Russian President, Vladimir Putin, has been targeting his country’s use of nuclear power to grow 25% by 2030 from roughly 16% of total electricity production (present Russian nuclear capacity is 24GW). That nuclear power forecast number may prove to be conservative since Russia may speed the retirement of older nuclear plants in an effort to have more modern reactors in place post Fukushima. That also means the Highly Enriched Uranium (HEU) agreement between Russia and the U.S., which is set to expire in six months, is in jeopardy of not being renewed since more uranium is likely to remain in Russia for domestic purposes and/or be sent to Asia rather than the U.S. since it may fetch more money Putin will likely move to capitalize on. If the recent adoption ruling by Putin is any guide, the fate of the HEU agreement and the exchange of nearly ~500,000 tons of between Russia and the U.S. may already be decided.
Let’s rewind a bit and take a quick account of some events that may be setting the tone for Russia NOT looking to extend the HEU agreement with the U.S. this June. For one thing, Russia’s own domestic nuclear needs will likely cause a drop in export levels especially since the country is trying to offset its own aging power plants and diminishing natural gas reserves in the Western Siberian gas fields. Let’s not forget that in 2007, Putin accused the White House of setting off a new arms race by the planning of a missile defense shield in Europe(something President Obama endorses today). A few years back Putin had suggested Russia was building new atomic weapons and he vocally has challenged the U.S. on its presence in Iraq and its stance against Iranian nuclear power (Putin was the first major world power leader to visit Tehran since the 1940’s). Putin also accused the U.S. with encouraging a pro-western Georgia to benefit a U.S.presidential candidate in the 2008 election. Last May, Putin, who was elected to a historic third term as Russian President, skipped the G8 summit in Camp David to focus on developing stronger ties with China. Also, Russia’s ARMZ, the state owned nuclear energy group Rosatom in Moscow, moving to own a controlling stake in Uranium One (TSX: UUU), made the U.S. uneasy enough that the concern was elevated to a national security risk in 2010. ARMZ also said in 2006 that it would not agree to re-sell Russian high-enriched uranium from military stockpiles post 2013 so the writing could be on the wall for low uranium prices to reverse.
So the “reset” in relations between the U.S. and Russia could become more chilly and actually come down more to business rather than friendship under Putin. The recent signing of a bill banning Americans from adopting Russian children is the latest evidence of the growing divide Mr. Putin is creating between the two countries and that should makes me skeptical the HEU agreement will be renewed—at least with similar terms.
Whichever way you look at it, lower uranium exports from Russia to the U.S.would vault uranium futures prices higher on the CME. Why? According to the Nuclear Energy Institute (NEI), uranium from Russian nuclear warheads under the program currently accounts for half of U.S. commercial reactor fuel. The U.S. presently produces ~4.02mln lbs of uranium per year. However, as a nation, we use ~55mln lbs of uranium a year yet import over 92% of uranium which means that any change in direction from Russia’s uranium would cause a supply imbalance in the US very quickly.
To think the uranium marketplace cannot see a supercycle again if Russia does not renew the HEU agreement would be unreasonable. This space has seen large, quick uptrends that I believe will happen again. Please refer to image below from The Ux Consulting Company for a visual representation of previous bullish periods for uranium which include 1975 (right after the 1973-1974 oil shock) and 2007 (when crude oil prices were marching toward record highs seen in 2008). These movements are important to keep in mind from a trading perspective especially since any change in Russia exporting enriched uranium to the U.S. would cause renewed bullish sentiment in crude oil that would be further strengthened by any slow adoption towards alternative energy, continued opposition to advance the Keystone Pipeline and the lack of modern refinery capacity (there hasn’t been in new refinery built in this country in over three decades). Collectively, this also reinforces my belief that a uranium supercycle would bring an energy shock ripple effect that simultaneously causes crude oil could retest the 2008 high of $147.27 per barrel within two years.
Now that I’ve given my argument for higher uranium prices, let’s take a look at some names to think about looking more closely at. It’s hard to ignore the bellwether of the group so Cameco (NYSE:CCJ) is a name I find appealing since its valuation has been plagued by the low price of uranium and delays regarding the company’s Cigar Lake mine. However, Cameco’s President and CEO, Tim Gitzel, doesn’t appear to be keen on waiting for growth to appear from thin air. Rather, Gitzel could make a move to acquire production, especially since Canada has agreed to send uranium to China, a decision that could secure as much as $3bln for Cameco thanks to deals consummated in 2010. I really don’t think investors appreciate the significance of the China move for Cameco but as uranium prices rise, it will be difficult to not consider.
Denison Mines (NYSE: DNN) is very compelling since acquisition rumors by Cameco actually make sense. Why? The McClean Lake Facility, in which Denison owns a 22.5% stake, is the only Athabasca Basin based mill that process high grade uranium from Cigar Lake without down blending. Therefore the present valuation of Denison may ultimately be too hard for Cameco to pass up since they could be served well to add production through acquisition of depressed assets. Shares of DNN have been in quicksand in recent months despite completing a private placement in late October of 4.145mln common shares at CAD$1.69. Denison also has a Flow Through Offering with KEPCO which dropped below the 15% to 14.92% according to company Q312 filings. According to that provision, KEPCO had until December 28th to acquire more common stock to get back to 15% or more so keep an eye on news whether they did or didn’t. Word that KEPCO lifted its stake back to 15% or more should be a positive catalyst for shares of DNN near-term. Conversely, if KEPCO didn’t lift its stake, the stock may suffer as questions arise why they didn’t. Plus, KEPCO’s entitlement to add representatives on the DNN board of directors would fall to one from two.
Strathmore Minerals (TSX: STM/OTCQX: STHJF) is a name I’m keen on due to the company’s strong position to leverage its dominant position in the Gas Hills to foster even more Asian alliances, including ones in China. Keep in mind Sumitomo of Japan already has an existing JV agreement to advance Strathmore’s Roca Honda,New Mexico property so one can make a bullish argument that Strathmore already having two high-profile Asian alliances (Sumitomo and KEPCO) is in a better position than many rivals to further develop relationships in Asia.
I’d be remiss to not touch on USEC (NYSE: USU) when mentioning the megatons and megawatts program. According to USEC’s recent earnings transcript, USEC will have significant supply of Russian low enriched uranium to sell and the company concluded its annual delivery arrangements with TENEX for 2013. However, many investors may not realize that USEC has a separate commercial contract with Russia to purchase supplies for the next decade. Terms of that contract are not so clear (to me at least) since I would guess that USEC would have to pay much more for that uranium than it did in the past (expect more clarity from management of USEC next month). Also, the company needs several billion in government funding to build the American Centrifuge plant. That makes USEC a risky play in this economic climate and funding expiring in February.
Those looking to play uranium through the ETF may find the Global X Uranium ETF (NYSE: URA) a good place to allocate capital for the longer-term.
I realize a big issue with uranium waste is still a detriment to toward sector sentiment but progress is being made on this front with companies such as TerraPower and Kurion leading the way. Regardless, with the price of uranium finally showing stabilization in the low $40/lb level, the time to look for value in a space which has suffered tremendously post Fukushima, is now. This means with Japan’s new prime minister changing course and endorsing nuclear plants, China, India and the UAE advancing its own nuclear ambitions and the U.S. moving forward with the development of safer, factory built small modular reactors (SMRs), the uranium market may be a great opportunity for investors in 2013. More so if the HEU agreement is not extended by Russia and the appetite for U.S. uranium supply begins to exceed current and even future demand.
Disclosure: John Licata owns shares of Strathmore Minerals and Denison Mines.