Uranium in an Ex-Russia World

From The Maven Letter | March 30, 2022

The uranium spot price gained 20% in March to close today at US$58 per lb. U3O8. There are several reasons why it gained so – and why I think the gains will continue.

(I will not in this article go into the backstory for uranium – the spot market supply excess that followed Fukishima, how the world’s producers decided in 2016 to work together to reduce output, how China’s big plans for nuclear energy are driving demand higher, and how sequestering (financial vehicles squirreling uranium away) has helped drain away excess supply – but will instead focus on what has changed in the six weeks since Russia invaded Ukraine.)

The most direct way that Russia’s war impacts the uranium-nuclear fuel market is enrichment. This is the process that boosts the ratio of the more fissile U-235 isotope to the relatively more stable U-238 isotope and it has to happen to create fuel for nuclear reactors.

Russia is home to 40% of the world’s enriching capacity. Those facilities, for instance, produce 25% of the enriched uranium that feeds US nuclear reactors.

Uranium has not been sanctioned. But there is talk of sanctions, from the US and Europe, and understandably so. As Grant Isaac, CFO of Cameco, said in a recent talk:

“You can’t invade a country and shell an operating nuclear power plant and still be deemed a reliable and responsible supplier of nuclear fuel.”

Sanctions aside, it’s very hard to move anything out of Russia right now. It’s hard to simply find ships willing to sail to Russian ports. If you can find one, do you think you can get loss & damage insurance for your cargo? Especially when that cargo is enriched uranium?

Bottom line: Russian enriched uranium is suddenly unavailable for the west. (China is likely still taking it.) And the west has to scramble to find alternative conversion and enrichment options…of which there are not enough.

It gets more interesting from there. This is not only a processing bottleneck – the lack of enrichment capacity specifically increases uranium demand.

When there is excess enriching capacity, enrichers underfeed. The easiest way to think of it is that they put less uranium into the machine and process it longer and harder, squeezing every possible bit of enriched fuel out of each pound of uranium feed.

Underfeeding their machines means they end up with excess uranium – they don’t use all the uranium they were sent to produce the amount of enriched uranium they agreed to produce. Enrichers often then sell their excess uranium into the spot market, and this has in fact added 10 to 15 million lbs of supply to the spot market annually in the last decade.

When enriching capacity is tight, the situation flips. Enrichers start overfeeding: they push uranium through their machines as quickly as possible, focused on churning out product rather than on getting as much product as possible from each pound.

The common analogy is squeezing lemons. Underfeeding is when a lemonade maker focuses on squeezing every last drop from each lemon; by doing so, they end up with excess lemons. Overfeeding is when a lemonade maker focuses on squeezing as many lemons as possible but, in haste, leaves some juice behind each time. The overfeeding lemonade maker runs through all of his lemons and then needs more.

And needing more is where enrichers now stand: in a complete 180, enrichers are suddenly swinging from underfeeding to overfeeding to try to produce enough enriched uranium to meet demand. The swing means enrichers will go this year from selling 10 to 15 million lbs in the spot market to buying 5 to 10 million lbs.

That’s a direct impact: a source of supply turning into demand.

On an indirect level, I think the new challenges in conversion and enrichment will encourage utilities to sign new contracts. Once uranium is owned via a long-term contract, a utility can start securing the path for that uranium to become UF6 and then enriched uranium. Knowing that path is suddenly getting more crowded, utilities will secure more pounds earlier so as not to get stuck without the ability to turn their yellowcake into fuel.

I’m already hearing from people I know in the uranium market that utilities are looking to do more buying in the near term, to lock in longer-term supply. It’s contingency planning, planning for the future, that will impact prices now.

OK, so Russia’s role in enriching is significant and is already having direct impacts on the nuclear fuel cycle.

This tweet captures some of the price moves already in play. Spot uranium is up nicely, yes, but conversion and enrichment are at record or multi-year highs (SWU stands for single work unit, the standard measure of the effort required to separate isotopes of uranium during enrichment).

The other Russia impact is less direct but still very significant: the move to diversify away from Russian energy. For Europe, that means finding an alternative to natural gas; nuclear is an obvious choice. For Japan, it has already meant an announcement expediting the vvveeerrrryyyyyyy long process of restarting its nuclear reactors, because Japan relies heavily on LNG while those are offline. For America, it means supporting renewed domestic uranium production (of which there is currently none) so as to stop relying on Russian-affiliated supplies (Kazak).

These are longer-term supports for uranium but they are still certainly real.

The direct and longer-term impacts of Russia invading Ukraine have, as I said, sent prices higher. Then the SPUT factor layers in.

Since it started buying to establish its uranium stockpile last August, the Sprott Physical Uranium Trust (SPUT) has been responsible for more than 50% of the buying in the spot market. SPUT has spent $1.6 billion buying 34.6 million lbs. of U3O8.

Those are incredible numbers. They also underline the opportunity that SPUT has created for big money to invest in uranium.

Consider that the physical uranium vehicle that SPUT took over to get started bought 18 million lbs. U3O8 over 18 years. SPUT has purchased twice that much in seven months, by creating an easily investable entity with ample capacity to scale, in a bullish uranium moment.

By creating the right kind of vehicle at the right time, SPUT attracted those $1.6 billion from new investors.

And that gets to a key point: big money can now invest in physical uranium. Big institutional money requires an investment to have good liquidity, so other big money can move in, and out, as the opportunity evolves, and likes when there is also a good chance that an influx of institutional capital will move the market in their favour.

There was no way to invest in physical uranium that offered these characteristics until SPUT. Now there is and the investment rationale checks lots of boxes: green revolution, commodity during inflationary times, specific anti-Russia investment, and clearly bullish supply-demand fundamentals. Remember, secondary supplies always filled the gap between production and demand but, between overfeeding and financial sequestering and producers buying in the spot market to fill contracts and so on, secondary supplies are drying up.

I was bullish on uranium before. I didn’t know what would prompt the next leg up; turns out Russia invading Ukraine was it. Next up: SPUT should list on the NYSE in a few months, which would likely spark another wave of buying. And when SPUT buys, the price moves.

The chart above, showing the correlation between SPUT’s uranium purchases and the spot price, shows that institutions are getting precisely what they want from this – their moves into SPUT are moving the market in their favour. Those who watch fund flows in the uranium space think this force is only just getting started.

So: late 2021 I was bullish. End Q1, 2022, I am way more bullish on uranium.

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