Interview with Jim Cornell of NuCore Energy, LLC

In our recent podcast, we interviewed Jim Cornell, CEO and President of NuCore Energy, LLC, a Delaware company that advises businesses operating across the commercial nuclear fuels market. Jim has 22 years of experience in the nuclear fuels market and was the former CEO of Nukem, Inc., one of the largest suppliers of nuclear fuel in the world. While at Nukem, Jim served as one of the principal negotiators of the historic US-Russia Megatons to Megawatts agreement and negotiated long-term uranium marketing arrangements with Uzbekistan and Kazakhstan.

In addition, he developed long-term teaming arrangements with major industry participants including General Electric, Westinghouse, Cameco, Areva, and Babcock and Wilcox.

You can listen to the full interview here:

In this interview, Jim discusses:

• The balance between Russian and US nuclear non-proliferation and why Russia is choosing to dismantle its warheads for the uranium contained therein and the US is not
• The relative cost advantages and disadvantages of downgrading the warheads versus mining a new supply of uranium
• The percentage of the overall uranium market that the Russia-US HEU deal represents
• Russia’s ability to meet increased global uranium demand
• The Russian incentive to sell natural gas and cling to nuclear energy
• How nuclear power as an energy source compares to reusable energy sources such as wind, wave, and solar
• Fukushima and the relative safety of nuclear energy

Uranium Investing News: Can you tell us what it was like being part of the negotiations with the Russians on the Megatons to Megawatts agreement?

Jim Cornell: Well essentially, I put the teaming agreement together. It was Cameco and Areva in which we participated as a collective leader to purchase all of the feed material that was derived from the HEU Contract and a separate agreement was entered into with USEC, the US Enrichment Corporation to acquire the enrichment services that were derived from the HEU. And the unique feature of this transaction was that it was government to government agreement but it was actually carried out by the private sector and at that time the US government was unwilling to commit its own resources in support of this transaction and so had asked the private industry to do that. And that’s how this whole deal came about.

It’s extremely unique, one of the largest, the most significant nonproliferation transactions in history without question. It was the conversion of approximately 25,000 Russian nuclear warheads into 500 tons of high-enriched uranium which in turn was blended down into lower-enriched uranium that could be burned in reactors, most of which was burned in US reactors surprisingly. Most people were not aware of that fact that Russian HEU material was being used to produce a significant amount of electricity in United States over the last ten years.

So, one of the questions that was asked was what was my reaction to participate in a deal like that and I had to say, and I think that this is true of all of the participants, it was a rare opportunity to be involved with a transaction of this nature and which has such positive benefits for humanity as opposed to what people normally associate with nuclear is something negative. And this was a deal that involved the two governments, it involved companies located in France, Canada, the US, and the negotiations both involved the private companies and the governments so that made it much more complicated than any type of transaction that any of us had been involved with. And all of the negotiations were involved with participation of the Department of Energy, US Department of State, representatives from the Russian government as well.

So there was a lot of back and forth moving between Paris, Moscow, Toronto, Washington and it involved untold number of negotiations. But in the final analysis this deal worked out quite well and will reach its conclusion at the end of next year with very few hiccups.

UIN: Uranium miners talk about the cost per pound to produce uranium. How does downgrading warheads supply compare economically to mining? Like what’s the actual cost per pound when downgrading weapons materials?

Cornell: No one has ever tried to quantify that number. We did; we attempted to. This is when I was at Nukem together with Cameco and Areva just to take a guesstimate at it. It’s very hard to calculate because the Russians, from their side, they actually calculate the cost of producing the HEU, which is extremely high. And then, from there, they take that cost and then they add the additional costs on blending it down so they came up with a really high value for that.

Now what we did was we stripped out, we said the HEU is the sum cost, what does it actually cost to take this material out of the weapon, to bring it to a facility and to convert it from a metal into a form where it can be blended down either in powder or liquid and also to produce the material that you need to blend it with. You have to blend it with, this is a very highly concentrated material so you are probably blending it on a ratio of, I don’t know, ten, 20, 30 to one with enriched tails material. And we calculated that they probably were losing money on the transaction and that it wasn’t really something that, except if you denominate everything in rubles and looked at it as a way to keep facilities operating which they needed to do. They had a lot of enrichment excess, enrichment capacity that they could dedicate to enriching the material that they used to blend down the HEU, and they had to bring in tails material and they got paid for that. That’s probably the only way they could justify it.

So the simple answer to the question is there really was no way to calculate the cost of blending down HEU. But you can take a stand on it and I would say it had to be enough where the Russians were willing to continue doing that and selling it to the western parties over the course of the transaction. So you assume that they had to be more than covering their costs and then making some but it’s really hard to quantify.

UIN: And now that the agreement is coming to an end in 2013 can you help our investor listeners understand what the impact will be on uranium stocks?

