A Critical Thinkers Review of the Uranium Market: Food for Thought

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A subscriber sent us the following in an email in response to some of our uranium content, and, with their permission, we thought it worth publishing.

A Critical Thinker's Review of the Uranium Market 

START

It is important to recognise the role that new energy technologies, such as breeder reactors, and the development of existing technology will have a part to play in future energy supply. 

In reality, the basic breeder reactor technology has been around for a long time. But it has not been scaled or commercialised yet. The recognition of fast neutron capture producing PU239 was a greater impetus to the Manhattan Project than the recognition of Otto Hahn’ splitting the uranium atom. 

You are also correct in recognizing that the government and the general public make many foolish choices.  The push for battery-powered EVs overlooks the energy source for replacing the displaced fossil fuels and the new infrastructure to support a more robust electric grid.  Germany and California are the Petri dishes for renewable energy, but they have the world’s highest electricity costs and more rolling blackouts.  Germany further suffers from de-industrialization.  Switching to higher-density energy fuels spurred industrialization and higher living standards.  Returning to lower-density fuels results in lower living standards.  Net zero by 2050 is an impossible goal and possibly a false goal. 

Few people consider the fundamental economic question underlying climate change: ‘Do the costs of mitigation exceed the costs of adaptation?’

Extending the list does not strengthen the point. You are correct that the disparity between investor knowledge and energy reality is stark. The average energy investor is the student of some newsletter writer.  A knowledgeable energy investor often looks for the best way to get through the maze.  The recent coup in Niger and the US support of nuclear power alter the maze unexpectedly.  No one has fully grasped the implications of Kazakhstan's reducing uranium production, and also most of Africa’s uranium production going East. It is great for uranium investors but not so great for consumers.

The Incentive Price Argument

The incentivized price argument argues increasing uranium prices incentivize more uranium production!

This argument is not new.  The argument refuted the peak oil theory and the dire predictions of The Club of Rome.  The argument is that increased uranium prices encourage more exploration and risk-taking to induce more production of scarce resources.   The incentivized price argument only applies to brownfield and greenfield mines that have restart and start periods of a few years.  

Brownfield mines are primarily small, high-cost, US mines that closed in lower, uranium price regimes.  

Greenfield mines are new mines that have finished the protracted exploration and development.  

After increasing uranium prices incentivize all brownfield and greenfield mines, nothing remains to incentivize, and the uranium price stabilizes. The incentive argument applies weakly to exploratory and developing mines since they cannot increase supply for 20 to 40 years.  

Three Outcomes Exist

(a). The incentivized uranium price successfully equates supply and demand for a protracted period, and the increased uranium price does not make nuclear power exceed the costs of its rival power sources,

(b). The incentivized price does not equate supply and demand, and

(c). The incentivized price is too high, and the cost of nuclear power exceeds that of its rival power sources.

Outcome (a) is the golden outcome and the most unlikely outcome.  All studies predict uranium demand will exceed uranium supply by 2040, with the incentivized argument applied strongly to explorers and developers.

Outcome (b) occurs when all the incentivized brownfield and greenfield production fails to equate supply and demand.  Further increases in uranium demand and prices effectively decrease uranium demand and limit prices through fuel switching and fuel substitution.  The uranium market then mimics the problem of dividing 100 pairs of shoes among 200 people.  Solving the shoe problem leaves 100 people with shoes and 100 people with none or with substitutes.   

For utilities, the analogous equilibrium occurs when some utilities shut down or substitute natural gas plants for nuclear reactors and switch fuels from uranium to natural gas.  Estimates for the equilibrium uranium price or term uranium price vary widely, but fuel switching likely moderates the uranium price and likely explains apparent utility complacency.  The utility always has an alternative to rising uranium prices.

