Uranium Update

Trump FUD, KAP tax, GLO financing woes, conversation with a nuclear engineer

Last week, I had warned of the possibility of a correction in Big Tech / AI stocks, and for uranium stocks to get dragged lower in the process. This warning turned out to be prescient, as the QQQs were dragged lower by almost 4% for the week, and even the mighty NVDA was down ~8%. Uranium stocks saw a violent reversal from last week’s bounce, with the major ETFs down more than 10%. During such corrections, it’s common to hear new bearish narratives emerge to explain the price action. This time, a number of investors seem to be worried that a Trump presidency will be bad for the uranium sector, because they view the US’ current pro-nuclear stance as primarily a Biden-Harris Administration initiative.

I think such concerns are misplaced. Since Trump was last in power, the US has pledged to triple its nuclear capacity and passed a number of major pro-nuclear laws through Congress, highlighting the strong bi-partisan support for the industry in Washington. The Nuclear Fuel Security Act (NFSA) obligates the DOE to establish reserves for low enriched uranium (LEU), high assay low enriched uranium (HALEU) and domestically produced U3O8 to support the domestic fuel industry, and the development of small modular reactors (SMRs) in particular. The NFSA is backed by $2.7bn in funding, with a further $700mm being added by the DOE, for a total of $3.4bn in purchasing through a RFP. While the RFP is open until 2040, it represents ~24mm lbs of additional uranium demand to be filled by Western miners, in a market that’s already in a steep structural deficit (see chart below). These bills were designed to set the groundwork for the Prohibiting Russian Uranium Imports Act, which became law this May, and bans all US imports of Russian LEU until 2040. Russia currently supplies ~25% of US nuclear fuel consumption. The ADVANCE Act, passed almost unanimously earlier this month, streamlines the process of licensing new reactor technologies in the US and increases staffing and funding for Nuclear Regulatory Commission (NRC) reviews.

Going back in time, in 2022 the Inflation Reduction Act (IRA) introduced a $15 per megawatt-hour tax credit for existing nuclear power plants, and $6bn in funding to support uneconomical plants, which led to the life extensions of reactors such as Diablo Canyon (originally scheduled to close in 2025, but now extended to 2035). The DOE has also granted a loan to Holtec, to restart the Palisades nuclear power plant in Michigan, which would be the first time a moth-balled nuclear reactor is restarted in the US. Discussions are underway to potentially restart Three Mile Island as well.

I could go on, but you’ve probably heard these facts from me before, and I’m sure you get the point: the pivot towards nuclear has a lot of momentum, and there is consensus across the political spectrum that there is no better alternative to supply green, baseload power to meet rising energy demands. It’s also important to remember that historically it’s Democrats who have been the anti-nuclear party, not the Republicans. Trump’s VP pick, JD Vance, is close to a number of Silicon Valley executives like Peter Thiel and Elon Musk, who are all strongly pro nuclear. Last but not least, the US represents only a quarter of the global nuclear fleet. No matter who wins the US election, the tectonic global shift towards nuclear is well underway, with 62 new reactors currently under construction, and new projects being proposed / announced almost every week (most recently in the UAE).

Meanwhile, the supply picture for uranium continues to be challenged, with Kazakhstan significantly increasing the Mineral Extraction Tax (MET) rate on the world’s largest uranium producer, Kazatomprom (KAP) from 6% to 9% starting 2025. Beyond 2025, the tax regime will change from a fixed rate to a variable rate based on production volumes and uranium prices. Importantly, the ramp up in tax rate is significantly more sensitive to production volumes vs. prices, effectively reducing the incentive for KAP and its JV partners to produce beyond the current volume thresholds. The new tax rules will disproportionately impact KAP’s JV partners (Cameco, Orano, Rosatom, Uranium One) as KAP’s largest assets are all under a JV structure. For example, the Russians will have to pay a punitive 18% tax on the Budenovskoye deposit when production ramps up, and Cameco’s JV Inkai pounds will become a lot more expensive.

