Trends in uranium spot pricing vs the long term supply contract price in the context of nuclear power's place in the World's electricity supply of the future. By Thomas S. Drolet (July 2013)

1. Trends
in
Uranium
Spot
Pricing
vs.
the
Long
Term
Supply
Contract
price
in
the
context
of
Nuclear
Power’s
place
in
the
World’s
electricity
supply
of
the
future.
By:
Thomas
S.
Drolet
15
July
2013
President,
Drolet
and
Associates
Energy
Services,
Inc.
tdrolet@tsdenergy.com
Vivien
Dizil's
article
in
Uranium
Investing
News
of
4
July
2013
accurately
and
succinctly
captures
the
short-­‐term
low
U3O8
spot
price
situation
of
the
moment.
Currently
Long-­‐
Term
Supply
Contract
(LTSC)
pricing
is
steady
in
the
$
57/lb.
range.
Specifically
she
said;
"Sellers
are
reluctant
to
sell
large
quantities
at
such
depressed
prices;
however,
they
are
willing
to
sell
smaller
quantities
at
this
lower
price
of
$39.50
US/lb.
Accounting
for
the
majority
of
the
purchases
were
utilities,
who
bought
from
producers
and
traders.
The
2
major
reporting
firms
(UxC
and
Trade
Tech)
indicate
that
utilities
are
still
on
the
lookout
for
low-­‐priced
sales."
First
of
all
the
whole
question
of
what
will
happen
to
the
original
54
nuclear
reactors
in
Japan
is
a
key
point
in
understanding
this
price
of
future
U3O8
issue.
It
deserves
some
special
attention
as
to
what
may
happen
with
spot
and
long-­‐term
pricing
in
the
future.
Drolet
Energy
believes
that
some
industry
spokesmen
are
somewhat
aggressively
hyping
the
recent
major
media
focus
on
reactor
restart
potential
in
Japan.
The
Japanese
Government,
the
9
Nuclear
Electrical
Utilities
together
with
big
business
are
all
united
in
wanting
as
many
as
possible
of
those
reactors
back
up
ASAP
due
to
the
horrendous
increase
in
costs
for
importing
LNG,
coal
and
diesel
gensets
required
for
replacement
electricity
generation.
Counteracting
that
goal
is
the
Japanese
public's
fear
and
distrust
of
Nuclear
Power
and
leaders
in
Government,
several
Utilities
and
Big
Business.
The
methodical
and
somewhat
pedantic
approach
of
the
newly
empowered
Japan
Nuclear
Regulatory
Authority
(NRA)
will,
on
its
own,
slow
the
desired
restart
schedule.
The
NRA,
the
general
public
and
the
local
Prefecture
Government
sentiments
will,
in
the
end,
in
our
opinion,
slow
the
restart
program
down
considerably.

2. Not
to
be
underestimated
is
the
very
important
issue
of
the
extent
in
time
(~20
years)
and
cost
(estimated
at
$150
Billion
+)
to
return
the
Fukushima
Dai-­‐ichi
site
and
the
exclusion
zone
to
some
stable
state
of
decommissioning
and
final
clean
up.
The
April
2013
IAEA
report
detailed
their
recommended
complex
path
to
final
restoration.
The
public
is
focusing
on
this
issue
and
will
maintain
its
heightened
vigilance
and
concern
for
years
to
come.
Today,
because
of
the
original
shutdown
of
all
54
reactors
for
some
22
months,
Japan's
nine
(9)
Nuclear
Utilities
have
a
lot
of
inventoried
nuclear
fuel
from
long-­‐term
supply
contracts
(LTSC)
signed
prior
to
the
March
2011
major
accident
at
Fukushima
Dai-­‐ichi.
Some
of
those
arrangements
could
not
stop
supply
under
'Act
of
God'
contract
considerations
while
all
of
the
original
54
reactors
were
shut
down
in
the
immediate
aftermath
of
the
accident.
There
are
currently
48
reactors
shutdown
with
some
probability
of
restarting
at
some
future
date.
Drolet
Energy’s
guess
is
still
that
the
Japanese
electricity
supply
system
will
end
up
permitting
the
restart
of
5
more
reactors
this
year,
10
in
2014
and
10
more
in
2015.
That
leaves
the
eventual
fate
of
another
approximately
21
reactor
units
still
shut
down
up
in
the
air.
Only
two
of
the
original
54
reactors
are
up
and
running
as
of
today.
