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Nuclear Power:
Facts, Myths & Investment Opportunities
By Elliot Gue October, 2007
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Investing in foreign securities involves special risks. Please see page 11 for a complete list of disclosures.
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Nuclear Power: Facts, Myths & Investment Opportunities In December 1951, an experimental nuclear reactor in Idaho managed to generate enough electricity to light four 200-watt light bulbs. Nuclear power became a reality. In the 50-plus years since that first test, nuclear power has grown into a key global source of electricity. Worldwide, there are about 440 commercial nuclear reactors in operation, supplying 16 percent of total global electricity demand. Nuclear power is even more important in the US, where 104 reactors produce about 20 percent of the nation’s power. And still more reliant on nuclear power are several European countries, including France, Germany, Britain and Sweden. In fact, France generates more than 80 percent of its electricity using nuclear power. Despite these successes nuclear power has been a controversial technology at times. Early promoters suggested that reactors would offer power “too cheap to meter.” Apparently, large American utility companies agreed; several hundred plants were commissioned between 1950 and 1974. But construction of plants proved expensive due to regulatory delays, failure to adopt a single standard design for plants and opposition from anti-nuclear groups. In the end, less than half of the plants commissioned were built. And high-profile nuclear accidents like Chernobyl in Russia and Three Mile Island in the US served to tarnish nuclear power’s image still further. But nuclear power is far from dead. Fast-growing nations like China and India are planning to make nuclear power a centerpiece of their respective national electricity policies—these nations are already building new reactors and experimenting with advanced reactor designs. And high natural gas prices coupled with the negative environmental impact of coal-fired plants has put the nuclear option back on the table in the US and Europe. Some major US utilities are expanding existing facilities and/or considering the construction of new plants.
reduce dependence on foreign supplies of oil and gas. Nuclear power’s renaissance spells myriad opportunities for investors if you know where to look.
It’s Electric Oil reigns supreme when it comes to transportation; in the US, petroleum-derived products like gasoline, diesel fuel and jet fuel account for more than 96 percent of all energy consumed for transport. More than half of that total is burned in passenger cars and light trucks. There are certainly some alternatives out there—such as diesel-like fuels derived from natural gas or coal—but they account for only a tiny piece of transportation demand at this time. And this is far from a US-only phenomenon. While ethanol produced from sugar has garnered a large share of the Brazilian transportation market and coal-derived fuels are important in South Africa, these are currently isolated cases. Globally, petroleum still accounts for well more than 95 percent of all transportation energy. Electricity generation is, however, somewhat more flexible. Electricity can be generated using a number of different fuels, including natural gas, coal and uranium (nuclear power). Coal is king of the US electric grid, accounting for more than 50 percent of all power generated in the US. But coal isn’t as dominant in electricity production as crude oil is in transportation. Certainly, natural gas and nuclear power are also key fuels when it comes to power generation. But just because electricity isn’t as dependent on any single commodity doesn’t mean that there’s not rapid growth in demand for commodities used to generate electricity. Nor does it mean that there aren’t bottlenecks when it comes to generating enough electricity to meet demand.
And countries like Germany and the UK, long opposed to the expansion of nuclear power, are once again considering the technology a key facet of their long-term energy plans.
In fact, electricity demand is set to grow significantly faster than demand for petroleum in the US and worldwide; to meet that demand, the world will need to make full use all of the fuel alternatives available for electricity generation.
The fact is that nuclear energy is a cheap and environmentally friendly way of producing energy. And nuclear plants can also
According to the US Energy Information Administration, demand for petroleum is projected to grow by less than 40 per-
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cent between 2004 and 2030; demand for electricity over the same period is projected to increase by close to 50 percent. And when it comes to electricity, US demand growth is tame in comparison to global growth. Check out the chart below.
