Phone A Friend - How Uranium is Bought and Sold

Friday, 31 March 2023 | 20 | 27.30

Podcast Transcript

Ed Coyne: Hello and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott. With me today are two special guests, Treva Klingbiel of TradeTech, and Per Jander at WMC Energy. Treva joins us today as President and principal of TradeTech and has been involved with the commercial aspects of the nuclear fuel cycle for more than three decades. Many of you are already familiar with Per from the webcast and the many podcasts we've done together, but for those that aren't familiar, Per is Director of Nuclear Renewables and Battery Materials at WMC Energy and serves as a consultant to Sprott. Treva and Per, thank you for joining Sprott Radio today.

Treva Klingbiel: Thank you for having me.

Per Jander: Thanks, Ed.

Ed Coyne: We're going to do something a little different today, and I can’t think of two other guests such as yourselves that can go into detail about nuclear energy. Per, I'm going to hand the reins over to you today to talk about all things nuclear, what we're seeing today, and where the potential market could be taking us.

Per Jander: I'll be happy to. Yes, Treva has been involved in price reporting and the market for as long as I can remember, certainly, and before I joined as well. Treva, I'll let you introduce a little bit about yourself, about TradeTech, and what you guys do. Also, if you can talk about the basic mechanics of uranium pricing and of the market. How do you set the price? It's a limited amount of liquidity in that market, so how do you deal with that and could you provide a basic explanation of that for our listeners. And then we're going to have to move on from there.

Treva Klingbiel: Well thanks Per. Thank you for that wonderful introduction. Same to you, Ed. Just to give a little more insight into what TradeTech does, we're primarily involved in uranium price reporting, as Per pointed out, but we also focus on analysis. To do this, we have established a core set of principles where we try to focus on our unique experience and expertise. We have assembled a team to help us with this. We have experts in utility fuel buying, government policy, market economics, as well as mineral economics and geology.

For those of you who don't know me very well, I, myself, was a fuel buyer for a utility in a previous life before co-founding TradeTech. Now, as we delve into pricing, Per, and how do we deal with pricing, the first thing I would suggest is that — you guys have pointed this out many times in your other podcasts and your other presentations — but the uranium market is a bit different than some of the other commodities and energy products that you might be accustomed to dealing with.

It's not very liquid. It is a thin market. It is a market that does rely on bilateral transactions, but it also does rely on public RFPs and transactions that are done through brokers. One of the things that TradeTech does is that we have a long history, because we established TradeTech in 1995, but we also have the database and the rights to all of the prices for the New Mexico Exchange value that was published since 1968. We're the longest-running uranium price publisher, and I've been doing pricing since 1995.

One of the things that's really incredible and important to understand about this market is that most parties who are buying and selling on a particular day are actually picking up the phone and are talking, texting or emailing that individual on the other side who's doing the buying or the selling. It's not going through brokers all the time, although brokers are active in our space, but there is a real personal relationship in the contact list. We know who to call, who's making the decisions, who the decision maker is on the other side.

That's a little bit different and a little more connected than what you might find in other markets. I'll stop with that because I know Per probably has some questions after I've said that.

Per Jander: That's a great introduction. Thanks a lot for that Treva. It's great that you brought up the history with New Mexico as well, because I personally am not as familiar with New Mexico [Exchange pricing] as before I joined the industry, and you say you have prices back to1968, which I guess was when the civilian nuclear program started buying fuel. I know that every time we get a data dump of prices that you start doing analytics on, they go all the way back to then.

Can you talk a little bit about how has the market developed since then? What was it like back then? I know you weren't around, but based on your knowledge, how has it developed and what changes have you seen as well in recent years, and is liquidity getting better? Is it getting worse? It will be very interesting to hear your observations on that.

Treva Klingbiel: One of the things I'll point out about uranium prices and about the uranium market that I think we all recognize but we sometimes tend to forget, is that our space, whether we like it or not, is always going to be heavily influenced by government policy. The reason for that, as you point out, goes back to the 1968 civilian nuclear program in the U.S. Largely those prices were determined by the U.S. government buying program in the early days. Then it was basically fueled by the first nuclear renaissance.

I know we're familiar with talking about the nuclear renaissance that occurred around 2000, but there was a first nuclear renaissance in the U.S. in the 1970s, and that largely drove prices with a very high expectation for a buildout program in the U.S. That was how the prices developed early on. Largely what happened was that in the early days, the reason you had a need for a spot price was because people were new to nuclear, and their fuel designs wouldn't necessarily line up with what their operations actually were — what they had contracted to purchase.

