A long-term outlook for uranium necessitates in-depth knowledge into the fundamental mechanics that make the uranium market function. This paper was motivated by a previous article about Cameco (NYSE:CCJ), a large Canadian uranium producer. An interest in the commodity led to this analysis. This paper covers some of what uranium production and use entails, and what such factors mean for investors.
Interested readers will find substantial analysis of existing and developing fuel cycle technologies and how those technologies relate to investment prospects. Following that, a discussion of uranium demand will give some insight as to what extent regulatory decisions in a given country could impact the overall market. Lastly, there are brief sections that outline supply trends from some nations that produce uranium as well as the overriding risk that pervades the uranium industry.
A note about the countries studied in this paper: The nations mentioned do not form the entirety of uranium producers or consumers. Rather, the goal was to show readers what is going on in as far as uranium is concerned across a geographically and culturally diverse set of countries involved in the industry.
1. FUEL CYCLE TECHNOLOGY ANALYSIS
Let's go over some technologies, human capital variables and risks associated with uranium mining. Knowing something about these variables will give foresight to likely market trends. For instance, let's say that copper and lead mining operations in Mexico are hampered for whatever reason. Say, a worker's strike or the inevitable inefficiencies that come with nationalization. Aside from direct copper and lead use, such mines are the primary source of thallium, a key element in scintillation detectors. Thus, a thallium shortage will very likely drive up exploration price as well as related safety and regulatory work. Detecting radiation in the nuclear industry is more important than detecting water in a boat. Any squeeze on detector price or availability will incur cost pressures, possible hazards to employees and consequent regulatory oversight. All that can throw a curveball into what "should have been" smooth sailing based on more widely-known metrics that glossed over seemingly small, but important, variables in the uranium market.
Such knowledge as outlined in the previous example takes some time to become "priced into the market," giving the informed trader an advantage. The leg up of having some technical background in the uranium market is substantial. An overview of key technologies can help the investor judge the viability and limits of ambitious development plans presented by industry innovators.
Readers should note that this analysis is a relatively brief, surface-level skimming of uranium technology. A full dissertation of uranium industrial technology and its associated risks is beyond the scope of this paper. Rather, this is a sampling of just some things to watch out for if considering uranium-derived securities as a substantial investment portfolio component.
Airborne detectors and scintillation counters form the backbone of finding possible uranium deposits. Of course, other geological data is taken into account to enhance overall reliability of an exploration report. The main risk here is allocating the proper amount of equipment, time and human capital to the exploration task. For large uranium companies, this is done best at the supervisory and/or middle management level. Top-level executives are likely more familiar with the financial, legal and marketing aspects of a business. Exploration does not place those skills as top priorities. Instead, exploration emphasizes technical competence, understanding of geophysics and use/troubleshooting of relevant instrumentation. Investors should look for company HR policies that emphasize those kinds of staffing goals.
Mining - Underground
Underground uranium mining exposes workers to significant radiation levels. Investors should make sure that uranium mining companies are not short-changing workers with pay, especially in developing nations where labor and human rights regulations may be relatively lax and "malleable." Cutting corners in terms of labor and safety is very likely to lead to strikes, worker discontent and unwanted regulatory attention. Generally, the higher labor costs associated with underground uranium mining are offset by proprietary access to a deposit that, by its hard-to-reach nature, would give the producer a substantial "economic moat" during the mining phase.
Mining - In Situ Leaching
In situ leach mining (ISL) can be done via acidic or basic solutions. Investors should expect relatively low mining efficiency and higher costs with basic solutions than with acidic ISL. Alkali (basic) solutions are used if the local geochemistry makes acidic mining unfeasible. However, even alkali-based ISL is considered the most cost-effective proven method for uranium mining. Investors should keep that in mind if ambitious miners want to operate as open-pit or underground operations, they may have trouble securing capital funding or continued profitability down the line. Such miners would be faced with ISL competitors likely bringing in higher profit margins for a given amount of mined uranium.