Annualized Growth in Electricity Generation 2004-2030
Region
%
Nort h A m er ic a
1.5
Eu rope
0.8 1.4 2.3 4.4 3.90
A si a Eu rope/Eu r a si a Chi na Indi a O t h er A si a Middl e E a s t A fr ic a Cen t r a l /Sou t h A m er ic a
countries will see demand grow at a far faster pace than in North America or Europe. For example, Indian power demand will rise more at a more than 3.9 percent clip while Chinese demand is expected to increase by more than 4.4 percent annualized. That means Chinese demand will more than triple between 2004 and 2030. To put these numbers into perspective, consider that by 2030, the EIA projects that China will consume more electricity than the US. Right now, China consumes less than 40 percent what the US does. And more broadly, OECD electricity consumption currently accounts for 60 percent of total world electricity use. By 2030, the OECD will account for barely 40 percent of world demand—rapidly developing non-OECD countries are set to see tremendous growth in electricity demand. These trends in the developing world should come as little surprise. The simple fact is that as nations develop and become wealthier, demand for electricity accelerates. Consumers in China are starting to buy the same types of household appliances, such as air conditioners and refrigerators, as their counterparts in the western world. The changes are coming at a rapid pace. All of these basic consumer appliances require electricity, powering a massive increase in demand. Demand has risen so rapidly, in fact, that Chinese power generators are having considerable difficulty keeping pace; there have been reports of widespread power blackouts in China during the past few years.
3.8 2.90
Bottom line: Demand for electricity globally is rising rapidly, with the fastest growth set to come from the developing world. The key question is, of course, where that supply will come from.
3.5 2.9
Why Nuclear?
Source: EIA International Energy outlook North America power generation is projected to rise at a 1.5 percent annualized pace through 2030 while developed Europe sees demand grow at half that pace. But non-Organisation for Economic Co-Operation and Development (OECD)
As noted above, electricity supply comes from a variety of sources, but it’s dominated by four: coal, natural gas, nuclear and renewables. Together these four broad categories generate more than 90 percent of the power used in the US. Few would argue that these four fuels will remain the dominant source of electricity for at least the next 20 years. The fact is that there’s no silver bullet for meeting the world’s
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energy demands. There’s no single fuel that will dominate the future of electricity, and all four of the key electric fuels will play a role in meeting growth. But when it comes to electricity generation, there are three paramount considerations: cost, environmental impact and security/political risk. Nuclear power offers advantages on all three counts, and the world is just starting to recognize that fact. One of the biggest benefits of nuclear power is cost. Unlike most conventional fuels, nuclear power has only a minimal fuel cost. The vast majority of costs associated with nuclear are upfront capital needed to build and obtain permitting for a plant. Uranium is the key fuel for nuclear power plants. The amount of power contained in one pound of uranium is equivalent to the energy content of 20,000 pounds of coal. And uranium fuel rods only account for roughly 27 percent of the cost of generating power from a nuclear power plant. Of that total, uranium costs account for only 3 to 5 percent of the cost of power; the balance is the cost of processing natural uranium into usable form. A Finnish government study conducted in 2000 examined the change in electricity costs for coal, nuclear and gas-fired plants. The study concluded that a doubling in uranium prices would result in a 9 percent jump in the cost of nucleargenerated power. But a doubling in coal and natural gas costs would cause a 31 and 66 percent rise in electricity costs respectively. Even the rapid rise in uranium prices in recent years has done little to change the economics of nuclear power production. The bigger component of costs associated with nuclear power are those costs surrounding the actual construction of plants. Companies generally pay these costs upfront and then account for the costs by spreading them over the operating life of the plant. Thus, these costs are capitalized over time in corporate accounts assuming some cost of capital. There are wide variations in calculated costs for nuclear plants between different countries, plant designs and the assumed cost of capital. But for more modern designs, current upfront costs of between $1,000 and $1,500 per installed kilowatt of generating capacity are possible.