Outcome (c) manifests ignorance of microeconomics and the theory of the firm among uranium analysts. These analysts and uranium Investors place too much emphasis on the previously spent reactor build costs that economists view as sunk, irretrievable, and immaterial.  That emphasis prohibits analysts from ignoring past expenditures and concentrating on future costs and revenues. The firm's value is the discounted value of future revenues minus future costs.  The cost of a previously built reactor does not enter that calculation.  If increasing reactor fuel costs makes nuclear power more expensive than natural gas power, utilities will trade-reactors for gas turbines. They will switch from uranium fuel to natural gas fuel.  The fuel switching point occurs when the marginal operating cost of an existing reactor exceeds the total average cost of a new natural gas plant.  With planned and proposed reactors, reactor build costs are no longer sunk, and the appropriate fuel switching point occurs much lower, where the average total cost of a kWh from a prospective reactor exceeds the average total cost of a kWh from a new natural gas plant. With the high costs of billions of dollars for recertification and relicensing, the relicensing and recertification costs become capital costs, and the reactor extension criterion becomes the new reactor build criterion.  Government intervention with a carbon tax may bias the choice of nuclear power.  

The current disparity between nuclear and natural gas power may not be large since a natural gas plant is essentially a jet engine.  A combined-cycle gas plant exhausts the heat of a gas turbine on a water boiler.  Among non-nuclear plants, combined cycle gas plants usually have the highest efficiency at around 45%, well below the Carnot efficiency.  The current and dominant pressurized water reactors have 33% to 37% efficiencies comparable to combined-cycle fossil-fuel plants.  The comparability of efficiency between pressurized water reactors and natural gas plants stems from comparability in the steam-generating cycles and ignores greater waste heat from a fission reaction. Liquid sodium-cooled reactors in the generation 4 mix will have higher efficiencies with higher operating temperatures and greater heat-transfer rates. 

In addition to ignoring reactor build costs as sunk, typical uranium market analysts assume existing marginal operating reactor costs never exceed fresh natural gas plant total average costs.  That assumption perpetuates the belief that utilities have an inelastic demand for uranium fuel, with fuel costs natively interpreted as U3O8 costs.  The reactor fuel cost consists of U3O8 mining, conversion, enrichment, and fuel fabrication costs.  In the Dustin Garrow interview dated 21 July 2024,

Western allies’ strategic shift away from Russian uranium -Dustin Garrows - YouTube

Garrow ballpark's historical U3O8 costs usually constitute 10% of existing reactor operating costs.  Assuming the increasing U3O8 cost is negligible in that metric may be unreasonable. Still, that assumption grossly understates the fuel cost as a percentage of reactor operating costs, with additional conversion and enrichment costs increasing by factors approaching 10.  Therefore, the U3O8 fuel cost component as a percentage of reactor operating costs may be much more significant than the historical 10%, and the marginal operating cost of an existing reactor may be much closer to the average total cost of a new natural gas-fired plant.  When that cross-over fuel cost occurs, further uranium demand will decline, and the uranium term price will reach a maximum. Given the probable closeness to the crossover price, the current U3O8 term price may be close to the maximum term price.  If this analysis is accurate for existing nuclear reactors, the analysis extends to planned and proposed reactors with more force. 

Since multiple factors influence fuel costs and other non-fuel operating costs, and since some imprecision may exist In defining operating costs, some inaccuracy may exist in Garrow’s historical 10% for U3O8.

Economics of Nuclear Power Plants

(1). Fuel costs account for about 28% of a nuclear plant's operating expenses. As of 2013, half the cost of reactor fuel was taken up by enrichment and fabrication, so the cost of the uranium concentrate raw material [U3O8] was 14% of operating costs.  That 14% figure is sufficiently close to Garrow’s ballpark 10%to guarantee accuracy.  The rapid increases in enrichment and conversion costs may increase the total fuel cost (comprising U3O8, conversion, enrichment, and fabrication) and the fuel percentage of operating costs above the historical 28%.  That immediately destroys the argument for inelastic U3O8 demand.  Another fallacy is that increasing enrichment costs increases U3O8 demand through overfeeding.  Limits on conversion capacity limit U3O8 demand by limiting the conversion of U3O8 to the enrichment stock UF6.

(2).  The World Nuclear Agency (WNA) graph of expected U3O8 demand exceeding U3O8 supply for decades derives from false assumptions and represents fantasy.  Adding fuel switching to the WNA analysis eliminates the gap between the supply and demand curves, and the fuel switching argument collapses the demand curve on the supply curve.  Ironically, the supply and demand curve gap speeds up Western fuel switching since Western banks usually do not finance reactors without sufficient fuel contracts to amortize the reactor build loan.

