2023 Uranium Outlook: Is Nuclear Power Out of the Penalty Box?

Wednesday, 11 January 2023 | 20 | 25.47

Podcast Transcript

Ed Coyne: Welcome to 2023. You're listening to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Director at Sprott. With me today are two reoccurring guests, Per Jander and John Ciampaglia. Gentlemen, thank you for joining me. Per, I know you had been on the road quite a bit in 2022, and I thought this would be a great time to take a look back at what stood out for the year, what happened in the year, what was exciting, and what defined 2022. 

Per Jander: What a year it has been, right? I would say the overall increase in momentum building for nuclear energy. It was very strong at the end of last year. Then you look at this year, and it has just continued to build real momentum and start to snowball.

You're starting to see it take a real effect now. It started with policy decisions and general guidelines, but now it's translating into nuclear reactors being built, reactors being announced, existing reactors getting life extensions, and even reactors that are slated for decommissioning, like the ones in California and even Germany, coming back and getting a new life. The overall strong increase in demand and the general environment around nuclear energy have been the most positive thing of the year for me.

The thing that is completely impossible to disregard is the geopolitical development with the Russian invasion of Ukraine. It shifted focus to energy security and how that has affected countries, not only in Europe, but all around the world, when governments began to realize that they cannot be too dependent on other countries regarding energy security. You need to be in charge of your own destiny.

One reason for doing that is to ensure that you have a steady supply of fuel, whatever that may be, coming into your country. But another thing — again, building the case for nuclear energy so well — is that you don't refuel a nuclear power station very often. You only refuel it once a year, once every two years. Based on that, you can really have your fuel on site and you're not very sensitive to disruptions, supply interruptions, and geopolitical instability. That has started to hit home with politicians and policymakers. These things combined have made this year one of the most positive for nuclear energy in general as far as I've been involved, and it's about 20 years now. 

Ed Coyne: John, how about on your side? You come at it from a little different angle. What stood out for you in 2022 as it relates to uranium?

John Ciampaglia: Thanks, Ed. I echo Per's comments. It's been an incredibly eventful year with many events that nobody could have ever imagined playing out. But for me, it boils down to two big themes. One, I feel like nuclear energy has finally shaken its pariah status among many countries worldwide. It feels like it's finally out of the penalty box.

Really, what's driving that is the need to decarbonize. Clearly, nuclear is going to be a part of the solution. But I think more importantly, this whole theme of energy security, which we've just not had to deal with for so many years, is now really front-and-center.

Just going back to nuclear energy being more included in the narrative around a sustainable energy source, at COP27 [27th Conference of the Parties to the United Nations Framework Convention on Climate Change], we finally saw key language adjusted to include nuclear energy. It may seem very simple, but just including words about low carbon and how they define low carbon energy to make it more inclusive of nuclear energy is really symbolic.

I think the Inflation Reduction Act in the United States is a groundbreaker in terms of finally taking nuclear energy out of the penalty box. I think that will translate into many decisions being made over the coming years that will finally increase the number of operable nuclear power plants. It's essentially plateaued for the last almost 25 to 30 years now. I believe we will see a net addition to new power plants over the coming years as more and more countries shift back to nuclear, including life extensions and restarts. This growth has been very flat, as I mentioned, for a long time, and I think it will finally break out.

But circling back to energy security, which I think has been just a huge theme. Bloomberg recently published an article saying that Europe has spent an extra trillion dollars on energy since the war broke out in February 2022.

That is an astonishing amount of wasted money for higher energy prices, whether for electricity generation, heating, or industrial processes. That has a massive drag on the economy. It's displaced many industries and businesses. It's impacting consumers and their ability to pay for energy and their discretionary spending.

I do think for 2023, the theme of energy security is going to be very dominant. It's just been unleashed, this issue that we're now facing around how to procure reliable and affordable energy in the world right now, given where we are. The world needs to reallocate the money it's spending on higher energy prices into longer-term sustainable forms of secure energy.

Ed Coyne:  I think you said two key words: reliability and affordability. That seems to transcend across basically all markets these days. That brings me really to the new year, 2023. What are some of the things as investors look to this space? Per, let’s start with you. As investors look to this space going forward, what are some key things they should watch out for or track as we go into 2023?

