Uranium Update
Potential Russian EUP restrictions, production hiccups, highlights from Cameco's conference call
On Friday last week, the Russian government announced it that would impose tit-for-tat sanctions on enriched uranium exports to the US. The announcement led to a prompt $6 move higher in uranium spot prices from $77 to $83/lb. As a reminder, Congress enacted the The Prohibiting Russian Uranium Imports Act earlier this year, which bars US imports of Russian uranium, but provides waivers to utilities on a case-by-case basis until January 2028. While the consensus view has been that Russian EUP would continue flowing into the US through 2027, this latest announcement has added a new layer of risk. Russia currently supplies ~27% of the US’ enriched uranium, and controls ~40% of global uranium enrichment capacity.
From Russia’s point of view, the retaliation makes sense for a couple of reasons:
Knowing Western dependence on Russian EUP, and the fact that the Western nuclear fuel cycle is stretched, why should Russia afford US utilities the luxury to figure out alternative supplies until 2028?
Russian EUP can be sold to friendlier countries like India, Iran, China (and other BRIC+ partners that are using Russian-built reactors) at much higher prices than under contracts to the West (since these contracts were negotiated during a lower price environment).
The recent NEI conference featured a presentation on the state of Russia’s nuclear fuel industry which highlighted that Rosatom’s (Russia’s state-owned nuclear fuel and power company) conversion and enrichment operations are stressed and overextended.
Demand for Russian EUP surged in 2023 and this year, with both US and EU importing significantly higher volumes for stockpiling purposes.
Russia also supplied initial fuel loads for reactors in Bangladesh and Turkey (initial load is 3x the annual reactor requirement).
This strong demand has stretched Rosatom’s capacity, with both conversion and SWU running at the operational limits, and UF6 stockpiles running low.
In light of these demand pressures, and the rising demand for uranium domestically (Russia is planning on building 34 new nuclear reactors by 2042), Rosatom is re-evaluating its long-term sales strategy.
With the recent escalation of the war in Ukraine, Russia will use every lever (political, economic, military) to maintain or gain leverage.
Russia has a long history of weaponizing energy supplies, with Russian state-controlled Gazprom temporarily halting gas supplies to Europe in 2022, causing energy prices to skyrocket.
If Russia decides to move forward with these restrictions, and US utilities have to scramble to secure alternate supplies, this could cause a major disruption across the fuel cycle. Both enrichment and conversion capacity in the West is extremely stretched (as evidenced by the sharp spike in spot SWU and conversion), and it’s unclear how the system could accommodate a sudden increase in demand. Russian enrichment contracts require that utilities provide UF6 at the same time as EUP delivery. Replacing these contracts will require utilities to deliver the feedstock upfront. For example, if a US utility has a Russian EUP contract for 2026, it will plan on receiving EUP and delivering UF6 in exchange to Russia in 2026. In other words, the utility doesn’t have to worry about sourcing yellowcake, conversion services and delivering UF6 for a whole year. However, if that contract is now replaced with a contract with Urenco, Urenco will require UF6 delivery upfront, pulling forward the entire UF6 fabrication process.
The restrictions will reverberate beyond the US, to the global nuclear fuel supply chain. Centrus, which imports EUP from Russia on behalf of US utilities, re-exports it to several countries including South Korea, Japan, Mexico, Taiwan. Centrus made a regulatory filing on Monday stating that Tenex, the Russian EUP exporter, has had its export license to the US rescinded by the Russian government. Centrus has previously highlighted the Russian ban as a major risk to its operations (see excerpt from Centrus’ 10-K below). The next shipment of Russian EUP is scheduled to arrive in the US in Q1 2025.
While the above scenario is quite scary, Russia’s announcement includes a number of qualifiers, which has led some to speculate that the move might be more bark than bite. Firstly, the Russian announcement uses the word ‘temporary’ when referencing the restrictions. Secondly, the press release states that some ‘exceptions’ are possible, on a case-by-case basis, which is quite similar to the language used by the US with regards to waivers. Earlier this year, Tenex issued US utilities an ultimatum to secure waivers within 60 days, or pay for their existing contracts upfront to avoid cancelation. The 60 day deadline came and passed, but Tenex decided not to act on it. Perhaps this is another bluff?