Cornell: I think what’s happened here is that most of the analysts who cover the uranium space really didn’t pay attention to agreements that were entered into between the US government and the Russian government and the US Enrichment Corporation and Russia subsequent to the HEU deal. And a few years ago, the Russian government and the US government negotiated an extension to what they call the Suspension Agreement between the two countries, which will allow the Russians to bring in a certain quantity of uranium into the United States and sell it to US utilities free of any duties and that agreement with last till 2020. And it really was intended to sort of replace the HEU deal. And that is going to give the Russians the right to bring in ten million pounds of uranium per year.

Now let’s put this in context. The US-Russian HEU deal, which expires next year, will contribute approximately 22 million pounds per year into the market of uranium. Of that 22 million, six million goes back to Russia and 16 million pounds currently is divided between Cameco, Areva and Nukem. So really let’s look at, we are saying 16 million pounds is currently available through the US-Russian HEU deal that can be delivered into the market through 2013. After 2013, this US-Russian Suspension Agreement will allow the Russians to continue to bring in ten million pounds per year through 2020. So now the difference is six million.

So there is six million differences between what can be brought in under the US-Russian HEU deal and the US-Russian amendment to the Suspension Agreement. However, recently, last year, the Russian entity TENEX and the US Enrichment Corp in United States entered into an agreement, which would allow the Russians to deliver an additional quantity of material into the marketplace and I believe that quantity is somewhere in the neighborhood of five million pounds per year.

UIN: If Russia will continue to supply uranium but it won’t be coming from warheads, where will it be coming from and will this be a new supply?

Cornell: They have two things. They have their own indigenous source of uranium. There are two agreements, one between the US government and Russia and the second one between Russiann uranium export company TENEX and the US Enrichment Corporation and those two agreements begin in 2014, and they will be contributing ten million pounds of uranium each per year. So if you take the 20 million pounds that we will be expecting from those two agreements post 2013 and compare them to the 23 million pounds that we are currently obtaining from the US Russian HEU deal, you see there is really only a three million pound gap between the two.

So the conclusion is that the exploration of the US HEU deal will have very minimal impact on the market since it is in effect being replaced by two other agreements, one between the US government and the Russian government to extend the US-Russian Suspension Agreement and the other agreement between TENEX and USEC, which would provide enrichment services to USEC and then there will be feed uranium contained in that.

UIN: Consensus is that uranium demand will continue to increase at about four percent per year. How much will this Russian supply be able to meet this increased demand?

Cornell: Well, I think right now, all that Russian supply is accounted for in most people’s supply and demand models. What you see what’s happening at the same time though is that it’s becoming much more difficult for mines to secure the financing to open up and develop some of these projects around the world. Certainly the market crash of 2008 began that and Fukushima occurred March 11 of last year contributed to that as well and has sort of contributed to reduce investor interest in the space. And as a result, these mining companies are finding it very, very difficult to secure the financing that’s necessary to develop their projects, and that in turn is contributing to a shortfall in supply going out to the future.

And the unfortunate thing is that the good news in this industry is really bad news for a lot of mining companies that can’t secure the financing. That’s really what’s reducing supply and creating an imbalance between supply and demand, because demand is growing at a little over four percent a year.

UIN: And from your perspective, what are the biggest issues facing the uranium market these days?

Cornell: The biggest issues right now are the elections coming up in France and it’s probably one of the biggest. If the socialists are running on a platform of reducing the French reliance on nuclear; right now the French get approximately 75 percent of their electricity from nuclear power plants and the socialist party wants to reduce that to 50 percent and that would result in phasing out certain number of reactors by 2022. So that will have a big compact. I think it won’t be immediate but it certainly would have in terms of public relations and perception, will have a big impact because that would dominate the news for a while this year. And right now the socialists are running ahead of, I don’t know what Sarkozy’s party is, the Liberal or, whatever party he is affiliated with.

And the other big issue is the startup of Japanese nuclear power plants which right now there is only, the Japanese have 54 nuclear power plants right now, only one or two are still operating. And the resumption of their operations is really a question that has to be determined and addressed by their local communities unlike in lot of other countries where that is delegated to the federal government. And by June, there won’t be any nuclear power plants operating in Japan and there is a lot of anti-nuclear sentiment there and lot of opposition to even starting these reactors up again. So we will see what’s happening at that. We will certain have – most people in the nuclear industry are expecting that those reactors will restart but if they don’t, or they don’t start as quickly as everybody else, that could put a lot of pressure on the market.

On the positive side, the Chinese have after one year of reevaluating their program decided to resume the schedule that they had put in place before Fukushima and that means that they are going to have installed a capacity in 2020 of about 80 gigawatts. And given the fact that usually the Chinese exceed their benchmarks, that could go up somewhere closer to 90 to 100 which means that they will continue to drive nuclear as far as the whole industry is concerned. And from there, they will also carry over their own development and expansion of their own nuclear program into nations around them, into Vietnam, Malaysia, they already have an agreement with Pakistan to build some reactors so we will see that happening. Same with South Korea. South Koreans have developed a very efficient nuclear industry; they are building reactors in the United Arab Emirates and hope to build more. The Russians are continuing to expand. The Indians are expanding their program. So we have a couple of things on the positive side and well on the negative side and we will see how those develop during the course of the year.