Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Swords (military weapons) to plowshares (tools that benefit mankind) is a concept in which military weapons/technologies are converted to peaceful civilian applications.
“They will beat their swords into plowshares and their spears into pruning hooks.” Isaiah 2:4
The destruction of some of the former USSR’s nuclear weapons and the down-blending of HEU to LEU would be a good example.
When the USSR collapsed Russia inherited over a thousand tons of weapons-grade uranium and a massive nuclear refining and fabricating infrastructure – 40% of world total.
During the twenty year Megatons to Megawatts Program Russia will convert 500 tonnes of highly enriched uranium (HEU – uranium 235 enriched to 90 percent) from dismantled Russian nuclear weapons into low enriched uranium (LEU – less than 5 percent uranium 235) for nuclear fuel and sell it to the US. The terms of the Megatons to Megawatts Program also required that the HEU be converted to LEU in Russian nuclear facilities.
The United States established a government corporation – United States Enrichment Corporation (USEC) to purchase and transport the LEU to the US. Russia designated Tekhsnabeksport (“Tenex”) a commercial subsidiary of its Ministry of Atomic Energy (MinAtom) to implement their side of the program.
The Megatons to Megawatts program had, as of August 2011, down-blended 425 tonnes of HEU – equivalent to 17,000 nuclear warheads. The twenty year program to down-blend 500 tonnes of weapons grade Russian HEU into fuel for nuclear reactors will eliminate the equivalent of 20,000 warheads by the time it comes to an end in 2013.
Truly swords into plowshares, nuclear warheads that were once on Russian ICBMs aimed at American cities are now providing 50% of the electricity produced by America’s nuclear power plants.
Russian stockpiles of weapons grade material being down-blended for civil nuclear reactors has filled a very large part of global uranium demand. This has exerted significant downward pressure on uranium prices. Long term low uranium prices, just starting to climb before the Japanese nuclear accident, has seriously affected mining activity.
The world’s uranium miners currently produce 40 million pounds less than the world’s nuclear power plants need – this figure doesn’t include the power plants under construction or the hundreds in planning stages. According to the World Nuclear Association China is currently building 26 reactors with plans for dozens more, the UK has plans to build eight more, Russia has 10 reactors under construction, 14 planned, and another 30 proposed. India has 6 reactors under construction, 17 planned, and another 40 proposed.
A host of other countries plan to build nuclear capacity, or expand upon their existing nuclear power capacities – emerging markets such as Brazil, Saudi Arabia, United Arab Emirates, Turkey, and Vietnam as well as developed nuclear markets such as South Korea, Canada and France. This author believes Germany’s decision to close all of its reactors will be reversed and the Japanese closing all of their reactors is unlikely.
The Megatons to Megawatts Program, according to the USEC, was supplying roughly 50% of the US’s LEU demand. Mining accounted for 8% with the rest coming from other sources (rapidly depleting utility and government stockpiles).
A ten year replacement contract, signed in March 2011, will see Tenex continue to supply low-enriched uranium (LEU) from Russian commercial enrichment activities to the USEC after the Megatons to Megawatts program finishes.
Under the terms of the contract, the supply of LEU to the USEC will begin in 2013 and ramp up until it reaches a level, in 2015, that is approximately one-half the level currently supplied by TENEX to the USEC under the Megatons to Megawatts program. There is an option clause to increase the quantities up to the same level of supply as the Megatons to Megawatts program.
Unlike the Megatons to Megawatts program, the LEU supplied under this new contract will come from Russia’s commercial enrichment activities rather than from down-blending of weapons grade material.
Because the allowed amount of Russian enriched uranium imports into the US is strictly limited through 2020 USEC will deliver only a portion of the enriched uranium to US utilities. Most of the enriched uranium will be delivered to USEC’s customers outside of the US in both existing and emerging markets.
The uranium sourcing for the new contract is extremely significant.
The U.S. has 104 nuclear reactors operating, this is the largest fleet of nuclear reactors in the world making the U.S. the world’s largest uranium market. In 2010 the US nuclear reactor fleet required between 51 to 55 million pounds of uranium.
The mined supply of uranium in the U.S. in 2010 was about four million pounds. The U.S. is producing only about eight percent of the required amount of uranium to keep the existing U.S. nuclear fleet running.
Russia doesn’t have a lot of domestic uranium, although the country does have almost half the worlds refining and processing capabilities. Russia is in the process of tying up uranium supply:
Conclusion
Let’s consider the facts:
RBC Capital Markets believes there is not enough uranium production from current or planned mines to; satisfy current reactor needs, meet new reactor start up initial core requirements (3x normal load for startup), and to build inventories for new reactors. RBC estimates there will be a global uranium shortfall of over 70 million pounds by 2020 and says that the uranium market will require substantial new sources of uranium to fuel the projected growth in the global nuclear reactor fleet.
The conclusion an investor has to reach from all this seems inescapable; global mined uranium demand, and uranium prices, are going higher, perhaps much higher. This makes for an incredibly exciting, and potentially very profitable, investment for those of us who like to be ahead of the herd.
The best way to play increased demand, and to leverage higher commodity prices, is to invest in junior resource companies. The coming US and global mined uranium supply shortfall, and the best way to play it – a soon to be uranium producer – should be on every investors radar screen. Is a quality uranium play on your radar screen?
Legal Notice / Disclaimer
This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.
Richard Mills does not own any shares of Uranerz Energy Corp. TSX – URZ
Uranerz Energy Corp. TSX – URZ is an advertiser on Richards website aheadoftheherd.com