Then, the expansion of nuclear power occurs by accurate supply and demand analysis with the equivalence of marginal existing reactor operating costs with average total costs of new natural gas plants and with the equivalence of total average costs of new reactors with total average costs of new natural gas plants.  Myriad fluid factors can affect the cost parameters such as carbon taxes, reduced rector building costs, new reactor designs, altered energy regulations, and improved gas and uranium exploration and production techniques. The WNA analysis ignores reprocessing and breeder reactors that augment supply without mining.

Two Certainties Exist

• The current uranium market analysis is fallacious and borders on fiction
• The current energy analysis and the accompanying energy policy are flawed

(3).  Thirty years ago, Stanford Penner at UCSD concluded renewable energies would only be effective on the margin and that society would need to make a Faustian choice between fossil fuels with CO2 emissions and Nuclear power with long-lived nucleotides.  Opponents can easily dismiss amateur speculations, but they cannot easily dismiss Penner’s speculations since Penner was one of the world’s leading thermos-dynamicists and a leading scholar in energy engineering.  As a former editor of “Energy, The International Journal,” Penner was constantly aware of energy issues. 

Doubting Penner’s trenchant conclusions elicits Mike Tyson’s adage: “Everyone has a plan until they get punched in the face.”  However, the choice between fossil fuels and nuclear power may be conditioned by the development or the neglect of breeder reactors.  Even thirty years ago, Penner believed breeder reactors were necessary to extend nuclear power from a few hundred years to a few thousand years.  Given the recent nuclear renaissance, the amount of available uranium may lessen the life of nuclear to fewer than a few hundred years without developing breeder reactors.  This possibility seems inevitable if the following excerpt from the Globe and Mail report is accurate: 

“By 2040, the report estimates uranium demand at 130,000 thousand tons;  but by the end of the decade (presumably 2030),  the report also estimates supply topping out at  85,000 tons uranium.”

(4).  The Globe and Mail report makes no sense since supply never equals demand at any uranium price.  If valid, this report replicates the repetitive argument of dividing 100 pairs of shoes among 200 people.  Then, many planned and proposed reactors must be cancelled.  Many existing reactors must eventually close with depletion among existing brownfield and greenfield mines.

Only 3 arguments contradict the report's logical consequences.

(a).  The report is incorrect, and sufficient uranium mines will develop in an orderly manner without gap shortages from long mine development times.  This is the flawed Rick Rule argument: “Either the price of uranium goes up, or the lights go off. I believe the lights will stay on, and the price of uranium will increase.”  The logical fallacy here is the ignorance of fuel substitution. Eg: China’s recent Thorium plant launch.

(b).  Only large quantities of mobile inventories can counter gap shortages from long mine development times.  This is Warren Irwin’s argument, but it seems unlikely.

(c).  The rapid deployment of Breeder Reactors, with one breeder reactor fueling 10 pressurized water reactors, solves the supply problem.  Unfortunately, the development of breeder reactors is confined to small prototype breeder reactors in China and Russia.

Ends

Food for thought, and open to debate. If you have knowledge or experience in energy economics, please contact us. Whether you agree or disagree, your thoughts and feedback are very welcome. If you can respond with facts and data rather than just your feelings, that would be much appreciated.

The above commentary and some of the significant events, such as uranium mines being put into care & maintenance, the emergence of financial groups buying physical uranium and world shortages of acid by covid initiated supply-chain issues, make me wonder if perhaps I was drinking the Kool-Aid in 2019. It’s clear that the early adopters of the uranium thesis had no more than a superficial view of the economic landscape, and it has taken a lot of fortuitous events to bring forward the timing of what now could be a rewarding 3 or so years for investors.

Still, I’ll take it. Moreover, we will proceed with a more realistic and cautious view of what‘ experts’ say, no matter how loudly they talk and how passionate they appear. Those experts have positioned themselves financially to front-run us and, therefore, are incentivised to drive momentum in the market irrespective of industry realities. We include the WNA in this group of experts; after all, they are financed and assisted by uranium companies and, therefore, find it circumspect with some of the available data. Welcome to one lesson from the world of investing 101.

