Casey Research will be hosting a webinar on May 21 entitled The Myth of American Energy Independence to discuss the nuclear power industry and offer insights into what’s shaping up to be the kind of speculative opportunity contrarians live for.
As a precursor to the event, Uranium Investing News (UIN) spoke with Marin Katusa, chief energy investment strategist at Casey Research, who believes that uranium is the most contrarian investment in the resource sector today.
UIN: Marin, I want to start off with something easy — why is uranium considered a contrarian investment?
Marin Katusa: Well, first of all, most recently because of the Fukushima disaster of 2011, it’s seen as a no-go. Right now, globally, the theme that you hear is that nuclear is dying or is dead. But yet, that couldn’t be further from the truth. On top of that, companies cannot produce the material for what it’s selling for right now. Uranium exploration has almost come down to a snail’s pace because there’s no capital that is being attracted to it.
That being said, the stars are lining up quite nicely for uranium. By that we I mean we have proved that nuclear is not dying, nor is it dead. If anything, it’s growing at a rapid pace globally. For example, one in five houses in the US is powered by nuclear energy. China plans on having twice as many nuclear reactors as the US has, and the US has 104— most in the world right now. And China is committed to that program. Furthermore, the spot price of uranium, eventually, with this HEU agreement, which is expiring at the end of this year, there’s going to be a race to acquire a stable, long-term supply of uranium. So, those are the two main reasons why uranium is, of all the commodities globally, the most contrarian investment.
UIN: Uranium prices haven’t taken off so far this year as analysts had hoped — what has led to this slowdown?
MK: Well, a few things have happened. Because of the Fukushima disaster, remember: look how many nuclear power plants went offline in Japan.
After Fukushima, there was a huge amount of uranium that hit the market. And it was absorbed quickly. What people fail to understand is that the Russians were one of the biggest buyers of the uranium from the Japanese — which very few people have ever commented on. And, more importantly, the Russians are one of the largest producers of it. You know, they provide almost half of America’s uranium.
Then there was Germany saying that, “well, we’re not going to produce; we’re going to slow down our nukes.” So, there’s been a slow transition.
On top of that, in the US, ConverDyn, which takes the U3O8 and converts it to UF6, was also shut down. So, all of the things were built up to create a stockpile of U308. That in reverse is now changing. ConverDyn can come back online; the Japanese are basically saying, “we’re putting these reactors back online.” And Germany really has no choice. After this election you’ll see that — they’re basically importing French nuclear energy.
So all these factors are coming in. The Chinese are building these reactors. They’re not talking about them now, they’re building them. Even countries like Saudi Arabia, which is the number two in oil in the world; they’re building 16 nuclear reactors.
So those are the reasons why U308 hasn’t taken off yet. And you know, we’ve talked about this in our newsletter for a while, saying “look: it’s not going to take off until the end of 2013, early 2014, before we start seeing it slowly move up.”
UIN: The Megatons to Megawatts program has helped moderate prices over the last 20 years or so — will the end of this program be a positive catalyst for the market?
MK: Definitely. That agreement has already ended; that’s expired. Final shipments are coming at the end of this year. There’s something called the Transitional Agreement, which is where the Russians said, “hey, don’t worry, we’ll bring you guys uranium, but it’s not going to be from downgraded from nuclear warheads anymore, it’s going to be from reprocessed tailings.”
Uranium is now going to be a higher cost, because now, unlike when the original HEU agreement was done — in 1992 when Russia was in chaos— the game has changed and the Russians are building nuclear power plants around the world, and with that comes a long-term supply contract at the feed.
UIN: What are the costs associated with nuclear versus other types of energy?
MK: What people have to understand is if you look at Japan, they were paying over $17 per mcf in gas. Why? They had to produce more gas for their electricity grid because the nuclear plants were down and they couldn’t even provide enough for the gas.
Uranium on the other hand, the big cost is building these nuclear power plants. And if you’re to take a triple in the spot price of uranium, it would make an insignificant cost to the overall electricity production. So the nuclear power plants, whether they’re paying $40 or $100, it makes no difference to them. It changes the actual electricity costs marginally. Whereas natural gas, the biggest cost is actually the commodity. It’s not the actual physical natural gas plant or coal plant.