Drolet
Energy
believes
that
the
majority
of
the
1960’s
designed
Mark
1
GE
BWR's
(like
Fukushima
Dai-­‐ichi)
will
not
see
the
light
of
day
again
on
technical
and
safety
grounds.
The
remainder
of
the
21
reactors
that
are
not
of
this
early
design
will
also
not
likely
make
it
back
for
a
variety
of
other
reasons
(fault
lines,
location,
local
Prefecture
Government
restrictions
and
general
public
opposition).
As
a
result,
under
the
above
scenario,
there
will
be
available
a
reasonably
major
surplus
of
enriched
uranium
fuel
inventory
whose
uranium
content
can
be
reconstituted
into
fuel
configurations
for
reactors
that
do
make
it
back
into
production
in
Japan.
The
end
result;
Japan's
enriched
uranium
needs
will
have
permanently
reset
to
a
lower
level
of
uranium
feed
demand.
Meanwhile,
Japanese
society,
which
pre
March
2011
already
had
one
of
the
most
well
developed
conservation
and
energy
efficiency
cultures
in
the
industrialized
world,
has
since
doubled
down
in
those
areas
by
necessity.
Furthermore,
even
more
aggressive
conservation
and
energy
efficiency
standards
have
since
taken
hold
with
a
vengeance.
At
the
same
time,
some
energy
intensive
industries
have
been
lost
to
other
Asian
countries
post
Fukushima.
In
other
words
peak
and
chronic
electrical
load
demands
in
Japan
will
be
lower
in
the
post
Fukushima
era.
This
despite
'Abenomics'
in
all
of
its
forms,
which
are
collectively
trying
to
reinvigorate
GDP
and,
through
lower
FX
manipulation,
increase
exports
from
Japan
to
the
world.
But,
let's
balance
off
this
rather
depressing
Japanese
situation
in
a
very
different
worldwide
context.
Factoring
out
approximately
21
reactors
(above
rationale)
in
Japan
has
reduced
the
likely
current
total
of
world
production
reactors
down
to
approximately

3. 414
reactors
from
the
currently
listed
435
reactors
listed
in
many
totals
by
the
IAEA
and
other
authourities.
That
figure
may
be
slightly
lower
with
a
few
shutdowns
in
the
USA,
Germany
and
Switzerland,
but
offset
on
the
upside
a
bit
by
some
recent
announcements
from
Pakistan,
the
Czech
Republic
and
the
UK.
As
a
result,
in
the
next
few
years,
and
until
new
build
reactor
programs
start
to
put
generators
on-­‐line,
world
uranium
supply
needs
will
likely
lower
to
the
155
Million
lbs./year
range
from
the
approximate
170
+
Million
lbs./
year
in
2011.
In
this
mix
of
issues
we
have
the
fact
that
most
major
Nuclear
Power
nations
have
substantial
strategic
inventories
of
enriched
uranium
that
can
be
made
available
to
their
own
nation
state
nuclear
power
reactors
if
the
need
arises.
We
also
have
the
end
of
the
Megatons
to
Megawatts
program
(M2M).
Despite
the
above
ending
of
M2M
in
2013,
Drolet
Energy’s
opinion
is
that
we
will
have
enough
uranium
available
to
supply
existing
reactors
and
the
few
new
reactors
for
the
next
~2+
years.
Now
for
the
good
news
for
the
overall
world
uranium
supply
industry.
Over
the
next
3
decades,
with
the
massive
new
reactor
build
programs
on-­‐going
in
Russia,
China,
India,
UAE,
Saudi,
some
South
American
countries
etc.,
(some
67
under
construction
today
with
a
further
potential
of
250
+
more
over
the
next
3
decades),
the
demand
for
new
mined
supply
will
gradually
sky
rocket
towards
~
300
Million
lbs./year
by
2040.
The
future
does
indeed
look
very
good
for
new
uranium
mine
supply
and
attendant
prices—
both
spot
and
long-­‐term
contract.
It’s
just
that
Drolet
Energy’s
definition
of
'future
price
increases'
as
being
defined
currently
as
later
this
year
of
2013
by
some
writers,
is,
in
fact,
'that
future
plus
a
few
years'
(mid-­‐late
2015
and
beyond).
The
good
news
is
that
the
new
mine
supply
industry
has
a
few
more
years
of
needed
breathing
space
to
reopen
shuttered
mines
and
bring
on
new
mines
of
all
types
in
many
countries.
The
future
for
uranium
pricing
(spot
and
LTSC)
post
mid
to
late
2015
and
beyond
looks
very
promising.
