We thought by now we’d heard it all. But the quote which follows, given to us in a tape-recorded telephone interview by the man who obtains nuclear fuel for the largest nuclear utility in the United States, surprised even us.
“From the point of view of today’s price, they did us a favor by sending a really strong signal to the production-side community that it was time to get out there and start looking to get stuff back into production,” Exelon Corp nuclear fuels vice president James Malone told StockInterview. Malone was referring to the uranium speculators and financial community, who have driven long-term uranium contracts to US$85/pound and the weekly spot price to $125/pound. “It may not have happened as quickly without this strong signal.”
And then we talked about the widening spread between the weekly spot and long-term uranium price.
“I think the sellers have the perception that prices should be higher in the spot market, but obviously the buyers aren’t sharing that perception right now,” Malone told us. Hence the pricing stalemate. “There isn’t any long-term activity to base a change in that price. It’s been flat for several weeks.”
Although the spot uranium price continues to set new records, many utilities are comfortable with the amount of U3O8 equivalent they have stockpiled. In his previous media interviews, Malone gave the impression that Exelon did not lack for the nuclear fuel to power the company’s 17 reactors, which produce about 20 percent of the U.S. nuclear electricity.
We asked if this were true. “That’s correct,” he responded. Others such as Entergy and FPL may not be as fortunate. The rumored scramble by at least three utilities for uranium equivalent could be one driver for the higher spot price.
And this brought us back to the uranium speculators. In late April, Malone wrote a guest commentary, which appeared in Fuel Cycle Week. In that issue Malone contended uranium speculators were driving up the spot price of uranium to make their investments in mining stocks more valuable.
We confirmed he continued to believe this. “I am not knocking the guys who are in it for financial gain. I can’t blame them for wanting to make money, but you have to understand what it is they are doing,” he said.
Malone cited the strong correlation between the stocks of junior mining companies and the uranium price. “The R squared is somewhere around 0.95,” he explained. R-square is a statistical coefficient of determination, which provides information about the validity of a model. This compares with TradeTech’s evaluation of the relationship to uranium stock share prices to the uranium price, which Gene Clark explained in an interview about a year ago.
Again he surprised us, having taken the time to meticulously study the ‘sell-side’ of the uranium market. But Malone admitted, “We didn’t look at all 450 of them.”
And why should he? Malone agreed with our premise that more than 90 percent of the ‘uranium’ companies are likely to disintegrate at some point. “Some of the smaller folks that are out there, really shouldn’t be there because they are not going to make it,” he said. “The other folks are going to fill the gap so that we’ll get a last marginal pound in at a reasonable price.”
When would we reach this ‘reasonable’ price? “It depends upon how some things like Cigar Lake come back to life because that’s such a large component of production,” Malone said. “Whether Shea Creek comes in during that timeframe – which will pretty much make a big dent – there’s several smaller ones. There’s a raft of properties people want to bring back into production. They may be able to only produce one or two million pounds a year.”
He agreed with our evaluation that many of those projections are falling short, especially on the smaller projects. But what about BHP Billiton's Olympic Dam? “I think Olympic Dam is so big that they can’t rush it,” he said. After we pointed out this could become the biggest open crater on earth, we both broke into laughter. “I think they’ve got to be reasonable in their approach to it,” he added.
We speculated about when hedge funds might begin selling uranium. Over the next few weeks, both Mestena Uranium LLC and an unnamed hedge fund plan to offer the largest amount of spot U3O8 and equivalent into the market in any single instance since last September. Dr. Robert Rich, a director of Yellowcake Mining, cautioned of a uranium ‘price adjustment’ at an unspecified time. “Bob and I used to share an office together when we were young and worked at Yankee Atomic,” Malone said.
He agrees there could be an adjustment. “It could be a two-phase thing. Some of the hedge funds may exit and just move on. Others may hang on and the market could stay above where it ought to be because it’s not yet fully rationalized with respect to the balance between supply and demand.” He added, “But, you could see some kind of adjustment that would bring it down a bit, and then take a longer time for it to reach a true rational equilibrium level.”
Malone’s conclusion? “The market fundamentals, if you simply look at the macro situation of supply and demand, it simply doesn’t support those kinds of numbers, especially in that time frame,” he said. “It is really a puzzle why some people have such a strong bullish position.”
And what does Malone believe is wrong with the time frame?
BOTTLENECK IN THE NUCLEAR RENAISSANCE?
Malone doesn’t think the nuclear renaissance is as imminent as many have forecast. “This is one of the things that frustrates me a little bit,” he started. “I think people need to understand: There’s an expectation of a tremendous number of plants around the world coming online real fast, and therefore driving demand up. Eventually, there will be that many plants. I just don’t think they can come on as fast as some people think they can.”
Where, then, is the obstacle? “You’ve got to get the forging to build the power plants,” Malone pointed out. “There are only a few places in the world that can do that right now.” He cited Japan Steelworks as the predominant supplier, and two others – one is South Korea and another in France. “There’s nobody in the U.S.,” he said.
“It’s a long haul to get all the pieces,” Malone explained. “Japan Steelworks is putting out a slightly greater than 100 percent increase in their capacity to produce the forgings. The process is going to take several years, probably on the order of five to ten to get the real production up to where we want it to be.”
Since 1974, Japan Steelworks (JSW) has manufactured the forgings of components found in nuclear plants. The company has manufactured about 130 reactor vessels now used around the world – nearly 30 percent.
