Take What You Can Get

Thursday, 5 October 2023 | 33 | 21:10

Podcast Transcript

Ed Coyne: Hello and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott Asset Management. I'm pleased today to welcome back two returning guests, John Ciampaglia of Sprott and Per Jander from WMC, to give us an update on the world of uranium. Gentlemen, thank you for joining Sprott Radio.

John Ciampaglia: Thanks for having us.

Per Jander: Thanks, Ed.

Ed Coyne: Well, gentlemen, as I understand it, you both just returned from the World Nuclear Symposium in London. Let's start there. John, why don't we start with you? How was that conference?

John Ciampaglia: It was very interesting. It was the first time I had attended. I think Per will tell you it's the world's largest nuclear-related conference and brings everybody out. I don't have any historical perspective, but clearly, the number of attendees at the event this year was probably the highest it's been in a long time, which I think is indicative of the renewed interest we're seeing in the sector.

We had an incredibly busy week in London, where I think we met close to 40 different investment funds that wanted to talk to us about all things uranium.

Ed Coyne: Per, what's the general vibe over there right now? With that many more people coming to the conference and so many meetings that you attended, what's the general sense or feeling over there right now about what's going on in this space?

Per Jander: Oh, I think it's easiest to sum it up as incredible optimism. Everybody's excited to have the biggest conference they've ever had, with over 700 people attending. It wasn’t just the usual suspects: fuel sellers, fuel buyers, and organizers. Now you have media, many investors, regulators, and reactor designers. You get the entire industry all together, and it's a great way to kick off the fall season after summer in fuel.

Ed Coyne: This is a question I wasn't planning on asking, but you just said it, so I have to ask. Reactor designers, can we dive into that for a second?

Per Jander: Yes. You have the regular designs that have been around for a while, but now, as you know, there's a fair bit of talk about SMRs, the Small Modular Reactors. There are many companies there, and many of them are being developed. Some are already being licensed. There are a few projects, and I think the furthest one along is in Ontario, Canada.

They've already contracted for the reactor, and they came up with a tender for the fuel. We're starting to see that fuel demand from these reactors is hitting the regular market. Considering how little development has been in this field for the last 20 or so years, it's a big development. Everybody's excited about it, for sure.

Ed Coyne: The term SMR, as you mentioned, Small Modular Reactors, is becoming more and more of a commonly understood term. Some of our listeners may be newer to this allocation and this market. Could you spend a few minutes talking about SMRs and where they are in the cycle right now?

Per Jander: The technologies themselves aren't new. They might be from the '60s and '70s, but the applications of trying to commercialize them is the new aspect of it. Traditionally, you have a reactor of about 1,000 megawatts, but now these SMRs are much smaller, about 300 to 400 megawatts on average. Some could be even smaller than that.

Some are very similar to what we see today, just a scaled-down version. Some others are very different and have very different fuel. It's a molten salt, or they use liquid metal. Say, there are about seventy different designs in the works right now. It's a pretty broad spectrum, a much broader spectrum than what you have on the large reactors. When you say SMRs, it's a very diverse group of designs.

The ones on the simpler end of things, very similar to what we see in the current reactors, are getting quite close to being licensed. Of course, the other ones are going to take a little longer. Still, you have very different applications for them, where you can make high-quality steam for industrial processes that can be great for desalination and hydrogen production. There are so many different applications of them.

Some of them use spent nuclear fuel as the regular fuel. It's just starting to pick up. Starting with the simpler designs in the next five or so years and then over the next decade or two, we're going to see, I think, a fast development and more applications and exotic designs, if you will. They all have pros and cons, but overall, some very interesting technical developments exist.

Ed Coyne: Very cool. That's going to be fun to watch develop. John, let's go back to you for a minute. You mentioned at the conference in London you had over 40 meetings with different fund companies. What was the general theme there? What was the interest or the enthusiasm that was coming from those meetings?

John Ciampaglia: Well, if you look at the world of commodities this year, it's been choppy. Uranium has been the standout. It's the best-performing commodity this year. It's probably up 35% or so for the calendar year, which is in sharp contrast to other commodities that are down 20%, 30%, 40%, or even more percent. It's the one commodity that's working, so I think that gets attention.

People start doing homework on the commodity and realize it's somewhat recession-proof, meaning it's not economically sensitive like other industrial metals. It's something you need to run your power plant with, so it's definitely less economically sensitive. The WNA put out a new forecast for uranium demand in the coming decades, and sure enough, they've increased the picture. That much brighter outlook provides, I think, very long-term durable demand, anywhere from 4% to 5% per year.

On the flip side, we had a lost decade in uranium, meaning a decade after the Fukushima accident, with very little capital in the sector. There was very little research, exploration and development. We've got ourselves into a situation where a supply deficit could form in the coming years unless we take action now and build new capacity.

I think that's why the sector got a lot of renewed interest because capital needs to come back into the sector, and that will create new investment opportunities, whether in many of the different uranium mining companies we invest in through our ETFs or the physical commodity itself.