With
the
above
thoughts
taken
into
account,
there
is
a
chance
for
2013-­‐2015
spot
or
LTSC
price
movements
to
be
in
either
direction.
We
should
play
close
attention
to
what
is
happening
with
Kazakhstan’s
move
from
a
reliance
on
spot
pricing
sales
towards
long-­‐
term
supply
contracts
(especially
with
Russia)
and
the
speed
of
bringing
on
reactors
in
China.
Both
of
these
major
supply
and
demand
issues
could
affect
pricing
issues
almost
overnight.
There
are
basically
3
types
of
uranium
extraction
techniques:
• In
situ
recovery
in
shallow
to
mid
depth
formations
(per
USA,
Australia
etc.)
• Conventional
Open
Pit
and
Underground
Shaft
mining
(per
Athabasca
Basin
etc.)
in
sallow
to
semi
deep
formations.
• Very
near
surface
trenching
deposits
(Argentina,
Australia
etc.)
In
the
near
term,
companies
using
in
situ
recovery
(ISR)
techniques
(example;
USA,
as
in

4. Texas,
Colorado,
New
Mexico,
Wyoming
etc.)
have
much
lower
capital
cost
structures
operating
on
lower
concentration
uranium
deposits.
The
time
to
production
is
relatively
fast
with
low
CAPEX
requirements.
Some
42
percent
of
today's
worldwide
U3O8
production
comes
from
ISR
operations.
Companies
like
Ur-­‐Energy
(URE:
TSX)
come
to
mind.
By
the
way,
the
reason
URE's
share
price
is
up
so
much
lately
is
that
they
have
a
well
managed
dispersion
of
long
term
supply
contracts
with
reliable
off
-­‐takers
like
USA
Nuclear
Utilities.
A
well
managed
company.
There
are
many
other
ISR
companies
that
will
benefit
in
the
short
term
for
the
same
reasons
(examples;
Uranerz
URZ:
TSX,
Energy
Fuels
Inc./Strathmore
Minerals
Corp…EFR
and
STM
on
the
TSX).
I
will
also
mention
one
progressive
ISR
company
listed
on
Australian
ASX;
Peninsula
Energy
–
(PEN.ASX)
–
PEN
which
owns
two
advanced
projects
–
the
Lance
ISR
in
Wyoming,
and
the
Karoo
in
South
Africa
–
both
with
a
solid
resources
of
about
50
million
lbs.,
and
both
with
some
blue
sky
upside.
For
instance,
in
our
own
back
yard
of
southern
Alberta
Canada,
there
is
a
very
innovative
new
private
start-­‐up
company
(Ualta
Energy
Ltd.)
that
has
uncovered
major
deposits
of
uranium
in
the
mid
shallow
ground
SE
of
Lethbridge.
The
company
is
currently
in
the
market
for
funding.
The
company
will
use
the
twin
technologies
of
ISR
and
oil
and
gas
industry
horizontal
drilling
techniques.
The
combination
of
these
technologies
means
fast
time
to
production,
low
CAPEX
and
the
use
of
tested,
tried
and
proven
horizontal
drilling
techniques
used
throughout
the
oil
and
gas
industry.
The
main
economic
potential
of
the
twin
Ualta
properties
are
considered
to
be
two
giant
uraniferous
bone
phosphate
deposits
hosted
in
two
large
sandstone
repositories.
For
the
longer
term
requirement
for
massive
new
quantities
of
uranium
needed
over
the
next
3
decades,
we
have
the
much
higher-­‐grade
uranium
deposits
in
hard
rock
areas
such
as
the
eastern
ridge
zone
of
the
Athabasca
Basin.
There
are
also
major
new
E&P
activities
and
finds
in
the
western
and
northern
ridge
zones
of
the
Athabasca
as
well.
The
downside
of
Athabasca’s
new
production
capability,
in
the
short
term,
is
that
the
E&P
time
and
high
mining
capital
costs
will
mean
more
time
and
much
higher
CAPEX
is
required
to
bring
these
much
needed
deposits
on-­‐line.
That
said,
the
major
supply
capability
from
these
high
grade
deposits
in
the
Athabasca
will
be
sorely
needed
for
the
major
reactor
build
out
programs
in
so
many
of
the
worlds
nations.
