Exclusive Interview - Part 1: Russian Retaliation and Uranium
By Gerardo Del Real
Written Apr. 23, 2018
Editor's Note: Today we're bringing you the Outsider Club's Gerardo Del Real's exclusive interview with the President and CEO of Uranium Energy Corp (NYSE: UEC), Amir Adnani.
Mr. Adnani is among the most active and well-connected players in the uranium space, and you'd be hard pressed to find a better person to explain why the uranium sector is heating up.
To your wealth,
Nick Hodge
Publisher, Outsider Club
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Gerardo Del Real: This is Gerardo Del Real with the Outsider Club.
Joining me today is the President & CEO of Uranium Energy Corp (NYSE: UEC), Amir Adnani.
Amir, thank you for joining me.
The timing for this interview couldn’t be better. You and I spoke several months ago and we both knew 2018 was going to be a pivotal year for uranium and uranium stocks.
It’s still early, but judging by the volume and share price performance of the better uranium juniors the past week or so, it’s clear that the recent chatter out of Russia has reminded investors and speculators just how quickly uranium stocks can move under more favorable market conditions.
I reached out because you are among the most active and well-connected players in the uranium space and I’m hoping that you can provide a mini-course on the current state of the uranium market, what we need to see price wise for a sustained rally, and why UEC is positioned to step up to the plate and help hedge against a potential ban of uranium to the U.S. by Russia.
It seems all roads lead to Moscow these days with the news cycle! Can you explain the proposed Russian retaliation action towards the U.S. and why the simple mention of a draft bill has such a big impact on uranium?
Amir Adnani: Gerardo, it’s great to speak with you again and thanks for taking the time to discuss these very complex and timely situations relating to the uranium market.
Things are really heating up between the White House and the Kremlin regarding the sanctions imposed on Russia by the U.S., the conflict in Syria, and Russia’s proposed counter sanctions against the U.S. and its allies. The situation remains very fluid and has been changing day to day.
The recently proposed Russian law submitted to the State Duma would ban nuclear cooperation, including uranium supply, not only with the U.S., but also in "other foreign states" who support U.S. sanctions against Russia and “those who support Washington's position on Syria.” If the draft law is approved by the Kremlin, the U.S. utility industry may be in for a major supply shock as a result of their overdependence on uranium coming from countries under the Russian sphere of influence.
Gerardo Del Real: How dependent is the U.S. on uranium from countries under the Russian sphere of influence? Is it a meaningful share of imported uranium supplies?
Amir Adnani: It is a pretty big deal, Gerardo, which is why UEC stock has moved higher in the past week. The U.S. generates about 20% of its electricity and 60% of its carbon-free energy from nuclear power. To fuel this generation, the U.S. imports about 40% of its uranium requirements from Russia, Kazakhstan, and Uzbekistan. The extreme dependence on foreign uranium from countries with elevated geopolitical risks is clearly a serious national security threat and has prompted concern from the industry as well as our federal government and Capitol Hill.
Uranium is a strategic mineral for the U.S. as well as a source of economic development and jobs. At its peak, the uranium industry employed more than 20,000 Americans; now the number is less than 500 and continues to decline. Since 2012, investment in uranium exploration is down more than 90%. In 2018, U.S. uranium production is expected to fall to approximately 700,000 pounds, the lowest production since 1949. At this level, domestic production will account for less than 2% of the uranium required to power U.S. reactors.
Gerardo Del Real: Amir, I’m perplexed that politicians and policy makers are not responding more forcefully to fix this overdependence. UEC has a unique advantage to have former U.S. Energy Secretary Spencer Abraham as chairman. What do you and Spence make of what the administration wants to see or do?
Amir Adnani: We’re very fortunate to have Spencer Abraham as chairman, he has considerable insight and provides significant guidance in our Washington strategy. Scott Melbye, our executive vice president, also provides deep experience in D.C. policy development. He has served as president of the Uranium Producers of America and has given testimonies on the state of the U.S. uranium industry to the House Oversight Committee. Also, as a Texas-based company in Corpus Christi, myself and our South Texas team are very familiar with the current energy secretary, Rick Perry, who we first met during his 14 years as governor of the state of Texas.