Overall, the new tax regime makes it less likely that KAP and its JV partners will invest in large projects in the future, unless uranium prices go significantly higher. Production will be rebalanced across KAP assets to minimize the tax impact (i.e., where possible assets will produce just below the next tax volume threshold). It also incentivizes KAP to slow down its production ramp up in 2026 / 2027.

Moving from Kazakhstan to Niger, we see another potential supply hiccup emerging. Global Atomic (GLO) issued a press release stating that its debt financing has been postponed once again, this time to August, as the banks require answers to some ‘additional questions’. Final approval by the bank is now expected in October.

Earlier in the year, the banks deferred making a decision based on the updated Dasa Project Feasibility Study (FS), which showed significant improvements in mine life, reserves and production. It’s quite clear that the inability to finalize the debt arrangement has to do with the political situation in Niger, which GLO has no control over. Understandably, investors are losing hope, and the banks’ repeated deferral is starting to look like a nice way of saying ‘no’. GLO stock was hit hard upon the announcement, dropping ~26% for the week, and leading to the following statement from the CEO to bolster confidence:

“Good evening everyone, my name is Stephen Roman, the largest shareholder of Global Atomic. Just wanted to give you some reassurance that our project is proceeding on schedule. We have discussions ongoing with potential JV partners. We thought we’d give the banks the first priority, but they’ve been slow. We’re not going to twist in the wind here. We’re aggressively moving this project forward, and I just want to give people some comfort that we are working hard to get something done here on the financing side, with the banks or with the JV partners. Hang in there, there will be more news, and just thought I’d let you know to stay calm.”

There are a couple of points here that I think are worth highlighting. First, I like that Roman emphasized that he is the largest shareholder, and that his incentives are aligned with investors. Second, I think the tone / wording of the message indicates that the bank financing route is not going to be feasible, and that the Company is going full steam ahead on the JV route. In the past, Roman has mentioned that he has been approached from a variety of sources for prepayments on uranium delivery contracts, from strategic equity investors including private equity firms, minority JV investment partners at the project level, and investment banks, for equity financing.

Still, there are a number of unanswered questions for investors:

• How long will the JV arrangement take to finalize, and how will GLO finance itself in the interim given cash levels are running low?

• What will the JV structure look like? What % of economics will GLO be giving away, and at what valuation? What proportion of the financing will be equity vs. debt?

  • GLO’s market cap is now only US$237mm, while the updated after-tax NPV8% at $90/lb uranium price is USD$1.3bn. There are also 51.4mm lbs of high-grade Inferred Resources to be converted into Indicated that are not included in the mine plan. Will the JV partner be willing to inject equity at closer to fair value vs. what the market cap implies?

• Will the JV partner be a pro-Western democracy or anti-Western dictatorship?

  • A partnership with Russia or China would be challenging given Canada’s recent rules against foreign ownership of critical mineral assets. It would also be unfavorable for Western utilities that have entered into offtake agreements with GLO.

  • The ideal JV partner would be a Western private equity, pension fund or insurance company, but it’s unclear what their appetite might be for geopolitical risks.

Given that GLO is trading at only 1/5th of the NPV of Dasa (and ignoring any value for BEFESA zinc recycling operation), I don’t think it makes sense to sell the stock here. However, I also won’t be increasing my position at this stage given the wide range of outcomes / uncertainty on the financing front. I’m still confident that Dasa will be a producing mine at some point, and while the cost of capital under a JV structure would be substantially higher vs. debt financing, there is still a good possibility that shareholders earn a handsome return given the deeply discounted valuation. In a worst case scenario where Dasa fails to secure financing, the implications for uranium price will be very bullish, and my positions in physical uranium and Western miners should offset losses in GLO.