Reactors require uranium to be enriched to about 3-5% U235. The U235 isotope is required in concentrations higher than typically found in nature since the predominant U238 isotope does not have the required nuclear stability parameters for sustained, controllable fission at cost-effective levels. Since U235 and U238 have almost the same chemical properties, enrichment is a substantial technical challenge. Subtle weight and electronic differences between the two isotopes have to be exploited to separate the desired U235. Today, precisely engineered centrifuges are the dominant technology that can enrich uranium to the required concentrations of U235.
So what can investors expect? Generally, when a new, expensive technology becomes mature, it becomes available for mass-market production and sale. As production profit margins lure in more producers, those goods became more and more widespread and affordable. However, that kind of free-market logic does not work with enrichment centrifuges. The high impact of malicious use by anyone interested in purchasing enrichment centrifuges generates a very high degree of government oversight and scrutiny. This limits centrifuge manufacturers' production and sales prospects.
Enrichment technology will continue to constitute a significant fraction of nuclear power costs. If enrichment technology becomes more widespread and affordable on technical and economic merits, it is certain that oversight and security concerns will increase proportionately.
Power Plant Operations
Nuclear cores rely on controllable neutron absorbers that moderate fission reaction rate. In terms of fissile energy released, more is not always better. Though it would never explode as would a nuclear weapon, a runaway nuclear core can still cause a very serious and costly hazard. This happens as the core heat and radiation melt through reactor walls and contaminate the immediate environment, quite possibly for a long time. Chernobyl and Three Mile Island come to mind. In order to ensure efficient operations without excessive risk, neutron absorbers are always monitored and adjusted while the core is active.
Movable control rods placed in the midst of the reactor core function as the primary neutron absorbers. The key to their effectiveness is the rods' chemical composition. Critical elements such as cadmium, boron and silver are used in control rod manufacture. Without going into too much technical detail, control rod design always entails a trade-off between the following variables:
- how effectively a key element can absorb neutrons of varying energies (thermal and fast neutrons)
- cost and ease of rod manufacture
- other detrimental mechanical and chemical control rod properties such as brittleness, relatively low melting point and/or undesired chemical reactions with the surrounding environment
- magnetic properties, since most rods are held up by electromagnets instead of mechanical supports as a safety precaution
The exact control rod composition, placement and other aspects of rod design will depend on precise reactor design, the operation scale and other detailed technical variables. Suffice it to say that not all control rod compositions and designs are created equal. Investors looking to quantify risk in a nuclear energy investment would do well to factor in the weak points of a given nuclear core design and its associated neutron absorption technologies.
Radioactive waste remains a hazard for millions of years. No single cultural, political or economic system devised by man can hope to last that long. Thus, until governments around the world decide which - if any - underground site(s) will serve as permanently sealed and lifeless waste reservoirs, nuclear waste will continue piling up in "temporary" storage containers at or near the facilities that generate the waste. Though this is not an immediate concern, nuclear waste disposal is a long-term issue that will not go away. A failure to resolve the problem through safe disposal or recycling will necessitate abandoning nuclear energy. The ever-increasing cost and proliferation risks will eventually overwhelm the finances of any business or government.
2. DEVELOPING FUEL CYCLE TECHNOLOGIES
Seawater uranium mining relies on a polymer matrix with a high absorption capacity that also yields the collected uranium with a low extraction or replacement cost. Efficient polymer chemistries made to capture uranium-based complexes and ions currently rely on comparatively efficient vinylbenzene and divinylbenzene monomers carefully linked to produce proper mechanical properties and ideal pore size. There are no especially costly or rare elements needed for producing the required polymer, hence this method's appeal.
Mining dissolved uranium from seawater could significantly boost uranium supplies. If this technology develops, it would be much cheaper and less environmentally harmful than current mining techniques, including ISL. Ultimately, seawater mining yield would be limited to how much uranium-laden water passes through a given uranium-absorbent polymer matrix surface area in a given time span. Additionally, decreasing uranium concentration gradients would develop near the mining sites. When projecting yields and returns, miners and investors would have to take into account this "uranium refill rate" for the local seawater region in which they are operating.