Stand Out Companies Taking Advantage of the Uranium Equity Resurgence:

IsoEnergy Ltd. (TSX: ISO) (OTCQX: ISENF) presents a compelling opportunity for investors seeking exposure to the uranium sector. As a globally diversified uranium company, IsoEnergy boasts a portfolio of assets across Canada, the U.S., Australia, and Argentina, offering a balanced mix of near, medium, and long-term growth potential. The company's flagship project, the Larocque East Project in Canada's Athabasca Basin, hosts the Hurricane deposit, which claims the world's highest grade Indicated uranium Mineral Resource. This high-grade asset underscores IsoEnergy's upside in exploration. Complementing its exploration prospects, IsoEnergy holds a portfolio of permitted, past-producing conventional uranium and vanadium mines in Utah. These assets are currently on stand-by, strategically positioned for rapid restart as market conditions improve. Further enhancing their value, IsoEnergy has secured a toll milling arrangement with Energy Fuels Inc. for these Utah properties. This combination of high-grade exploration potential and near-term production capabilities positions IsoEnergy as a dynamic player in the uranium market, offering investors exposure to multiple stages of the uranium value chain.

Premier American Uranium (PUR) presents a compelling investment opportunity in the U.S. uranium sector. The company's strategy centers on consolidating, exploring, and developing uranium projects across America, with a particular focus on three historically significant uranium-producing regions: the Grants Mineral Belt in New Mexico, the Great Divide Basin in Wyoming, and the Uravan Mineral Belt in Colorado. PUR's extensive land holdings in these areas, which boast a rich history of past production and contain current and historic uranium resources, form the foundation of its asset portfolio. The company is actively advancing its projects through ongoing work programs, aiming to unlock the value of these strategic holdings. PUR's market position is further strengthened by the backing of prominent investors, including Sachem Cove Partners, IsoEnergy Ltd., Mega Uranium Ltd., and various corporate and institutional stakeholders. Led by a team with extensive U.S. uranium experience, PUR is well-positioned to capitalize on the current uranium market dynamics, which are the most favorable for over a decade. This combination of strategic assets, experienced management, strong financial support, and favourable market conditions makes PUR an attractive option for investors seeking exposure to the resurgent U.S. uranium sector.

ATHA Energy offers investors a compelling opportunity in the uranium sector, positioning itself as a key player in the pursuit of clean energy solutions. The company's portfolio is strategically balanced, featuring three wholly-owned post-discovery uranium projects with significant potential. The Angilak Project in Nunavut and CMB Discoveries in Labrador boast historical resource estimates of 43.3 million lbs and 14.5 million lbs U3O8, respectively, providing a solid foundation for future development. Additionally, ATHA's recent high-grade uranium discovery at the GMZ site in the Athabasca Basin further enhances its asset base. What sets ATHA apart is its unparalleled land package, encompassing 8.1 million acres across two of the world's most promising regions for uranium discoveries. This extensive exploration potential, combined with established resources, positions ATHA to potentially capture significant value as the demand for uranium grows. The company's strategic positioning is further bolstered by its 10% carried interest in key Athabasca Basin exploration projects operated by industry leaders NexGen Energy Ltd. and IsoEnergy Ltd. This diversified approach, blending established resources with vast exploration potential and strategic partnerships, presents a multi-faceted investment proposition in the evolving uranium market.

Energy Fuels (NYSE American: UUUU; TSX: EFR) stands out as a premier U.S.-based critical minerals company, offering investors exposure to multiple high-demand sectors. As the leading uranium producer in the United States, Energy Fuels supplies natural uranium concentrates to major nuclear utilities, supporting carbon-free energy production. The company has recently expanded its portfolio, venturing into rare earth element (REE) production with mixed REE carbonate output beginning in 2021 and launching commercial-scale separated REE production in 2024. This diversification extends to vanadium production and the potential recovery of radionuclides for cancer treatments, positioning Energy Fuels at the forefront of critical mineral supply chains. The company's asset base is anchored by two key uranium production centers in the U.S.: the White Mesa Mill in Utah, the nation's only operating conventional uranium mill with a licensed capacity exceeding 8 million pounds of U3O8 annually, and the Nichols Ranch ISR Project in Wyoming, currently on standby with a 2 million pound U3O8 annual capacity. Energy Fuels has expanded its global footprint by acquiring the Bahia Project in Brazil, which is believed to contain significant titanium, zirconium, and REE resources. Complementing these production assets is one of the largest NI 43-101 compliant uranium resource portfolios in the U.S., alongside various uranium and uranium/vanadium projects in different stages of development. This comprehensive asset base and the company's diversified production capabilities present a unique value proposition for investors seeking exposure to critical minerals essential for clean energy and advanced technologies. With its primary listing on the NYSE American under "UUUU" and a secondary listing on the Toronto Stock Exchange as "EFR," Energy Fuels offers investors a stake in a company strategically positioned to capitalize on the growing demand for critical minerals in the global transition to clean energy.