The OECD, in cooperation with the International Energy Agency, released a study in 2005 examining the overall costs of nuclear, coal and gas power in a number of different countries. Costs include fuel and operating costs, as well as upfront construction and back-end waste disposal costs. The cost of credits for CO2 emissions—now introduced in many countries—isn’t factored in. Because nuclear power doesn’t release CO2, inclusion of such credits would make nuclear look more attractive economically. The study was based on costs for plants scheduled to be constructed worldwide between 2010 and 2015. The study assumes a 5 percent cost of capital and a 40-year operating life for the plants. Using those criteria, nuclear is cheaper than both gas- and coal-fired power in most countries. The difference between nuclear and gas-fired power is particularly stark. And even if we increase the assumed cost of capital to 10 percent, nuclear remains cheaper than coal in 70 percent of the countries studied and cheaper than gas in 80 percent of cases. It’s also worth noting the relatively wide differences in nuclear costs between countries. In particular, France has access to particularly cheap nuclear power plants. There are a number of reasons for this, but most center around the country’s commitment to nuclear power; more than 80 percent of the electric grid is nuclear. France uses a standardized plant design, making it easier and cheaper to maintain plants and obtain spare parts. Also, a standardized plant design makes labor more mobile and reduces construction costs; construction costs fall as companies gain experience in building plants. And because the government is committed to nuclear energy, the permit process in France is streamlined, cutting out significant red tape and regulatory-related costs. Some of the same benefits that help keep France’s costs down are also relevant elsewhere in the world. For example, US nuclear plant ownership is becoming more concentrated in the country as larger utilities buy up reactors from smaller operators; these larger players have considerably more experience and know-how when it comes to nuclear power. And because they’re committed to nuclear power, they’re more willing to invest in the assets.
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One factor at play in the US is that the permit process has been streamlined somewhat to reduce the regulatory burden compared to procedures 30 years ago when the last wave of nuclear plants were built. Another factor helping to reduce costs in the US is operators building larger facilities and up-rating the capacity of existing facilities. Larger reactors tend to have a lower cost per kilowatt than smaller facilities. Bottom line: No matter how you choose to evaluate cost, nuclear is cheap. And because fuel prices aren’t particularly important, the cost of nuclear power is steady and predictable. When it comes to availability and political risk, nuclear also looks like a winner. It doesn’t require much uranium to power a plant, so there’s no need to have hundreds of tankers and barges plying the world’s waterways to deliver fuel to power plants. And the world’s largest and richest reserves of uranium are located in Canada and Australia, both stable and developed countries. The US also has significant uranium reserves in the Southwest that are economical at current prices. Since 1990 more than 90 percent of the new power plants built in the United States have been natural-gas-fired. The Energy Information Administration (EIA) projects a continued rise in the importance of gas as a power plant fuel; it accounts for about 17 percent of the nation’s power supply now, a ratio projected to increase to around a quarter by 2025. But natural gas is not the ideal, clean power supply that some suggest. Natural gas reserves in the US are already depleted. Deepwater reserves and unconventional plays like Texas shale will help keep US gas production from falling drastically over the next few years. But it’s clear that the US will have to step up imports of gas in the form of liquefied natural gas (LNG). LNG imported from places such as Russia and the Middle East carries significant supply risk and, most likely, a fair degree of political risk. Thus, as North American gas production peaks, supply risks increase. And this supply risk isn’t only a US problem. Europe—excluding Russia—is heavily reliant on imports of gas to satisfy demand. In January of 2006, a political dispute between Russia and the Ukraine prompted a major disruption of gas
supplies into the EU. Shortages of gas approached critical levels in Italy and Germany. And even more worrisome, a vicious Russian winter caused a boom in its demand for gas; the country had trouble producing sufficient gas to satisfy the hungry European market. More recently, Russia has grown increasingly worried about a domestic shortage of natural gas in the next few years. Russia has the world’s largest gas reserves—nearly 48 trillion cubic feet, representing more than a quarter of the world’s total proven reserves. But gas prices are subsidized domestically and given Russia’s strong economic growth, demand has boomed. Russia is even looking at diverting some gas from its Sakhalin project to domestic uses; this gas had originally been slated for the export market. This could spell further supply disruptions for Europe in coming years. Even the UK—traditionally an energy-independent nation— has experienced considerable trouble with gas supply. The country’s once prolific North Sea gas fields aren’t providing enough gas to meet demand, and there’s talk of building a major pipeline to connect the UK with continental Europe; Britain would receive supplies of Russian gas along that pipe. Clearly, natural gas is not as readily available to consuming nations as it once was; in future more gas will need to be sourced from geopolitically unstable regions of the world. That’s not the case with nuclear power and uranium. The final issue is, of course, the environmental benefits of uranium. Nuclear power produces no emissions of sulphur oxides (SOX), nitrous oxides (NOX), greenhouse gases or any other pollutant. Radiation levels outside a nuclear plant are no higher than background levels present at almost any other location on the planet. Further, the nuclear waste issue is perhaps the biggest red herring propagated concerning nuclear power. Spent nuclear fuel rods still contain 97 percent of their original energy and can (and are) routinely reprocessed and recycled in most countries. This cuts down on waste volumes and cuts natural uranium demand by as much as 30 percent. Radioactivity of these rods is reduced significantly simply by time; spent rods lose a good deal of their radioactivity simply by sitting in cooling pools after ejection from the core.