On the risk side, research and labor expenditures needed to hire and retain personnel that can progress knowledge in the field is a potential wild card for investors. Polymer chemistries and associated production support technologies can be surprisingly intricate and complex, especially with a new and ambitious plan such as seawater uranium mining. Research personnel and their associates/assistants need to have the proper education and, if possible, experience in relevant physio-chemical and synthesis sciences. Since seawater uranium mining is a relatively new goal, accumulating effective human capital could be a snag in investors' returns.
Investors or creditors with an eye to seawater mining should be wary of business strategies that rely on simply throwing money at the problem. Doing so will give painfully negative ROI if decision-makers involved in the work neglect to prioritize the focused theoretical and experimental specialties needed to advance this (or any) highly complex scientific endeavor.
Laser Isotope Separation and Enrichment
Laser isotope separation (LIS) is based on the small mass difference between the U238 and U235 isotopes. This mass difference corresponds to slightly different electron shell behavior when each isotope is ionized or otherwise electronically excited by a properly calibrated laser. These subtle excitation differences are enough to be exploited by an appropriate separation scheme.
An investor needs to know that, though promising, there has been waning interest in laser-isotope separation. From a production and supply standpoint, this is unfortunate since LIS promises to be more efficient, robust and less capital-intensive than current centrifuge cascades. Those interested in the uranium production and nuclear power market segment should watch for possible renewals and initiatives as far as LIS goes. Hints of progress will very likely decrease enriched uranium prices in the short term as the market adjusts to superior enrichment yields per dollar. However, this factor has to be weighed against the scalability of LIS operations. LIS has shown some promise when dealing with small uranium samples. Large-scale enrichment jobs are still out of LIS's domain.
Innovative Reactor Engineering
There are several interesting developments in new and potentially ground-breaking nuclear reactor designs:
- Traveling Wave Reactors (TWRs)
- Small-scale, relatively easy-to-build conventional boiling-water reactors (BWRs)
- Fission-fusion plant and waste recycling facility
Reactor Design: Traveling Wave Reactors
The TWR is based on the notion of fission happening through a controlled neutron gradient (wave) within the reactor core. Conventional reactors operate by a fission reaction more or less homogeneous throughout the core. Reaction rate control via neutron-absorbent rods and other neutron absorbers does not generate a well-defined, predictable neutron gradient. The TWR intends to fix that. Aside from the coveted U235, a TWR could theoretically use spent nuclear fuel, thorium and some U238. Of course, even a relatively low efficiency would be offset by the lower production and fuel costs since a TWR is not as picky with regards to viable fuel material. TWRs would generate energy with a fraction of the waste and refueling requirements.
Despite some optimism, the TWR concept is very ambitious, even by nuclear technology standards. It requires exquisite simulation and fine-tuning of neutron flux and related thermal/radiation energies over long timeframes. Interactions with depleted and fresh material would need to be constantly monitored and adjusted without compromising safety on one hand and generating capacity on the other.
Reactor Design: Small-Scale BWRs
Small-scale, simpler BWRs assembled on demand could fill an important niche in the energy nuclear market without compromising environmental safety or requiring exuberant financing. Such small-scale BWRs could be spread out, powering an individual building or complex instead of a city or municipality. Doing so would reduce start-up and operating costs as well as environmental risk per unit of electricity produced. Like the TWR, small-scale BWRs are not yet contributing significant electricity. If successful, both designs could substantially reduce demand for uranium by making more efficient use of current uranium inventories and waste products.
Reactor Design: Fusion-Fission Hybrid
Researchers at the University of Texas presented an ambitious plan for nuclear power - increase overall efficiency and neutralize harmful nuclear waste through controlled fusion. The idea incorporates a fusion core that would generate most of the plant's power and, as a fusion by-product, a plethora of neutrons. Surrounding the core, fission reactor waste that is currently a point of much contention and concern is transmuted into harmless species as a result of being immersed in this sea of fusion-generated neutrons.
