground-to-a-halt/

10. World Nuclear Association, 'World Uranium Mining Production, Updated July 2017, www.world-nuclear.org/information-library/nuclear-fuel-cycle/mining-of-u...

11. Secondary sources include government and commercial inventories, reprocessed uranium, underfeeding at enrichment plants (extracting more U-235 per given volume of feedstock), uranium produced by the re-enrichment of depleted uranium tails, and low-enriched uranium produced by blending down highly enriched uranium (typically from military sources).
12. World Nuclear Association, 7 Dec 2017, 'Uranium suppliers respond to production cuts', www.world-nuclear-news.org/UF-Uranium-suppliers-respond-to-production-cu...

13. Rhiannon Hoyle and Mayumi Negishi, 31 July 2016, 'Japan Nuclear-Power Jitters Weigh on Global Uranium Market', http://www.wsj.com/articles/japan-nuclear-power-jitters-weigh-on-global-...

14. OECD's Nuclear Energy Agency and International Atomic Energy Agency, 2016, 'Uranium 2016: Resources, Production and Demand', www.oecd-nea.org/ndd/pubs/2016/7301-uranium-2016.pdf

15. Cameco, 'Uranium Price', www.cameco.com/invest/markets/uranium-price

16. Andrew Topf, 12 Jan 2016, 'Nuclear Renaissance Has Analysts Bullish On Uranium', http://oilprice.com/Alternative-Energy/Nuclear-Power/Nuclear-Renaissance...

17. Nuclear Monitor #792, 2 Oct 2014, 'Uranium's dead cat bounce as miners play chicken', www.wiseinternational.org/nuclear-monitor/792/uraniums-dead-cat-bounce-m...

18. World Nuclear Association, 2 May 2017, 'Uranium producers prepare for market recovery', www.world-nuclear-news.org/UF-Uranium-producers-prepare-for-market-recov...

19. MINING.com, 23 Dec 2017, 'Are Higher Uranium Prices Around The Corner?', https://oilprice.com/Alternative-Energy/Nuclear-Power/Are-Higher-Uranium...

20. Peter Ker, 5 Dec 2017, 'Kazakhstan puts a rocket under uranium markets', www.afr.com/business/energy/kazakhstan-puts-a-rocket-under-uranium-marke...

21. Mining Weekly, 19 Dec 2017, 'Tokyo Electric says Canada's Cameco seeks $682m in damages', www.miningweekly.com/article/tokyo-electric-says-canadas-cameco-seeks-68...

22. Nick Sas, 18 July 2013, 'Uranium industry in crisis: Borshoff', The West Australian, http://web.archive.org/web/20130725060831/http://au.news.yahoo.com/thewe...

23. Steve Kidd, 6 May 2014, 'The future of uranium – higher prices to come?', www.neimagazine.com/opinion/opinionthe-future-of-uranium-higher-prices-t...

24. Bejamin Leveau, 29 April 2016, 'Uranium industry focuses on costs as supply glut continues', http://blogs.platts.com/2016/04/29/uranium-cost-supply-glut/

25. Nuclear Monitor #856, 26 Jan 2018, '2017 in Review: Nuclear Power', www.wiseinternational.org/nuclear-monitor/856/nuclear-monitor-856-29-jan...