Prefer to listen to this article? Please click the play button above.

"Uranium Fever Backed by Bill Gates Betting on Nuclear Energy"
~ Bloomberg 7/09/2024

"One of The Last Holdouts, Australia Weighs Nuclear Power Pivot"
~ Bloomberg 7/10/2024

Mark your calendars: August 23rd promises to be a pivotal day. That's when Kazatomprom, the world's leading uranium producer, will announce its half-year financial results and, more crucially, offer guidance for its 2025 production plans. This announcement is set to reverberate through the uranium markets, given Kazatomprom's considerable influence. In 2022, Kazatomprom produced just under 55 million pounds of uranium - almost 45% of the world's supply.

In response to robust demand from utilities, the company announced in August 2022 that it would increase its 2024 production to 65 million pounds - a nearly 10 million pound increase. Then, in August 2023, they further upped their 2025 production guidance to an ambitious 79-80 million pounds. By 2025, the company planned to utilize 100% of its subsoil exploitation rights with the Kazakhstan government.

However, things took a twist on January 12th when Kazatomprom announced a downward revision of its 2024 guidance to 55 million pounds, chopping approximately 10 million pounds off its original target. The company blamed sulfuric acid shortages and construction delays.

Just last week, Kazatomprom updated its 2024 production outlook again, increasing guidance by 6%. While the investment community viewed this as bearish, it is noteworthy that the new 2024 target of 60 million pounds still falls 5 million pounds short of the original guidance.

This begs the question: how will the continued shortfall affect Kazatomprom's 2025 production? Next year's production goal, announced in 2023, remains unchanged at 79-80 million pounds. During our visit to Almaty in April, Kazatomprom remained tight-lipped about its 2025 guidance, promising that all would be revealed during their August 25th earnings release.

However, our discussions with other uranium producers and consultants in Almaty yielded intriguing insights into Kazatomprom's woes. The company cited sulfuric acid shortages as a significant bottleneck and these issues persist. For instance, Cameco, during its recent second-quarter conference call, noted that its Inkai joint venture with Kazatomprom is producing 800,000 pounds less than projected-nearly 20% below expectations. Cameco pointed to sulfuric acid supply shortfalls as the primary cause of this disappointment. Cameco also highlighted that increased sulfuric acid deliveries are critical for Inkai to meet its projected 2024 production of 8.3 million pounds. We suspect these sulfuric acid challenges are affecting Kazatomprom's broader operations, bolstering our belief that their 2025 production will fall short of expectations.

Our conversations in Almaty, coupled with Kazatomprom's cryptic remarks, suggest that production shortfalls  are not only due to sulfuric acid shortages but also stem from development problems at Kazatomprom's massive Budenovskoye 6 and 7 greenfield projects. The Budenovskoye projects are surrounded by controversy and were originally projected  to ramp up and produce  13 million pounds of uranium by the end of 2025, representing almost 20% of Kazatomprom's output. However, the projects have reportedly been plagued by construction delays and are significantly behind schedule.

The controversy centers on the 2022 sale by two oligarchs of a 49% stake in the project to Rosatom, the Russian state uranium company. Kazakhstan's national wealth fund approved this sale - Kazatomprom's major shareholder - but without the consent of Kazatomprom's management or external shareholders. The fallout led to the resignation of several senior executives, including the chief operating officer, whose departure may now be compounding Budenovskoye's delays. The project was slated to produce 5 million pounds of uranium in 2024 and its delay likely accounts for a significant portion of Kazatomprom's 2024 shortfall. As a greenfield project, the Budenovskoye development requires extensive new infrastructure, complicating its ramp-up.

"Energy Intelligence," a leading energy information outlet, reported on October 6th, 2023, that industry sources have expressed to them skepticism about Kazatomprom's ability to meet its timelines due to the massive infrastructure and capital requirements. One source stated, "I don't see any production from the area until at least 2026."

Further complicating matters, downstream processing bottlenecks are now emerging. Rosatom plans to refine the uranium at the Stepnogorsk Chemical Complex in Kazakhstan, which must triple its capacity to handle Budenovskoye's output - a schedule rumored to be significantly delayed.

Two potential geological factors might also hinder Budenovskoye's development. Firstly, the uranium-rich zones are nearly twice as deep as those in Kazatomprom's other in-situ leach projects, complicating development. Secondly, the deposit may contain significantly more carbonate than Kazatomprom's other sites, which means greater acid consumption - a problem given the current acid shortage in Kazakhstan.

