Peninsula Energy (ASX:PEN) President and CEO Gus Simpson discusses the major drivers behind the current uranium market, technology-based cost solutions for nuclear power projects and the company’s latest quarterly report.
Peninsula Energy is a low-cost uranium producer with assets in the US and South Africa. The company is currently producing from its Lance project in Wyoming’s prolific Powder River Basin, supplying uranium to investment-grade utilities under long-term contracts. Prefeasibility studies are nearly complete at the Karoo uranium project in South Africa, which has a JORC-compliant resource estimate of 56.9 million pounds of eU3O8.
INN: China and India are expected to be important growth drivers for uranium prices in the coming years. Would you please speak to the supply and demand fundamentals in both of these countries and how they impact the global uranium market?
GS: First and foremost, China is the main player at this point in time, and India is expected to be a significant player behind them in the next decade or so. Growth in China is driven by a move to urbanization and subsequent industrialization, which is putting enormous demands on energy. This process of urbanized expansion in China has translated into a tremendous environmental impact for that country. Atmospheric pollution is a major problem there due to the reliance on coal.
This is resulting in the need for emissions-free energy production; however, solar and wind power cannot provide base load, high-intensity, emissions-free energy, and that is where nuclear comes into play. Hence, China’s nuclear program should in the next decade outstrip the amount of capacity installed in the US. This has had a very steep growth curve with a major impact on uranium production and consumption, and it will continue to do so.
China has been a major player in financing and consuming the massive growth of uranium production in Central Asia, particularly in Kazakhstan. We are now seeing that spilling over into Africa with the Husab mine, and we are seeing them move into Australian and Canadian uranium projects as well.
Going forward, we should see the supply/demand balance shift, and a normalization of uranium prices to ensure the ongoing longevity of production from multiple sources around the world.
INN: Aside from China, what are other world governments doing to encourage the growth of their domestic nuclear power programs?
GS: There is currently a significant amount of nuclear power growth activity around the world. The Koreans are on a steady state of industrialization with a shift toward nuclear energy, and Russia is expanding its fleet significantly as well. More recently, we have seen the completion of new nuclear builds in Turkey, the United Arab Emirates and expressions of intentions to move towards nuclear power by Southeast Asian countries and various other Middle Eastern countries. Of course, Britain, which has an aging nuclear fleet and an aging coal power fleet, is upgrading its nuclear capabilities jointly with EDF Energy, along with some Chinese participation as well. There are several new nuclear power plants under construction in the US, the world’s largest consumer of uranium.
INN: Nuclear power has the lowest operating cost compared to gas and coal power plants. However, the high capital cost for building new reactors has been a roadblock for nuclear power in the global energy mix. Do you have any insights on solutions underway for driving down these capital costs?
GS: Your observation is a good one. It is important to put this in perspective. Across the world, the majority of the current total 430 nuclear power stations are in Western Europe and North America, and that is a function of these economies having the capacity to finance these large infrastructure projects. Nuclear power plants are no different from a large hydro power operation, a large freeway system or any other large capital project; all require sophisticated financing mechanisms. In general, emerging market economies have yet to reach this level of financial sophistication; subsequently they have had to adopt lower-cost energy solutions that ultimately are more environmentally damaging.
One of the big developments in terms of cost solution is technology. The Chinese have acquired several new technologies, including the Westinghouse AP1000, of which they have two in construction and soon to come online. The cost is $2.5 billion per gigawatt of capacity, which is about the same as a coal power plant. This is still more expensive than a gas power plant, but requires much less operating cost and is more stable in terms of in fuel costs.
Over the last 12 months, the Chinese have been entering into arrangements with Bulgaria and Argentina to supply these units. We’re seeing this more cost-effective and reliable Chinese hybrid technology originating from Westinghouse moving out into the developing nations. I think it is a game-changing trend that will continue, with China taking the lead as a significant exporter of this technology.
Another technology that the Chinese have been developing for the last decade and a half is the pebble-bed reactor. Originally developed by Siemens (ETR:SIE) and bought by the Chinese quite some time ago, this type of reactor does not require an enormous amount of water for cooling, which means they do not need to be built near the sea or any other large body of water. This will allow the Chinese to roll out these units firstly in the western portion of the country, which is much more arid and lacks significant sources of water. But I think we will see this technology rolling out into other more arid parts of the world with limited water supplies, such as the Middle East.
This lower upfront capital cost and the negation of a need for coastal construction is going to be a major game changer in the world. And subsequently, the demand for uranium will increase alongside new demand.
INN: Thank you for that insight. Would you please explain to our audience the difference between term contracts and spot contracts? What role does each play in shaping prices and driving the market?