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Only 3 percent of the waste in spent rods is high-level waste that needs permanent storage. This waste is solidified and stored in glass—a process known as vitrification. The environmental benefits of nuclear are most clear when it’s compared to coal-fired power. Coal releases a number of pollutants into the atmosphere; three of the most damaging and important are sulphur oxides (SOX), nitrogen oxides (NOX) and mercury. Sulphur dioxide is behind acid rain and has been linked to respiratory illnesses. Nitrogen dioxide can also cause respiratory illness in low concentrations and is a contributor in the formation of smog. Mercury can cause birth defects in high concentrations. Even worse, mercury can accumulate in the flesh of fish; when eaten, these fish can cause health problems. Emissions of such pollutants are controlled by many governments. In the US, control is often accomplished using an emissions trading scheme: Polluting plants can buy credits from low-emissions plants to make up for their excess emissions. In recent years, credits have become extraordinarily expensive. Polluting plants have been looking for ways to reduce the need to buy these credits. Burning low-sulphur coal can help reduce sulphur emissions. Advanced scrubbers can also dramatically reduce emissions of nitrogen and sulphur oxides. Considerable new scrubbing capacity is scheduled for installation in the eastern part of the US as utilities adapt to rising costs for pollution credits. In the developing world, the situation with NOX, SOX and mercury is even worse. Scrubbers are expensive to install and require significant maintenance and some ongoing expense to remain effective. Moreover, the US has truly large reserves of low-sulphur coal in the western half of the country; not all developing countries have a similarly attractive resource. A perfect example of the pollution problems inherent with un-scrubbed, older-style coal plants is China. China consumes more coal than the US and European Union combined, and a new coal plant opens up in the nation roughly once every two weeks. Many of these plants aren’t equipped with the advanced scrubbers used in the US and other developed countries. In addition, modern plants in the West create
higher pressure and temperature in their boilers, increasing efficiency by as much as 50 percent. Heavy reliance on less-efficient coal plants is taking a toll: Of the 10 most polluted cities in the world, seven are located in China. It’s estimated that acid rain falls on more than a third of the country, causing damage to crops. Smog and respiratory illness are also more common in China than in most of the developed world. In fact, in some cities, the smog and soot are so thick that cars typically drive with their headlights on during daylight hours. The final point concerns greenhouse gases like carbon dioxide (CO2). Scientists differ in their views on how serious and immediate a threat global warming and greenhouse gas emissions are to the global climate. I’m certainly not qualified to enter that debate in a meaningful way. However, many countries are passing laws to curb their emissions, so it would seem important to at least keep track of these emissions. The developing world will be the prime contributor in the future, as burning coal releases large amounts of CO2. China alone accounts for about 30 percent of the world’s total CO2 emissions and is overtaking the US as the world’s largest emitter. But even the developed world—with its advanced coal-fired facilities—is seeing rapid growth in CO2 emissions. Europe has been the most aggressive in passing laws limiting such emissions and remains one of the most vehement supporters of the Kyoto Protocol for curbing CO2. The agreement called for an 8 percent reduction in greenhouse gases between 1990 and 2012. But according to the Oil and Gas Journal, Europe is a long way from meeting that goal; in 2004, emissions were actually 4.4 percent higher than in 1990. Of course, cars, trucks and other forms of transportation accounted for some of this jump, but coal plants remain a major contributor to CO2 emissions. Bottom line: Despite its benefits and the use of the most-advanced technologies, coal is the dirtiest power source. This is a particularly large problem in the developing world. Nuclear power is one way for developing countries like China and India to get the power they need without the negative environmental side effects.
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Already Going Nuclear As noted above, the strongest growth in electricity demand and nuclear power plant construction is coming from the developing world—in particular, China and India.
uranium recycling costs roughly four to five times what natural uranium costs to purchase. Thus, uranium prices would have to rise dramatically before countries pursue recycling more aggressively.
