Forget the fracking revolution, uranium still works: interview with CEO of Uranium Energy
With record low natural gas prices and utilities switching to coal to take advantage, MINING.com asked Uranium Energy’s (NYSEAMEX:UEC) CEO Amir Adnani last month whether uranium is also struggling under the fracking revolution.
Adnani's company is a uranium production and exploration company focused on the southwestern US states.
The company's Hobson recovery facility in Texas processes in-situ uranium, a method used for 30% of uranium production worldwide.
Adnani is 34 and lives and work in Vancouver, his hometown.
Interview was edited for clarity and length.
MINING.com: Basic question to start Amir, does fuel demand for nuclear power largely drive uranium demand?
Amir Adnani Right.
MINING.com: There has been new pressure added to uranium energy prices, and that is natural gas and fracking, which is underpricing coal right now. On top of Fukushima, is there more concern right now in terms of what you are seeing with uranium demand?
Amir Adnani: The main challenge I’d say with the nuclear industry is what happened in Japan with Fukushima. I think that is more of a real kind of a challenge—more of a hit than low natural gas prices. I think the natural gas price argument just doesn’t work for a number of reasons.
Part of the reason is that people want to develop nuclear power—especially in emerging economies—is to diversify their energy base. A diversified energy base is best built around base load power, which is what nuclear power is very good at generating. So basically the power is there continuously, 24/7, and it can go for 15 months to 18 months before you need to reload a reactor. No other major type of power generation can do that consistently without price fluctuations to the fuel. So if you look at natural gas, the natural gas argument just doesn’t work.
And as you know, the issue with natural gas is two-fold. One, the quoted price is in US dollars, and it is not the same quoted price in Japan . . . [where its price is ] four- or five-times higher. And two, I think there is a lot of concern that as infrastructure is developed . . . [natural gas] prices are going to fluctuate and go higher than they are right now.
And so the advantage of nuclear again is still the fact that a small amount of uranium fuel can power a reactor continuously for long periods of time.
If you want to have an education system, transportation system and a modern healthcare system, you need to have that power and be diversified.
So with all that said, it’s not about natural gas. It’s more about safety concerns with nuclear reactors operating in the long run. Now a lot of reactors, if they are not situated on a fault line, they don’t have a lot to learn from what happened at Fukushima. The reality is if you are not situated in the type of setting where Fukushima was situated, then there aren't a lot of lessons to be learned.
Fukushima wasn’t a failure of nuclear technology; it was a failure of better engineering or lack of better engineering in preventing—basically—an earthquake and tsunami scenario of the magnitude that came about.
Also, I think there is a lot of focus and attention right now on safety. I think that is the key issue: how to prevent scenarios that happened in Japan with the Fukushima reactors.
That is the way I would characterize the focus. Now, if you are a utility in the US—Exelon, for example—and you ask, “Are you going to build nuclear reactors or natural-gas fired plants?" You are going to say "natural gas" because it’s cheaper.
But that is very different because, ‘A’ that is a US utility and ‘B’, with or without Fukushima or higher natural gas prices, there wasn’t going to be a lot of new nuclear builds in the US, mainly because the US already has a space full of nuclear generator electricity. Twenty percent of the base already is nuclear electricity.
MINING.com: What is the build plan for nuclear power plants in the US, Europe and Asia?
Amir Adnani: Well the US has a couple of reactors under construction down in Georgia [that are] being developed by Southern Company, and they have licensed two additional ones to be built right now in South Carolina. So you have four reactors that are licensed.
There is about $54 billion in government loan guarantees that congress has provided for nine new nuclear reactors.
That is not a big number relative to China, which has 26 under construction, or on a world-wide basis where there is over 60 under construction and only two in the US. It’s less than 3%; the growth isn’t here.
The growth is in China, which has 26 under construction and plans to build 100 by 2030. You look at South Korea, Russia, India and some of the countries in the Middle East. That is where the bulk of the growth is. That is where the deals are getting signed.
Like yesterday when . . . a consortium of nuclear companies signed a $3 billion deal with the UAE to provide the fuel for the reactor they have coming online in 2017 and provide the fuel for 10 and 15 years.
