The only significant commercial use for U3O8 is as a fuel for nuclear power plants for the generation of electricity. Through the process of nuclear fission, the uranium isotope U-235 can undergo a nuclear reaction whereby its nucleus is split into smaller particles. Nuclear fission releases significant amounts of energy, creating heat to generate steam to spin a turbine, and is the basis of power generation in the nuclear industry.
Uranium has other commercial uses in the fields of medical diagnosis and other industries, but these markets are very small in terms of volume. Uranium is also used as a feedstock for over 200 private nuclear reactors, which are operated for research purposes and for the production of isotopes for medical and industrial end uses.
Uranium Production Process
The initial step in the process of preparing uranium for use in a nuclear reactor is the mining and upgrading of the ore in a uranium processing facility to produce uranium concentrates containing 80-90% U3O8. Uranium concentrates are priced and sold based on the U3O8 content.
The second step takes place at licensed uranium conversion facilities where U3O8 is converted to UF6 (or to UO2 for Candu type reactors). Above 56 degrees Celsius, UF6 is a gas and is in a suitable form to be enriched to produce fuel for the majority of reactors. Following the production of UF6, enrichment and fuel fabrication are the next steps before the nuclear fuel is ready for loading into a nuclear reactor.
Uranium Industry Overview
During fiscal 2018, the spot price of uranium continued to be relatively volatile. After a strong start in the first quarter, with spot prices increasing from US$22.25 per pound U3O8 at February 28, 2017 to a high of US$25.50 in March 2017, prices fell back to the US$20 per pound range in May 2017 and remained at this level for much of the second and third fiscal quarters. The price volatility in the first quarter of calendar 2017 and fiscal 2018 followed significant production cuts in Canada, the United States, Kazakhstan and Africa, which were announced in late calendar 2016 and early calendar 2017. The production cuts came after a period of prolonged depressed uranium prices, which, according to Ux Consulting ("UxC"), were below the all-in production costs of most of the world's sources of primary uranium supply and coincident with the expected expiration of higher priced supply contracts signed during the utility contracting cycle in the mid-to-late 2000's.
Volatility returned to uranium prices late in the third fiscal quarter of 2018 due to the announcement of further substantial cuts to global production in November 2017 -- beginning with Cameco Corporation ("Cameco") announcing a minimum ten month shutdown of the McArthur River Mine/Key Lake Mill complex in Saskatchewan, Canada. Cameco's McArthur River/Key Lake operations represent the largest and highest-grade uranium mine in the world, producing approximately 18 million pounds of U3O8 annually. Following Cameco's announcement, National Atomic Company Kazatomprom ("Kazatomprom") made a further announcement regarding production restraint -- outlining that production through 2020 would represent a 20% reduction in planned output from its operations in Kazakhstan. Following these announcements, the spot price of U3O8 increased again, reaching a high of US$26.50 per pound U3O8 in December 2017, before retreating to US$21.25 per pound U3O8 by the end of fiscal 2018.
While the Cameco and Kazatomprom supply curtailments have had an impact on the spot price, it has not been sustained. The impact of the curtailments from a global production standpoint, however, is quite significant. According to UxC data, global production peaked in calendar 2016 at 162 million pounds of U3O8, then fell in calendar 2017 to 154 million pounds U3O8, and this trend is expected to continue in calendar 2018 with the latest forecasts of total production dropping to 141 million U3O8. To put this in perspective, UxC expects annual uranium reactor requirements (UxC's Requirement's Model "URM" Base Demand) in calendar 2018 to be in the range of 194 million pounds U3O8. While the rationalization on the supply side is needed, higher priced long-term supply contracts have been protecting much of the higher cost mine production from exposure to spot price levels in the US$20 per pound U3O8 range. As many of these legacy contracts are now expiring, the rate and degree of production cutbacks has finally accelerated. These curtailments are expected to result in the drawdown of excess uranium supplies in the market and, ultimately, an accelerated rebalancing of uranium market fundamentals.
A recent market development, which could be preventing the U.S. utilities from entering into a new cycle of significant uranium contracting, is the Section 232 Trade petition recently filed by two U.S. uranium producers before the U.S. Department of Commerce. This provision of the U.S. Trade Act of 1962 was successfully pursued by U.S. producers of aluminum and steel in response to levels of foreign imports that were viewed to be negatively impacting U.S. national security. The Trump Administration has imposed tariffs on the import of both commodities, although some nations (including Canada and Mexico) have been provided exemptions. It is still too early to predict how the U.S. Department of Commerce will respond to the Section 232 trade petition for uranium, and what (if any) remedies would be applied in the case of uranium imports. For greater context, U.S. domestically mined uranium accounted for approximately 5% of U.S. uranium requirements in calendar 2017, and it is expected that U.S. production will decline further in 2018.
On the demand side of the uranium market, fundamentals continue to trend positive. Many nations today, particularly in the emerging markets, struggle with the need to deliver reliable and affordable electricity to their growing populations, without compounding climate change and air pollution challenges. As such, nuclear energy, with its reliability and clean air benefits, is filling an important role in the supply of baseload power around the world. Measured in new nuclear capacity connected to the grid, the calendar years 2015 and 2016 were the best two years in the past twenty-five. Reactor start-ups in calendar 2017 declined slightly from those levels, however the trend of increasing nuclear capacity appears to be continuing. For example, the Chinese government recently announced that in calendar 2018 it would be connecting a further five reactors to the electricity grid, and that construction will commence on six to eight additional units. In addition, the Kingdom of Saudi Arabia is advancing its nuclear energy plans, having commenced reactor procurement discussions with supplier countries, and the United Arab Emirates is rapidly nearing the completion of their four reactor construction program, with the first unit expected to be connected to the grid in calendar 2018.
The recovery of the Japanese nuclear energy industry post-Fukushima continued to gain momentum in calendar 2017 and into 2018, with seven reactors in operation and a further two more likely to restart before the end of calendar 2018. This is in line with recently re-elected Japanese Prime Minister Abe's stated goal to utilize nuclear power to supply between 20% and 22% of electricity needs going forward.
In the United States, after the closure of six nuclear power plants in recent years there has been a growing recognition of the value of a 24/7 baseload carbon-free energy source. Four states, New York, Illinois, New Jersey and Connecticut, are preserving their nuclear-power generating capacity by passing legislation to level the playing field for nuclear. Two additional states, Pennsylvania and Ohio, are considering similar legislative action. The declared bankruptcy of First Energy, who operates three reactors in those states, has highlighted the need for immediate action to preserve critical sources of baseload capacity. The U.S. federal government also continues to stress the negative impact on the reliability and resilience of the country's national grid from the potential loss of additional nuclear capacity. A recent Department of Energy Grid Reliability Study and the Federal Energy Regulatory Commission have both pointed to the need for changes to current market structures. With respect to new reactor construction in the U.S., the two Vogtle units in Georgia have resumed construction following the Westinghouse bankruptcy restructuring, while construction of the two Summer units in South Carolina remain suspended.
As of March 2018, the World Nuclear Association ("WNA") reported 448 reactors operable worldwide with 57 new reactors under construction, 158 reactors planned or on order, and another 351 proposed. By reference, these numbers are higher than those existing prior to Fukushima. Translated into uranium demand, UxC projects their URM Base Demand to range from 194 to 209 million pounds annually over the period from 2018 to 2035.