Once upon a time, two very warlike tribes decided to make the world a slightly better place, by turning at least some of their swords into ploughshares. Actually, they didn’t even make ploughshares, whatever those are, but fuel that could produce electricity. Now, everyone knew that, eventually, the supply of this fuel from the old swords would run out. In fact, everyone, from the suppliers of fuel to its users to the people who invested in companies that make the fuel, knew the exact date on which this source of fuel would run out. As the date approached, and then passed, though, a few “analysts” scurried out to tell people who weren’t really paying close attention that there was a secret, money-making angle to play.
Of course, what I’m describing is the end of the Megatons to Megawatts program, a project that took highly enriched uranium from Russian nuclear weapons and down-blended this material to make a large amount of nuclear reactor fuel. Lately, we’ve seen a number of sources of investing news publishing articles that suggest there will be a huge upswing in uranium prices soon, because of the massive supply shortfall caused by the end of Megatons to Megawatts. This is an old and crazy idea that has popped out of the woodwork a few times, and just because it is back again doesn’t make it any less wrong.
While I was working at Byron Capital Markets, my colleagues and I looked at the whole question of uranium supply and demand. We did something that seems pretty obvious, but that isn’t trivial. We looked at all the operating nuclear reactors in the world, and all the planned reactors. We added up the uranium the operating reactors use, if they continued to operate, we added up all the new uranium required if the planned reactors all come into operation on schedule, and we added up all the refueling needs of any new reactors over time, through to 2020. Then we looked at the licensed and potential output of all operating uranium mines and mills, and the outputs of all the funded and planned mines through to 2020. We removed the supply from the Megatons to Megawatts program, and we examined some unconventional supplies of uranium even though these were really small. The result was that there was no massive shortage of uranium coming, at any point in our study period. And because of the operating costs of the likeliest producers, there was no massive price spike coming, either.
There are no possible positive demand shocks in the nuclear industry. It is possible to have a few or many reactors get shut down, say because public sentiment swings wildly and foolishly following a disaster in Japan that resulted from poor disaster planning and the old equipment used inside an antique nuclear facility. But no nation is suddenly going to pull a curtain aside and show the rest of the world 20 new nuclear plants that we all knew nothing about. If some nation decides today to go on a nuclear binge and build those 20 reactors, we have 10 years to get ready for them.
It is possible to experience negative supply shocks. On the 13th of March, Cameco finally announced production from Cigar Lake, after a series of issues. Other uranium mines occasionally get shut down because of political or economic forces. Uranium suppliers do have some pretty smart people working for them. If they see a chance to shut down a small mine that is making only a marginal profit and increase the spot price of uranium without inconveniencing their customers by impeding deliveries, you can bet that they will look at that option. Maintenance and upgrade, anyone?
I conclude that there isn’t likely to be any massive surge in uranium prices anytime soon. There is likely to be a long-term increase in price that will move us through $40 and back towards $50. If your long-term investment plans include low-cost uranium miners, you are probably doing the right thing. There may even be some noise that looks like surges in pricing, so play the momentum on those if you’re brave enough. But there are other more interesting critical materials to me, and over the coming weeks, we will tell you about some of them.