Russia and the Uranium Fuel Cycle

Topics: Commodities, Energy, Nuclear, Uranium

The article below is an excerpt from our Q1 2022 commentary. 

Uranium prices surged during Q1. Spot uranium advanced 26% from $42 to $53 per pound while the quoted term price rose 19% from $42 to $50 per pound. Anecdotally we heard of several unreported transactions as high as $60 per pound. The term price is now the highest since 2014 and the spot price is the highest since 2013.

In February, Cameco announced that it would seek to restart its MacArthur River mine in the Athabasca basin of Saskatchewan. Before deciding to suspend operations at the mine due to low prices in 2018, MacArthur River produced 19 mm pounds of U3O8 on a 100% basis (Cameco owns 70% in a joint venture with Orano). We hoped that Cameco would hold off on restarting MacArthur River until it was able to secure long-term production contracts that would effectively tie up MacArthur River’s incremental production and this is exactly what happened. We believe this removes a key overhang from the uranium spot market.

Russia’s invasion of Ukraine has serious implications for the global uranium and nuclear fuel cycle markets as well. Uranium and nuclear power can be more complex than other commodities, so we would like to provide some background. First, uranium is mined, either from dedicated uranium hard rock mines (i.e., Cigar Lake and MacArthur River in Canada), from in-situ leach operations (i.e., Kazatomprom’s operations), or as a by-product in a larger mine (i.e., Olympic Dam in Australia). Uranium is concentrated and shipped to a conversion facility in the form of U3O8 – a yellow powder. Before uranium can be fabricated into fuel rods, it must first be turned into a gas – uranium hexafluoride or UF6 – at a conversion facility. The uranium gas is next sent to an enrichment facility. All uranium is made up of two distinct isotopes, U-258 and U-235. The former makes up 99.3% of all uranium, and the latter is only 0.7% by mass. In order to sustain a chain reaction in a nuclear reactor, the fuel rods must contain between 3-5% U-235.

Centrifuges are able to carefully separately the two isotopes and effectively “enrich” the uranium hexafluoride from 0.7% to 3-5% U-235. The low enriched uranium (LEU) is then fabricated into fuel rods and shipped to nuclear power plants.

Russia is a key direct and indirect player at several points along the fuel supply chain and the impacts could be material. First, Kazatomprom is the world’s largest uranium producer from its in-situ leach mines in Kazakhstan. Although not involved with the conflict in Ukraine, Russia’s presence looms large. Earlier this year, civil unrest broke out in Kazakhstan and Russia sent troops into the country to quell the uprising. Given how critical Kazakhstan is to upstream global uranium production, the proximity with Russia is likely putting pressure on some US utilities to enter into long-term contracts with other producers and diversify the upstream source of their fuel.

While Russia’s impacts on uranium mining might be indirect, it is critical in the conversion and enrichment segments of the fuel cycle. Russia converts 35% of world uranium production from U3O8 concentrate to UF6 gas and any disruption would be impossible to overcome. This has led some officials to consider fast-tracking the reopening of US conversion capacity. The US presently maintains no conversion capability of its own. Similarly, Russia is crucial in the global enrichment business, controlling nearly 50% of the world’s capacity. It remains unclear how the industry would manage if Russian conversion and enrichment capacity was made unavailable. This will likely all lead to increased pressure to acquire and potentially stockpile material.

Unfortunately, given the deficit in mined uranium over the past several years, it is not clear this will be possible.

On the demand side, there have been several bullish developments. As we discussed in our last letter, the European Union officially added nuclear power in its “taxonomy” of green technologies. The designation now allows institutions to invest in uranium and nuclear power without running afoul of any ESG commitments. The implications are huge. Immediately following the announcement, France declared they were embarking on an ambitious nuclear reactor new build program and extending the life of several existing reactors. The UK has committed to a nuclear new build program as well. No analyst had any European new build reactor demand as recently as a year ago and so these announcements serve to further tighten the market going forward.

Since China, India, Saudi Arabia, Canada, and now Europe have all embraced nuclear power, we’ve been arguing the US should follow suit. No matter how unfortunate, the US seemed to be going in the wrong direction. But an extremely interesting and positive development has just taken place, suggesting a turn in fortune for the US nuclear power industry might be at hand. Having firmly committed to closing the large Diablo Canyon reactor in California, on April 29th, Governor Newsome abruptly changed course and suggested he would seek to keep Diablo Canyon open with $6 bn in potential federal funding for several capital projects at the reactor. We cannot overstate what a change this represents. Diablo Canyon was the most politically charged and significant energy decision since cancelling of the Keystone XL pipeline. As recently as eight weeks ago, it seemed impossible that Governor Newsome could walk back his commitment to shut down the facility. We are hopeful this is a signal that US can now be added to the list of countries that are once again embracing nuclear power. As we have discussed in our past letters, nuclear power is the key to our energy future. For every unit of energy expended in mining, converting, enriching, and reacting uranium, 100 units of electricity are generated. This EROEI is at least three times better than oil and gas and 20-30 times better than renewables. Furthermore, nuclear power emits no carbon.

Even before all this renewed interest in nuclear power, the uranium market was in severe long-term structural deficit—a deficit that could only be solved by much higher uranium prices. When we made our uranium investments in 2018, we did not count on any nuclear renaissance from the OECD world. Given all the renewed interest in building new plants and extending the life of present generating facilities, the long-term structural deficit in uranium is set to become even larger. Uranium prices are poised to move dramatically higher as we progress through the 2020s.


Intrigued? We invite you to revisit our entire Q1 2022 research letter, The Gas Crisis is Coming to America, available below. 


Q1 2022 Research: The Gas Crisis is Coming to America