They didn't have flexibilities necessarily built into those contracts in the early days to accommodate that, which we now have. They would have to come into the spot space and buy. It switched over from the government-buying program to the utilities buying, and they were buying primarily because they were trying to match up what their actual fuel designs would be based on what they had contracted for, because the contracts didn’t provide those hedging mechanisms we now have today with quantity flexibility. That’s how the market started.

In the 1980s, basically, we saw the warming of the Cold War and the Western markets started to open up to the Russians. The Russians had built up a large stockpile as they were trying to build up their nuclear program for weapons, and they then found themselves in a position where they needed hard currency. They wanted to basically try to liquidate some assets. One of the assets they had at hand was uranium. They tried to break through to the market at a time when we were at a nuclear renaissance. Prices were going very high for the other producers in the western world, and so they were offering those pounds at a really good price.

Those pounds moved into the Western market and that did push prices down, and then that led later to a dumping case. That then created all sorts of lawsuits. Government agreements led to a time when we had a bifurcated market, a restricted and unrestricted market. Then eventually, those markets joined back together. Then we saw the entrance of financials and the pushup to the price that occurred in 2007 where it hit $138. Then, again, this is where we have to remember, governments are always really critical in our space.

One of the reasons that the price turned over and came down was that we had a number of buyers who needed cash, and one of them in particular who needed cash at that time was the Department of Energy, which needed cash in order to do some cleanup. The government had no money at that time. They, again, turned to an asset to sell into the market just as the Russians had originally done, and started selling their inventories into the marketplace and pushed the price down off of the $138.

Now, there were other sellers that joined in too, but it was largely driven by the Department of Energy at that time. That's how we get to the day and age that most people are most familiar with now, which is basically we had financials come in. We've seen the market start and stop based on nuclear programs. One of the reasons that the market has started and stopped on occasion is because we see those programs that are state supported tend to be predictable.

If you're just relying on market dynamics like we had in the U.S, all we have to do is go back not that long ago – keep this in mind, It's not that long ago. It's not even two years that we weren't sure that Exelon was going to be operating two of its plants. Right up until midnight, we were waiting to find out if they were going to be operating, and that was a decision that turned out to be positive, again, because they received state government support for those plants. That's really critical, and it's one of the key things that we see developing in the marketplace today in every country, whether it's the U.S., Canada, Japan returning their reactors, we [also] see it in the European Union. We see it globally where everyone, every government and policymakers are turning to nuclear and recognizing that it has to be part of their program if we're going to meet net-zero carbon emissions goals.

That takes us to where we are today. That was the quickest history of the price I've ever given, and so there you have it.

Per Jander: Treva, thank you. That's very, very fascinating, and I'm learning a lot of things just by listening to you. One of the things when you look at the market here, and obviously the prices of your report, you have the spot price as most people are familiar with. That's what investors would see when they would look at published prices to try to see what brokers are publishing, just to get a feel for what's going on. That's obviously what spot is trying to reflect as well, is the spot market.

Most utilities and suppliers engage in what we call the term market, which is something completely different. If you can just speak a little bit to those two markets and the relationship of the two, and a little bit of the size differential between them with regards to volume. I would think that would be quite interesting for some of the listeners here.

Treva Klingbiel: It's a very good question, Per, that you bring up because I think one of the things that can be really frustrating to anybody who's new to the space is trying to wrap their head around the fact that essentially, depending on any particular year, but on average over time, about 80% to 85% of the uranium that is purchased and burned in a reactor is sold or purchased under long-term or mid-term contracts, not under spot contract. The spot market only represents, at most, about 25% of our market ever in any particular year.

We've often been described as being a market where the tail wags the dog, the spot price directs the entire market even though most of the volume is being sold or purchased under term contracts. It does make it really confusing for those people who are coming in and trying to understand this market. It's one of the reasons that back in 1996, in fact, TradeTech introduced the first long-term indicators. Until that point, there had only been spot price indicators that had been published, and we introduced long-term indicators at that time.

We've been publishing long-term indicators for both uranium conversion and enrichment since 1996 because that's where most of the activity is, that's where people are buying, that's where they're selling. If you look at our reports on any particular week, you'll see that we talk about what's happened in the spot market and that's what people pay attention to, but there's a really long discussion about how many utilities are out there in the marketplace looking for multiple millions of pounds over really long durations, sometimes on the order of eight, 10, 12 years.

We really pay attention to that. That's something that really drives the dynamics of the market. The two are correlated, to answer your question about whether they're correlated. They really are. What we see is typically that the long-term indicator lags or is a following indicator of the spot indicator, and it doesn't demonstrate as much volatility. One of the things we have in the spot price is volatility that's reached levels as high as 48% in '22, and we don't see that volatility in the term price. It doesn't move up and down all the time the way the spot price does.

