Sprott Gold Talk Radio S2E7 – Fall Uranium Update

Show notes

John Ciampaglia and Per Jander join Ed Coyne for an update on the uranium market. Topics include the recent World Nuclear Symposium, government policy change on nuclear energy and the need for new sources of supply.

Transcript

Ed Coyne: Welcome to season two, episode seven of Sprott Gold Talk Radio. I'm your host, Ed Coyne. Today we have two returning guests. Peter Jander of WMC Energy and John Ciampaglia from Sprott Asset Management. I asked them both to join us today because the last time we were all together was back in February, and much has changed in both the physical market of uranium and also the equity market. So, John, I'd like to start with you. Give us an update of what's happened over the last few months as it relates to the overall market and what are we seeing in the equities with the miners today?

John Ciampaglia: Sure Ed. It's good to be back on. It's been an incredibly eventful and obviously very news-driven market in 2022 and I think uranium has been a very interesting story for a growing number of investors around the world. There's been many positive developments in a very difficult backdrop which is rising interest rates and persistent inflation, which unfortunately has really hurt the overall sentiment of the market and prompted a lot of investors to essentially sit on their hands or move to cash. Uranium and uranium miners were chugging along very nicely up until about April and despite the very strong fundamentals we were caught in that downdraft, that macro downdraft. But what's interesting to us is that May and June were very difficult markets for just about every asset class. But around the first week of July we noticed something starting to happen and that was uranium and uranium stocks started to decouple from the general equity and bond markets which were still under selling pressure.

I actually think the uranium stocks are probably one of the best performing equity groups across the whole market since the beginning of July. Just to give you a little bit of color, most stocks fell pretty hard in that second quarter, but the uranium stocks are one of the first groups to start to recover, and from about July 6 to September 15 many uranium stocks are up in aggregate about 35%. I can't think of another group that's had that kind of bounce. So what's driving that bounce? It's not investors bringing large amounts of capital back into the sector. I think it's investors recognizing that these stocks got oversold and that the fundamentals underpinning them are very positive. I think that's a very good sign for the uranium miners. On the physical uranium side of the equation we saw the price peak at $63 a pound in April after starting the year at $42 a pound. And then in the correction that I mentioned we had kind of in the mid-forties and then in the last few days we've kind of ticked back up to $50 to $52 range. And really what prompted that was the Japanese Prime Minister finally signalling to the market that they need to restart more closed power plants, nuclear power plants, if they want to ensure reliable energy and avoid any risk of brownouts this winter. Since August 24, I think it's fair to say that I've been incredibly busy talking to different institutions around the world that are looking at all of the positive news developments in the sector and have reached out to us because they want to learn more about nuclear energy and the uranium market fundamentals.

Last week we did a three-night roadshow with institutions in Asia. This week we just finished a mini two-day trip in New York City talking to institutions. And what's been positive for us is that the interest is coming back, but we're also starting to engage with institutions for the very first time. And I would say many of those institutions are much earlier in their research process in terms of trying to understand the nuclear energy market, trying to understand the uranium market and how it fits in the context of the overall energy mix and the energy crisis that is really unfolding primarily in Europe right now. So it seems like the sector after summer slumber has kind of come back to life.

Ed Coyne: And John, what are you seeing with those institutions? You bring up a great point that a lot of times these institutions are sort of early to a game and try to think about where the puck is headed, right? Are they expressing interest in predominantly the physical side of the market or are they looking at the equity market or is it a mixed bag? What's been your experience so far as you talk to these institutions?

John Ciampaglia: Yeah, it's a great question. I think a lot of the conversations we have start with the physical market because it's the cornerstone. The physical market has such a dramatic impact on the underlying equities, whether you're a producer, a development company or an exploration company. So the conversation typically focuses on that. It does often cascade to the miners because there's also interest in getting exposure to the mining companies because the mining companies provide a lot of operating leverage, particularly the producers, while the development companies provide a lot of optionality meaning they're the companies that are going to build the mines of tomorrow that are critical in terms of bringing supply to the nuclear energy market. And so people understand that the lead times are very long to develop new mines and that it's critical for the industry to rise up to this challenge and to essentially deal with the supply gap that's been building for a number of years.

Ed Coyne: John, you've also mentioned in the past, and I think Per has mentioned this as well, the price of physical uranium relative to either a) existing mines starting back up or b) new mines being developed or produced or discovered. What is that price today? You'd mentioned that the price of uranium is kind of sitting in the $50 low end of the $50 range, as low as 42 and as high as 63 this year. And what are you seeing as mining companies are looking at that and what projects may or may not be coming online because the price is slowly starting to escalate north again. What is that number today in your estimation?