Secretary Perry is a huge supporter of the U.S. nuclear power and uranium industries and was recently quoted saying “The Trump administration thinks nuclear energy is very important. It’s important domestically, it’s important internationally.”
So, you can see that under the current administration there has been increasing support for the domestic U.S. uranium industry. We have seen bipartisan support from Capitol Hill to promote the importance of a safe and viable domestic production industry. One of the more recent measures came when Secretary Perry halted damaging transfers of the government’s excess uranium to fund clean-up activity at legacy enrichment facilities.
There is momentum developing for the U.S. uranium industry which has also prompted the filing of a 232 petition with the U.S. Department of Commerce (“DOC”). The petition proposes to reserve 25% of the U.S. uranium market for domestic producers. Section 232 of the Trade Expansion Act of 1962 authorizes the Secretary of the DOC to conduct investigations related to the effects of imports of any material on the national security of the United States. Based on recent actions in the steel and aluminum industries, DOC appears likely to open an investigation into uranium.
The petition was filed in January and we are looking for DOC to make an announcement on beginning the process in the near future. Once DOC has agreed to pursue an investigation they will have up to 270 days to prepare their findings and submit a report to the president. The president will then have 90 days to make a decision on the DOC investigation with a plan of action or inaction at his complete discretion.
If President Trump follows the petitioner’s suggestion, domestic uranium prices would have to move considerably higher to incentivize new production. Recent estimates indicate this would require prices in the $45-$55/lb. range, a significant increase over current spot prices around $21/lb.
Ensuring the U.S. has a viable domestic industry extends past fueling U.S. reactors. The industry is also required for U.S. national defense applications that require U.S.-origin uranium in meeting international law. U.S.-origin uranium is also required for the U.S. nuclear Navy for its refueling programs. Members of Congress are increasingly aware that the U.S. must have a thriving domestic uranium industry for national defense programs as well as fuel for the U.S. reactor fleet.
Gerardo Del Real: Let’s talk about the supply-demand fundamentals impacting utilities and why they are potentially the single most important catalyst for a sustained uranium bull market?
Amir Adnani: Beyond all of the market chatter and potential catalysts associated with the possibility of Russian counter sanctions and the 232 petition, ultimately the core fundamentals of the market will drive the uranium price. Primary supply will be needed and its simply not available at current market prices in the quantities necessary to supply global uranium demand required by the utility industry. Basic production costs will have to be incentivized with a much stronger uranium price to meet utility requirements. This demand is much stronger than most people realize, there are now more operable reactors (449), and more reactors planned, proposed, and under construction (565) than there were in March 2011, pre-Fukushima.
Utilities are the ultimate demand driver of uranium prices as they are the only end user of the fuel needed to power their reactors. Currently, the utility industry is in the position of seeing older legacy contracts rolling out of their supply portfolios. As these older contracts fall off, the utilities will need replacement supply in a new, longer-term contracting cycle that is just beginning. The longer-term supply-demand fundamentals will require contract prices much higher than current market prices. Most producers are struggling, with the vast majority of production costs well above current market prices. This situation is not sustainable in the long run.
As we discussed a few months ago, the market turned an important corner in 2017 with significant production cut announcements from several of the world’s largest producers. This is contributing to a notable decrease in uranium supply in 2018 and beyond. These production cuts will lower expected 2018 global production to about 135 million pounds — in stark contrast to the 194 million pounds of projected utility demand.
While inventory and other secondary market sources should mitigate this gap over the near term, those supplies are finite and in the process of being drawn down. Furthermore, while recent production cuts will go a long way toward rebalancing the market, we continue to expect additional cuts in global output, absent a material and sustainable price increase.
These and other recent developments continue to be part of a strengthening uranium story. We believe the long-term fundamentals look outstanding for low-cost ISR producers and UEC is coming out of what has been a long bear market with additional, and fully permitted low-cost assets that can be turned on with higher uranium prices!
(The Outsider Club Interview Part Two with Amir Adnani to follow)
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