The company recently announced it would increase investments in manufacturing capacity to meet the global demand. One of the company’s main targets is to supply new nuclear pressure vessels to the U.S. and Chinese markets. JSW anticipates orders for 25 pressure vessels and 31 from the U.S. Some wonder about the challenges increased activity in the nuclear sector holds for the supply chain’s growing demand for heavy forgings and other major components.
According to the Nuclear Energy Institute (NEI), license applications for more than 18 new reactors could be filed by a dozen energy companies by 2009.
On Wednesday, Richmond, Virginia-based Dominion Resources reportedly asked Hitachi and General Electric to build its third nuclear-powered electric generating unit at the company’s North Anna power station in Mineral, Virginia. Earlier this month, Dominion awarded GE Energy’s nuclear business a contract to secure critical, ‘long-lead’ components for the nuclear power unit. This order included large forgings required for GE’s ESBWR reactor design. The forgings would likely come from Japan Steelworks.
A long lead time is required for the forgings. “It’s a long haul to get all the pieces,” Malone told us. “Right now, the facilities even for assembling a reactor in the United States are limited in their capabilities.”
A bottleneck could result in obtaining heavy forgings as well as assembling them. In August 2006, Constellation Energy announced it had entered into an agreement with AREVA to procure 44 heavy forgings – needed for the reactor pressure vessel and steam generators – to construct the first potential nuclear power plant of a planned U.S. EPR fleet. The forgings will reportedly be manufactured into the final components at the BWX Technologies facility in Mount Vernon, Indiana or AREVA’s facility in Chalon-St. Marcel.
Construction on the Dominion plant could start as early as 2010. It could go into production by 2014. This matches the timetable Malone cautioned us about. He pointed to progress made by NRG Energy made at the company’s South Texas project.
On April 27th, NRG announced an agreement with Tokyo Electric Power Company (TEPCO) to help develop the combined construction and operating license for NRG Energy’s application to the U.S. Nuclear Regulatory Commission later in 2007. “The good news is that the ABWR (Advanced Boiling Water Reactor) has been built in Japan and is under construction in Taiwan,” Malone said. The NRC has already certified General Electric’s ABWR design. “It’s a known entity and licensed in the United States,” Malone explained.
Doesn’t this appear like enormous momentum moving forward? “I think it’s going to be a slow build up,” he told us. “It’s like one of those curves that’s kind of slow, then has the knee out there – the hockey stick – and then it starts to go up.” But he also warned, “We have to have the folks to operate them. We have to have the infrastructure to build them. We have to have the regulatory oversight. If we go at it the right way as an industry, I think it can be terribly successful.” He believes the renaissance will emerge several years down the road. “Probably on the order of five to ten years to get the real production to where we want it to be,” Malone said.
Malone firmly believes there will be a nuclear renaissance in the United States. “We need electricity, there’s a tremendous amount of emotion with respect to greenhouse gases, and nuclear can be base load electricity without the greenhouse gases,” he told us. “A lot of people are realizing that now, especially when James Lovelock takes the position that nuclear power is a good thing to do for electricity production. I think he’s got the right message.”
Our final surprise was that Malone had a copy of Investing in the Great Uranium Bull Market. “I was impressed by the fact that he (James Lovelock) was right in the foreword.” Dr. Lovelock actually wrote the foreword for this publication and personally endorsed our book, writing, “'I unhesitatingly recommend it to politicians, environmentalists and all those concerned about our future.”
And finally we asked whether or not Exelon Corp would participate in NYMEX futures trading. “That’s too early to say,” Malone responded. “My position on that is we need to digest what we were told, learn how it works, observe it – and if we believe there’s some advantage or some useful purpose for us participating, then we would consider it.”
And finally we asked whether or not Exelon Corp would participate in NYMEX futures trading. “That’s too early to say,” Malone responded. “My position on that is we need to digest what we were told, learn how it works, observe it – and if we believe there’s some advantage or some useful purpose for us participating, then we would consider it.”
But what about the safety of nuclear reactors, especially from terrorist attacks? After September 11th the U.S. Nuclear Regulatory Commission mandated new security measures at U.S. nuclear power plants. These measures included altered or new physical barriers, increased security personnel, training enhancements and additional surveillance equipment. According to Exelon Corp’s website, the total cost of these enhancements exceeded $150 million in capital spending and now includes approximately $20 million in additional annual operating expenses each year.
How do these enhancements hold up?
In a recent note from the Nuclear Energy Institute, legendary actor Paul Newman (and now also becoming a legend for his line of food products) toured Entergy’s Indian Point nuclear plant outside New York City this past Monday (by the way, Paul Newman also has our book, Investing in the Great Uranium Bull Market). Mr. Newman reported as follows:
“I recently toured the Indian Point nuclear plant and I expected to be shown safety and security at the plant. But what I saw exceeded my expectations. No Army or Navy base I’ve ever visited has been more armored and I couldn’t walk 30 feet inside the plant without swiping my key card to go through another security check point. There was security at every turn, and the commitment to safety is clear.”
We agree with both Mr. Malone and Mr. Newman that nuclear power will be more important for the anticipated dramatic electricity growth in the future. And no one really knows precisely how much longer the spot uranium price could continue higher, where it will peak and at which price level would be sustainable. But everyone likes to guess about these matters.
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