We are just back from Kazakhstan with Uranium News

Moving into the Uranium theme, our analyst just returned back from Kazakhstan on a fact finding mission, so combined with a few earnings updates, we figured an update is in order. If you aren’t a U-a**hole like us and your eyes glaze over by the first mention of U, feel free to skip ahead and straight into the Events…

Before we jump into scuttlebutt from Kazakistan, let’s go over some recent developments in the uranium market that caught our attention. The big one, obviously, is the Russian Uranium Ban Bill that passed. You probably read 788 twitter thread and watched 15 hours of YouTube videos, so we are not going to waste time, just wanted to give you our quick take. Since the US utils. got their waivers until 2028 this ban is a giant nothingburger. Only upside is, now balls in Putin’s court, and if he decides to turn up the heat on NATO and the west by banning all natural and EUP uranium exports to the West, boy aren’t we in trouble. While fundies are glued to the Numerco screen to see if the ban will give a $5 pop to U308, Putin’s retaliation will have a much more profound effect as Rosatom is the only commercial HALEU supplier in the world.

Here’s another news that caught our eye. Italy, second largest manufacturing industry in Europe and 9th largest economy in the world, previously had an Einstein moment in 1986 and shut down all of its nuclear plants. Following the elections in late 2022, the sentiment around nuclear began to change and this week the government officially began working on legislation that’ll return Italy to nuclear power. Funny how a center-right wing coalition snatches the government from hopeless socialist lib-turds and immediately policies start to make sense again. Anyway, Italy was in no one’s bingo card and tbh it does not matter for the supply/demand models of next 3-5 years. But nuclear is increasingly gaining support and the next unplanned life-extension or restart could move the needle significantly. Remember what happened when Feds allowed Diablo Canyon to stay open in 2023? Next surprise likely has larger impact.

Let’s touch on a couple recent earnings from the majors before moving on to the conference in Kazakhstan. Cameco came out on Tuesday and you gotta love their buy-high sell-low business model. To give them credit, company managed to boost production, up to 5.8m pounds from 4.5m, but also comes with higher costs as all the increase in production was from their mines in Canada. Production from Inkai JV was actually down 16%. So they had to drop this nice line in their Q1 MD&A: “In 2024, we expect the average unit cost of production at McArthur River/Key Lake to continue to be higher than the average unit life of mine operating costs reflected in our most recent annual information form..” We are not going to act like we have an edge in geology or guess whether CCJ ramps up to meet their target production for 24/25 (18mn lbs each at Cigar Lake and McArthur). What’s more interesting is understanding how much they could realistically need to buy in the market. If you go through their 2024 outlook in the MD&A report, “Committed purchases (including Inkai purchase volumes)”of 9m lbs and “Market purchases” of 2m lbs. Of the 9m committed purchases, Inkai is expected to contribute 4.2m lbs: “our JV Inkai purchases, which we have assumed will be equivalent to our 2023 purchase volume of 4.2 million pounds. If Inkai production and/or deliveries vary, committed purchases may vary and we may have to rely on our other sources of supply”. Inkai produced 8.3m lbs total in 2023 before many of the production/management issues showed up, that’s 3.3m pounds to Cameco’s share. With all that’s going on the ground, the outlook could turn out to be too optimistic, more on that below.

Kazatomprom had a trading update, which we are sure you already went through if you are involved in U trade. Production was up 7%, (Yaay). While U-twit were discouraged to read that the floods did not impact production and company did not lower their previous guidance, we are going to touch on couple things (and talk more about later). First is the sulfuric acid plant construction was delayed a year from 2026 to 2027. Acid shortage is a big problem especially when you need it in increasing quantitates and all your domestic supply capacity went offline in the Uranium winter. We found out in Kazakhstan that a substantial amount of sulfur is now coming from Russia, but recently Russians told KAP that they want their sulfuric acid used only in their own JVs (Akdala, Kharasan, Akbastau and South Zarechnoye mines). The other is the unexpected management changes. This was one of the surprising observations on the ground in Kazakistan. The company just cannot get its sh*t together. More on that too, later.

The conference was dominated by the Chinese, Russians and French’s Orano (not surprisingly, post Niger, they need every pound they can find). Also not surprisingly, the Western utilities really didn’t show up. One comment from a US utility buyer that did show up was, with the pending Russian Ban Bill, most didn’t want to be seen in this part of the world. He said most utilities that were dealing with the Russians was now putting in extra effort to remain anonymous in their search for alternative supply, to hide the fact they were dealing with the Russians.

The Chinese are interested in both sides of the trade, on the contrary to what many will be telling you that they are only buyers. But their sales are only limited to parts of their off-take agreements and mainly to facilitate their locations swaps. (We’ve known for a while that they are involved in swaps mainly with KAP, where they will send pounds to the EU and US from Namibia and receive pounds from Kazakhstan thru the railway). Chasing down some of these cagey Chinese guys, we found that they are selling out some of their excess conversion and enrichment capacity to the West. They’ve also been aiding the Russians and the US utilities, by repacking Russian EUP and exporting it under Chinese origin.

We’ve been hearing that hedgies were the main players especially closer to the front end and the spot market. We were still surprised when we found ourselves getting drunk with some Goldman Sachs Directors. Seems that they are both active in project financing, and also brokering pounds for their fund clients. We tried to get a sense of how many funds and $$$ are active in the market (unsuccessfully), but the feeling we got is a decent amount of financial interest is positioned long for a price blow off top.

