by Marin Katusa, Katusa Research:
A case for investing in any natural resource always starts with supply and demand.
When we talk about those things in uranium, we talk in terms of pounds.
Uranium is an especially unique market because there is primary production (which comes from mine production) and secondary production (uranium from decommissioned nuclear warheads and other sources such as reprocessing tails).
In 2015, 86% of uranium supply came from mines and 14% came from decommissioned nuclear warheads and other secondary uranium production sources.
As a result, a uranium investor must not only analyze mine production like he would in the copper or silver market, he must analyze nuclear warhead inventories as well.
On the mine supply side, the central Asian country of Kazakhstan (yes, where Borat is from) is currently responsible for 41% of global mining production. Canada is a distant second (16%) and Australia is a distant third (8.9%). A handful of countries produce modest, but meaningful, amounts of uranium, but what goes on in Kazakhstan dominates the mined uranium market. Below is a pie chart that shows global uranium production, red represents Russian friendly nations and blue represents US friendly nations.
All of Kazakhstan’s uranium production comes from ISR (in-situ recovery). ISR is the cheapest way to produce uranium. This is because ISR involves no digging, hauling, or crushing of rock. There’s no conventional open pit mines or underground mines. You don’t need big dump trucks or mining shovels for ISR production.
ISR pumps the equivalent of soda water into porous rock that hosts elevated uranium concentrates. The water becomes “impregnated” with uranium and is then pumped out of the rock. An ISR operation is more like a water processing facility than a mine.
It’s important to keep in mind that ISR production is similar to oil and gas production. It produces a lot when the well is first tapped and then production declines. As the production declines, new wells are drilled to offset the production decline rates.
Kazakhstan is producing a lot of uranium now, but it is just starting to experience production declines. The current price of uranium does not warrant drilling new wells in Kazakhstan. It has the lowest cost of uranium production in the world, but drilling new wells is not economic at $20 per pound uranium. To bring on new production in Kazakhstan, $35 – $40 per pound uranium is required.
And logically expected, Kazakhstan just announced it plans on reducing its uranium production by 10%. When the world’s largest producer of uranium announces a 10% reduction, speculators must pay attention.
The decommissioned nuclear warhead market is dominated by Russia and the U.S. At the end of The Cold War, Russia and the United States agreed to reduce their nuclear weapon stockpiles and use their uranium for nuclear power production. As part of the agreement – nicknamed “Megatons to Megawatts” – the United States agreed to buy 500 metric tons of surplus uranium from Russia. This program lasted from 1993 to 2013.
After selling a portion of its inventory, Russia is estimated to hold 134 million pounds of uranium. The U.S. inventory is estimated to hold 260 million pounds of uranium.
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