Morning Guys,
A friend and I were discussing the Secondary Supply market over the weekend and I figured it was worthwhile sharing here to order my thoughts logically, receive critical feedback, and to share with the HC community.
To set the scene, I came across this infographic which tracks temperature anomalies globally from 1880-2017. This shows very quickly the issue we face and the need for non-carbon based energy sources, of which Nuclear is the clear leader in baseload power generation.
Hit the link and click "play". Below is a screen shot from 2017:
View attachment 1259948
Now onto U ...
UxC, a Specialist Consulting Service within the U sector states that in 2018 the following applies in terms of supply and demand within the Sector:
Demand = 191m lb
Primary Supply = 136m lb (74%)
Secondary Supply = 48m lb (26%)
At 26% of total estimated supply, the Secondary Supply is what this post is interested in as my friend and I think that
this is potentially materially overstated and not appreciated by the market.
During a 2017 presentation on Real Vision, Mike Alkin a well known U analyst, estimated that the Secondary Supply totalled 45m lb and came from three sources:
View attachment 1259978
Those three sources are:
(1) US DoE supplies (
2017 = 7m lb)
(2) Japanese inventory (
2017 = 15m lb)
(3) Underfeeding from enrichment facilities (
2017 = 23m lb)
To address each one:
(1) US DoE Supplies
In early 2018, Rick Perry the head of the DoE suspended the supply of U to the market from that source.
View attachment 1259990
Given the current status of the S232 review and increasing tensions between the USA and Russia (a major supplier of fuel for US reactors) it is very unlikely, IMO, that this suspension will be lifted anytime soon.
Thus, investors could consider the impact of this 7m lb p.a. of secondary supply leaving the market as structural.
(2) Japanese Inventory
Subsequent to Fukushima, Japanese utilities had contractual obligations to continue buying U from parties such as Cameco and inventories built up. These inventories have, in part, been resold in the spot market. Mike Alkin estimated that this was c. 15m lb in 2017.
Japan has been progressively restarting reactors after numerous safety improvements and the restarted reactors now total 9 with more in the approval process and the rate of restarts accelerating.
View attachment 1259996
In addition to this, the Japanese Government recently released an Energy Policy Plan which reiterated their commitment to Nuclear as a critical component to Japan's energy mix out to 2030. This means that more reactors are going to be restarted and new reactors built (to replace the older models that have been permanently closed):
View attachment 1259999
Thus it is safe to assume that as reactors are restarted and inventory starts to be consumed once again, this 15m lb p.a. estimated supply to the spot market will decline and then cease entirely. This is especially so if Japanese utilities model the cost differential between selling on the spot market at today's prices and then buying contracted U in the out years at higher costs.
(3) Underfeeding from enrichment facilities
The process of producing fuel for Nuclear Reactors is shown below (from the 2017 Mike Alkin presentation):
View attachment 1260005
The enrichment facilities are basically centrifuges that spin UF
6 to concentrate the U-235 to a higher percentage (4%) required by Nuclear Reactors.
When capacity is tight they run the centrifuges for less time per unit of input to create a unit of output as there is a relationship between time and extracted U-235. This is nonlinear. It takes a proportionally longer time to get those last little bits of U-235 than it does to get the initial U-235.
Thus when capacity is tight/ demand is high, they use more units of input, spin it for less time, replace the input and spin again. The tails still have a higher amount of U-235 but this does not matter as the cost of buying more UF
6 is less the the opportunity cost of not having spare capacity.
In 2017 Mike Alkin's presentation stated that the Enrichment facilities had 58m Separative Work Units (SWUs) of capacity vs. 47m SWUs of demand.
This meant that the Enrichment Facilities had lots of spare capacity so they could keep spinning the UF
6 for longer to exact more U-235 without any opportunity costs. They would incur only marginal cost of production and could sell the additional output in the spot market.
In 2017, Mike Alkin estimated this to be 23m lb of supply ... a huge number relative to total supply.
The US DoE has estimated that there is substantial capacity within the Enrichment sector (2017 Report) but it assumes Urenco replaces decommissioned centrifuges as they are retired.
It also notes that 45% of global Enrichment Facilities are controlled by Russia ... an issue that investors may want to think about given geo-political issues currently.
However, the latest data show that the
capacity of Enrichment Facilities has fallen in the last 12 months from 58m SWU to 53.6m SWU.
View attachment 1260035
This reduction in capacity has likely occurred due to a crash in margins for Enrichment Facilities and thus as old centrifuges are decommissioned they are not replaced.
This means that even if demand for U was static (which it is not, see below) the capacity for Enrichment Facilities to supply underfed UF
6 to the spot market is decreasing.
In addition to the decreasing capacity of Enrichment Facilities globally, fuel demand is growing from within the sector as new reactors plug into the grid and Japanese reactors are restarted:
View attachment 1260041
Furthermore, this demand growth is baked into the cake due to the number of reactors under construction:
View attachment 1260047
The above table doesn't take into account Japanese RE starts either.
Conclusion
I would be keen to hear a rebuttal, but from the above, my friend and I think that a major source of supply to the market - 26% of 2017 supply, could shrink dramatically in 2018/ 2019+ and is not being talked about yet within the Sector, or at least not disseminated to retail investors:
(1) US DoE, 7m lb supply to spot market in 2017 ..... CEASED for current fiscal year and probably with become permanent
(2) Japanese inventory, 15m lb supply to spot market in 2017 ... will likely decrease as more reactors restart and Japanese policy provides utilities with confidence of Nuclear future
(3) Underfeeding 23m lb supply to spot market in 2017 ... as capacity of SWU decrease (58m SWU --> 53.6m SWU in just one year) and demand increases, spare capacity to spin UF
6 for longer is reduced which in turn reduces supply for the spot market.
I think that UxC is materially overstating the amount of Secondary Supplies at 48m lb for 2018. I also think that this secondary supply to the market is going to be much lower structurally and that the supply/ demand deficit is going to be much larger in the out years than current models suggest.
PDN (and other miners that can fill this deficit quickly) should be huge beneficiaries once the penny drops.
Cheers
John
(20min delay)