Some nuclear fuel experts have also pointed out that China could buy excess Russian EUP, and sell its own EUP to the US, helping US utilities circumvent the restrictions. A similar tactic is deployed in the oil market where India buys oil from Russia, refines it, and then sells the end product to Europe, allowing European nations to avoid buying Russian oil directly.
It’s hard to speculate at this stage which way things will go. Uranium spot prices have given up their gains over the past couple of days, suggesting that traders are skeptical if Russia will go through with the ban. If the Russia-Ukraine war escalates however, Putin could be pushed towards inflicting maximum pain on Western powers. Buying more EUP from China may not be straightforward either. Given Trump’s strong anti-China stance, the US could put heavy tariffs on Chinese EUP. It’s also possible China decides to impose its own restrictions on EUP supplies given its close ties with Russia. China needs a lot of EUP for its domestic nuclear buildout, and could decide to stockpile, instead of selling. Alternatively, if Trump is able to successfully mediate a peace agreement, then we could see restrictions ease.
Even if one is to believe that these threats are a negotiating tool, and that the flow of nuclear fuel will continue unrestricted in the near term, this shouldn’t change the longer-term trend toward geopolitical bifurcation. The reason is that Russia simply can’t be trusted as a long-term supplier of a strategically important fuel. Both the US and Europe have recognized the importance of achieving energy independence, especially in light of the increasing power needs to support AI development. It’s important to remember that the Russian ban was passed by Congress with strong bi-partisan support, and that the US is already investing significant sums to rebuild the domestic nuclear fuel supply chain. These efforts will all go to waste if utilities were allowed to continue purchasing EUP from Russia and/or China indefinitely.
Regardless of how the Russian ban plays out over the next few months, the big takeaway for investors should be that while the demand for nuclear power keeps increasing, the supply chain for nuclear fuel continues to look uncertain and fragile. This ultimately translates to onshoring of nuclear fuel supply chains and increased stockpiling, which exert upwards pressure on prices.
Unfortunately, geopolitical uncertainties have been bad for uranium spot prices and sentiment in the near term. Utilities have been forced to focus more on EUP, which is what Russia primarily sells to the US, and delay / defer contracting for U3O8. Contracting volumes for uranium are still well below last year, and spot market volumes remain anemic with prices at the mercy of traders and other ‘sloppy’ sellers who continue to dump a few pounds here and there in an illiquid market to raise cash. Some of these sellers are uranium mining companies who bought uranium a few years ago and are now selling inventories to fund capex and avoid doing equity raises. Last month, the KAP-backed ANU fund decided to shut down and sell its ~2mm lbs inventory into the spot market, further depressing prices.
This lackluster contracting and spot market activity is likely to continue until utilities get clarity on waivers, Russia’s true intentions in terms of retaliation, and how the new Trump administration will handle the Russia-Ukraine situation. This could take several more months to play out. While the sideways chop / volatility is frustrating as a uranium investor, uranium is one of the few markets where you can get an inkling on future price pressures by looking at different parts of the fuel cycle. On that note, both conversion and enrichment prices are continuing to make new highs. Conversion prices increased $1 to $289 / kgU in October, representing a ~370% increase since 2022. Spot enrichment prices are up ~200% over the same period. In comparison, spot U3O8 prices are only up ~89%. Since the starting point for all nuclear fuel is U3O8, a spike in the prices of downstream products and services, ultimately translates to higher prices for yellowcake.
Geopolitics aside, global uranium supply is struggling to meet expectations across the board. Just this year:
Kazatomprom reduced 2025 guidance by 17% from 30.5-31.5K tU to 25-26.5K tU (~15mm lbs decrease).
Paladin reduced 2025 guidance from 4-4.5mm lbs to 3-3.6mm lbs.
Peninsula Energy reduced 2025 guidance from 700-900K lbs to 600K lbs.
Orano suspended Somair operations.
UR-Energy reduced 2024 guidance from 650-750K to 325-475K lbs.