The
majors
in
the
Athabasca,
like
Cameco
(Cigar
Lake
intended
commissioning
and
opening
etc.),
Areva
and
Denison
(DML
and
its
recent
acquisition
of
Fission
Energy
FIS:
TSXV),
and
the
up
and
coming
E&P
Juniors
(just
a
few
of
many
examples;
Alpha
Minerals
AMW:
TSXV,
Athabasca
Uranium
UAX:
TSXV,
and
Lakeland
Resources
LK:
TSXV)
may
end
up
eventually
being
acquired
by
these
same
majors
or
being
partnered
during
the
E&P
stages
with
reactor
end
user
corporations.
Collectively,
the
major
portion
(~
60%)
of
the
base
long-­‐term
North
American
and
World
uranium
supply
will
have
to
come
from
these
new
conventional
open
pit
and
underground
shaft
mining
discoveries.
New
shallow
trench
supply
from
South
American
countries
like
Argentina
will
round
out
new
uranium
supply
capability
(example:
U3O8
Corp:
UWE:
TSX—they
also
have
a
multi

5. mineral
[Uranium,
vanadium,
phosphates]
opportunity
in
Columbia—the
Berlin
Project).
On
the
issue
of
U3O8
spot
vs.
Long
Term
Supply
Contract
(LTSC)
price
question,
the
determining
factor
to
watch
closely
will
be
the
LTSC
price.
Yes,
the
low
spot
prices
of
today
may
mean
short
to
mid-­‐term
sweat
and
stress
to
investors
and
to
the
overall
industry,
but
the
LTSC
is
what
should
be
watched
carefully.
Various
reporting
agencies
(UxC
etc.)
do
put
out
an
estimate
of
the
current
average
long-­‐term
price
occasionally.
However,
for
obvious
competitive
reasons,
the
pricing
and
duration
of
these
contracts
is
a
fairly
closely
guarded
data
point.
For
sustainable
major
new
supply
from
new
mine
sources
to
be
committed
and
big
money
spent,
we
will
need
the
world
LTSC
price
to
be
seen
to
be
rising
and
maintaining
a
level
of
the
mid
$70’s/lb.
of
U3O8.
Finally,
a
big
picture
comment
based
on
Drolet
Energy’s
background
in
the
large
Electrical
Utility
reactor
user
world.
Reliable
and
sustainable
electricity
generation
in
any
country
needs
a
balance
of
many
generating
sources
in
our
ever-­‐increasing
urbanization
of
the
world’s
populations.
We
need
more
near
baseload
‘dense’
energy
supply
systems
like
new
and
better
designs
of
Nuclear,
more
Hydroelectric
(mostly
run
of
the
river
ROR),
more
Natural
Gas,
and
“yes”
more
efficient
Coal
generation
and
some
Geothermal.
Until
economic
and
reliable
energy
storage
systems
are
available,
renewables
like
wind
and
solar
will
remain
a
relatively
small
component
of
supply
systems
on
a
worldwide
averaged
basis.
However,
should
economic
renewable
energy
storage
systems
be
developed
for
wind
and
solar,
then
Drolet
Energy
expects
these
systems
to
quickly
ramp
up
from
the
current
~2
%
of
electricity
to
~
8
%
of
electricity
generation
supply
on
a
world
averaged
basis.
Large
Generation
3+
Nuclear
reactors
(1000-­‐1400
MWe)
will
dominate
in
nuclear
supply
near-­‐term
(examples;
Toshiba/Westinghouse,
Hitachi/GE,
Areva,
Russian
VVER’s,
new
Chinese
systems
etc.,).
In
the
longer
term,
uranium
fueled
Small
Modular
Reactors
(SMR’s—approx.
150-­‐300
MWe)
and
Molten
Salt
Reactors
(MSR’s
-­‐-­‐-­‐approx.
100-­‐300
MWe)
will
take
their
emerging
place
based
on
safety
and
perceived
(not
yet
proven)
economic
grounds.
SMR’s
will
enable
electrical
utilities
to
better
match
grid
growth
needs
with
annual
demands.
Also,
though
in
the
very
early
stages
of
development,
as
MSR’s
progress
through
the
R&D,
demo
and
prototype
stages,
we
would
have
available
a
system
that
is
conducive
to
supplying
a
very
high
thermal
heat
source
required
by
some
large
industrial
concerns
as
well
as
being
a
safe
and
proliferation
resistant
electricity
supply
system
to
the
grids
of
the
world.
Some
future
versions
of
the
MSR
may
use
thorium
in
some
cases…
but
most
will
concentrate
on
uranium
as
the
base
fuel
source.
Thomas
S.
Drolet.
1-­‐828-­‐493-­‐1523
tdrolet@tsdenergy.com