Friday, September 13, 2013

HEU Has Ended—What Now? Uranium Shorts Potential Squeeze -

Where's The U.S.' U3O8—Now That Russia's Down-Blend Is Complete?

A recent World Nuclear News article—Russia completes Megatons to Megawatts work—appears to answer any doubts whether the long-standing uranium down-blend program between the U.S. and Russia is really ending this year. When I say really ending this is just my suspicious side wondering if I'm missing something with the U3O8 spot price now at 8-year lows as it hovers around $34/lb.

The market has known for a while that the end of this utility supply program may significantly boost both near and long-term uranium prices—removing ~24M lbs. per year from an already tight market that annually consumes more than it mines. To make supply matters worse, mines have been deferred due to low prices while demand is expected to rise as Japan's reactors start coming back online later this year, and with the number of reactors worldwide set to more than double by 2030.

The August 29 article says that the final shipment of low-enriched uranium (LEU) from TVEL's JSC Electrochemical Plant (ECP) marks the completion of Russia's 20-year commitment to down-blend weapons-grade uranium. An August 21 picture shows the final canisters of LEU leaving the ECP plant by rail on route to St. Petersburg, to then be shipped to the USA.

Formally known as the HEU Agreement—contracted in 1994 between the US Enrichment Corp. (later privatized as USEC Inc. which I'll mention later) and Techsnabexport (Tenex)—since 2000 the program has been under the U.S. National Nuclear Security Administration (NNSA). To date 500 tonnes of Russian weapons-grade HEU—equivalent to 20,000 warheads—have been down-blended into 15,259 tonnes of LEU, and has provided about 10% of U.S. electricity over the past two decades.

This short article should beg investors to start asking how U.S. nuclear utilities intend to make this up? If you are thinking 10% doesn't seem like that big of a shortfall, then start thinking 50% as the total percentage of U.S. electricity supplied by nuclear power is about 20%. In other words the HEU program fuelled 10% of all U.S. electricity, which is half of the amount supplied by nuclear power.

The United States has the worlds largest fleet of nuclear power reactors with 100 operable, 3 under construction, 9 planned and 15 proposed, as of July 2013. Nuclear power plants provide reliable low-cost electricity with no greenhouse gas emissions, but they are multi-decade capital projects costing billions per reactor that are dependent on long-term uranium supplies—there is no fuel substitute!

With the HEU program almost done, nuclear utilities will have to buy more U3O8 on the open market or enter into more off-take supply agreements with uranium miners—both could spell substantially higher uranium prices. When you have an already tight market, with supply shrinking even as demand is growing, at some point the market's pricing mechanism has to kick in to find its equilibrium.

If uranium prices don't rise soon, not only will it be next to impossible to fund new discoveries or to develop deposits, more producing mines will close. Uranium is radioactive and highly regulated, meaning that this mining supply tap takes substantially longer to turn back on than for other mines.

This begs the question how many uranium miners have already committed their future production to a nuclear utility—to secure financing, or to avoid falling prices? This might explain why there is such a large $20 gap between the U3O8 spot price and long-term prices which are still around $55/lb.

Another question is how do the Russian's intend to replace the $13 billion in HEU revenues that Tenex has brought into Russia's federal budget? And what will become of Tenex's four ECP plants?

Nuclear power and uranium are important markets for Russia and for some of its nearby former soviet nations. The most recent uranium production table at shows that the top 7 out of 37 nations produced about 90% of the world's uranium last year. Kazakhstan was by far the largest producer with more than the next three—Canada, Australia and Niger—combined. Russia was only 7th, but with Kazakhstan and Uzbekistan these three alone represent 46%+ of world production.

I mention this just as an interesting observation; I have no idea if these countries even get along, let alone have any cartel-like ambitions. In any event Russia has been investing more, not less, in uranium production—soon to complete its takeout of the rest of (TSX: UUU) Uranium One Inc..

Russia needs all the uranium it can get as it expands its own fleet of nuclear power reactors with 33 operable, 10 under construction, 24 planned and 20 proposed. In addition Rosatom—Russia's state owned nuclear company—is promoting a special package deal to finance, build, supply and operate even more nuclear power plants worldwide.

Russia's nuclear power technology full-meal-deal with batteries-included is attractive to emerging nations like Turkey, Egypt, South Korea and others who have already signed long-term agreements. At $5B to $8B a pop per reactor, Russia might care less about the current low U3O8 price and any Rubles it might lose to the cost of mining—further straining future global uranium supplies.

Then there's China, which has been stockpiling uranium and securing its own supply—state-owned China Guangdong Nuclear Power Group bought Extract Resources last year for its rights to the Husab uranium deposits in Namibia, reputedly the fourth-largest in the world. China is the world's driver of future reactor builds with 17 operable, 28 under construction, 53 planned and 118 proposed.

The U.S. still has the world's largest fleet of nuclear power reactors that will require 18,983 tonnes of uranium this year—again to produce around 20% of its total electricity output. Uranium mining in the U.S. last year totalled 1,596 tonnes—only about 8% of its needs. Over half, around 11k tonnes, of the U.S.' uranium came from the HEU program—with its final delivery any day now!

With uranium prices still this low, there obviously was a bigger short-term supply overhang than at least I expected after Japan and Germany shut down its reactors after Fukushima. However with more reactors in the works today than ever before, and with countries like Russia and China tying up and needing large percentages of the world's uranium for themselves, how and where will the 100 U.S. nuclear power reactors source their own future uranium supplies starting next year—without driving prices considerably higher?

