If ever anyone wanted proof that lawmakers are the same the world over, look no further than politicians in the Russian Duma, who are threatening to impose sanctions on nuclear fuel exports to the US, in retaliation for the latest US sanctions on Russia imposed April 6.
An article about the development has gotten so much traction that Cameco’s share price (TSX:CCO, NYSE:CCJ) was up 5.9% on Monday.Shares of Uranium Energy Corp. (NYSE:UEC) likewise got a big boost in trading volume, which increased 144% from Friday’s trading session.
But that serves as proof that uranium investors don’t understand the global nuclear fuel market or appreciate the billions in revenue nuclear fuel exports generate for Moscow.
The idea that a uranium miner would end up selling more uranium to US utilities as a result of the proposed Russian sanctions is wrong. The only country that will be hurt by uranium fuel sanctions is Russia.
That the Duma member who introduced the legislation, Speaker Vyacheslav Volodin, is on the list of names released by the US Treasury Department to comply with laws designed to punish Russia for election meddling, human rights violations, annexation of Crimea and ongoing military operations in eastern Ukraine, provides a deeper context.
Investors Should Count To 235It is a challenge for the average investor to understand the uranium market. It operates behind closed doors and very little data is publicly available. It is a club with specific barriers to membership.
Even for those investors who can afford them, consulting reports offer conflicting data and may not provide the historical context, technical inputs or assumptions that explain price, forecasts and conclusions.
As for enrichment, the market operates behind a steel-enforced door that leads to a vault guarded by dragons inside a fortress perched on a cliff above a treacherous sea. Even uranium industry insiders get lost navigating the enrichment labyrinth.
A research note issued yesterday by an investment bank that covers Australian miners shows that uranium investors need to count to 10—or maybe 235—before placing a buy order.
It is easy to confuse uranium with uranium enrichment, but they are different. One is a physical mineral commodity, the other is an industrial service.
The US is the largest single nuclear fuel market, despite the number of units that have or will likely shut down due to dysfunctional electricity markets. Its 99 reactors require an average of 15.5 million SWU/year.
In 2014, the order book of Tenex, the marketing arm for Russia’s commercial enrichment business, totaled roughly $23 billion, including almost $6 billion in over 20 contracts with US nuclear utilities.
Under the contracts, US nuclear utilities purchase enrichment services, SWU, from Tenex. What they get is low enriched uranium (LEU) that is then fabricated into fuel assemblies.
Sometimes, US utilities also buy uranium from Russia that is enriched to produce LEU. Most of the time they don’t.
Investors also need to know that there are quotas on Russia’s nuclear exports to the US. Those took effect in 2008.
Russia has stated publicly that it wants to increase its market US share from the current 20% limit imposed by the quota. That’s sound business.
Global Enrichment Capacity Glut
It is certain that some kind of cap will continue after 2020 to protect the only enrichment plant in the US owned by URENCO.
With a capacity of 4.8 million SWU/year, the URENCO USA plant in New Mexico has enough capacity to supply roughly 33% of annual US reactor enrichment requirements.
But by imposing sanctions on nuclear fuel exports to the US, Russia’s access to the US market will be slammed shut and that ambition will fail.
US nuclear utilities have plenty of other suppliers with ample excess capacity to choose from.
In addition to the URENCO USA plant, Urenco owns enrichment plants in Germany, the Netherlands and the United Kingdom, for a total capacity of 18.8 million SWU/year.
Orano (AREVA) operates a 7.5 million SWU/year plant in France. China is rapidly building up its capacity, and Brazil and even Japan can close the gap.
Any would be thrilled to gain market share in the US, particularly as the amount of idle enrichment capacity worldwide has grown in the aftermath of Fukushima. And, due to the modular nature of centrifuge technology, capacity can be increased quickly.
Russia, on the other hand, with estimated enrichment capacity of 28 million SWU/year and subject to various trade restrictions in some Western markets, will lose out. New reactors can’t be built fast enough to maximize the excess capacity.
Initially, the measure was going to be fast tracked and a vote held this week. Now, however, a first vote has been delayed until mid-May, after the Kremlin and industry experts review it.
It is safe to say that even if the bill does proceed, sanctions on nuclear fuel exports to the US will be dropped.
By: Andrea Jennetta