First Meltdown-Proof Nuclear Reactor In 2017? And Low Uranium Prices For How Much Longer?

Russell Fryer March 30, 2016

Thoughts And Dialogue From Russell Fryer

As everyone knows, the Chinese are rapidly advancing the roll-out of nuclear reactors as the country moves away from fossil-fueled power generation.  Recently, the Chinese announced that they believe they have mastered the ‘new age’ reactor design, known as the helium gas cooled Pebble Bed Reactor.

Almost the holy grail of reactors, the South Africans have been talking about since the early 1990s and continue to investigate the design to this day.

All it took was China’s enormous future electricity requirements and Germany’s design improvements to upgrade the South African efforts.

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A critical point about these smaller reactors is the risk of meltdown is removed due to the helium gas that is used as the heat transfer medium; a fact that the ‘greenies, proponents of climate change and global warming; and those living by nuclear reactors should be pleased with.

The graphite coating of the ‘uranium pebbles’ is the other key in the ability to manage the reaction.  When the core temperature rises to a level that passes certain thresholds, the graphite coating surrounding the uranium insures the fuel does not break down. This causes nuclear reactions to slow, helium gas to cool, and the core temperature in the reactor to drop, averting a meltdown.

The Chinese have taken the Pebble Bed Design one step further by designing smaller reactors that use lower enriched uranium.

The smaller reactors should also hasten the permitting process and build-out, resulting in shorter construction times to supply power to smaller communities. With these smaller reactors, I would expect lower overall uranium usage in the long-term but a quicker absolute ramp-up in terms of immediate uranium consumption.

But what do you think happens to all those uranium explorers that will go into production after 2020 or 2022? Do you think they will actually get into production? I have even heard some explorers believing they will go into production in 8-10 years, or in 2024-2026. What will the price of uranium will even be in 2024-2026? The sell side has $50/lb as the long term uranium price.

Many people ask me, “why is the spot price of uranium so low?” The reason is quite simple. With the aggressive devaluation of the Kazakh Tenge, Namibian Dollar, Uzbek Soum and Russian Ruble, is it any wonder why the spot price of uranium is at $30/lb?

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(The depreciation of the four currencies versus the spot price of uranium (white dotted line))

The Russian Ruble has strengthened lately, mostly due to the 20% run up in oil prices. However, the Tenge remains weak and when uranium is sold in US dollars and translated into the weaker Tenge, the amount received is greater now than the past. Thus, the Kazaks, the largest producer of uranium in the world, have the incentive to ramp up uranium production in 2016 and beyond. See the recent pressure being put on the Kazakh uranium companies to increase production.

Unfortunately, this should keep the spot price of uranium lower for longer, contrary to what market forecasters and experts believe. The smaller sized nuclear reactor rollout, depreciating uranium currency of major producers, and new mining technologies will suppress the uranium price in a similar way fracking has suppressed the spot price of oil.

Only those uranium companies with AISC of $45/lb or lower, with multiple revenue streams, will survive this current environment. Those uranium explorers and developers that need $55, $60, $65, and even $70 spot uranium and have no mill or processing facility might not survive, again, contrary to market belief.

What is as interesting to me is most of the high-priced 5 year uranium off-take contracts roll off towards the middle to end of 2016.  And utilities are not signing new uranium off-take contracts at the long-term uranium price, but around spot plus an escalator. So expect earnings compression in the uranium sector in the future.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Palisade Global Investments Ltd. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.

Russell Fryer has been the Chief Investment Officer at Baobab Asset Management LLC since 2009. Mr. Fryer also served as the Managing Director at Macquarie Bank and as Managing Director covering the natural resources sector at North Sound Capital LLC. Prior to this, he served as a Director of Emerging Market Equities at Deutsche Bank AG and previously ING Bank. Mr Fryer has over 26 years of experience investing in the natural resources industry.

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