VettaFi’s Evan Harp sat down with Sprott Asset Management CEO John Ciampaglia for a two-part interview. The first part covers the uranium market, where Sprott is a leader through the Sprott Physical Uranium Trust (SPUT, TSX: U.U ($US); U.UN ($CA)).
Evan Harp: Can you give me a broad overview of uranium?
John Ciampaglia: There’s a lot of interesting things happening in uranium and nuclear right now. We’ve still got this bear market, if you ask me, that we’re trying to work through with the Fed tightening and quantitative tightening. But what’s interesting to me is that the uranium stocks are one of the few sectors that have actually bounced very early in the summer. I mean, they got caught in a downdraft in Q2 with the Jackson Hole speech and all that, but if you look at the performance of them since July 1, they’re up 30%. I can’t think of anything up 30% over the summertime.
I was talking to CNBC about this yesterday, that the fundamentals are so interesting in uranium right now and nuclear that it’s allowed the sector to decouple from the rest of the market and all the macro headwinds that everything else seems to be facing. So I think that’s kind of interesting that in an environment where people are struggling to find positive returns this year, in this malaise that we’ve hit since kind of April/May, it’s one of the few sectors that has done a V-shaped recovery. We haven’t really seen the return of money flows into the stocks, but I think that will come in due course.
So, what’s really driving all of that? Well, it’s just recognition of what we’ve described as a growing number of energy policy U-turns that are happening around the world right now. Whether that’s California doing an about face on Diablo Canyon, which was their last nuclear power plant — I love the fact that California has had power outages yesterday and today, and just last week they agreed to extend the operating license for Diablo Canyon which, by the way, produces 8% of the entire state’s electricity. One plant. They decided that to extend its operating license to 2030.
Then you look at Japan, two weeks ago, Japan finally announced more restarts of reactors. Why? Because there’s an energy crisis going on right now, and we’re not experiencing it anywhere near the same degree that that’s happening in other parts of the world. For example, your energy bill and my energy bill this winter probably will double, but the reality is if you look at natural gas, it’s $9/million vtu in North America right now. $9 is a lot, by the way. It’s $60 in Asia. It’s $90 in Europe right now. So you can imagine the scope of the shock that they’re having right now with natural gas prices, which is having a direct impact on electricity prices.
Then we’ll have the second shock coming when winter starts and people start using that gas for heating. So they’re having a heck of a problem over there because they’ve been overly reliant on Russia for that supply of natural gas, which we know is now being weaponized.
Nuclear obviously is not the most politically friendly topic for politicians to rally behind. But when you have your constituency having their energy bill go up five or 10 times, and the tradeoff is, “Do I keep the nuclear power plant on?” or “How am I doing with my energy bill went up 10x?” Unfortunately, sometimes you need crisis for politicians to have the will to make the tough decision. So that’s what’s happening. California, Japan, South Korea — new prime minister had a complete U-turn on a nuclear energy, India signaled they want to build more plants, China just said they could accelerate the build out of their nuclear reactors.
Then you’ve got poor old Germany. That’s the poster child for dysfunctional energy policy in the world, who finally announced a day or two ago that they might keep two of their last three nuclear reactors on reserve, just in case there’s a shortfall this winter.
We think of what’s happening right now as a parallel to what happened in the mid to late ’70s, when OPEC got control of the oil price, credit, and oil shock. That was the catalyst for the first big pivot in energy policy that we saw in the West, and that energy policy was designed to reduce reliance on OPEC oil. That was the catalyst that spawned the buildout of most of the nuclear power plants in North America and Europe, and most of those power plants are still operating today.
Evan Harp: This is interesting to me. You had mentioned at the beginning of that you still felt like uranium was in a bear market, even though it’s up 30% this year at a time when the rest of the market is seeing red. Do you just see that as a prologue to bigger things for the space?