Kazatomprom's target is to produce 13 million pounds of uranium from Budenovskoye in 2025, but it's conceivable that we may see no production at all until 2026. Given Kazatomprom's ongoing issues with sulfuric acid shortages and the challenges at Budenovskoye, we anticipate a significant reduction in their 2025 production guidance from the original 79-80 million pounds.

In our Q1 2024 letter, we explored the extent to which Kazatomprom's 2024 production increase - almost 10 million pounds - was sold forward and whether, if production disappoints, the company will make up the shortfall either by purchasing on the open market or selling from inventory. This question remains unanswered following our April meeting in Almaty. Should 2025 guidance be substantially reduced, as we suspect it will be, the question of how much of this projected increase has been sold forward will resurface.

We hope Kazatomprom's August 23rd announcement will clear up these uncertainties.

The anticipated increase in uranium supply, first projected two years ago, has yet to materialize. Kazatomprom's substantial 2024 production targets have not been met and we believe the 2025 guidance will be drastically reduced. The uranium market is currently in deficit. As we noted in our Q1 2024 letter, reactor demand is projected to outstrip mine supply by 170 million pounds, up from 145 million pounds in previous years, driven by new nuclear reactors starting up and extending the operating lives of older plants.

Any disappointment in Kazakhstan's uranium production next year will only exacerbate this structural deficit. If Kazatomprom reduces its guidance, as we anticipate, the uranium market could very well turn chaotic as buyers are forced to acknowledge the extent of the deficit.  We believe the uranium bull market is far from over. Production shortfalls will fuel the next phase.

On the demand side, the most intriguing development comes from Down Under. Historically a staunch opponent of nuclear power, Australia may be rethinking its stance. Between 1952 and 1957, the United Kingdom conducted 12 major nuclear weapons tests in Australia, including the two Emu Field tests conducted on the mainland in 1953. French nuclear tests in the Pacific in the early 1970s galvanized the country's anti-nuclear sentiment. Since the 1970s, Australia has heavily restricted uranium mine development and has prohibited the construction of any new nuclear power plants since 1998.

Yet, Australian public opinion on nuclear energy may be shifting. Last month, Australia's main opposition party unveiled plans to build seven nuclear power plants if it returned to power. These plants would be constructed on former coal power sites starting in 2035. The current Labor government came to power in 2022, pledging to slash Australian greenhouse gas emissions by 2030. Since then, Australia has invested heavily in renewable energy. Unfortunately, due to renewable energy's poor energy efficiency and high cost, Australian electricity costs skyrocketed. As more and more Australians have come to realize the shortcomings of wind and solar, a renewed interest in nuclear power has emerged as a realistic option to help achieve the country's stringent CO2 reduction targets.

The proposal has already ignited controversy with familiar arguments resurfacing about nuclear power's high construction costs and the flawed belief that renewables can provide ample low-cost energy.

Politicians have pushed for SMRs or small modular reactors to address the argument about high capital costs. The benefits of SMRs, outlined in many of our letters, could sidestep the criticisms of excessive capital costs associated with nuclear energy.

How this political drama will unfold is anyone's guess, but it is fascinating that a nation with such strong anti-nuclear credentials is now seriously considering investing in nuclear power. Slowly but surely, the world is realizing that to meet future CO2 reduction goals, significant investments in expanding nuclear electricity generation are essential.

Curious to learn more? Click here and subscribe to our updates for exclusive access to further insights on this topic in our upcoming Q2 2024 newsletter.

Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen or experience. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. Historical performance is not indicative of any specific investment or future results. Investment process, strategies, philosophies, portfolio composition and allocations, security selection criteria and other parameters are current as of the date indicated and are subject to change without prior notice. This communication is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Nothing in this communication is intended to be or should be construed as individualized investment advice. All content is of a general nature and solely for educational, informational and illustrative purposes. This communication may include opinions and forward-looking statements. All statements other than statements of historical fact are opinions and/or forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the beliefs and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such beliefs and expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements. All expressions of opinion are subject to change. You are cautioned not to place undue reliance on these forward-looking statements. Any dated information is published as of its date only. Dated and forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any dated or forward-looking statements. Any references to outside data, opinions or content are listed for informational purposes only and have not been independently verified for accuracy by the Adviser. Third-party views, opinions or forecasts do not necessarily reflect those of the Adviser or its employees. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.