Per Jander: You would say that whatever the spot price is, it's going to have some kind of influence on the term price. I'm now sure if you look at it just five years ago maybe, there was a fairly big overhang in the spot market, and what a lot of intermediaries do – the trading companies such as the company I worked for as well, we certainly did it – is that you buy up material in the spot market, you find someone to finance it for you quite affordably, and you sell it at fixed prices further out in time. That may have been more attractive to what the primary suppliers would offer utilities and that would then in turn into the term market.

Whereas today, there is not that much material available in the spot market and financing rates are certainly quite a lot higher than they were before. Now it feels more that it's whatever the primary suppliers, whatever their prices are, that's what's governing the term price.

Ed Coyne: I would just add to that too, really quickly. It does seem what Per said, it does seem the term market is starting to move the spot market. I mean, when I talk to investors, and I think this is going to be interesting for the investors listening, they see the price movement as a pure demand from the utility companies. Is that fair to say then that effectively the term market will drive the spot market going forward if more utilities are going to increase your demand, whether it's three-year, five-year, or like you said, even as far out as 12-year contracts to secure that uranium? Am I hearing that the right way, are we listening to that the right way?

Treva Klingbiel: You are, Ed. I think that's a good point. Utilities certainly do drive the term market. We shouldn't forget, however, we've had periods where producers have been big buyers in the term market as well. You cannot overlook the fact that anybody can be a term uranium buyer. If you're a spot uranium buyer, you can also buy under term contract.

If you have producers — as we have had in the past and we even have today — who might have contracted for more than they're operating right now, they might have plans to have higher operations in the future but not yet today. They can, depending upon the economics of the market, choose to come in and sign contracts if they can find someone who will sell to them. The one thing that we have to recognize is that the producers — the people who are actually producing the uranium — do tend to prefer to sell directly to a utility because it's a closed-in loop, they know then it's out of the market.

You might have producers that sign long-term contracts, but generally, the sellers prefer to really have on the other side a relationship with the utility because they know that material's not going to come back into the market, and they'll have to compete against themselves sometime in the future.

Per Jander: It feels we're starting to see the potential onset of some kind of bifurcation. Obviously, Russia — most entities do not contract with Russian entities right now, but there seems to be also in uranium, and perhaps other product forms as well, a slight deviation depending on, or a price discount depending on any geopolitical or supply chain risk. I think it's quite clear we're talking about central Asia here. Do you see that as well that there's a — it's obviously not a huge price difference – but there is a price difference anyway, but we're not reporting it today?

Treva Klingbiel: I think you bring up a good point. We do see signs of that developing, a bifurcation in the market, if you will. Remember, I made the reference earlier about who sellers prefer to sell to. They prefer to sell to utilities. That globally applies to any counterparty. In this market, in particular, security of supply is paramount. It's the number one driving force. There's a lot of focus on economics and what the price is, but beneath all of that is the need to make sure that you have fuel there to put into that reactor, and you want to know what the risks are associated with, and who you're purchasing from.

One of the things that's happening right now, especially when we talk about Russian supply, is even though there are no sanctions, there's nothing legally that prohibits a U.S. or a European utility from buying Russian material today, there are issues and concerns, if I'm a buyer. about banking. Can I actually make payment to the bank, that you might direct payment to because of indirect sanctions or other laws that are on the books in a particular country?

There are lots of things that are occurring like that in the marketplace right now as a result of what's going on with Ukraine. That has created a situation where there is a lot of focus from the risk side of the house, if you will, for utilities especially about, do we want to take on this risk right now? What are other options? Yes, it may cost more, but [there’s] security of supply and the ability not to be in violation of a contract. No utility wants to take fuel and not be able to pay for it. No utility wants to pay for fuel and not be able to get it delivered because of logistical or transportation issues.

That's the number one thing that comes up as a question mark after, okay, they've won a bid, they've submitted an offer, they're the best price — but can we even actually get delivery of the material, and can we pay them? That's an assessment that actually goes on with any supplier, it's not just [with] Russian [suppliers]. Utilities go through this process of assessing the risk for any buyer that they’re purchasing material from.

Per Jander: That all makes a lot of sense, and it ’ll be interesting to follow going forward here, too, because it’s obviously… it’s a fairly sizeable amount of material that is mined in an area of the world where it’s not necessarily needed for further processing, and eventually the reactors that it's going to go into as well. Clearly, something to keep an eye on going forward anyway.

I've been involved in nuclear now for maybe 20 years, and it feels like it's brighter than it's ever been. You have life extensions, you have new build program announcements and all sorts of things, and even [small modular reactors] SMRs, which I thought would be a decade away. Now, all of a sudden, it actually it sounds like it's becoming something that you start to have to consider in your demand forecast. Can you talk a little bit about what you're seeing there and just, in your view, what are things to keep an eye on there?