So the elasticity of the electricity cost is way different, much higher for the coal and gas plants because their biggest cost is the actual commodity, the natural gas or coal. Whereas for the nuclear power plants, once you build that plant, your spot price, your commodity makes less than a 3 percent difference to your cost of electricity. That’s an important thing for people to understand.
And literally, we’re going to wake up one day, and you know, when the Russians do an agreement with the Chinese; the Chinese are investing the equivalent of over $400 billion into the nuclear sector. The price for uranium is irrelevant to that amount. Getting a long-term, stable supply of that material is what’s important. And I think you’ll see the Russians do an agreement, probably by the second quarter of 2014. And if you look at the marginal costs of reprocessing tailings and tails, you’re probably looking at north of a $60 spot price for a contract.
UIN: Uranium is currently sitting at around $40 per pound, which isn’t making it an attractive space to be producing. What price does the market need to see in order to bring more uranium mines into production?
MK: First off, we we should clarify that we’re talking talking about conventional uranium production. It depends a lot on the existing infrastructure; so let’s take Africa, for example. You need $75 to $80 uranium to bring any new uranium conventional production in Africa.
If you want to take Europe, that’s just a non-starter. Australia, you’re looking, depending on where you want to go, you’re looking at about $65 to $70 per pound, you would need to bring it on production.
In the US, if you’re looking at any new production, you’re going to probably need $65 to $70 uranium. If it’s ISR in the US, you’re going to need $45, $50. And the one place where you would, the cheapest price would be the Athabasca Basin.
Only because rates there are literally order of magnitude differences of two times anywhere in the world. And you still need about $50 for any new production to come online.
UIN: Though the spot prices have dropped, long-term prices have remained relatively consistent. How can investors use long-term prices to understand the uranium market?
MK: For example, look at it this way. In 1960, America was the largest producer of uranium in the world. It produced over 36 million pounds of uranium. In 2012, America produced less than 3.5 million pounds of uranium, yet they are the world’s largest consumer of uranium. And on top of that, they import over 95 percent of the uranium they have, that they consume.
That, as you’ll see in our seminar, we talk with the Energy Secretary of America about how this is one of the riskiest situations in America. And it’s not like this is a small niche market. If the Russians wanted to, they could pull the plug on 20 percent of the homes in America.
That would be equivalent to the biggest blackout ever in the history of a developed country. Now, if the spot price of uranium went from $40 to $60, it would make less than a 5 percent difference to the electricity cost, the total electricity cost. Do you think the Americans are going to care?
Do you think that the nuclear power plants, the utilities, will care? What they care about is keeping the lights on!
Whereas if the natural gas price went from $4 to let’s say, $6, you’re looking at over a 30 percent increase in your electricity bill. The same is not true for nuclear.
UIN: You’ve mentioned natural gas and coal a few times. What is the relationship between uranium and natural gas or coal?
MK: Well, they’re not tied together. That’s what I’m trying to get at. When you look at coal, coal and natural gas are tied together because they’re competing against each other.
You see, a coal plant, when you’ve got these, they’re called bi-generational plants, where you can have a coal plant and a natural gas plant in the same facility.
It would take about an eight- to 12-hour shift to convert from coal to natural gas. So, part of the reason why coal prices have been so slaughtered in North America is because the natural gas success of the shale, they’re competing for each other. Right?
Whereas, you cannot convert a nuclear reactor. Nuclear reactors provide 20 percent of base load power. Even if natural gas went to $2, it still can’t compete with nuclear energy. Like, nuclear energy is the cheapest form of electricity in the world. Once the power plant is built, it’s the cheapest form of power. So coal and natural gas are competing, so they’ll be capping each other. You know, once natural gas gets to about $4 a MCF, it’s cheaper to use coal, so the now those electric generators are going to switch from natural gas to coal. Once it goes below that, they switch back to natural gas.
UIN: The domestic market in the US for nuclear power is expanding at a very slow rate. What are the underlying issues causing this?
MK: That’s my whole point. We’re saying that it’s going to be zero growth in North America.
But you still have to feed 104 reactors just in the US, and America imports 95 percent of what they consume. And the contract that they’ve been importing is expiring; it’s done.