John Ciampaglia: Yeah, I mean, we believe that uranium has started a new bull market in about the last 18 months. The price 18 months ago was in the high $20s per pound. Right now we’re in the low $50s per pound. So we’ve had a pretty big move, and most of that’s come in the last 15 months. So we do think that the uranium price — the spot physical commodity — has started a new bull market after essentially being in what we would describe as a nine-year bear market. We think we’ve finally broken free of that downtrend. What’s basically happening is, you’ve got all of these different companies and countries announcing extensions and buildout in financial support and regulatory support for nuclear energy, which, inevitably, is going to create much more demand for the physical. So that’s lifting the physical, and when you have a higher physical price, that obviously is getting a huge boost to the mining equities. Because without the higher price of uranium, you’re not going to have an incentive for these companies to turn on resumed production of many mines that were put on care and maintenance in the bear market.
So you’re seeing the mining companies, and now it’s one after another, restarting mines that have been closed for five years. Which is really healthy because it’s basically saying there’s a price to make a profit and there’s a contract underlying those pounds in terms of utilities coming to them saying, “Hey, we need to buy the stock from you.” It’s a really healthy sign. That’s why the uranium equities have had this 30% bounce in the last two months. There’s very good fundamentals, there’s very good sentiment and narrative because of all the policy shifts. The Inflation Reduction Act I think is a good example where nuclear energy — existing power plants, they got a $15 per megawatt hour tax incentive. These are small things, but they provide financial support to the existing fleet of nuclear reactors that makes them more competitive, so they can continue to operate.
We just see a big, big change happening with policy and regulation, and that’s really boding well for the price of physical uranium and, obviously, for the companies that are producing it by developing new mines and exploring. There’s a very interesting story there. I do think it’s one of the bright spots in the market right now. The interest is coming back.
We’ve been doing calls this week, at night, with institutional investors in Asia, Hong Kong, and Japan. All of a sudden, they’re waking up and saying, “Hey, finally Japan is making the tough decision to get more reactors, because they’ve been dragging their feet for a very long time on this decision.” The reason why they’ve been dragging their feet is because there was there wasn’t enough public support for politicians to do it. Then all of a sudden, you’ve got the natural gas price spiking on them, and then it’s like, “Hey, we don’t have a choice. We have to do this because of electricity in the winter.”
Evan Harp: I think that’s a really powerful story, especially considering Japan’s history with Fukushima and events in the past that have made nuclear a harder pitch there. If there’s political will for expansion of nuclear in Japan, that says a lot. In terms of developing tech, there are breakthroughs in nuclear fusion. Is there a danger that kind of tech could cut the uranium bull market off? Or do you see that as not necessarily being a concern right now?
John Ciampaglia: Fusion is like the magic bullet to everything. So, I mean, essentially, if you could figure out how to do it on a large scale, you will basically wipe out the entire oil and gas business. Because you could singlehandedly replace it all. The reality is it is so far from large-scale commercialization that when you hear about such-and-such research lab or such-and-such university doing experiments — what they’re able to do, I’m sure they’re jumping up and down with excitement. But they’re literally able to create fusion reactions that last less than 60 seconds. So, it’s very, very interesting what they’re doing, but it is very far away from becoming viable.
I think what’s more interesting is the development — and this could be a completely different story — but the development that’s happening right now around small modular reactors. These are, they sometimes refer to these as advanced technologies. But everyone from the United States, to France, to Canada, Japan, South Korea, are all recognizing that advanced modular reactors are a viable technology to support the development, commercialization, and construction. Essentially, the big rub with nuclear power plants, there’s three of them.
One, they’re really big in terms of their power generation, which means they’re most suitable for big cities. They don’t work in smaller metropolitan areas because they’re really expensive to build. And they’re always over budget and over schedule. So that’s the Bugaboo. It’s not their safety, the operating track record of nuclear power plants around the world is excellent. So the concept that everyone is working on is, what if you could create a small modular reactor? Just to put it into context for you, a typical power plant is like a gigawatt, which is 1000 megawatts. A small modular reactor can be anywhere from 77 megawatts to 300 megawatts, so they’re very small. They’re built-in factories, and then they’re brought to site and assembled, so it takes out all the elements – working outside, the environment. They’re smaller, they’re simpler to build, and they’re more versatile for different jurisdictions. There’s 70 different designs being worked on globally, right now. It’s a bit of a race, you’ve got GE and Katash working on a design, you’ve got New Scale, you got TerraPower, you got Rolls Royce working on a design, and a number of different governments are providing support to these entities developing technology, because governments like the United States have realized that the future is not in the really big reactors. The future is going to be in hundreds or perhaps thousands of the smaller reactors.
