Uranium Market and Financing
The uranium market is subject to long cycles and appears to be on the cusp of recovery after a long period of low prices. The macro outlook is very positive, but the timing of the recovery has been affected by trade tensions which have impacted all commodity markets.
On the macroeconomic level, revised projections for nuclear generating capacity indicate strong growth, following the introduction of more favourable policies in several countries.
Secondary supplies of uranium are forecast to gradually decrease from the current 14-15% of reactor requirements to 4-9% in 2040. Since 2015, annual primary uranium production has decreased more than 43Mlbs U3O8 and both Cameco and Kazatomprom have reaffirmed their commitment to supplier discipline.
How uranium is traded
Uranium is not traded (in material quantities) on an exchange, like other commodities. Contracts are entered into by buyers and sellers with prices published by independent market consultants (such as UxC LLC and TradeTech). There is no obligation on buyers or sellers to report prices.
Spot and term price
The bulk of the global uranium trade occurs under long term contracts which have typically been priced at >20% above spot prices in recent years. The spot price indicator is relevant to sales of uranium in the near term, while the term price indicator reflects the base price at which transactions for long term delivery could be concluded, at the time the price is published. Future deliveries would be priced at the base price escalated from an agreed date to the date of each delivery. Uranium is also delivered under market related term contracts; in the current market the delivery price under these contracts is based on the prevailing spot price indicator at the time of delivery.
Majority of end-users negotiate long-term contracts
Uranium for near term delivery is available at spot prices. Utilities and suppliers are both buyers and sellers in the spot market, depending on market conditions, but in recent years the majority of transactions have involved intermediaries. Utilities, the end-users of uranium, have historically bought between 70% to 80% of their uranium under long-term contracts from suppliers with any uncovered requirements being met by the spot market. The uranium market therefore primarily quotes two prices, the long-term contract price indicator and the spot price indicator.
The below Figure shows the historical long-term uranium price indicator and the historical spot price indicator back to 2010.
Figure 1: U3O8 long-term contract price and U3O8 spot price, sourced from Cameco
The Figure shows that uranium sold under a long-term contract is priced at a premium to uranium sold at spot. The premium paid under long-term contract represents the value to the utility of securing a known quantity of uranium at a fixed price for an agreed duration, timing and quantity optionality within a delivery year and is a reflection of the significant cost avoided by the utility if it were to purchase the same quantity in the spot market and hold it until the deliveries years indicated in the long term contract. Since Fukushima, in early 2011, uranium prices (long-term contract price and spot price) fell dramatically however a premium for long-term contract prices over spot prices existed, which has averaged approximately 25%, based on the data presented over the last 10 years.
The Figure also shows that the only time over the last 10 years that the long-term contract price and spot price converged was in January 2011 following a sharp increase in the spot price to US$73/lb and this situation existed for only one month until the prices diverged.
In general, utilities will supply their reactors from a mix of inventory, term contracts and open requirements. These uncommitted requirements will be satisfied in the spot market, from inventory or from optionality in existing contracts. The major portion of the supply portfolio, in general, is from term contracts.
Buyers usually purchase uranium either through ‘off market’ discussions with a small group of selected suppliers or ‘Request for Proposals’ (RFP) which are more formal. For most term contracts, the negotiations are held two to three years before deliveries commence. The short lead time between the decision to mine and first production at Honeymoon gives Boss the ability to offer into current RFP’s and respond quickly to changing market conditions.
The marketing strategy for Honeymoon is to build a robust sales portfolio which would cover costs and protect the mine from any future market downturn while retaining sufficient uncommitted supply to take advantage of rising market conditions. Boss will be monitoring the term price and its strategy is to enter into long-term base escalated contracts once term prices reach an acceptable level. Once this requirement is met further contracts will be layered in to optimise average sales price in an anticipated rising market.
For the first time since the early 2000’s, there is consensus in the industry from utilities as well as suppliers that supply from restarts and new mines is needed in the early 2020’s to ensure long term security of supply and that current term price levels will not support that investment. This is further supported by current analysts who forecast a rise in the spot price. Analysts predict that a long-term price in the US$40’s/lb will incentivise restarts whilst a spot price closer to US$60/lb will be needed for most new mines.
To arrive at a base case for this study, a historical analysis of the relationship between long term and spot price indicators since 1996 was carried out which demonstrated that the long-term price traded at a 25% premium to the spot price. This validity of assuming that this premium would continue in the future was supported by an analysis by Numerco1 confirming that that they expected the ‘continued contango relationship to exist between the spot and long -term prices well into the 2030’s. On this basis Boss’s forecasted price assumptions ascertained it is reasonable to expect long-term contract prices will trade at a premium to spot prices in future. Boss then reviewed an unbiased cross section of industry spot price forecasts which resulted in an average long-term price of $55/lb once the premium had been applied.