John Ciampaglia: What the market is trying to solve here is annual demand of about 180,000,000 pounds of uranium to supply enough fuel for all the existing reactors operating today. And last year primary mine supply was only 130,000,000. So, the industry is essentially living on borrowed time because you can't rely on secondary supply and underfeeding indefinitely. And there is a point in time where if you don't bring on new mine supply, the industry will have a problem and the industry won't have the ability to take advantage of the opportunity it has in front of it, which is a lot of the government support and policy announcements of late that are really giving the nuclear energy industry a huge boost in terms of operating license and competitiveness against other forms of energy.

And so going back to that incentive price, and that incentive price is the level that a company needs to see before it makes a big economic decision, capital intensive decision, to either restart something that's been on care and maintenance or make a really big capital investment around a new greenfield project. As the price is broken out of the high twenties to thirties to forties to fifties per pound, you've seen companies make announcements this year about, okay, we finally have a firm price, an economic price, we finally have utilities coming back to contract to make sure those pounds have a home and they're not going to get dumped into the market. You're seeing companies like Cameco and Paladin and Boss Energy announce restarts. Obviously keeping in mine on care and maintenance for multiple years is a very expensive endeavour. You want these mines to come back online because they're huge cash flow generators and revenue generators for these companies. So we think the restarts is a very healthy sign and a very necessary supply response that the market needs to ensure long-term security supply.

In terms of building a new mind, it's clearly not $50. It's significantly higher than that. And I think that's why a lot of investors are bullish about the uranium price because they acknowledge that there's no way a new mine will come online until the price gets to a level that's significantly higher than $50 a pound. And with all the cost inflation we've seen in mining in the last year, many people think that price is easily north of $75 and perhaps as high as $100 for some deposits, depending on their grades. So that's a fundamental crux of a lot of the investment thesis that institutions have basically relayed back to us in conversations with them.

Ed Coyne: Well, that's fascinating and I think that's a great segue and thank you John, for that because I think that's a great segue to bring Per on from WMC Energy. Per, I know earlier this month you were at the World Nuclear Association's World Nuclear Symposium, which we were talking before this podcast. Today is the first time in a couple of years everyone has gotten back together. So I'll loved to hear, and I know the audience would love to hear your insights into what did you glean from that conference? Any key topics or themes or takeaways that you could share with us today from the World Nuclear Symposium.

Per Jander: Thanks. Great to be back on again and I just came back from London last week. Like I said, it was the first time for three years this symposium happened, and it's by far the largest nuclear conference for the year. We have some other smaller conferences that deal with nuclear fuel mostly, but this is much broader,  where you have reactor technologies, policy making and other legislation as well. So it's a much wider audience and it's a very good way to kick off the fall session after a fairly slow summer. There is so much good news. John mentioned Japan coming around and trying to make a push to restart as many reactors as they can. And believe it or not, they're even mentioning the word new build, which obviously no one thought that would happen ten years ago after Fukushima.

You got the Koreans making a 180 shift as well. They're now going full-steam ahead on the nuclear program, not just their domestic one. They're also going to export a lot of the technology. Actually the best new build project that has been happening in the world, most likely ever, but certainly over the last couple of decades is the Korean reactors being built in UAE, in Abu Dhabi. They're on time, on budget, and the Koreans have done an amazing job there. They obviously have amassed a lot of experience in how to build these reactors and they're ready to deploy it somewhere else. So it's fantastic news to see that. And then the new builds news, it's almost hard to keep track of all the reactors being announced there. It really is a lot of them coming on.

You've got a big contingency talking about SMRs, the small modular reactors, which probably has a very bright future ahead of them. It's a little further out, but it can certainly have a very big impact on not just the electricity generation, reactors are obviously what the main focus of the nuclear industry is so far, reactors for producing electricity. But the Director General touched on it very well in her opening address, that we're making very good progress in the electricity side of things, but also other areas where nuclear is starting to be able to look at how can they make a very big difference. It could be industrial processes. You have heating and cooling of buildings, even shipping that has used crude oil, you can have some nuclear liners. There were some companies looking at that. And hydrogen production is certainly an area that could have a potentially very big future and desalination in warmer countries. They don't have access to fresh water. There's definitely a big role to play there too. So it's not just electricity anymore. We're moving beyond that and setting our eyes on the next target and what's to address next.

The US. Government was there. Kathryn Huff had a very good speech there too, and it's great to see their support. And if you look at the inflation reduction act that was just passed there in the US. It's the biggest ground-breaking change for the nuclear field in decades. It really puts it on an equal footing with other means of producing electricity. Every nuclear operator in the US. Is probably looking at some sort of new build program right now. Clearly it's going to take some time, but it really changes the playing field for them. Now they can compete on equal terms. Pretty sure it's going to be full steam ahead, which is great to see.

Obviously, California has decided to keep Diablo Canyon on, which is fantastic news, and there's even talk of the Palisades in Michigan, which was scheduled for decommissioning, may actually come around and come back online again. So much good news, it's hard to know where to start. I'll be happy if you want to dive into any of the particular topics I touched on there.