China started its civil nuclear power program in 1970 and currently has 12 nuclear reactors in operation, providing only a little more than 2 percent of the country’s power. But, as I highlighted above, the country’s heavy reliance on coal is starting to exact a significant environmental and economic toll; the government is pushing the rapid expansion of China’s nuclear industry. The country has set a goal of increasing nuclear generating capacity fivefold by 2020.
India is another interesting nuclear story. Because the nation acquired nuclear weapons after 1970, it’s excluded from the Nuclear Non-Proliferation Treaty (NPT) and has therefore been forced to develop its nuclear power program with an eye toward independence from the need to import fuel or technology. Thus, the country has been forced to rely on domestic uranium supplies for its 14 nuclear reactors currently in operation.
Given the rapid projected growth in Chinese electricity demand, some of this growth would be needed to simply maintain nuclear power’s share of the Chinese electric grid. But the government is actually looking to boost the percentage of its power needs that comes from nuclear power to help diversify away from coal-fired power. In total, this will require building between 30 and 35 new plants in the next 15 years.
The problem with India’s domestic uranium supply is that it’s of extraordinarily low grade; the ore that’s mined isn’t at all rich in uranium. Thus, it’s very expensive for India to mine this uranium. It would be a good deal cheaper to source that fuel from outside India, importing uranium from places like Canada, where ore grades are far higher and mining cost is lower. India could also benefit in terms of efficiency if it were able to import civil nuclear technologies from abroad.
And this isn’t just some pie-in-the-sky plan. China is already constructing and siting new plants. China is currently in the process of building four plants with a total capacity of 3,170 MW and just completed two plants. China has some domestic uranium resources, but they aren’t sufficient to meet demand, especially as new reactors come online. Currently, the nation imports roughly half the uranium it needs, mainly from Russia and Kazakhstan. In the future, China is likely to diversify its supply by purchasing uranium from Canada and Australia as well. China operates a closed-fuel cycle. Basically, that entails recycling spent fuel rods to recover some of the unused material. This reduces uranium demand, but certainly doesn’t eliminate the need to import natural uranium—despite an expanding recycling program, China’s demand for uranium continues to rise rapidly, far more rapidly that its ability to expand domestic production. Moreover, according to a large uranium mining company, the cost of recycling and handling spent fuel well exceeds the current cost of natural uranium. Most estimates suggest that
But that’s all starting to change. The Bush administration negotiated a deal with India in July of 2005 that would remove many of the restrictions on nuclear power-related trade between the two nations. After nearly two years of intense negotiations, the deal has received most of the approvals it needs from the US Congress. However, lately the bill has encountered some political opposition of a different source – from within India’s ruling coalition government. But eventually, it’s likely some sort of India –US nuclear deal will be enacted. At this time, India has definitive plans for eight new nuclear reactors. And the country has long-term plans in place to increase nuclear power’s share of the Indian electric grid from 2.8 percent last year to 25 percent by 2050. Such an expansion would obviously require massive new construction of nuclear plants. Russia is normally considered a key exporter of energy-related commodities; few consider the rapid pace of Russian electricity demand and the need for the nation to supply internal demand. But the Russian economy has been in the midst of a boom, due in no small part to the country’s vast mineral
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wealth of oil, natural gas and metals. A growing economy spells rising demand domestically for power. Of course, Russia could continue to supply that demand using domestically produced natural gas. But the country would rather export its valuable gas reserves abroad where it can earn top dollar. As noted above, Europe is a key consumer of Russian gas. Thus, it makes economic sense for Russia to expand its domestic use of nuclear power. In short, that’s exactly what Russia is planning to do. Nuclear power currently accounts for about 16 percent of the Russian grid; the government has proposed increasing that share to 25 percent by 2030. To accomplish that goal given rapid growth in electricity demand would require building 30 to 40 new large-scale reactors. But, as I noted above, it’s not just the developing world that’s considering new nuclear construction. Germany is re-examining plans to phase out nuclear capacity; leading scientists in that nation have stated that nuclear is the only way for Germany to meet the CO2 emissions guidelines of the Kyoto Protocol. And in the US, plans are proceeding for a major expansion of existing facilities and new reactor erection. Meanwhile, countries like Finland, France and Japan remain committed to domestic nuclear programs. Finland gets 27 percent of its power from its four nuclear plants and is in the process of constructing a fifth reactor due to start up in 2009. France has 59 reactors supplying around 80 percent of its electricity demand. Interestingly, the country is the world’s largest net exporter of power thanks to its nuclear power program. Power is France’s fourth largest export, with neighboring Italy—which has no nuclear plants—as its largest customer. The country is also planning new reactors to replace older reactors due to retire; France is experimenting with advanced new nuclear designs. Finally, Japan has to import 80 percent of its energy needs due to a lack of domestic natural resources. Nuclear power is a key component of the country’s energy policy; nuclear plants also reduce Japan’s dependence on imported fossil fuels. Right now, nuclear power supplies nearly a third of electricity generated in Japan; by 2009, nukes should account for 37 percent of power supply—by 2014, more than 40 percent.