1 Numerco Limited is an independent commodity supply and technology company
Accordingly, Boss’ strategy, consistent with industry practice, is to predominantly enter into long-term base escalated contracts (which ordinarily include an US inflation-based escalation factor) on a rolling basis.
Based on present forecasts, Boss considers it reasonable that the commencement of construction could commence in 2021 and has the ability to enter into long-term base escalated contracts at a price of US$55/lb in 2023 with first deliveries under those contracts in 2026. The Boss model includes the conservative assumption that all contracts prior to 2026 will be priced at the spot price indicator at the time of delivery and be delivered under market related term contracts or spot contracts. Boss has assumed that none of the sales between start-up and 2025 will include a premium or be based on the mid-term price indicator. These assumptions result in an average LOM price for sales of US$50/lb.
Although Boss has used a price of US$50/lb as a base case scenario for its financial analysis, it has also presented the detailed financial outcomes at a U3O8 price of US$40/lb, US$45/lb, US$55/lb and US$60/lb. Further sensitivity to the U3O8 price is highlighted under the Honeymoon Feasibility Study tab, which shows impact to pre-tax NPV with a 20% movement (up and down) to U3O8 price.
As the lead time to bring a new mine to production is significant (seven to 10 years from discovery to commissioning on average) prices would have to rise significantly in 2020 if new mines are to be brought on as needed. The longer the price remains low, the more probable a perceived shortfall becomes in the early 2020’s and a potential overshoot in prices before they settle at a sustainable level.
Cameco/ UxC estimate that cumulative uncovered requirements are about 1.9 billion pounds to the end of 20352. Due to a lack of investment, high capex and policy issues the supply response from idled and new mines looks uncertain.
This is an ideal environment for the Project, as Honeymoon:
- Has costs closer to restart production than to the average cost of new mines; and
- Can be brought into production within a year of taking the decision to move forward.
Figure 2: Honeymoon and the Front End of the Fuel Cycle
Uranium mining is the first stage of the front end of the fuel cycle. Uranium from the Honeymoon mine will be transported to Adelaide from where it will be shipped to a Conversion Facility and stored until it is purchased by a customer. Once the uranium has been purchased by a nuclear utility, it will undergo conversion, enrichment and then be fabricated into fuel and used to generate electricity in nuclear power stations. All uranium from the Project is solely for use for the generation of electricity in civil nuclear reactors. Throughout all stages of the fuel cycle, uranium from Honeymoon will be subject to the provisions of the Nuclear Non-Proliferation Treaty and all applicable Australian bilateral safeguards treaties with customer countries.
Conversion plants are operating commercially in the USA, Canada, France, Russia and China. The principal destinations for the uranium from the Honeymoon mine will be the Western conversion facilities: Cameco’s facility in Canada, ORANO’s facilities in France and Converdyn’ s facility in the US.
It was originally envisaged in the PFS that Honeymoon’s final product would be uranyl peroxide; discussions with conversion facilities and operating ISR operations led to a decision that further calcination and production of U3O8 would significantly enhance the specification of Honeymoon’s final product.
In March 2019, the Company updated its Exploration Target range for the Project which now comprises a total of ten target areas; seven in the Eastern Region tenements and three situated within the Western Region tenements (see below Figure). Five of the targets are in areas extensional to the existing Mineral Resources, while the remaining five cover various geophysical anomalies similar to other geophysical features historically associated with economic mineralisation elsewhere in the region.
Figure 3: Honeymoon Exploration Targets
The Exploration Target estimate for the Honeymoon Uranium Project is now 28Mt to 133Mt of mineralisation at a grade of 340ppm to 1,080ppm U3O8 for a contained 58Mlbs to 190Mlbs U3O8 (26,300 to 86,160 tonnes of contained U3O8), using a cut-off of 250ppm U3O8. This updated range demonstrates that, in addition to the global Mineral Resource (JORC 2012), there is potential for a significant amount of additional uranium around the Honeymoon Project area.
Until uranium market conditions improve, exploration activities will focus on low-cost and non-invasive geophysical techniques, allowing for smaller, cheaper and more focused exploration drilling programs.
Future exploration is being looked at in two contexts:
- Near-mine extensions that may be accessed with the infrastructure (trunk lines, power distribution) on the existing mine lease; and
- More regional exploration for resources which may be developed utilising the spoke and hub loaded resin transport model widely used in the United States ISR industry. Boss is developing a model for spoke and hub development, incorporating plant upgrade requirements to increase IX elution, drying and packaging capacity in order to understand the maximum economic distance from the main facility resources may be accessed and the mineralisation requirements to support a spoke development.