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Uranium - Geopolitical events to aggravate supply situation

28th of March, 2022 - torck capital management AG

It’s only been shy of two months since we published our last update on uranium. Back then, we saw two major catalysts that will impact the uranium price in a positive way: The inclusion of nuclear energy production in the European Union’s green finance taxonomy as well the protests and unrest in Kazakhstan affecting uranium’s supply dynamics as the country are responsible for north of 40% of all of the world’s uranium production.

We still consider the points made in this article from early February highly relevant and think that the events described are having their impact on the broader uranium market. As of late, the eruption of the Ukraine-Russia conflict has added another push factor to uranium’s current playbook. 

Possible sanctions hitting production and enrichment

With Russia invading Ukraine, the world has turned to sanctions with the US and Europe taking the lead. In the U.S., President Biden has issued two executive orders in early March with the goal of stopping imports of Russian oil and gas. The European Union joined the U.S. by making key goods from the iron or steel sectors a target of its sanctions.

At the time of writing, uranium imports into the U.S. or Europe seem not to be affected by the sanctions. But this could change. Already, a Ukrainian energy coalition is requesting the U.S. to cease importing Russian uranium. After all, so their argument goes, banning Russian uranium imports would help defund Russia’s war machine.

As it stands, the US is getting about 16% of its uranium from Russia, while about 20% of the European Union’s uranium is of Russian origin. If sanctions on Russian uranium were indeed to take hold, the ramifications could be significant. Besides Niger, Kazakhstan, Canada, Australia, or Namibia, Russia is one of the world’s top uranium suppliers. 

But it is not only about the production – the enrichment of raw uranium is just as important. In this respect, Russia provides about 35% of all enriched uranium to the world. And the country also has the biggest enrichment capacity globally, with China ranked second. As some speculate, the world could not have enough capacity to immediately replace Russian enrichment services – especially since a fuel shortage resulting from the Russian sanctions could put additional stress on the remaining Non-Russian enrichment facilities.

The supply deficit is real

A ban on Russian uranium from the U.S. and the European Union would require Non-Russian enrichment plants to step in and increase output. Because of low demand, these facilities were currently underfeeding, which means they were putting some of their unused uranium back into the market, adding to a general alleviation on the supply side.

In the case of being called to action due to a potential ban on Russian uranium, capacity at these facilities would have to be ramped up leading to overfeeding rather than underfeeding, meaning that these enrichment services would need extra uranium. What contributed to a general alleviation on the supply side would now add more demand for mined uranium supply. 

The end result would be an even higher uranium supply-side deficit. Already today, there is around 200M lbs of uranium demand and only about 135M lbs of mined supply. Factoring in the 25m lbs secondary supply from underfeeding and mobile inventory, the total supply deficit adds up to 40M lbs. With a US/EU ban on Russian uranium and underfeeding turning into overfeeding at Non-Russian enrichment facilities, the supply deficit would grow to over 80M lbs.

Catching up is hard

So, spot uranium is really in short supply. And it will be hard to increase additional supply in the short term as new uranium mines cannot be started on the fly but take several years to be up and running.

As a matter of fact, many existing uranium mines are being depleted as we speak. Simultaneously there has been a broad lack of investment in the exploration and development of new mines during the last bear cycles of low prices. New investments and sustained higher uranium prices above $60 also for long-term contracts over an extended period of time would be for a proper resurrection of new mine construction to make up for the last 10 years.

Adding insult to injury is the aforementioned U.S. executive order that was passed by President Biden. It contains an investment prohibition that banks U.S. people, wherever they are located, from doing any new investments in the energy sector in the Russian Federation. While neither the term “investment” nor the term “energy sector” are defined in the executive order, it is likely that a commodity like uranium (in any form) will be touched by the order and any transaction that constitutes a commitment or contribution of funds or other assets or a loan or other extension of credit to an enterprise dealing with uranium will be prohibited.

Aiming for more independence

The recent geopolitical turmoil has made the world take notice that some independence when it comes to the supply of energy commodities is not a bad thing going forward. In the U.S. it might once again become obvious that the country needs to be an energy exporter, unleashing its bountiful reserves of shale gas that it can also provide to the world as an alternative to Russian gas.

One customer could be Japan. The country is currently getting 5% of its oil and about 8% of its liquified natural gas from Russia. If these cords were cut with the sanctions taking hold, other natural gas and oil producers would have to take the Russian suppliers’ place.  

However, voices within Japan called for another option. The former defense minister and senior lawmaker Itsunori Onodera proposed to hurry up with the restart of Japan’s nuclear reactors. More than 10 years after nuclear meltdowns at the Fukushima Daiichi plant, many Japanese reactors are still in the process of being relicensed in accordance with the new safety standards imposed after the nuclear disaster. With the current geopolitical shifts, this could be about to change. Just as things could be changing in South Korea as well, now that Yoon Suk-Yeol, a supporter of nuclear energy, has been elected president.

Things are moving in Europe

A similar realization is also gripping Europe. The war in Ukraine has demonstrated in an impressive way that the EU must work towards diversifying its energy supplies. This will be ever more important as nuclear energy is currently gaining popularity again as a consequence of rising fossil fuel prices.

In Belgium, the decision has been reached to delay a nuclear phase-out by another 10 years. Instead of initiating the decommissioning of its nuclear reactors in 2025, as originally planned, the country will push this back to 2035 due to the current uncertain macro situation.

Also, in the Czech Republic, a tender was launched that aims at building a new reactor at the Dukovany nuclear plant. This endeavor is well in line with the country’s overall goal of increasing nuclear power generation.

A significant shift could also be underway in the United Kingdom. In a recent meeting with executives from major nuclear utilities and technology companies, UK’s prime minister Boris Johnson was hinting at the fact that the government is willing to get up to 25% of its electricity from nuclear power. This would imply almost a 10% increase as nuclear’s current contribution to UK’s energy mix stands at about 16%. If this move were to occur, the country would not only have to revamp several existing reactors but support and enable large investments in new power stations.

Such government support has already been spoken in France. Early February this year, President Macron announced that up to 14 new nuclear reactors are supposed to be built over the next three decades. Macron’s announcement can also be seen as a reinforcing statement towards nuclear energy that provides more than two-thirds of the country’s electricity output.

What to do as an investor

We at torck capital management have expected higher prices to materialize over the next few years due to supply and demand imbalances. However, the speed at which these higher prices occur due to the Ukraine conflict and Russia’s isolation is impressive. With these prospects, investments in energy metals exploration companies ever more become a no-brainer. 

We have said it before, but we say it again: At torck capital management, we believe that uranium should be part of every serious investor’s portfolio. So, we have created the new “Energy Revolution Fund” that gives investors exposure to commodities like uranium. This fund is the perfect fund at the perfect time.

About torck capital management

torck capital management is an asset management boutique based in Zurich. Well-established in the Swiss financial industry, our goal is for torck to become the leading boutique of choice for exponential opportunity investments. We aspire to both drive meaningful change with our investments and seize exponential return opportunities in times of market disruption. Our new “Energy Revolution Fund” – launched at the end of September 2021 – builds on the thesis that a worldwide clean energy transition will kick-start another “super cycle” of rising commodity prices, which was last seen in the early 2000s when China’s economic growth took off. With investments in hand-picked junior mining companies that ensure an adequate supply of minerals for the clean energy transition, we see the potential for our next exponential opportunity.

Follow our upcoming blog articles to learn more about how the clean energy transition will impact the demand for critical minerals and create a strong investment case for junior mining companies.

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