NUCLEAR ENERGY & URANIUM MINING
RealCap Overview & Outlook 2016
Introduction 2015 has ended on an extremely positive note for climate change campaigners and ultimately for the nuclear energy industry. This is despite the continued market turmoil that plagues the global mining and energy sector. The “market” has not discriminated between unprofitable base metal miners, highly leveraged oil producers or those companies who have shored up cash, minimised CapEx and are positioned to emerge from the storm. All have been affected to some degree by the commodity price lows and negative market sentiment. Is 2016 poised to be the year in which the uranium mining sector begins to benefit from the growing demand for uranium to fuel nuclear power reactors? The increasing government and public awareness globally of the impact of climate change have once again brought clean-air energy to the forefront. Nuclear energy, undoubtedly, has an important role to play in ensuring a base-load, clean-air energy source which caters to growing global energy demand. Furthermore, nuclear energy currently has a non-substitutable fuel source – uranium.
Climate Change Climate change is the biggest environmental challenge of our generation and governments around the world are finally committing to policies which hold them accountable and legally bound to meeting emissions targets and standards. At the Paris United Nations Climate Conference (COP21) held in mid-December 2015, a historic deal has been struck between nearly 200 countries to commit to a variety of goals and targets. Global warming on average is to be kept below two degrees compared with pre-industrial levels and greenhouse gas emissions are to stop rising and begin declining rapidly. Individual nations can decide how best to manage their compliance with these newly ratified targets and funding will be made available to help poorer countries overhaul energy generation and industrial processes to diminish reliance on pollution-intensive fossil fuels.
Global Warming Even climate change sceptics are prepared to acknowledge that the earth is warming and although those sceptics often point to a planetary temperature “cycle” that extends beyond our range of measurement, since the rapid industrialisation of the world, there can be no doubt surface temperatures have increased. The chart below based on data gathered by NASA and shows global temperatures have been increasing each year since 1975. One of the major contributing factors to this temperature increase is the increase in Greenhouse Gas Emissions (GHG). These airborne pollutants, trapped in the upper atmosphere act in much the same way as a greenhouse, or impenetrable blanket, insulating the earth by not allowing heat to radiate back into space. Global Annual Mean Surface Air Temperature Change
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1 0.8 0.6 0.4 0.2 0 -0.2 -0.4 -0.6
Greenhouse Gases There are four key greenhouse gases which are emitted: • • • •
Carbon dioxide (CO2) – primary gas emitted by the burning of fossil fuel and industrial processes. Methane (CH4) – Emitted during the production and transport of fossil fuels and from livestock and other agricultural processes. Nitrous oxide (N2O) – Emitted during industrial and agricultural processes as well as the burning of fossil fuels. Fluorinated gases – emitted from a variety of industrial processes.
The concentration of CO2 in the atmosphere has increased by more than 40% since pre-industrial times meaning the current CO2 level is higher than it has been in at least 800,000 years. Volcanic eruptions do release large quantities of CO2 but, the U.S. Geological Survey (USGS) reports that human activities now emit more than 135 times as much CO2 as volcanoes each year. The chart below shows the total emissions by these key greenhouse gas groups since 1970. This data comes from the IPCC (Intergovernmental Panel on Climate Change) Assessment Report.
Again, there can be no doubt the concentration of greenhouse gases is increasing in the upper atmosphere. When examining the sectors responsible for greenhouse gas emissions, the IPCC finds that Electricity and Heat Production (25%), Agricultural, Forestry and Other Land Usage (AFOLU, 24%) and Industry (21%) are the key responsible sectors.
Electricity Production Examining electricity production specifically, the World Nuclear Association compiled the results from 20 different, independent reports to provide a comparison of the lifecycle GHG emissions produced by different electricity generation technologies.
GHG Emissions (Tonnes CO2 e/GWh)
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It is clear that the burning of fossil fuels (lignite, coal, oil and natural gas) produce significant amounts of greenhouse gas. The challenge for countries is to find the appropriate balancing point between the burning of fossil fuels which have the advantage of providing the base-load supply necessary for our rapidly urbanising and industrialised cities while reducing emissions. While solar and wind generation have the distinct advantage of being “clean-air”, they cannot provide sustainable base-load supply. The two energy technologies which are capable of providing the necessary generation consistency as well as limiting air pollution are nuclear and hydroelectric sources. COP21 now has countries committed to a reduction in greenhouse gas emissions as the direct mechanism to combat further rises in global temperatures. The New York Times (12 December 2015) reported the following:
“…the Paris deal could represent the moment at which, because of a shift in global economic policy, the inexorable rise in planet-warming carbon emissions that started during the Industrial Revolution began to level out and eventually decline. At the same time, the deal could be viewed as a signal to global financial and energy markets, triggering a fundamental shift away from investment in coal, oil and gas as primary energy sources toward zero-carbon energy sources like wind, solar and nuclear power.” The China Post (14 December 2015) reported:
The burning of those fossil fuels releases invisible greenhouse gases, which cause the planet to warm and disrupt Earth's delicate climate system. Ending the vicious circle requires a switch to cleaner sources, such as solar and wind, and improving energy efficiency. Some nations are also aggressively pursuing nuclear power, which does not emit greenhouse gases. The United States and China – two major energy intensive and industrialised nations acknowledge that a shift from fossil fuel to greener sources, including nuclear power, is essential.