GS: Historically, the majority of uranium has been sold on term contracts, up until about 2012 to 2013. The term contract effectively has a fixed price and a fixed delivery date. These are typically agreements between producers of uranium and utilities companies. Spot contracts have a duration of 12 months or less and tend to be at market-related prices.
The Fukushima event and the shutting down of Japanese reactors led to a demand and supply imbalance for uranium, compounded by the large inventories that were built prior to this event by utilities in Western Europe, Asia and North America.
Between 2012 and 2016 there has been a preference for shorter-term contracts, with spot contracts making up a big part of these. You need to differentiate that between spot contracts and market sales; these are two different things. It has been a preference for the utilities, which are under pressures of their own in a reduced economic environment, to trim their costs and to maintain their margins. Also, probably about 50 percent of consumption by utilities over the last five years has been coming out of built-up inventories.
However, this inventory is running itself down, and we are also seeing an increased demand from new reactors that are being brought online every year. This will push the supply/demand balance in the favor of the suppliers, and we will see more term contracts occurring and less spot sales, which will subsequently move prices back up to more sustainable levels.
INN: More specifically, could you speak about Kazatomprom’s decision to move away from market sales and towards term contracting?
GS: Kazakhstan accounts for at least 40 percent of the world’s uranium production. Historically, they’ve gone through a period of massive production growth, a significant proportion of which went to the Chinese and the Russians. Materials going to the west were typically sold under a government anti-corruption directive and were sold to traders that would then sell to utilities. Effectively, the decision to move away from this is a smart one. They have formed a central selling organization which will operate out of Switzerland and buy material at market prices from the producer units in Kazakhstan. The central selling organization will resell that material in term contracts to utilities. You will also see them pursuing more value-added products; in other words, rather than simple concentrate, selling the more advanced fuel products like UF6 and ultimately fuel assembly.
All of this will have an impact by taking more material out of the short-term market arena and placing it into the longer-term markets, which will really stabilize the uranium supply market and be good for prices.
INN: What impact will a return to term contract pricing have on valuations for western uranium producers? What about the impact on Peninsula Energy’s valuation?
GS: I think we saw it in the beginning of this year with a shift upwards in the spot price and significant price increases in uranium equities. The reality is that a return to term contracting will take more material out of the spot market, causing the only really visible price to move up, and that will have a very positive impact on uranium company valuations. I am sure some time over the next six to 36 six months we will see further upward shifts in the spot price and stock valuations.
INN: Kazatomprom also announced that it will cut production by 10 percent, or 5 million pounds, in 2017. What impact do you see this cutback having on the global uranium markets?
GS: First of all, I think it sends a clear message that the current market prices are well below the marginal cost of production, and as we know in any market that is not sustainable. I think this move to reduce their production in the current environment is one of a growing sophistication in an organization that has achieved a very large market share and now it is building its margin; this is a typical business model, whether it’s Japanese cars or Korean electronics or Chinese manufactured goods. This recent production cut is a very important move in that direction by the world’s largest supplier and will have a big impact on the uranium market going forward.
INN: Thank you for the unique insight on what you see happening in the market. Peninsula Energy has been producing from the Lance ISR project in Wyoming since December 2015. You recently released your December 2016 quarterly activities report. Would you please share some highlights from the report?
GS: Peninsula is in a very strong position. We produced close to 35,000 pounds U3O8 in the quarter and delivered 200,000 pounds U3O8 under term contracts. We are now planning to solely produce to supply our contractual obligations going forward. We have a further 300,000 pounds U3O8 remaining to be delivered over 2017. Over the next decade we have approximately 8 million pounds of uranium fully contracted with investment-grade utilities, and that is at an average price of $55 a pound. We are not going to produce material for sale into the spot market. We have been focused on term contracts and we will continue to do that.
Our focus now is to manage costs and ensure that our production costs are less than our sales costs. I think we will weather the current storm in uranium and be well positioned for the upcoming turnaround in the market.
INN: What progress have you made toward completing feasibility at Karoo? Any plans for 2017 to 2018?
GS: We are still progressing with the prefeasibility study that is nearly complete. We’ve done that jointly with DRA and that is financed by their investment arm, Concentrate Capital. We are in discussions with them and other parties to provide funding for the bankable feasibility study, which we are targeting for completion by the end of 2018.
We do have lots of activity going on in South Africa with strong plans to continue. Obviously Karoo or any new project is going to require a change in the pricing of uranium. We believe that by the time we are close to making a production decision at Karoo we will see a normalization of the uranium environment, with increased contracting and subsequently better prices for producers.
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