Note that the fissile products would not interact due to any heat or chemical reaction generated by the fusion process. Anything that could be achieved through conventionally engineered means, such as burning, melting or vaporizing atomic waste has no effect against phenomena generated by atomic nuclei. Rather, the intense abundance and energies of fusion-generated neutrons would in theory transmute the remaining radioactive nuclei until stable fission waste products are produced. If such a device is successful, nuclear power would overcome an enormous safety, public relations and cost barrier.
3. DEMAND ANALYSIS
Mainstream Energy Source
Today, uranium has reached the status of a mainstream energy source in many countries. Though there was, and remains, understandable anxiety over widespread nuclear power, the fact is that uranium-powered electricity has made significant inroads into many nations around the world. The following is a partial listing of various countries' power output and what percentage of it comes from nuclear reactors.
Table 1 - Sample Nations' Electric Output, Corresponding Percentage from Nuclear Power
Note that the "% Electricity from Nuclear" is in reference to each country. So, for instance, 74.8 percent of France's electricity is derived from nuclear power, 5.1 percent of South Africa's electricity is from nuclear power, and so on. Since these percentages are independent of each other, they do not add to 100 percent. Instead, the percentage column is meant to illustrate the extent that each of the mentioned countries depends on nuclear power. A sustained uranium supply squeeze would hurt Russia, Germany and France much more than it would South Africa, Mexico or Brazil.
Sample Countries' Nuclear Energy Use
The next pie chart compares the same countries' nuclear energy use as a percentage of total worldwide nuclear-derived electric power in 2012.
Chart 1 - Sample Nations' Nuclear-derived Electric Output as Percentage of Total Uranium-Derived Electricity
The U.S. and France account for a bit more than half of all uranium demand in terms of electric power. Thus, political events or energy policy decisions in those countries could have wide-ranging repercussions for global uranium prices. Note that the U.S. generates only 19 percent of its total energy through nuclear power, but even that 19 percent adds up to a third of global energy production. "Mid-level" nuclear energy users such as Germany, China and Russia also have considerable weight when it comes to influencing global uranium demand via domestic energy policy.
Likely Chinese Demand Increase
China has a large market with opportunity and motive for large-scale growth of nuclear power. Both have large populations and substantial experience with heavy industry. Given China's larger population, likely future economic growth and geopolitical influence, a special focus on China is warranted.
China's "economic miracle" has its side effects. Until very recently, Chinese energy policy was characterized by lax pollution laws and consistently prioritizing economic/financial goals over environmental concerns. Though all nations do this to some degree, China has taken this mentality to an unreasonable extent. At the time of this writing, China has experienced several severe bouts with pollution in its major cities. Although cars are responsible for some of it, fossil-fuel power plants are in no small part to blame. Consequent costs such as asthma and other health issues are becoming a large concern for the Chinese government. Recently, Chinese policy-makers have focused on renewables that reduce overall pollution impact without compromising performance. Although nuclear power is not renewable, its efficiency and relatively mature technology make it an alluring alternative to fossil fuels. The Chinese government maintains control of key infrastructure and industrial concerns such as energy. Thus, decisions revolving around Chinese nuclear power and consequent uranium demand are likely to hinge on political calculations as much as on responses or anticipation of economic forces. Those interested in the uranium market would do well to keep an eye on Chinese energy policy. Particularly, watch for Chinese public sentiment and government reactions to nuclear accidents like the Fukushima Daiichi event in May 2011.
Production and Demand
Starting in 1960, worldwide uranium demand was on a steady increase that reached a plateau in the mid-1990s. Since then, there was a small demand bump in the early 2000s, but no significant demand boost from 1990s average levels. As of 2012, global uranium production added up to 58.4 megatonnes. At first, the main drivers of uranium demand were military nuclear stockpiles. Later, as Cold War pressures subsided, civilian energy use grew to be a very significant variable in the uranium market.