Uranium Miners' Potential Melt-Up

We all know that most metals and mining stocks—including uranium—sold off with gold earlier this year. Gold dropped sharply by around 15% to $1321.50/oz. in mid April, then bounced to the high $1,400s, flat-lined for a month just under $1,400, dropped sharply again in June by around 15% to $1,200, and has built back up to the low $1,300s since then. Uranium's slide was less dramatic than gold's in April, with its largest decline of 13% happening in July from around $40/lb. to $35/lb.

My point is that earlier this year most uranium mining stocks drifted in sync with falling U3O8, gold and other metals prices. However unlike gold and gold stocks which sank even further, uranium stocks stopped losing ground around mid to late April—even as the U3O8 spot price saw its biggest drop late in July. Why didn't uranium mining shares sell-off again?

When a mining group bases despite its underlying commodity price falling, this is often a key signal that market sentiment has finally swung the other way in anticipation of an upswing. This is not surprising in light of uranium's various positive catalyst events that have been playing out on cue.

Another key point is that after Fukushima, market sentiment for anything nuclear was so dismal that the whole uranium mining group got slaughtered to the point of becoming one of the most heavily shorted sectors—nuclear power growth and safety facts didn't matter. Shares of major producers are still down over 50%, with most smaller uranium miners down by up to 90%—or gone altogether.

The surprising part here is that despite the industry's fundamentals never looking better, most of these shorts seem to still be in place. When comparing these huge short positions to the total number of shares outstanding and the average daily trading volume, it appears that short covering rallies could become another potentially explosive upside catalyst—they have to cover sometime!

One specific example may have been (NYSE: USU) USEC Inc., which operates the only U.S.-owned uranium enrichment facility in the United States. We mentioned USU in our May 12 Filtered Mid-Day Market Movers Recap weekend newsletter after picking up on its trading action earlier that week at our website's daily Hot Sheet at $0.43.

The only news I could find to explain the action was their Q1-2013 Results—showing more losses—and that their American Centrifuge achieved two RD&D Program Milestones. USEC's stock was not even in compliance with the exchange's $1 minimum bid requirement at that time.

The NYSE asked the company multiple times about USU's trading, but USEC's policy is not to comment on unusual market activity. This was after USU's early July 1-for-25 reverse stock split—converting our earlier $0.43 post to $10.75. As a follow-up we posted USU again the last week of July and in our August 4 newsletter at $26.64, before it topped out at $29.12.

USU is now around $11/share and shows a split-adjusted 52-week low of $0.27 on July 1, and a high of $29.12 exactly four weeks later on July 29. NASDAQ shows 13,694,085 shares as the USU Short Interest on the June 28 Settlement Date, and 25.7 Days To Cover. The most recent August 30 report shows 963,856 shares short, taking 3.3 days to cover. If not a short-squeeze, then what am I missing?

The table below shows small-cap uranium miners with sizeable short interests and at least one mine in production or in development. Short data is from, stock prices are from our website.

 Company (click to research) August 30
Short Interest
Time To
 Uranium Energy Corp.
13,558,921  422,065  32-Days  $3.02  $1.40  $2.33  $9.35 
 Ur-Energy Inc.
4,990,303  252,143  20-Days  $1.39  $0.70  $1.04  $5.45 
 Uranerz Energy Corp.
6,689,889  569,277  12-Days  $1.89  $0.88  $1.07  $7.65 
 Dennison Mines Corp.
7,007,816  651,616  11-Days  $1.72  $1.03  $1.16  $15.01 
 Uranium Resources Inc.
2,179,660  228,960  10-Days  $6.30  $1.75  $2.73  $14.99 

With uranium stocks technically basing and starting to respond positively to news again, it will be interesting to see where these short positions eventually cover—will we see more USU style rockets?

Uranerz Energy Closes US$10 Million Bought Deal Financing

URZ traded up from $1.17 to as high as $1.64/share in July as construction advanced at Uranerz Energy's first ISR mine—located in the prolific Powder River Basin (PRB) of Wyoming; and on news that drilling of the company's first of two Deep Disposal Wells (DDW) had been completed.

Then after flatlining at the $1.30 level for a few weeks, the market didn't seem to like Uranerz' August 27 news release of a $10M financing at $1.17—taking URZ down to just over $1/share. Half-warrants attached allow the purchase of additional URZ stock at $1.60/share—potentially providing the company up to another $6.84M if exercised within 30-months after last Friday's closing.

While it's natural to hope for equity raises only at high prices, companies have to strike the best deal available to keep advancing their projects. Equity financing—if even available—is usually preferred because unlike debt it's not repayable, nor secured by assets. The alternative—especially in a weak market—is often exorbitant high-cost debt, which is just another form of shareholder dilution.

Uranerz' low-cost $20M state loan is still pending—queued with similar loans applied for before theirs. On June 7 URZ announced a $6M short-term note financing as a bridge to commence drilling of the DDWs at Nichols Ranch. Uranerz obviously thought their state loan would be processed by August 15—with the short-term note repaid—as the interest rate bumps up from 6% to 10% then.

Uranerz' news releases anticipate uranium production to commence around the end of this year. Now that this equity financing has closed, I wouldn't be surprised to see URZ start to trend higher again on construction updates, and as their last DDW gets completed—as their mine approaches the finish line.

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