Thomas Drolet has decades of experience in capitalizing on the movement of international energy markets. The chief of Drolet & Associates Energy Services is not sanguine about the long-term potential of fracking, but in this interview with The Mining Report, he tells us why now is a great time to reinvest in the uranium space.
The Mining Report: It's been a rough couple of years for uranium prices. Realistically, could news of possible restarts of nuclear plants in Japan positively impact the price of uranium, even if it's only psychologically?
Thomas Drolet: The psychology of Japan restarts has been driving the spot price; perhaps it will start to move the all-important long-term price, too. The long-term price is the signal that the utilities are buying. It is paramount to core value investing.
Let's talk about Japan. My observation, after having been there several times post-Fukushima Daiichi, is that there is a giant tug-o-war going on. Pulling on one end of the rope is Japanese industry, which is paying a high price for fossil fuels replacement electricity, and the current government, which is definitely for bringing the nuclear plants back on-line. Tugging on the other end of the rope is a profoundly fearful public. Hanging onto the middle of the rope is Japan's new nuclear regulatory agency. It will take time for this stronger regulator to finish a series of mandated safety checks before it can authorize bringing back some of the mothballed reactors.
Kyushu Electric Power Co. Inc. plans to restart two reactors at Sendai in the middle of Q1/15. This is sending a positive signal to the whole uranium production and supply space. However, the inventory of fuel at the Japanese reactors is very high; the utilities had long-term contracts when they were shut down. And those contracts generally could not be terminated. The large, existing inventory of fuel will be gradually eaten up as reactors restart after wending their way through nuclear regulatory approvals, prefecture approvals, local town approvals and, finally, national government approval.
TMR: Will the Japanese be building new reactors, as well as bringing back the ones that were mothballed?
TD: The Japanese have announced the intent to start building a couple of new reactors, but I do not see any real progress yet on the early-stage design efforts. What I do see is that the major reactor suppliers from Japan—Mitsubishi Corp., Toshiba Corp.—are actually doing the opposite; they are concentrating overseas. They are doing deals in the United States, in Europe, in Southeast Asia.
Two years ago in the U.S., there were 104 working reactors. Six of them were stilled for valid local or contractual reasons: i.e., the argument with a supplier of new heat exchangers for San Onofre took two units out. And there was significant displeasure in the Northeast with a couple of reactors, and one in Wisconsin. Anyway, we are down to 98 reactors in the U.S. now.
In the U.S., four new AP1000 reactors, each one delivering 1,200 megawatts, are being built by Toshiba/Westinghouse Electric Co. Toshiba is the master contractor, supervising Westinghouse and, among others, Chicago Bridge & Iron Co. N.V. Until these four reactors are operating successfully, roughly on schedule and roughly on budget, the U.S. is not going to be a high-growth area for nuclear power. Waiting on the sidelines, major utilities like Duke Energy Corp., Exelon Corp. and Entergy Corp. are in the very early stages of applying for new reactor builds.
TMR: Given this environment, how do spot prices relate to long-term contracts in the uranium market?
TD: Spot is simply uranium put up by suppliers for short-term cash needs. The price is almost certain to be taken up further by a smart utility, or by the enrichers, the firms that enrich the uranium that goes into the fuel fabrication process and eventually burns in the reactors. Current activity in the spot market is a signal that a corner is turning. Uranium fell to ~$30/pound ($30/lb) on the spot market in the early fall. That is below the average cost of worldwide production by a good US$10. The price obviously cannot stay there because people have to make money to stay in business.
Although an important corner has turned, I am not saying that there is massive upside for all uranium companies as a result of what is happening on the spot side. There will be a slow and steady climb driven by major utilities coming in on buying cycles that meet their internal needs.
TMR: When the long-term prices shoot up, who will benefit?
TD: The uptick will mostly benefit the big producers and the current suppliers, such as Cameco Corp. and Denison Mines Corp. Juniors such as Ur-Energy Inc. may catch a bit of that wave. Interestingly, Ur-Energy has ramped up production to about 600,000 pounds (600,000 lbs) this year at its Lost Creek operation in Wyoming. The company is very transparent. According to its CEO, the firm's production cash costs are averaging $22–23/lb. Ur-Energy is selling into the long-term market. It has 5 million pounds under contract through 2021 at an average price of $50/lb. Targeting the long-term users is a smart move. And, importantly, Ur-Energy's capital and production costs are relatively low, because it does solution mining.