The UK is the most recent developed nation to re-examine nuclear power’s role in its electric grid. This is a particularly notable development as Britain’s large reserves of North Sea oil and natural gas have traditionally made it energy independent. In July of last year, the British government released a detailed energy review. That report recognized the need to expand nuclear power and replace plants currently due to be decommissioned as they come to the end of their useful lives. Here’s a passage from former Prime Minister Tony Blair’s foreword to the report:
…As a nation, we have been fortunate up to now that our energy needs have been met largely from domestic sources. Coal, with oil and gas from the North Sea more recently, have driven our economy. Investment in nuclear power has also provided a significant proportion of our electricity. But we now face two immense challenges as a country—energy security and climate change. First, we will soon be net importers of oil, and dependent on imported gas at a time when global demand and prices are increasing. Energy consumption by China and India, for example, is projected to double by 2030. At the same time, many of our coal and nuclear power stations are coming to the end of their lives. Without action to ensure reliable supplies and replace power plants, there will be a dramatic shortfall in our energy capacity and risks to our energy security. Second, and even more important in the long term, is the impact that our sources and use of energy are having on our planet. The evidence is now compelling that the activities of humankind—and greenhouse gas emissions in particular—are changing the world’s climate. Temperatures are rising and so are sea-levels. Extreme weather is becoming more common. There is no scientific consensus yet on how much time we have to avoid dangerous irreversible climate change. But the overwhelming majority of experts believe climate change is already underway and, without collective action, will have a hugely damaging effect on our country, planet and way of life.
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The prime source of greenhouse gas emissions is the production and use of energy. If we are serious about tackling climate change, the centerpiece of our programme—in the UK and across the world—must be in ensuring we power our economy and way of life in a cleaner, greener and more efficient way. Source: http://www.dti.gov.uk/energy/review/index.html. The Energy Challenge: Energy Review Report 2006. Presented to Parliament by the Secretary of State for Trade and Industry by Command of Her Majesty, July 2006.
This is just a small flavor of the UK government’s detailed energy white paper. But it’s clear that the government is seriously examining the replacement of current nuclear facilities; nuclear power’s environmental benefits also feature prominently in the report. It’s clear that nuclear power is expanding rapidly in both the developed and developing world. This is a trend I expect to continue for many years given the clear advantages nuclear power holds over fossil fuels.
Playing Uranium The most direct way to play an expansion of nuclear power globally is to buy the companies that supply the key nuclear fuel—uranium. Uranium is a naturally occurring metal that’s only slightly radioactive in its natural state. In fact, it’s a rather common mineral in the Earth’s crust. In its natural state, uranium occurs as uranium oxide (U-3O8). Due to its yellowish color, this ore is colloquially referred to as “yellowcake.” Yellowcake is composed of two main components: U-235 and U-238. The stable U-238 accounts for more than 99 percent of mined uranium. The unstable U-235 is the isotope used to create a nuclear reaction and produce energy. The first step in producing uranium fuel is mining natural uranium. There are a few ways of doing this. Two of the more common methods are surface mining and in-situ leach production. The former is akin to strip mining coal or any other mineral; the latter involves pumping acid down a hole and dissolving the uranium. Acid and liquid with dissolved uranium is known as pregnant liquid; this can then be pumped back to the surface, and the natural uranium separated.