Ed Coyne: Now, are you seeing this from the Wall Street perspective, or are larger institutions showing interest? Who is the typical investor that you're meeting with today? Do you think this is still very early days for people looking at this from an investment point of view?

John Ciampaglia: Yes, it's a great question. I often get asked in meetings, "What kinds of funds do you talk to because everyone's trying to gauge how well-known has this story become?" I often will tell them that the sweet spot seems to be around anywhere from $100 million to $30 billion. That seems to be the sweet spot because these funds are more nimble.

They can deploy capital quickly. They tend to be family offices, different energy transition types of funds, some generalists and hedge funds. I also get asked, "Okay, well, that's great. It doesn't sound crowded, but what about the big guys?" My answer consistently has been, "Well, they're nowhere to be found yet." It's simple. It's just this is still in a sector that's quite small and still in a recovery phase.

The big money can't get that well-positioned because there isn't the depth of the company and liquidity they're looking for. That's a good sign when you don't have all the capital rushing in at once. I think the investors we've talked to who have done their work over the last couple of years in this sector have been very well rewarded.

Ed Coyne: Well, we talked about the investors a bit. Per, let's go back to you for a moment and talk about the users or utilities out there. Is anything changing in that landscape? Are we seeing more utilities come back into the market and have more conversations with you all? What's the general temperature of utility companies these days?

Per Jander: Well, it's heating up. I would say just looking into the next couple of months after the summer, I think we've been counting about seven or eight utility tenders, which is a lot more than you normally would see. This is only within the next two months. If you add up the demand for this, it's probably 15 to 20 million pounds that will be contracted for deliveries in the next 5 years or so.

Then, if you add up the numbers, I was talking to some price reporters there recently, and they said they think it's about at least 10 utilities with demand in 2024. This is when supply is very tight, not only in the spot market but also stretching out into '25 and '26. There's not a lot of material there, and the price reporters and consultants are advising utilities that "Take what you can get, essentially." It's getting into a much tighter situation than it's been before.

Ed Coyne: Let's shift to the supply side for a minute. Both of you separately have talked about this in the past about what it takes price-wise for an existing mine to restart or turn the switch back on versus a new mine coming online today. What are we seeing from the supply side? Per, let's start with you on that. Are you seeing more discoveries? Are you seeing new or existing mines flipping the switching and going back into production? What's the overall landscape there?

Per Jander: After Fukushima, there was absolutely nothing spent on any exploration at all. Now, the existing ore bodies we are looking at today have been known for quite some time, but they just haven't been developed because the economics haven't been there. Now we're seeing Cameco ramping up their assets, and the Kazakhs are ramping up as well.

This is to meet the demand the pounds have already been contracted for. They're already committed and sold, essentially. Then, right at the start of the conference, there was an announcement from Cameco that they were having some production issues at the two largest flagship productions at McArthur River and Cigar Lake. It's about 2.7 million pounds, which will be a shortfall this year.

Now, all that is not Cameco's portion -- that might be a million and a half pounds. But, their big partner, Orano, the French company, it's about a million pounds for them. That's something that these companies will have to find somewhere else and make up for.

Ed Coyne: How about on the discovery side, then? Was there any talk at the conference about "new discoveries" related to new mines going out there and looking for stuff? Any word on that?

John Ciampaglia: Yes. Maybe I'll take that one, Ed. I think the reality is that a lot of discoveries have been made. They were made a long time ago. Discoveries might have been made in 2012 or 2014, and the mines are nowhere near being built because they haven't started them. The reason for that is simple. We have not been in a pricing environment that would incentivize the financing and the ultimate construction of these new deposits.

That's changing, and we think that in this current cycle, we will finally get new greenfield production to market. If you think about some of these mines that are the most likely to come online, let's say they get built at the end of this decade. You're talking about almost 15 years from discovery to production.

It's a very long cycle, particularly when a bear market is squished in there. The supply response is coming, but it's going to come slow. That's just because, as I mentioned, we lost a lot of years in terms of expiration development while the sector was in a bear market.

Ed Coyne: Well, that's got to explain at least part of the move we've seen here more recently. Can both of you dive into what we've seen from a price movement in uranium and the miners? We've seen quite a bit of a move here. John, I know you mentioned from a performance standpoint it's been one of the bright spots in commodities in general. Is there anything else that we're missing that you think is driving that price, and what's your outlook for that price over the next couple of years?

John Ciampaglia: I think investors are looking for new ideas. The market has been one-dimensional for so long, with a very small number of large-cap tech stocks driving many of the returns within the bellwether indexes. I think people are looking for new ideas. It's hard to find growth. I think it's fair to say that this sector has very resilient growth ahead of it, albeit by small percentages, but it's growing.

The supply-demand fundamentals look very good in support of higher pricing, and higher pricing is what you need to generate a supply response. That supply response provides the industry with a long-term security supply. That's the crux of the investment thesis that many investors have shared with us.

Ed Coyne: How about from a geopolitical standpoint? Both sides of the aisle have agreed that we need nuclear going forward to get to this carbon-neutral footprint. Any new developments that came out of the conference?