Treva Klingbiel: I couldn't agree with you more. I alluded to it earlier about seeing government support, that's really policy support, really seeing that not just in one country, not just in China, but seeing it globally, seeing it even for the first time really in the U.S. with the Inflation Reduction Act and the Nuclear Fuel Credits program. Now utilities in the U.S. have the comfort that they can buy fuel without worrying about their plants being shut down in two or three years. That's why we see these longer-term contracts being signed and concluded. There is a confidence there that we see being played out in the way the players are behaving themselves in the marketplace.

We look at SMRs; we do see that they're going to move along. We see GE, Hitachi New Scale, and Rolls Royce, I mean on and on, and on, that really have excellent programs, have support, have life extensions. This is absolutely going to make a difference to the future demand, and it really is something that gets underrated in terms of its impact on where future demand might be.

If we look at that, some of the new build SMRs right now, we're looking at definitely over 200 million pounds of demand by 2035, easily. That's taking a very sober look at these new build programs and whether they'll meet their targets. Let's just say it really takes off, it could even be above that. We're looking at a market that is talking about some significant growth on the demand side, certainly by 2030, and certainly by the time we get into 2035.

Ed Coyne: Most of our investors understand the life extension of current reactors, and they can get their mind around that. They can also get their mind around some of the new builds of reactors that they're familiar with seeing. Could you spend a few more minutes talking about the SMRs and why that's such a big development or a potential development going forward, and what that could mean for nuclear power in general?

Treva Klingbiel: One of the things that the nuclear industry has been accused of for many years is that we don't know how to promote our own program. We don't know how to message ourselves very well because we're all engineers, we're geeks, we're analysts. We don't know really how to get the message across. The one thing that has happened with small modular reactors is I think we've got the message right. It's “small,” which means you don't have a lot of investment upfront. The risk is smaller.

“Modular” means you can increase, it can be made bigger if it needs to be, it has flexibility, and “reactor,” which means it's going to have all the newest, highest safety tech. We really hit on the right messaging just with the name “small modular reactors.’ The other thing about them that is so beautiful is that they really can be deployed very quickly and in places that typically you would not have deployed a reactor because you needed to be removed from urban centers or you needed to have maybe access to cooling or certain things like this.

SMRs have a lot of flexibility that, through the modular part of the name really comes into play. Because of that, we expect that you might see hundreds of them deployed, as opposed to where we might be talking about tens of the big reactors being deployed in a country, you might see hundreds deployed in a particular country once they're up and operating, then have been commissioned, permitted and demonstrated.

We're very close to that. We'll expect to have one in Canada by 2030 that's up and operating. Once that's done, we expect that their growth pattern will far exceed what we've seen with the larger reactors, just because they can be built quickly, they require smaller investment, and they also have the potential to be modular and very flexible.

Ed Coyne: Yes, I think the modular part is fascinating and the idea that [SMRs] can really bring cleaner energy to the masses in that way, in that form, in a much more affordable way, is exciting for everybody. I think what our investors are constantly thinking about is, how do I think about this as an investment? How do I think about this longer-term? What does this mean to me in my portfolio? Does it make sense to add this? I think things like these SMRs are really quite a unique way to view this opportunity. Thank you for explaining that in a little more detail.

Treva Klingbiel: Sure, my pleasure.

Ed Coyne: Before we sign off, is there anything you'd like to leave our listeners with on how to think about this going forward? You've done a great job talking about price discovery and what's gone on in the market from a historical standpoint, but if someone wants to track this or follow what TradeTech's doing, what should a listener walk away with outside of the information you've provided us?

Treva Klingbiel: The uranium space, the nuclear space has tremendous growth ahead as far as we can see in terms of generation capacity, SMRs, [and nuclear plant] life extensions. We think that having other people be on board with that and be supportive of nuclear power is something that we want to encourage. If we can encourage that by educating them, we're happy to do that.

Ed Coyne: That's fantastic, and I suspect we'll get requests to have you back on. The knowledge and the education that I've just walked away with in the last half hour or so has been incredible. Per, you've been kind enough to share your time with us as well. You're always welcome back, as you know between the podcast and the webcast, we've become fast friends here. I thank you both for being on Sprott Radio. Once again, I'm your host Ed Coyne, and you're listening to Sprott Radio and thank you.

Uranium Spot and Term Markets Explained

Spot market: Uranium is traded for immediate delivery. Delivery is the exchange of cash for the uranium. 

Term market: Uranium producers selling directly to utilities under contracts with terms of 3 to 15 years in duration.