The current global supply/demand balance of uranium is ultra-tight. It total, global demand for uranium currently stands at 175 million pounds annually. Global mine production—the total natural uranium production from all mines worldwide—stands at roughly 110 million pounds. That means that there’s about a 65 million pound deficit because mines aren’t producing enough uranium to satisfy demand; demand exceeds mined supply by more than 60 percent. Obviously, supply must equal demand longer term, or nuclear plants would simply be shutting down all over the world due to lack of fuel. Three primary sources of uranium have allowed the mining deficit to persist: tails recycling, inventories and highly enriched uranium (HEU) from Russia. The term “tails” refers to the waste stream from uranium enrichment. Basically, to make uranium for power plants requires taking natural uranium that’s composed of 0.71 percent U-235 and boosting it to 3 to 4 percent U-235. The waste stream from the process is depleted uranium containing a smaller amount of U-235; 0.20 to 0.35 percent U-235 are typical for tails. There is a trade-off here between the cost of enrichment and the quantity of natural uranium consumed in the enrichment process. Specifically, by more fully enriching the natural uranium, the tails can be depleted further. This means you can produce more nuclear fuel out of a given quantity of natural uranium. However, this requires more enrichment work, so the cost of enriching the uranium is higher. In recent years, the tails have been falling. This is likely because companies want to minimize the quantities of natural uranium consumed during enrichment. This obviously has helped keep demand lower than it would otherwise be; more fuel is being squeezed from the same quantity of uranium. But most agree that this is reaching a limit. The cost of enrichment is rising rapidly, and there’s insufficient capacity. That makes it less economical to keep reducing tails. Moreover, at best, this conserves a few million pounds of uranium per year. A more important component of the uranium demand/supply balance has been inventories and Russian HEU. There
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are two sources of uranium inventories: governments and utilities. Utilities built up large inventories at lower prices in the ’80s. They’ve been able to simply use up inventories of uranium to continue operating. But inventories are now very low and most utes are looking to secure new supplies during the next few years. The US and Russian governments—among others—have stockpiles of uranium. But some of this uranium is used to replace fuel rods in nuclear-powered submarines; it’s not all available for sale. In addition, a large global uranium mining company estimates that a good portion of the material is contaminated and will require reprocessing before it’s available for use. At any rate, occasionally governments sell off part of their stockpile; these stockpiles are dwindling and represent only a few million pounds of annual supply. Finally, there’s Russian HEU. Basically, this is weapons grade uranium that’s reprocessed into nuclear fuel; this reprocessing is part of an agreement between the US and Russia to decommission old nuclear warheads. Traditionally, this has added another 25 million pounds or so to annual supply. But the agreement expires in 2013, and Russia recently stated that it will not renew the deal. Those 25 million pounds will soon disappear from the market. And just as with any mining or drilling operation, supplies are never guaranteed. One giant Canadian producer was forced to delay one of its most important uranium mining projects for years due to a rock fall, flood and mine shaft collapse. That project was among the largest uranium mines in the world. If such an accident can affect a huge, well-run company, you can bet all uranium producers are subject to the same sorts of delays and cost overruns. Thus, when we look at the potential for mine expansion, production estimates should be taken with a grain of salt. But while supply is limited, demand for uranium is gradually picking up steam as new reactors come on line during the next few years. New reactors can require more than 1.5 million pounds or uranium for initial fueling and another 500,000 to 600,000 pounds annually for ongoing refueling. Utilities are starting to show signs of desperation when it comes to contracting new supply. Specifically, the uranium
spot market has traditionally been a buyer’s market; buyers would enter the spot market and ask for a price, dictating the time of delivery. The buyer would then simply choose the lowest offered price. Recently, the uranium market has shifted to more of a supplier’s market. Suppliers are coming into the market and asking for bids; the seller is setting delivery terms and choosing the highest among several offered prices. I can think of no more classic sign of an excess of demand over supply. Even more worrisome on the supply front is who’s buying uranium on the spot market. Traditionally, it’s been the users of uranium that have been the big buyers in the spot, but recently, some companies have reported that uranium miners/suppliers have been bigger buyers. This is happening because uranium miners have contracted to sell more uranium to utilities than they’re able to produce; they have to buy uranium at sky-high spot prices to meet demand. Rising demand and shrinking supply can only mean one thing: rising prices. It should come as little surprise that spot prices have risen from less than $10 per pound in 2002 to more than $130 in June of this year. To play the uranium mining industry, there are really two ways to go: the large, established uranium mining firms with existing production and smaller “junior” uranium miners that are still in the exploration or early production phase. The larger uranium miners will benefit from rising prices but there is one major problem with these companies: legacy contracts. Basically, the uranium spot market only accounts for about 10 to 12 percent of annual demand for uranium. Most of the world’s uranium supply is covered under long-term supply arrangements between utilities and producers. Most of the big producers, as you might expect, are very active in the contract market. This is great during periods of falling uranium prices because fixed prices eliminate the volatility of the spot market. But it means that these companies’ realized price for uranium sales adjusts only slowly to spot conditions; in periods of rising uranium prices, the big producers don’t get as much money for its uranium as spot prices would suggest.
