Uranium supply and demand: John Polomny and Justin Huhn

Sprott Uranium Trust is 6% of my holdings.  Uranium has now reached an $80 spot price where it may be profitable to mine it (the incentive price is probably $80-120).  Should I keep holding?

This is the best discussion of uranium I have heard, they give names and numbers, and good insight into Kazatomprom's production process and capex cycle.

TLDR: No meaningful supply coming on for the next 3 years, *might* happen in 5 years.  He thinks Kazatomprom cannot meet their targets and will have to report this around Jan/Feb.  

Points:

• (1:00) High level view?  30-40m pounds shortfall this year, glut of demand for next 3-5 years which cannot be met by supply. (2:26) Current producers: Cameco, Orano, Kazatomprom, Uranium One, Uzbekistan, Namibia, BHP, thats it.  In future: Paladin (Langer Heinrich starts production next year, full production aimed 2025).  For the next 3 years, all this production capacity is sold out.  Start seeing new production capacity in 2027/28.  (3:33) Reactor (uncovered) demand for existing operations (not talking about new builds or currently under construction) is greater than what is set to be purchased.  Secondary variables considered: producers & financial entities buying, inventory restocking.  Inventories are not at dire levels - they never are - he sees does not see a utilities panic.  Thinks we will have a 'musical chairs' moment after 24 months.  Starting now with a very thin spot market.  Only current relief valve is Kaz, but he thinks they cannot increase production enough to meet their targets.  In the next 5 years, he does not know where U308 price will end up, but far higher than the 'incentive price'.

• (7:20) John: twitter rumours that utilities put out RFPs for 100/200K pounds of Uranium, no one responds.  Whats happening with term price (instead of spot)?  Justin: (8:00) Term and spot are connected. Term is lower than spot ($66 term vs $82 spot), but you can't arbitrage it.  (9:24) Term contracts have floors (sixties) and ceilings (nineties, maybe 100s).  (10:21) Now have fewer contracts referencing the spot market.  "Everyone knows we are in a bull market".  Floors and ceilings continue to inch up, and are for longer periods.  Enrichment contracts into the 2040s.  Utilities signing contracts delivering 7-10 years out.  (12:09) Spot and term are connected, though spot is more visible.  Spot is so thin we have multiple dollar moves with very few pounds traded ($2 or 3 move on zero pounds traded, when bids come into the market offers get pulled back).

• John (13:55): Demand: COP28 announcing tripling of nuclear capacity by 2050.  Justin: Sweden, & UK are planning new plants, Poland alone planning 24.  Gives permission to the left to embrace nuclear.  But it's not needed in a 3-5 year timeline: icing on the cake.

• (21:28) (John) Can Kaz increase production as management says?  (24:05) (Justin) Mining is never on-time and on-budget.  Langer Heinrich's restart capex has gone from 84m (Autumn 2021) to 120m (five months later) simply from inflation.  Shortage of plumbers, electricians and ppl who can drill wells.  (26:06) Even nuclear fuel analysts like UEC and TradeTech are skeptical about supply timeframes, and are telling their customers that we are years away from supply.

• (26:31) For Kazakistan, sulphuric acid is an issue, they were supposed to produce 23.5 thousand tonnes this year, will miss that by about 1000 tonnes (2.5 to 3m pounds) off their target (on a 100% basis), they're projecting next years' production 10% below their subsoil-use contract (25 to 25.5 thousand tonnes), so trying to produce an additional 8-10m pounds next year.  But from their capex this year, he thinks they cannot even maintain last year's levels.  Speculates is may be because they don't have sulphuric acid.

• (27:43) Kaz production process and capex cycle.  ISR operation needs to inject the acid into a series of wells to impregnate the ore-body, then it takes time for the ore body to be impregnated.  From drilling the wells to first production is 6-8 months, full production is 12-18 months.  From that peak, it only declines.  So they must constantly drill.  But they don't drill much in Winter (Dec-Feb), so we can see their capex  in Q2 & Q3 of every year, and get an idea of what they produce the following year.  He thinks they will have a hard time even meeting 2023's production (let alone a 10% increase), and they'll have to tell the market this in Jan or early Feb.  