Now on to some of our bullish observations. We were always cognizant of the fact that capacity could show up form one of the opaque territories, such as Uzbekistan, and kill the party. After harassing every Orano Frenchman we could find (some actually seemed to enjoy it), it is obvious that KATCO (Orano mining subsidy) is pretty disappointed with Uzbekistan. Both the grade and the overall reserves are substantially below expectations and expected annual production will be less than initially thought. After polling multiple contacts from the Eastern world, it seems that Uzbekistan supply is not going to exceed 6-8mlbs in 2029-2030, and the risk is to the downside.

Another scuttlebutt was that NexGen’s Rook1 will be delayed at least until 2029-2030. Remember, this is a major project, average annual production of 21.7m lbs with impressive Mill feed of 2.37% grade. Also, its location in the West ensures that pounds make it to the utilities without any shipping issues. A delay in this project puts a significant dent in the supply/demand models.

Our final observation concerns Kazatomprom. People in the West sometimes don’t fully appreciate the inner workings of a government-owned and controlled company, especially in the second world. To make it to the top in any of these government-owned companies, you’ve had to played the political theater pretty well, and also have the right connections to whoever is at the top of the government. That also means that, you invested more time into making the right connections, schmoozing the hell out of top dogs and climbing the social ladder than working on your hard/technical skills necessary to execute a highly skilled profession like engineering or mining. Add another layer of complexity, the quest of aligning oneself with the right power vector in a country that swings between the influence of multiple dictatorial superpowers like Russia and China, you can understand why the inside of Kazatomprom could look pretty chaotic. But what happens in these chaotic companies that are led by nepotism, ego and short-sighted planning? Well, look at what happened in May 2023 when KAP literally donated the Budenovskye mine to Russia. That mine was the most important uranium mine for KAP’s future, and it belonged to the people of Kazakhstan, the company had no right to just give it to Russia. In response, the most of the management walked out and left Kazatomprom. So why bring this up? More and more, we see that people that get sh*t done in companies like Kazatomprom, are people that are usually educated in the West, worked hard on developing their skills and went back to their home country to do some meaningful work to benefit their beloved country. Now, who do you think walked out in May? Doesn’t take a genius to connect the dots between previous management leaving and KAP beginning to have all kinds of production and operational issues. How do you run a massive and technically complex company when everyone on the top is there not based on meritocracy, but because they skillfully kissed the right asses and left their principles at the door. We observed that the events that began in January 2022 (with the attempted coup in Kazakhstan), increasingly polarized the Nazarbayevist vs. the Tokayevist. Recently, Tokayev is taking more decisive actions to pacify loyalist close to Nazarbayev, causing a division in government and bureaucracy. One could observe the same division, tension and competing interests within Kazatomprom, which is never a good recipe.

So what are we watching after the conference? Obviously, everyone’s watching whether Putin will retaliate following the Russian Ban Bill that just passed. We think 60%/40% he does not make a major move. Look, Putin is a strategist. He is playing the long game. Dominating the global nuclear buildout is a priority for him and he is winning. This is how he expands his influence, just think about it, say you are either Turkey, Egypt, Bangladesh, Hungary or any country that partnered with Russia. It’s a sweet deal for you because they are building it and financing it for you too. Say in 10 years, nuclear becomes 25% of your grid. How are you going to cross Russia? How are you not going to answer when he comes calling? Banning exports to the West will just over-complicate things for him, why spook future potential customers? They may hesitate to sign the dotted line if they are doubtful that they will be able to find fuel at a reasonable cost. We are already hearing data center projects are considering solar power generation as an alternative to nuclear SMRs as supply shortage is becoming a more pronounced issue. Think Putin is too smart to do anything irrational, especially heading into an election.

You should really be following Namibia if you are in the U trade. Namibia houses Husab, Rossing and Langer Heinrich mines, also Tumas, Etango, Norasa and Reptile projects are in the works. Namibia’s uranium mining is dominated by the Chinese (they own Husab and Rossing mines, also minority stake (25%) in Langer Heinrich) and Russia has some projects they are trying to move forward. Few things in play in Namibia. Paladin’s Langer Heinrich started production in March. Hearing that the Chinese are not happy with being just a minority there and kinda kicking themselves that they did not snap up the remaining shares when they negotiated but passed in 2017. It makes sense that Chinese make a move for this asset. What happens when Langer Heinrich pounds are not available to the West? Another issue in Namibia is water. See, Namibia relies heavily on an old desalination plant built by Orano in the 1970s for their mines. But there is just not enough water to go around for both civilian use n the neighboring larges cities and the uranium mines, and if we get a severe draught-like weather, it is not hard to see that mining activities could be temporarily sacrificed. Another water-related issue is some of these Uranium mines are too close the city’s aquifers, especially Kalahari and Stampriet. Now obviously uranium mining and drinking water does not mix well, and we don’t know if this is just a way that the Namibians are telling Russians to f*ck off, but just seems like Russians are not going to be getting a lot of U308 from Namibia, and neither will the West.

Bottomline, U remains a supply issue, and mixed in with a few unknown unknowns, like Putin or more production issues at the majors, surprises seem to be still skewed to the upside. We will continue to have our ear to the ground here but we still seem to be trending in the right direction…