Global Energy Mix The contributions to global energy generation come principally from coal, oil and natural gas. The chart below from the International Energy Agency
(IEA)
shows
these
contributions over time. Renewable sources are a very small component of energy supply as historically the technology has been inefficient, expensive and unable to provide meaningful base-load supply.
Nuclear Energy In the World Energy Outlook from the IEA, they state: “Nuclear power is one of a limited number of options available at scale to reduce CO2 emissions. It has avoided the release of an estimated 56 Gt of CO2 since 1971, or close to two years of emissions at current rates.” They point out that currently, 80% of nuclear generation capacity is in the OECD, but it is non-OECD countries, specifically China and India, which will account for the majority of nuclear generation capacity growth. China currently has 30 operable reactors, 21 under construction and a further 43 planned. To provide some context to the amount of uranium fuel required the World Nuclear Association (WNA) breaks down the inputs into the annual operation of a 1000 MWe nuclear power reactor through the mining, milling, enrichment and operational fuel cycle. Mining Milling Conversion Enrichment Fuel fabrication Reactor operation Used fuel
Anything from 20,000 to 400,000 tonnes of uranium ore 171 tonnes of uranium oxide concentrate (which contains 145 tonnes of uranium) 214 tonnes uranium hexafluoride, UF6 (with 145 tU) 23 tonnes enriched UF6 (containing 15.6 t enriched U) – balance is 'tails' (0.20%) 17.5 tonnes UO2 (with 15.6 t enriched U) 8760 million kWh (8.76 TWh) of electricity at full output, hence 16.5 tonnes of natural U per TWh 17.5 tonnes containing 14.5 t uranium (0.8% U-235).
The current global uranium requirement for 2015 is 66,883 tonnes as estimated by the WNA with 2014 production of 56,252 tonnes. There is, therefore, a current supply shortfall. The supply-demand mismatch has been met from secondary supply sources such as the conversion of weapon stockpiles to nuclear fuel (US-Russia Megatons to megawatts programme completed in 2013) but these sources of secondary supply are diminishing. In order to meet uranium requirements, uranium miners need to be not only currently producing more uranium but undertaking the exploratory work that will ensure a supply pipeline in the coming years. Given the current price environment, the opposite continues to occur with projects being mothballed and exploration suspended.
The Outlook Given all we know about climate change, about the role that nuclear energy must and will play in ensuring clean air, base-load energy supply and about the ambitious nuclear expansion plans of the non-OECD countries in particular, what can we expect from 2016 and beyond? Certainly uranium as a commodity and uranium miners will be affected by global sentiment, but while the market is currently “non-discerning” in the commodity and mining space, we believe 2016 will see a realisation that there are apples and oranges.
Uranium The uranium spot price has been relatively stable over 2015 and well off the 2014 low. However, at a spot price of $35/lb, there is little incentive for explorers and miners to ramp up production. More importantly, they are unable to secure the type of financing that would be required to meaningfully expand in this low price environment. The uranium price has to shift upwards to reflect the economic realities of supply and demand. In 2007 and 2008, the uranium price was being driven by a high degree of speculative investment activity which sent it to highs of $130/lb, not a true reflection of the demand-supply dynamics, but we again have a disconnect between the business fundamentals and the market perception. If power utilities realise they need to meaningfully enter the market and stop “banking on” uranium price deflation that could signal the start of the market recovery. Additionally, given the roll-out of nuclear power stations, many utility providers may take advantage of this environment to enter into long-run off-take agreements with producers. This would also signal that confidence has returned to the market and that the nuclear thesis remains intact.
Uranium Producers The most tracked basket of uranium explorers and producers is the Global X Uranium ETF (NYSE: URA). Indexed price performance is shown relative to the price performance of Toro Energy (ASX: TOE) over the last 5 years. While both have lost value, the ETF basket performance has been particularly affected by negative sentiment in the mining industry as big, liquid operators have been targeted by market participants.
This again speaks to the need for investors to be discerning in their stock selection. Those exploration and mining producers operating in “safe� jurisdictions who are benefitting from a strong dollar environment and who have strong balance sheets are poised to be the stand-out winners as the market adjusts to the economic realities of the uranium mining and nuclear industry.