• (29:14) Kaz production guidance for 2025, they say they want to hit 100% of topsoil-use contract (30.5 to 31.5 thousand tonnes, or 80m pounds, a 33% increase from 2022) - does not see how its physically possible.  Even if they increase production, most of that increase is from new deposits (Budenovskye 6 & 7 is a JV with Russia, and another one which is JV with Orano/France), Russia's share will go to Russia (who are short Uranium).  And more of Kazatomprom's share will go to China. So Kazatomprom's pounds won't be dumped into the spot market.

• (31:33) Other new large projects in the next 5 years: a) Dasa b) Arrow c) Phoenix d) big Namibia mines (final investment decisions in 2024, first production 2027/28) e) Kazakistan increasing f) Uzbeks increasing g) small stuff in US/Oz.  Thats all we have.

• (32:18) (John) Why cant Kaz increase production? (Justin) In my personal opinion, not enough workforce and sulphuric acid, running up against limits of physical reality.  They signed a lot of production contracts at lower prices.  Their current production is already 55-65m pounds, to expand that by 30% is a a big undertaking.  High grading and resource depletion: new projects not as good.  Building sulphuric acid plant, comes online 2026, that should help increase production.  More commercial incentives: instead of jist flooding the market.  Their max production level was back in 2016.

• (37:15) John talks about the US.  Only produces 40K pounds.  What price is needed for US production to be sustainable?  (Justin) Old mines from the 70s/80s are from New Mexico with a bad legacy.  So looking at Texas, Wyoming, possible Nebraska, maybe South Dakota and Utah.  Lots of companies are moving towards production.  We are at the incentive price.  Still capital and labour constrained.  (42:00) Justin talks about Section 232, Trump's Nuclear fuels working group, IRA, restart Palisades and building SMRs

• (49:12) Investment implications.  Currently 130-140 uranium companies.  3/4s of them have have no intention of producing.  Same for any mining industry (eg: gold juniors).  Have't seen animal spirits in market yet (M&A pickup), usually happens last 1/3rd a bull market.  Could be years away.  Best companies have 'X-factor': what will they potentially do that they are not thinking about now?  Management's ability to create value in a bull market.  

• (1:01:40) (John) Where are we at in the bull market?Thinks this bull market will be longer and more drawn out than previous one.  "Stair stepping its way up".  There will be downturns/consolidations.  (Justin) Uranium can spike without conversion and enrichment doing so.  Buyers are price insensitive.  (1:08:00) China is the only one with inventory, they may sell it, but unlikely.  (1:0:47) Where are we in the cycle?  Clearly not at first inning, he doesn't know where we are.  KISS, we are in a multi-year U bull market.  U stocks still sensetive to general stock market decline.

• (1:12:30) Whats the bear arguments?  Apart from another Fukushima.  A large holder of inventory selling into the market.  Only one is China.  They had 5 construction starts this year, they need 8 per year to hit their targets.  They have 26 under construction.   They do not have a lot of domestic Uranium in the ground.  Their goal is to produce 1/3rd, contact /3rd, and overseas acquisitions for the last 1/3rd.  They cannot produce the first 1/3rd and are relying on Kazatomprom instead, singing contracts so large they were more than Kaz's book value. They may be sitting on 6 years of inventory, not enough for them.  He does not think China will sell, as they think of energy security/stability, not profiting from Uranium.  Unless they can replace what they sell.

• (1:18:30) At some time the price will be high enough for new U to find its way into the market (eg: if it stays at $200 per pound for 5 years we will get U from phosphates and seawater).  But there's nothing in the next 3 years.

Update Jan 2024: On 12th Jan, Kaz warned it can't meet 2024 production targets.  And Uranium is finally starting to make it into the mainstream (financial) media.