Per Jander: Definitely keep an eye on uranium prices, not just the spot price, but I think the long-term price. Clearly, many utilities have shifted their supply away from Russia, not just when it comes to uranium, because Russia is not that big in supplying uranium, but the other components of the fuel cycle, such as conversion and enrichment.

The utilities that were dependent on Russian supply have been instructed to shift away from it, partially from their boards but even from society itself. More and more are doing it. Even while they're taking deliveries of existing contracts, they are writing no new contracts with the Russian supply as of last year.

Many utilities are getting to that now, and it takes a while to do these things. It might have been frustrating when people thought, "Well, how come the price is not moving more?" Well, it takes time. First, if you're a utility, you need to sort out your supply of fuel fabrication, including the bundles that you put the uranium inside. That is very technically complex and it takes quite a while to sort out all those details.

I just returned from a two-week trip to Europe where I met with quite a few utilities with Russian-designed reactors. They have just finalized or are in the final stages of completing these contracts with Western suppliers of Russian-designed fuels. When they have those in place, that's when they can come out and start buying uranium. It's about to happen in the next, say, three to six months.

This is not something that happens overnight. It's not a big catch-up effect where everything hits the market at once, but there are quite sizable volumes. It's in a period when there is fairly tight supply in the next, say, between 2023 to 2027, 2028. You're not going to see new supply coming into that time. Supply is already tight and there will be some competition for that material. In simple supply and demand economics, that means that the prices will have to go up. That's something I definitely think they should keep an eye on.

You will definitely not be able to see when this demand hits the market because it's just not announced. It's a lot of confidentiality around it. But you will be able to see once a month when the price reporters publish end-of-month prices -- that's when you can start to see the effect on this. Something that's very exciting to me, another topic is on the effect potentially of the green taxonomy in the European Union, in the UK. South Korea has also a similar framework, and the effect that can potentially have on investors.

Ed Coyne: John, to that point. For you, 2023 is just around the corner, of course. What should investors be focused on as it relates to the general markets, meaning the energy markets, [and] the uranium markets? But also, what should they be looking at Sprott? Is there anything that we're doing that could be interesting for 2023 that investors should be focused on or looking out for?

John Ciampaglia: I think with respect to uranium, it's obviously been a bit of a roller coaster year. We started off the beginning of 2022 at about $42 a pound for U308 and quickly popped up to $63 a pound in April on the back of speculation that there could be sanctions against Russia with respect to uranium and services. 

As that speculation dissipated, for a number of reasons, prices meandered between $48 and $52 a pound. It's been in a very tight trading range for a number of years. While the price of uranium is up 15% for the year, it's not too dissimilar to what's happened in a lot of commodities. If you take a look at oil, for example, we started 2022 at $80 and peaked up to about $125 and went right back to 80. We had a round trip, start to finish, for 2022.

I think if you, as Per mentioned, dig a little deeper and look at what's going on in the other parts of the fuel chain, that's where really all the action was happening. Those are obviously two parts of the fuel chain that investors are not directly exposed to. That's on the conversion and enrichment side where we saw significant price increases over the course of the calendar year because of the impact of utilities trying to shift to alternative suppliers. 

One of the things that we're looking out for, not just in 2023, but in 2024, is one, the restart of capacity that's been shut in over the last few years. The ConverDyn Conversion Facility is finally scheduled to reopen in, I believe, April of 2023. There's a conversion facility in the UK that's been closed for a very long time, and the UK government recently awarded a contract, I believe, to Westinghouse to essentially explore whether that plant could be reopened.

I think these are very important data points because when governments start turning over all kinds of rocks like that, plants that haven't been opened for many years, the UK government making its first financial investment in a new power plant build in 30 years, those are really powerful signals in terms of the oil tanker turning around. It’s moving slowly, but it’s moving.

But again, we’ve offshored a certain part of our supply chain to Russia. The big challenge for the industry for the next two to five years is going to be to essentially reshore some of that capacity so we’re not beholden to aggressive nations. 

Ed Coyne: John, let’s stay on that theme for a second. You talk about the great restart, or I like to think of it as nuclear power 2.0. As the world talks about this in a much broader, sweeping way, from an investor standpoint, we've talked about physical, we've talked about the miners, how should investors start thinking about either A, allocating to this space, or B, participating in general in this space? Should investors be thinking about buying individual stocks, buying a basket of stocks, participating in the physical market? How can one participate in this space going forward to try to take advantage of some of these opportunities both you and Per have talked about? 