Chart 2 - Uranium Global Demand and Production: 1945-2012
Historically, uranium production stayed ahead of demand. A big supply boost in the 1950s helped keep prices in check. Between about 1960 and 1980, production oscillated with uranium price swings, but stayed ahead of demand. Then in the late 1980s, demand outran production. Since then, uranium production has executed the same, lopsided U-shaped formation, bottoming out in the early 90s and steadily rising up since then. Nonetheless, the latest data for 2012 show a gap of approximately 10 megatonnes between worldwide demand and production. This gap means that about 14 percent of uranium demand is satisfied through reprocessed fuel rods and sales of former nuclear weapons systems' uranium for civilian use.
Demand Analysis Summary
Investors should consider the fact that uranium prices are likely to increase in the near future. This will stimulate production and work to close the supply/demand gap. In the process of doing so, new production technologies are likely to become economically feasible. Also, the substantial dependence on nuclear power among major players such as France, Russia and the U.S. means that those and other governments will have incentive to allow larger mining operations. In the future, production can be expected to match or exceed demand. Since this gap is possible only through cannibalization of waste fuel and military inventories, it is not a sustainable economic phenomenon. Producers and consumers of uranium are aware of that and are making plans to build more efficient production and waste recycling technologies. (See "Ambitious Fuel Cycle Technologies")
4. SUPPLY TRENDS OVERVIEW
Sample Nations' Production Disclaimer
As mentioned before, this paper will focus on a partial listing of nations involved in the uranium market. It should be clarified that the countries here do not compose the entirety of uranium-producing entities. As the most garish example, Kazakhstan is by far and away the largest uranium producer, with Kazakh mines accounting for over a third of global uranium production in 2012. Neither it nor other prominent producers such as Namibia, Australia and Canada are represented in the below charts.
The idea is to focus on supply/demand phenomena from countries that do not get as much attention as the more popular uranium market players. Thus, the following charts top out with Russia which, in recent history, has not produced more than nine percent of global uranium supplies. The graphs are separated for the reader's ease to more easily distinguish trends among smaller producers. This way, national trends in, for instance, Brazil, are not blurred on the larger scales necessary to capture Russian, U.S. and Chinese production. The data is scaled to be a percentage of total global production for each given year. Once again, since not all producing countries are mentioned, the annual production percentages do not add to 100 percent.
Chart 3 - Sample Nations' Percentage of Global Uranium Production 2005-2012 (C3.1, C3.2, C3.3)
Except for China and perhaps Germany, all of the countries above seem to be decreasing their uranium mining operations. This will place more negotiating and market power in the relatively few countries that commit to increasing uranium production.
5. KEY RISK
Building Costs Dampen Investor Enthusiasm
Even though nuclear power is very efficient in terms of amount of fuel used, the initial costs and inevitably shifting power plant completion timeframes make nuclear power a relatively risky investment. This fact results in correspondingly higher interest rates that eat into subsequent operating profit. The recent Fukushima event exasperated perceived risk and lenders' hesitation to invest in nuclear generator projects. Therefore, nuclear power businesses will have to either pass on the higher building and borrowing costs to future/existing customers or stall their plans for further nuclear power plant generation, thereby dampening demand.
High construction costs are not likely to dissipate even with low uranium prices. This is because given current nuclear reactor designs, costs and risks are inherent in the technology and safety requirements of any nuclear plant. Additionally, the social and political consequences of an event like Fukushima are difficult to reliably quantify in advance, adding another layer of risk.
Prospective investors and other interested readers should finish this paper with some insight into what exactly the "uranium market" entails in terms of technologies, challenges and advantages. Though this article was meant to touch on a variety of subjects, I could not help but cut short some measures of depth and additional explanations due to time and knowledge constraints. On the other hand, I know that many retail investors shy away from uranium because it is perceived as intrinsically more risky and finicky compared to other energy commodities. Hopefully, the uranium market has now been demystified to some extent.