John Ciampaglia: I don't know about at the conference, but I think the one thing we highlighted in many of our institutional meetings in London was that 15 different bills are working through the U.S. House right now, which says a lot. I don't think the U.S. government even said "uranium" or “nuclear energy” until two or three years ago.

It's just been a sea change in focus, and that focus is being driven by efforts to decarbonize and the growing reality that nuclear provides incredible baseload power. It backs up the intermittency of renewable energy very effectively. Then, finally, everyone is focused on energy security following the massive price spikes we saw in many commodities after the war broke out in the Ukraine.

This has now become very top of mind for governments not just in the U.S. but around the globe. They're now pivoting back to nuclear energy to tick all these boxes regarding energy transition, security, and reliability. I think that's very powerful because the industry was left for dead for a long time. I think that's why the industry and the mood at the conference have been so positive.

Ed Coyne: Well, you talk a lot about that from a security standpoint, where we are from the baseload standpoint and all the opportunities. Is there anything on the risk side that our listeners should think about or be aware of? Whether it's geopolitics, whether it's mines themselves, what risks or things could maybe go bump in the night as more investors look to allocate to this space?

Per Jander: It's tough to come up with something. If you're investing in certain mining companies, certain jurisdictions might be riskier than others. There is a lot of focus on Kazakhstan, Uzbekistan, and Central Asia. How does that materially get to the West? Well, the Chinese are positioning themselves, and yes, it's very easy for them to take that, and their program is growing by 10 to 12 reactors a year. They're going to need that.

They're going to need more and more. Even Russia is allegedly having some issues getting physical uranium to their borders as well that they need for their domestic programs and conversion and enrichment capacity. They're also turning up the heat and saying, "Hey, we need deliveries here as well." The West has left them. Well, what would you get if you were in the West?

Well, where would you go [to get uranium] if you’re in the West? Canada is the obvious choice. You have Australia, of course. Now Africa would be the clear third, and in Namibia, even though many of the mines there are owned by the Chinese, some of the material finds its way to the West, too. One cause for concern is the development in Niger, where Orano now has shut off production at the Somair mine and says, "We'll wait until there's more pro-French government in place before we turn it on."

This is 5 million pounds a year. They don't deliver monthly anyway, so there's a good chance this will all be sorted out before you start seeing any meaningful implications. Still, it's another factor to keep an eye on, another thing to add to all the potential bullish scenarios here. Developing a bear side is hard, and it points a lot in one direction. We've been saying that for quite some time now, but it's a convincing case anyway.

Ed Coyne: Yes, you're certainly seeing in the price action, and as I think I mentioned to both of you before this call, now we're even hearing advisors and individual investors asking us questions about it. It's becoming more mainstream, which is just the beginning of some real enthusiasm here. Gentlemen, before we sign off, is there anything that I didn't ask that you wanted to convey, whether it's from an opportunity standpoint or just a general-theme standpoint? John, why don't we start with you? Is there anything I missed that I didn't ask that you wanted to leave the listeners with today?

John Ciampaglia: Yes. Well, I think you touched on it a second ago in that this investment theme is being more understood. People are doing more research. It is a complex topic, so it's not like we can configure all this in an hour or two. We often spend a lot of time with large institutions, walking them through the fundamentals and the fuel chain and helping them understand how it all fits together.

When you see the Wall Street Journal, The Financial Times, Barrons, or these kinds of mainstream publications writing about this topic, whether it's the renewed interest in nuclear energy or some of the uranium companies, I think that's very powerful. It's getting this message out. People see the price action. Not that we're touting short-term performance, but all you have to do is look at what's going on in the sector the last three years, and it's performing well.

It is volatile, so you must ride the ups and downs, but , we believe the trend is higher. I think that's what's getting a lot of attention. I think we will be very busy for the balance of the year.

Ed Coyne: Yes, I would agree with that. Per, anything you want to close out with?

Per Jander: Well, we can go back a bit to where we started with the WNA symposium here because what they do every two years at the symposium is to develop a report called the Nuclear Fuel Report. It's updated every two years, and you objectively have the supply and demand situation. The big news this year versus two years ago, well, it's up quite a significant bit. Also, we've seen SMR demand there for the first time.

That's 35 gigawatts by 2040. Sure, it's an abstract number and in a long part of a far-distant future, but it's all starting to kick in, not just in the short term but the more fundamental demand will be starting to drive this development here, so there are many interesting times to come, Ed.

Ed Coyne: Well, gentlemen, as always, it's a treat to have you both on. As much as I read all the material that both WMC and Sprott put out, I feel like I'm always learning from you every time I talk to you. Thank you for taking the time today. For those who want to learn more about Sprott and WMC, I encourage you to visit our websites.

You can go to sprott.com. That's S-P-R-O-T-T.com. For those who want to learn more about WMC Group, you can go to W-M-C-G-R-O-U-P.com, and they do a nice job there, talking about the opportunities in the space. All right. Thank you all, and thank you for listening. Once again, my name is Ed Coyne, and you're listening to Sprott Radio.