Ed Coyne: Sure. Thank you. That's fascinating, and it's great to hear the enthusiasm that's going on around nuclear in general. Let's talk about financing for a moment, the US getting involved, and I'm assuming a lot of that is going to be taxpayer dollar and so forth but what is it looking like, in your estimation, from the private sector? Are you seeing institutions starting to look at this space from a financing standpoint, both on current opportunities, but probably more importantly, I guess, would be the new builds? So what did you hear at the World Nuclear Symposium as released to financing on existing projects as well as new projects? Anything to share with us on that?

Per Jander: Yeah, absolutely. It's been very good development there. Obviously this EU taxonomy that people have heard about now for a while, but nothing moves fast in Brussels. It's a done deal. It's going to happen as of January 1. There may be some challenges to it, from countries that are opposed to it, but I think that they really don't have a chance to stop it anymore now. So that's going to come into effect, which means that you can access all these ESG funds that have been sitting on the sideline that now open up for nuclear investments, new build and existing reactors, life extensions of them.

The UK was very soon to follow. They have an equal sort of green stamp of sustainability, of nuclear energy, so they're also qualifying for ESG investments. Korea did something similar as well. So you're seeing this in a row of different jurisdictions where ESG labeled capital can now access nuclear projects. And I was speaking to one very large investor who said that the day after Germany announced that they're going to keep the reactors on over the winter, they got inbounds from German investors who now say they're clear to invest in the nuclear field again, where they haven't been to date.

So that's an immediate change right there and I don't think it's going to stop there. There's a lot of people starting to look at this, like John mentioned for the first time. But these are very smart people and they get up to speed very quickly and we're more than happy to share our experience and knowledge in this field. So the more questions the better.

Ed Coyne: Well, it certainly feels like we're still in the first inning of this whole project. It's really amazing when you're on the outside looking in and watching what's happening both on the physical side and the equity side, and watching major players like Japan and Germany start to talk about this openly in a very public way and seeing policy change around it. I think we're certainly in for some exciting times over the next couple of years, if not decades, as relates to price fluctuation, which is real opportunity both on the physical side and the equity side.

Well, gentlemen, I really appreciate you taking a little bit of time out today to talk more about nuclear. Is there any last point that you'd like to share with our listeners? John, why don't we start with you, if there's anything else you'd like to add.

John Ciampaglia: Yeah, I mean, there's a lot of really interesting developments going on in the space and fundamentals are really important because at the end of the day, markets are driven by fundamentals. But I think sentiment and perception are equally important. And in my two days of marketing with our host that took us out to see these institutions, the sell side analyst that has been involved in the sector and tracking it for the last 15 years, he said in one of the meetings, to me the perception was always oil and gas, then coal was worse and then nuclear was on the bottom. And I thought that was amazing because the perception of nuclear, and I think a lot of that perception was unfounded and based more on fear versus fact that it's just the pyramid is completely flipped now. The world has figured out that nuclear power provides more than 50% of all the greenhouse-free gas power production in the world. It can provide very reliable baseload energy.

And I think the world is looking at a very unfortunate case study right now in Germany, a country that decided years ago to phase out its nuclear power and shift to rely on renewables and Russian natural gas. Germany, a country that's always professed to be very green and progressive, right now is burning enormous amounts of coal to provide electricity. And obviously it's going to be a very interesting winter to see what happens in terms of electricity production as well as heating. You mentioned about the German decision with respect to the last three operating plants. I couldn't help but laugh when the German government announced that they've made a decision to keep two of the nuclear power plants on standby and shortly thereafter the utility that operates them said, well, you can't just keep a nuclear power plant on standby. So there's just a lot of dysfunction there in terms of their communication. And as I said, it's going to be a very interesting winter to see if they can get through, given how vulnerable they are right now within natural gas supply and electricity prices.

Ed Coyne: Per, I know I've heard you say this as well before about the baseload, and I think this idea that it's one versus the other is really unfounded. The reality is we need everything and nuclear is certainly going to be part of that solution. Per I'll turn it back to you before we shut this podcast down. Any last tidbits you'd like to share with the audience?

Per Jander: I can end on a light and happy note. I was having lunch with a gentleman from Finland in London last week. He's a fuel buyer for one of the utilities there and on his phone he had an app that's showing the output of their brand new reactor that's finally coming online and they're ramping up now and you can basically follow day-by-day what the output is of it. And now it's a 1200 MW, which is already put's it as one of the largest reactors in the world, but it's going to come up to 1600. And he was beaming with pride, he was so relieved to see it on, and I asked him, OK, so what does this mean? Are you going to come and buy uranium now? And he just like, "yes!, and I'm going to buy a lot of it." It was just very happy to see. So we need more of that and it's coming, so it's good times ahead.

Ed Coyne: That's fantastic. Well, gentlemen, once again, thank you so much for sharing your insights. This was a really informative podcast, really exciting topic. And once again, I'm Ed Coyne, your host of Sprott Gold Talk Radio. Thank you for listening.

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