John Ciampaglia: The market is incredibly small in terms of a total market capitalization. There really are a couple of options. One, try to get exposure to the physical commodity market through different vehicles, including our own, or try to gain exposure to the improving fundamentals that are playing out in the mining sector.

I think the mining stocks, while they have underperformed this year relative to the price of the commodity, they've done better relative to, say, other sectors of the equity markets. What we always try to remind investors is that whether it is a mining stock or an oil and gas stock or whatever, at the end of the day, they're still stocks and they tend to have moderate levels of correlation to general equity markets.

We have definitely seen selling pressure over the past few months on the stocks. That is clearly frustrated a lot of investors because they see the price of uranium moving up, they see all these great announcements, and the fundamentals look incredibly constructive, yet the stocks have underperformed.

In 2023, I think for Cameco McArthur River, we are going to see finally a big jump in production after a slow start in 2022. But we are seeing a bunch of smaller mines finally winning contracts for more mid and long-term deliveries from utilities. But those contracts being awarded are really going to be able to enable the mining company to restart their operations.

The other interesting thing that we have been looking at just this past week is some of the Department of Energy contracts that were awarded to some of the different suppliers for U.S.-origin uranium. One of the things that Per and I have been watching for really closely is any visibility as to what prices the U.S. government is paying for their first loading of uranium for their strategic stockpile.

I found it really interesting that some of the prices that the U.S. government paid for U308 ranged as high as $70.50 a pound, $64.47 a pound. Other contracts did not have that granularity of terms. But what is important to note here is if the current spot price is at $48 a pound, the U.S. government was willing to pay well in excess of that for U.S.-origin material. I think it is a signal that the spot uranium price today is somewhat depressed because we just have had a very challenging macro background.

Ed Coyne: It seems to me that this has certainly moved from being a speculative trade to a long-term investment. I think the short-term frustration that maybe some investors feel when they can widen their lens, so to speak, and think about this as a decade-plus potential investment for their portfolio is the price disruption actually [becomes] [inaudible 00:14:59] more of an opportunity.

Per, let's shift gears for a second and talk a little bit about what could go bump in the night. What could effectively derail the positive outlook we are seeing over the next, say, three to five years, from the restart that John talked about to the prices increases and new buyers coming into the market that you talked about? What do you see out there that could potentially derail this if anything at all?

Per Jander: One thing that potentially will keep me up at night — until it is up and running — is the conversion plant that John talked about. It's the U.S. one that ConverDyn operates. It's slated to come back online early April, potentially even early in March. If something does go wrong there, obviously it's going to have conversion prices shoot through the roof. But conversion is very important for the nuclear fuel chain in the sense that it's the connector between uranium and enriched uranium product or the enrichment process.

If you don't have enough conversion capacity, it does not matter how much uranium you have, you're still not going to be able to make the fuel. From a uranium investor, it's also important that that flow happens because — as we have been talking throughout the year of this switch from underfeeding to overfeeding — when there's a shortage of enrichment capacity, especially if countries are starting to move away from Russian supply, we need to create more Western supply. That is not going to be able to come online in new facilities until 2027, 2028 maybe. But in the meantime, we can create more capacity by switching from underfeeding to overfeeding. In order to do that, you are going to consume more uranium.

You need to have your conversion capacity available to enable this flow of uranium to go into enrichment. Basically, what it means is that you can create more enrichment capacity by consuming more uranium. Having operating conversion facilities will actually increase uranium demand.

As from a uranium investor's perspective, you want to have every conversion capacity fully functional as possible. It's also interesting that John alluded to this Westinghouse facility at Springfield in the UK, and now Cameco has invested in Westinghouse. It's an old facility that operated about 10, 15 years ago. There is one component missing in it, and it is basically the uranium refinery, if you will, where you do [convert] U308 into UO3, [which is] an interim step.

Fortunately, Cameco has that facility in Blind River in Canada. That is why Cameco operated this facility about 15 years ago for a while because they have the capacity to do it. Now, as they are owners of Westinghouse, they clearly have that capacity again. I think we are looking at another 5,000 tons of conversion coming into the market as soon as that facility is operational. It's a very good thing for the nuclear industry, in my view. It adds stability to it and in the long run, it's actually going to create more uranium demand. That's a very good thing.