So it is interesting, those announcements of deals getting signed like that from oil rich countries in the Middle East—it goes to show you how diversified the market is.
It isn’t just US, Japan, Germany and France. Those countries were responsible for the first phase of nuclear reactor construction in the 1960s and '70s. They have already built their reactors.
Today what you see is the rest of the world saying, "We want nuclear power as well." And that is where the growth is coming from—the rest of the world. The construction cycle we are seeing right now—there hasn’t been this type of movement towards building reactors world-wide since the first phase of reactor neutralization.
MINING.com: When are we going to see something reflecting that in the prices right now? Uranium spot price is at $49/lb right now. Do you see a catalyst in the future?
Amir Adnani: I think it has been affected already, and I will tell you what I mean by that.
We saw an announcement Tuesday night—you may have seen it as well—where Paladin Energy (TSE:PDN) signed a $200 million cash-to-payment deal with a major utility to deliver uranium to this major utility in 2019.
Let’s step back for a second. Now I am going to ask you a question, can you tell me another business . . . and say to them: "I am going to deliver to you the product you want from me seven years from now but you have to give me a $200 million cash pre-payment today?"
I mean how many times have you seen that in any thing? I mean I certainly haven’t seen that in uranium ever, and it’s tough to see that in mining in general where you get royalty revenue streams . . . but they have so many covenants tied to them.
So 48-hours-ago Paladin, the uranium miner, comes out and signs a deal with a major utility where the major utility is going to get uranium from Paladin in 2019, seven years from now but is going to give Paladin $200 million in cash.
So my point is that the spot market isn't based on reality, because if the spot market was very liquid, a utility . . . would never feel like it would have to spend $200 million to lock in a contract seven years out. They would just go buy the uranium today.
That is the thing people don’t understand about the uranium market, (it) is that spot prices are very penny traded.
If you say right now "Hey I want to buy $200 million of uranium in the market, someone go get me that." First of all there isn’t anything available of that size at $49 quoted price. So what’s the point of you and I sitting here constantly talking about $49 uranium if people can’t transact at $49 uranium?
And if they can get billed for that, that’s based on quantities they wanted, they wouldn’t be giving a uranium miner like Paladin $200 million cash today and getting the material in 7 years’ time.
I think this announcement is very bullish for the supply side arguments in that the supply side argument is basically skewed. I mean there isn’t enough supply out there. The big mega projects are having problems, you look at expansion of Olympic Dam is a $30 billion exercise and BHP Billiton (NYSE:BHP) hasn’t made any decision on that yet, and there is news that they may delay that for two years.
On the uranium front, the only major project that can potentially come online is Cameco’s Cigar Lake (TSE:CCO), but other than that . . . Areva has basically shelved their Trekkopje project in Namibia, and Cameco shelved their entire project in Western Australia. Olympic Dam, we talked about that.
The easy production came out of Kazakhstan in the last decade—an 85% net increase in global output—but that growth has basically gone flat now.
There just isn’t an easy answer to the supply side growth out there, and even today, without new reactors coming online, demand outstrips supply. That’s the whole issue.
So why are the utilities so nervous to do a deal like with Paladin? That speaks volumes that there are concerns about the supply side, long term projections of new long term reactors coming online means that demand is going to grow.
Even though the capital market and the stock market had a very negative reaction to the Fukushima events, in a way the negative stock market reaction suggests that the uranium sector is dead, or there is no growth there, but it is quite the opposite. It was a very emotional reaction but if you take a sober perspective and say "What's it all look like?" There’s 430 reactors operating, there are 65 under construction and another 150 to be built over the next 20 years.
So a pretty solid story, probably more solid than any other commodity out there because in this environment I don’t see copper end-users or iron ore end-users stepping up and giving pre-payments to producers for delivery that’s seven years out, have you seen that? I haven’t seen that.
Uranium is the only metal that’s got that going on for it. So, I think there is a very unique story here.
Disclosure: Michael McCrae holds shares in Cameco Corporation (TSE:CCO) and Global X Funds (NYSEARCA:URA).