During the recent Q3 earnings call, Cameco management stated the following with regards to these various market dynamics [emphasis mine]:
We're 2 years, 2.5 years now into this Russian invasion into Ukraine. And as Grant, I think, has pointed out many, many times, once that happened, obviously, that caused a bit of a crisis in the whole market, but the utilities often start at the far end in the enrichment space and work their way backwards. I don't think they're finished in enrichment yet to. There's -- you can see the prices are holding pretty firm and enrichment conversion are hitting new highs, and we're waiting for it to come down the pipeline really into the uranium space because we're going to have a problem there going forward as well.
So the first question that we got this morning was about the pattern of contracting, and it's just important for everybody on this call to remember that when utilities really are thinking about securing that fabricated fuel bundle, they start at the reactor and they work upstream. And as they do that, we've seen pressure on the enrichment space. We've seen a lot of pressure on the conversion space. And I would just echo Tim's earlier comment that the world has yet to see that demand fully hit the uranium space, which is, by the way, very, very good news for uranium.
Cameco also highlighted some important points regarding the supply / demand situation and contracting market, which is responsible for 85% of uranium purchasing:
The fundamentals in this market are very clear and they're very positive. The long-term price is up again, $81.50 now in U.S. dollar terms. And we're not even remotely close to replacement rate contracting. This is a market that has never seen these kind of uranium prices with so little demand in the market. That's a pretty positive signal. And the structural gap between uranium supply and uranium demand does not require a Russian ban. On a global basis, there is not enough primary supply capacity and secondary supply availability to meet the demand as it's growing in a very certain and predictable way. That is ultimately what's going to drive prices. And when you see a structural gap, that's a one-way trade. We need higher prices to incent the kind of investment to generate the primary production that's going to fill that gap. So that's very clear. That's unavoidable.
There are utilities who know they need future supply and they're working accordingly. But there are some uncertainties that are holding that up. And a big uncertainty there is whether the Russian ban is going to stay or not. It would require legislative action to overturn. The question is how easy will waivers be between now and 2028. And that's driving some uncertainty in the market or let's call it some pause from some of the fuel buyers. But when you step back and look at the overall dynamics and you see that market-related contracts are being priced at $70, low-$70 escalated floors, $130 escalated ceilings, if you pick the midpoint between those floors and ceilings, that's 3-digit uranium, that's $100 uranium.
Finally, there were some important tidbits with respect to spot market activity and the link between spot prices and LT contract pricing:
When you see the spot market soften like it's done and who are the culprits there? Well, it's anybody who produces material and doesn't have a home for it. Those are the culprits for why the spot market is softening. When the spot market softens and comes off like it has, $10, utilities are inclined to believe that, that should mean a one-for-one reduction in floors and ceilings, right? So if the spot market has come off $10, then shouldn't floors fall by $10, shouldn't ceilings fall by $10? And because we're strategic and because we're patient, for us, it's always about pricing appropriately for the future. And our message is the spot market coming off because somebody has sold 50,000 pounds of material in a clumsy way into a thinly traded market, has nothing to do with the appropriate price of uranium 2 years from now and out and beyond. So it's got nothing to do with where floors and ceilings should be.
These comments further corroborate the assessment that weakness in the term and spot markets this year is not a reflection of fundamental supply / demand factors, but temporary factors such as clarity on the Russia ban, which has forced utilities to focus more downstream products and services, and defer purchasing of U3O8. The lack of liquidity in the spot market, combined with price insensitive selling, has led to a depressed spot price, but this has not impacted producers’ negotiating leverage. After experiencing a decade long bear market where most uranium miners were left for dead, the producers are unlikely to budge at this critical juncture. Recently signed contracts continue to offer tremendous upside asymmetry, with only ~$5 of downside and ~$50 of upside.
Once the contracting cycle starts in earnest, uranium prices will more accurately reflect the LT supply / demand dynamics, leading to a strong upwards inflection in cash flows for producers and near-term producers. Based on the recent price moves in conversion and enrichment, the continuous supply disappointments, and the price inelasticity of demand, this ‘fair’ price will be significantly higher than the current spot and LT price. Contract coverage for both US and EU utilities starts falling off dramatically starting 2027, and with the nuclear fuel cycle running on a 18-24 month time frame, the window to cover those future uncovered requirements is quickly closing. It’s been a tough year for the sector, but I think the patience will pay off.