Another, I wouldn't say necessarily the negative thing, but it's an uncertainty, is that there is a recent management change at Kazatomprom, where Askar Batyrbayev, the former Chief Commercial Officer, has announced that he's leaving the company in January next year.

Askar has been very helpful in that he has a very Western mindset. The new CEO, I'm not that familiar with, but from what I'm hearing, he's also a very capable individual. It's just something to keep an eye on, what's coming out of Kazatomprom, and hopefully it's not going to be a shift in their attitude or in their behavior. But that's something that we're just going to have to keep an eye on for the next month or two.

Ed Coyne: John, is there anything on your end that you see as potential speed bumps that people should be thinking about, or investors should be thinking about? 

John Ciampaglia: One of the fallouts from over-relying on Russia is for small modular reactors [or SMRs], which there's just growing support for them around the world, the fuel that is specifically required, which they call HALEU, H-A-L-E-U, which is this high-assay, low-enriched uranium. The world was essentially relying 100% on Russia to develop that fuel. Now with the world pivoting away, the world needs to come up with its own... The Western world that is, needs to come up with a homegrown solution.

It was just announced a couple of days ago that one of the small modular reactors that's leading the pack in terms of its pilot project could be delayed by two years now because of uncertainty related to the fuel. That's a power plant backed by Bill Gates at TerraPower in Wyoming. That's unfortunate because in the short-term it's clearly going to be a bit of a constraint on deployment of small modular reactors. But on the flip side, we're very positive about the development and commercialization of small modular reactors.

Where I live in the province of Ontario in Canada, they've recently broken ground at our Darlington Nuclear Power Plant to build Canada's first SMR there. It's happening. Shovels are starting to go underground. We think it's going to be a key driver over the next 10-plus years for uranium, and it really is not incorporated into any analyst models that I've ever come across. That is a wildcard in terms of how much incremental demand we may see from the deployment of SMRs over the next 10 plus years.

Ed Coyne: I think that goes back to a point you made earlier about reliability and affordability. I think over the next couple of years or even the next decade, as these things continue to expand and as more people enter into the market, to me, it looks like this is just a tremendous opportunity to potentially add to one's portfolio as they think about the future, both from an energy standpoint but also from an investment standpoint. Gentlemen, it's always a treat to have you both on. But before we sign it off, if there's any last points you'd like to make, I'll turn it back to each of you, and from there, we'll say goodbye.

John Ciampaglia: I would say that I expect it to be a very interesting winter in Europe. Just to give you some perspective on UK wholesale electricity prices. Back in mid-December, prices hit £2,585 per megawatt hour. That's about 45 times the 2011-2020 average price.

This has had a profound impact, obviously, on consumers and businesses. Obviously, any industry that is highly energy intensive, these kinds of businesses are obviously taking the brunt of this price shock. That's having a meaningful impact, obviously, on economies, and budgets. Governments are trying to mitigate some of these impacts for businesses and consumers, obviously, by implementing price caps on annual electricity bills and providing subsidies and whatnot. But the reality is that's not sustainable over the long term. You need to find permanent solutions to deal with these kinds of issues. I think that's where governments are finally acknowledging that nuclear can be part of the long-term solution. 

Ed Coyne: Thank you, John. Per, how about on your end?

Per Jander: Yeah, very much the same direction as John was going. Just coming back from Europe now. There was not a single day that I did not overhear a conversation in an airplane, in a bar, on the news --just overhearing it on the street -- where people are discussing electricity prices in general and even nuclear energy in particular.

It's not like I'm hanging out with a bunch of nuclear nerds. I know a fair few of them, but these are just random people in bars. They have nothing to do with it, but just anyone in Europe is talking about these things right now, and the pressure is mounting on politicians to do something. It's starting to show in policies, and it's a very positive thing for the nuclear industry. It's basically like, "Finally, now it's our time," and they are ready to deliver. I think 2023 is going to be a very exciting year.

Ed Coyne: Wonderful. Forgive me for having the picture painted in my head of you sitting around a bunch of men and women in lab coats with goggles on having cocktails. But that was the image that popped into my mind. With that, I think we'll say goodbye and close out 2022. Again, for all of our listeners, you're listening to Sprott Radio. Thank you.