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SPEC IAL REPOR T
To find more leveraged bets, you’ll need to explore further down the capitalization curve, looking at smaller producers and uranium explorers with more leverage to the spot market. Uranium mining is a risky business. Production delays, unforeseen project cost and simple labor and raw materials inflation can all have important effects on the economics of a particular mining project. And production costs vary wildly depending on the grade of ore mined and how large overall reserves are. Riskier still is exploration. Uranium explorers buy acreage and drill holes, taking core samples to evaluate reserve size and ore grades. Sometimes even the most promising reserves just don’t pan out and can never reach economic production. It’s impossible to know this for sure until you’ve spent considerable sums on exploration; only once uranium is produced can we really know for sure the full costs and viability of a project. To account for this higher level of risk, risk-tolerant investors should take a more diversified approach to playing the junior uranium producers and exploration companies. Specifically, one must recognize that no matter how careful your selection criteria, some promising uranium exploration stories will never work out. Fortunately, there are high rewards to be found in this sector as well. If this bullish thesis on uranium prices and nuclear power is even half correct, I suspect there will be many winners among the uranium juniors during the next few years. For the best chance at big returns, cast a wide net. Specifically, instead of just buying one or two high-risk names, consider placing a smaller amount in five to 10 such companies. There are literally hundreds of small-cap uranium plays listed on the US, Canadian and Australian exchanges. It’s tough to know which firms are quality potential producers and which are just glorified marketing campaigns. To play the juniors, consider focusing on companies that meet one or more of the following criteria:
Existing production of uranium or companies that will be producers in the next few years. Projects that advance to within a couple of years or so of the production phase have some economic viability. Also, most
small producers and soon-to-be producers don’t have the overhang of legacy contracts that the majors do.
Uranium exploration firms that have a large ownership stake from a major uranium producer. Core sample reports and financial announcements are all important, but no one knows more about the potential of a given reserve than a big producer with operations in the same area. These companies truly understand the region in which they operate and won’t take a position unless there’s some promise. In fact, some make a habit of taking small positions in uranium exploration that look promising.
Companies that have partnered with major producers on projects. For similar reasons, big producers don’t tend to partner with companies unless there’s solid potential. Risks The information contained in this informational report is neither an offer to buy nor a solicitation to sell any security or type of securities nor should it in any way be considered personal financial advice. Consult your investment advisor before making any investment. Investing in foreign markets involves unique risks including, but not limited to, currency fluctuation and political risk. Further, Green Faucet, Inc. does not represent or endorse the accuracy, timeliness or reliability of any of the information and/or opinions provided by registered representatives and third-parties. This special report, Nuclear Power: Facts, Myths & Investment Opportunities (www.greenfaucet.com) are products of Green Faucet, LLC. and KCI Communications © 2007 GreenFaucet, LLC. All rights reserved. Green Faucet, LLC. and KCI Communications. Green Faucet, LLC www.GreenFaucet.com KCI Communications, Inc. McLean, Virginia 703.394.4931 www.kci-com.com
About the Author Elliott H. Gue is an associate editor of Personal Finance, one of the most widely read investment newsletters in the world. He is editor of The Energy Strategist, a premier financial advisory solely dedicated to covering the complex energy markets, and also two e-zines: The Energy Letter and Trader’s Talk. He is co-author of The Silk Road To Riches: How You Can Profit By Investing In Asia’s Newfound Prosperity.
Nuclear Power: Facts, Myths and Investment Opportunities || www.greenfaucet.com
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