To close things off, I wanted to share some quotes from a recent conversation I had with a nuclear engineer and investor who’s been in the industry for 50+ years, and understands the fuel buying process intimately. My questions were primarily focused on why utilities have not been more aggressive in buying, despite the abundant supply challenges, and when we can expect uranium prices to make the next move higher. Below are some excerpts from his response [emphasis mine]:

“Some folks invested in uranium stocks think that buying uranium is like walking into a dollar store and walking out with a bunch of uranium to stick in the reactor. It's a long and complex procedure that is meticulously planned and executed at every step. And it takes time. I very much doubt the fuel and physics engineers even know what the spot or term price of uranium is. That is not what they do. Fuel buyers likely do know the Per Janders of this world - but price discovery usually occurs around the time contracts are negotiated. That latter process also often takes months to conclude as these are complex, very detailed documents. Because there are now so few suppliers in the US, utilities will go to Canada and Australia as most mines in Namibia are owned by Australian companies. But most of these contract books are already full out to 2026/7. Unless some big mines come on line sooner than we thought, or utilities shut down plants, I can easily see this ending up in a bidding war. Too much demand on too little supply is not a good place to be for a utility.”

“As I have said many times, uranium moves very slowly, and that is primarily because the industry follows very strictly prescribed procedures that they do not deviate from. You also have to understand that uranium is carefully tracked stored and monitored. Storage is regulated by the NRC in the US. So it is the process that governs the timing, and based on what I have seen and experienced during my career, you can expect fuel buyers… and by that I mean the people who actually procure finished fuel bundles..to be coming to the table beginning around September. I doubt it will be earlier than that.”

“The fuel and physics employees who provide the specs are mostly on vacation at this time, so work tends to be on a care and maintenance basis for most of the summer months. No fuel is purchased without those specs. Once the fuel enrichment, the number of fuel elements that are needed, and core locations are specified, the fuel buyers take over, so they will start pricing out those requirements around September, October, and November. Once they have the costs, the money needs to be authorized by senior plant management. Once approval is given, the contracts are  finalized with suppliers. If waivers are obtained, that could be with a Russian supplier (not very likely), or they will seek out a US or friendly nation supplier... Canada, Australia, Namibia. Since most utilities in the USA are in the same predicament, there will be many coming to a much smaller table to cater to their future needs. It is possible that some of the fuel and physics people will be told they have to delay vacation, but that does not happen usually. Each utility will have its own procedures, but more or less, it unfolds as described.”

“The thing to remember in all this is that the jobs I have described are highly specialized, and there are very few incumbents. They are also human and get sick and take vacations just like the rest of us. What I can absolutely guarantee is that all the players will follow the procedures to the letter however long that takes. There will be no shortcuts. They will not change the process because of perceived or actual shortfalls, or because of the price of uranium and related services.”

“I detect some impatience in uranium investors, and I do understand how very frustrating this business is... especially if you have a lot riding on it. One of my key principles is not spending all my days looking at share prices. There are much better things to do with my time. I know that is not easy. In my younger investing days, I did that. Now I know that it does not matter. Stock prices will respond soon enough. The key things to look for in uranium are whether the fundamentals will cause prices to go up or down and what black swan events are out there that could derail it either way. All major industrial nations are  flocking to nuclear power, and that ultimately translates into more uranium demand. It will not occur tomorrow , but it will occur. And that is where the frustration is... we don't quite know when.”

“You can not control equity markets any more than you can control what your neighbor thinks or does, so there is zero point in fretting over things you have no control over. Uranium will do what uranium always does. It moves at a snails pace until it doesn't. What we are watching is a pressure cooker. The demand outstrips supply by a wide margin now and in the future, sooner or later, that pressure will translate into higher equity prices because there is no way to relieve that market pressure other than through more uranium supply or less demand. The latter is unlikely to happen, so that leaves more supply. And that must come from all those companies you are invested in. You must have patience. Without it, uranium will drive you nuts.”