You can’t get enough elsewhere. And now that amount that’s been contracted out to the Americans from the Russians, the Russians can now go to Saudi Arabia, they can go to China, they can go to South Korea, they’re going to go to India — nevermind the other ‘stan countries, the other CIS countries. And now there’s a lot more competitors for the fixed supply.
UIN: So what is the US going to do to? Obviously you’re saying they can’t just turn off all the lights.
MK: Exactly. They have no choice but to do what? Pay more. Because they can’t produce more themselves.
UIN: AREVA (EPA:AREVA) secured a $70-million multi-year contract to supply uranium to an undisclosed US utility. Is this type of transaction indicative of the state of the nuclear industry in the US?
MK: Yes, definitely. That’s telling you right now that the utilities can’t get the feed, so they’re buying future contracts. Let’s look at AREVA’s costs. Where is AREVA getting it from? AREVA’s costs are north of $50, $60 right now, in existing production. And on top of that they’re having issues with some of their production.
So despite all of these things are; the utilities are now going up to the companies directly to get offtakes.
UIN: So I guess we’re looking at a race for uranium supply?
MK: This is a race for energy security. First of all, your GDP is directly correlated to your electricity generated. If your cost of electricity is too high, you cannot grow your GDP. And every country is well aware that to be a successful country, you need a diversified energy matrix. You need coal, you need natural gas, you need uranium, nuclear. And then, to keep all the environmentalists happy, you need a small portion of green energy. Because you’re looking at three cents for nuclear power. The same amount of electricity generation would cost about 12 to 15 cents for green energy — you’re looking at four or five times the cost.
So at the end of the day, when China is now putting up hundreds of billions of dollars to build this nuclear matrix, the fuel, it’s irrelevant to them. So it’s a major race, and the Americans already have their nuclear power plants built. So whether they pay $60 is irrelevant to them. They just need a supply.
So people ask me, “well, what does this mean?” Well, in 2018, if you were to buy uranium today to secure it for 2018, it’s over $60 right now.
Why would a utility pay over $60 if they didn’t think that it’s going to be harder to get uranium in the future?
The forward curve is over 50 percent higher than where the spot is today.
Another reason why we’re bullish: I wrote a report about showing how the 2018 future curve was $68 per pound, US.
Uranium is not something like gold that you can take to the bank and put it in a vault, and you know, use it when you want to. It’s such a strategic component of America’s energy security. It’s going to become a strategic metal; it is a strategic metal. And it’s going to become strategic for China, for Russia, India and Saudi Arabia, and the rest of the world.
UIN: Japan is going to be restarting its reactors at the end of the year; how is that going to impact demand?
MK: They’ve already made the decision; it’s moving forward. And on our, this is on our webinar, which I highly recommend people see. The person who’s advising Japan is on our seminar, and that’s Lady Barbara Judge. And she’s telling you exactly what’s going to happen, because she’s the one who’s telling them what to do. And it’s going to happen, Japan has no choice but to do this.
A country cannot afford the highest energy costs in the world and still expect their economy to be competitive. That’s what it comes down to.
UIN: Can you tell our readers a little bit more about the webinar that you have coming up?
MK: Yeah. Never before have we put together a group of such an established crowd from the government side.
We’ve put together actually a pretty impressive list or panelists. We’ve got the former secretary of energy for the US, Spencer Abraham. Lady Barbara Judge, who is absolutely one of the most impressive people you’ll meet. She is the head of the UK Authority for Nuclear Power. She runs the UAE’s Nuclear Authority and is one of the three counselors of the Japanese Fukushima Disaster Advisory Council. So, very impressive. Then we’ve got Canada’s former energy minister on, who ran all of Canada’s nuclear programs, Rick Rule. And then Amir Adnani, who’s on our Next 10 List, who built the most recent uranium mine in North America.
There will be some shocking statements made from the people who ran the countries’ energy programs. So, you know, it’s easy to get comments from market players. But to have the guys who were the absolute policy makers. You know, it’s pretty big stuff. It’s going to be a good one.
UIN: Well, I look forward to checking it out. Thank you for joining us today Marin.
MK: Thank you.
The Casey Research webinar will take place on May 21 at 2:00 p.m. Eastern.
Securities Disclosure: I, Vivien Diniz, hold no direct investment interest in any company mentioned in this article.
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