Global Atomic (GLO) presents investors with a unique opportunity to gain exposure to the uranium and zinc markets through its dual-focus business model. The company's Uranium Division is advancing the fully permitted, high-grade Dasa Deposit in Niger, discovered by Global Atomic's geologists in 2010. With the "First Blast Ceremony" on November 5, 2022, and processing plant commissioning scheduled for Q1 2026, the Dasa project is on track to become a significant uranium producer. The company's exploration success extends beyond Dasa, with three additional uranium deposits identified in Niger, promising further growth potential. Complementing its uranium assets, Global Atomic's Base Metals Division holds a 49% stake in the Befesa Silvermet Turkey, S.L. (BST) Joint Venture. This modern zinc recycling operation in Iskenderun, Türkiye, recovers zinc from Electric Arc Furnace Dust (EAFD) to produce high-grade zinc oxide concentrate for global zinc smelters. The joint venture partner, Befesa Zinc S.A.U., a European market leader in EAFD recycling with a 51% stake in BST, brings significant industry expertise and market access. This diversified approach offers investors exposure to the growing uranium market, driven by increasing demand for clean energy, while also benefiting from the steady cash flow generated by the zinc recycling business. Global Atomic's strategy combines the high-growth potential of uranium mine development with the stability of an established zinc production operation, creating a balanced investment proposition in the mining and metals sector.

enCore Energy (EU), positioning itself as "America's Clean Energy Company™," offers investors a focused play in the domestic uranium sector. The company stands out as the only U.S. uranium producer with multiple operational production facilities, all utilizing In-Situ Recovery (ISR) technology. This method, co-developed by enCore's leadership team, is known for its efficiency and minimal environmental impact. enCore's management brings extensive expertise in ISR uranium operations and the broader nuclear fuel cycle, providing a strong foundation for operational excellence. The company has already demonstrated production success in South Texas and is poised for growth with a pipeline of future projects. Key among these are the Dewey-Burdock project in South Dakota and the Gas Hills project in Wyoming, which promise to expand enCore's production capacity. Additionally, the company holds significant uranium resources in New Mexico, along with non-core assets and valuable proprietary databases, offering the potential for further value creation. EnCore's commitment to working collaboratively with local communities and indigenous governments underscores its focus on sustainable and responsible development. EnCore presents an opportunity for investors to gain exposure to the growing demand for domestic uranium production, driven by the increasing role of nuclear energy in clean power generation. The company's established production base, growth pipeline, and experienced management team position it as a key player in securing America's nuclear fuel supply chain.

Bannerman Energy (ASX: BMN, OTCQX: BNNLF, NSX: BMN) offers investors exposure to the uranium sector through its flagship Etango Project in Namibia. The project boasts a large-scale uranium resource and has undergone extensive feasibility studies, including a recent Definitive Feasibility Study for an 8Mtpa operation completed in December 2022. Etango's mining license was granted in December 2023, with early development works now underway. The company is progressing towards a Final Investment Decision targeted for 2024, supported by ongoing Front End Engineering and Design studies and project finance activities. Bannerman's recent Scoping Study (February 2024) demonstrates Etango's potential for expansion to 16Mtpa or life extension, showcasing the project's scalability and leverage to higher uranium prices. With Namibia's supportive mining jurisdiction and Bannerman's commitment to responsible development, Etango represents a significant opportunity in the growing uranium market.