The really interesting element of this is, if they can get the technology figured out and they can commercialize it, where do you put them all? Because, as you know, the public resistance to just about anything in life is so high, you know, this whole NIMBYism, right? But what if there were thousands of sites that exist today that would be happy to host a small modular reactor? And where would those sites be? Those sites today are where existing coal power power plants sit. Many of these plants are destined to close over time, and what happens is you have one of these plants in Wyoming, for example, that have 600 people working there, these people lose their jobs, the whole town dies. So, the concept is, what if you could take that site where the coal plant is and retool it to an SMR? All the power lines and transmission infrastructure is already there, doesn’t have to be built. You retrain the workforce, you create hundreds of new construction jobs in the process. And voilà, you get rid of your coal plant and you got an SMR there 10 years from now.
Evan Harp: That is a compelling series of events, and it makes a lot of sense. I have one more question to bridge us between nuclear power and gold. That is, what do you see as the effects of Russian sanctions in the long term? Russia, of course, is a place that does quite a bit in terms of uranium processing and uranium mining. It also has a footprint in precious metals.
John Ciampaglia: Well, it’s having a profound impact right now in the uranium market, because as you correctly pointed out, Russia is a player in terms of production of uranium. So that’s the core ingredient that you throw away. And most of that production is not actually in Russian territory, it’s through joint ventures they have in Kazakhstan. But where Russia plays a meaningful role in this whole storyline is that they are a meaningful provider in services along the nuclear fuel chain, and the two elements are conversion — where they turn it into a gas and then, from that gas, they basically enrich it by spinning it in centrifuges. Russia is about 40% of the global capacity available today for enrichment, and there are about almost 30% for conversion services.
The question is, well, why did they control so much of those important services? The answer is when the bear market really took its hardest bite out of the sector, many of the companies in United States basically declared bankruptcy. There is a major facility in Illinois, a conversion facility that’s been closed since 2017, because the prices were too low. So you’ve got capacity in the West that’s been either closed or curtailed. What we did is we offshored all those services to Russia because they were cheap. It worked great for everyone — utilities got cheap services, that allowed consumers to have cheaper electricity, but that works only when everybody’s friends. Now that we’re no longer friends, that supply chain is all messed up, because the utilities in the United States and in Western Europe are saying, “Okay, I don’t want to sign any new contracts with Russia. But I can’t cancel the contracts I have with them today, because there’s no alternative supplier.” What’s happened is that the suppliers in the West are saying to utilities, “Look, we’ll restart, but we need to have the right price, and more importantly, we need to have long-term contracts because we don’t want to make these huge capital investments, hire all kinds of people, and then we’re friends again with Russia and you move all your business back to them. No, thanks.”
It’s such a delicate situation that the Department of Energy in the last couple of months has gone to Congress and said, “We’re worried about this, and we’d like $4 billion of funding because we need to facilitate this transition away from Russia.” Basically, the U.S. relies on about 20% of its enriched uranium from Russia. So it’s not a huge amount, but 20% is enough, because you don’t ever want to have a shortage and have your power plant run out of fuel. The government is, I think, sufficiently concerned about this transition that it’s asked for billions of dollars in funding.
We think the government, the U.S. government, also wants to build a strategic reserve of uranium like it has with oil. We think they have made decisions around that, but it’s still in its infancy around their procurement. So uranium is a critical, critical mineral. I believe a lot of governments are realizing that the supply chain is a lot more vulnerable than they previously thought, and so there’s a lot of things happening there.
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