Before uranium is ready for use as nuclear fuel in reactors, it
must undergo a number of intermediary processing steps which are
identified as the front end of the nuclear fuel cycle:
- Mining and milling to produce U3O8;
- Refining and conversion to produce UF6 and UO2;
- Enrichment to produce low-enriched uranium; and,
- Fuel fabrication to produce fuel assemblies or bundles.
Nuclear utilities, the ultimate users of nuclear fuel, purchase
uranium in all of these intermediate forms. Typically, a fuel buyer
from power utilities will contract separately with suppliers at
each step of the process. Sometimes, the fuel buyer may purchase
enriched uranium product, the end product of the first three stages,
and contract separately for fabrication, the fourth step.
Sellers consist of suppliers in each of the four stages as well
as brokers and traders. Cameco's involvement comprises selling uranium
in the first two steps, and in some cases has unique supply and
trading arrangements with customers to manage the latter two steps.
In addition to being sold in different forms, uranium markets are
differentiated by geography. The global trading of uranium has evolved
into two distinct marketplaces shaped by historical and political
forces. The first, the western world marketplace comprises the Americas,
Western Europe and the Far East. A separate marketplace comprises
countries within the former Soviet Union, or the Commonwealth of
Independent States (CIS), Eastern Europe and China. Most of the
fuel requirements for nuclear power plants in the CIS are supplied
from the CIS's own stockpiles. Often producers within the CIS also
supply uranium and fuel products to the western world, increasing
competition.
Cameco sells uranium products and services exclusively for the
generation of electricity to utilities throughout the western
world. There are fewer than 100 companies that buy and sell uranium
in the western world. Because the number of uranium producers is
small and few among them are publicly traded companies, Cameco believes
it prudent to not disclose certain business data in the uranium
and conversion segments of its business, including unit production costs.
Where does the supply of uranium
come from?
Production from world uranium mines supplies only 62% of the
requirements of power utilities. The balance comes from secondary
sources. Secondary supply is essentially inventories of various
types and include inventories held by utilities and other fuel cycle
companies, inventories held by governments, used reactor fuel that
has been reprocessed, recycled materials from military nuclear programs
and uranium in depleted uranium stockpiles.
Primary production
The uranium production industry is international
in scope with a small number of companies operating in relatively
few countries. In 2007 eight producers provided approximately 85%
of the estimated world production of 109 million pounds U3O8.
Secondary sources
Secondary sources are a common feature in commodity markets, but
they assume a particular importance with uranium. Since 1985, western
world uranium production has been less than western world utility
uranium consumption. The resulting shortfall has been covered by
a number of secondary sources. Excess inventories held by utilities,
producers, other fuel cycle participants and governments (including
Russian government inventories) have been and continue to be a significant
source of supply but availability is declining. Recycled products include reprocessed uranium, mixed oxide fuel and re-enriched tails materials. Some utilities use reprocessed uranium
and plutonium derived from used reactor fuel as a source of supply.
In recent years, another source of supply has been the use of excess
Russian enrichment capacity to re-enrich depleted uranium tails
held by European enrichers. Finally, highly enriched uranium (HEU)
derived from the dismantling of Russian nuclear weapons has become
a significant source of supply equivalent to a large mine. A limited
amount of uranium from the US weapons program has been introduced
into the market but is not expected to become a significant supply
source.
With the exception of recycled material, secondary supplies are finite and will be depleted over
the next few years. The Russian HEU, will continue
to supply annual quantities to the western market
(See What is the US-Russia HEU Agreement?) until 2013.
What factors affect uranium
demand?
Demand for uranium is directly linked to the level of electricity
generated by nuclear power plants. Reactor capacity is growing slowly,
and at the same time the reactors are being run more productively,
with higher capacity factors, and reactor power levels.
An external factor expected to have a particularly important impact
on the prospects for nuclear power, is the trend towards the liberalization
of electricity markets in many countries. Historically, electric
power utilities in the western world have operated in regulated
electricity markets. Typically, a government regulator allowed each
utility to serve a captive market area and earn a prescribed rate
of return on its assets. The focus was on delivering a reliable
supply of electricity. Since the mid 1990s, however, there has been
a transition toward market liberalization. This trend began in the
US and has been adopted to varying degrees in Europe and
the Far East.
Generally, deregulation in the electrical generation industry has
resulted in utilities competing for market share on the basis of
price. This new bottom line focus has necessitated changes in utilities'
planning and operations including improved operating methods, lower
unit production costs and optimizing the use of assets. Faced with
the challenge of deregulation, electric utilities worldwide have
been restructuring through mergers and acquisitions. Often restructuring
has resulted in larger utilities, some of which are strongly committed
to nuclear power.
Nuclear utilities have dramatically improved the operating performance
of their reactors. One measure of performance is the capacity factor.
Across the entire US fleet of reactors, the average capacity factor
has increased from
66% in 1990 to 91.8% in 2007. Improved reactor
performance translates into greater uranium consumption and to more
demand for nuclear services in general.
How are uranium sales contracts
structured?
Unlike other metals such as copper or nickel, uranium is not traded
on an organized commodity exchange such as the London Metal Exchange.
Instead it is traded in most cases through contracts negotiated
directly between a buyer and a seller.
The structure of uranium supply contracts varies widely. Pricing
can be as simple as a single fixed price, or based on various reference
prices with economic indices built in. Contracts traditionally specify
a base price, such as the uranium spot price, and rules for escalation.
In base-escalated contracts, the buyer and seller agree on a base
price that escalates over time on the basis of an agreed-upon formula,
which may take economic indices, such as GDP or inflation factors,
into consideration.
Delivery quantities, schedules, and prices vary from contract to
contract and often from delivery to delivery within the term of
a contract.
What is the spot market?
A spot market contract usually consists of just one delivery and
is typically priced at or near the published spot market price at
the time of contract award. When a contract is priced at spot, it
is usually the value quoted by one of the several market information
services such as Ux, TradeTech or Nukem, at the end of the month
prior to the delivery date. Spot market delivery quantities vary
from 50,000 to a few hundred thousand pounds U3O8.
Over the last few years, about 15% of the western world's uranium
requirements have been procured in the spot market, that is, for
delivery within 12 months of contract award. In 2007, about 20 million
pounds U3O8 were traded on
the spot market.
How does the long-term market
operate?
Historically, some 85% of all uranium has been sold under long-term,
multi-year contracts with deliveries starting one to three years
after contract award. In 2007, about 250 million pounds of U3O8 were
contracted in the long-term market.
Long-term contract terms range from two to 10 years or more, with deliveries to begin two to five years after contracts are finalized. Other commercial terms are specified in the
contract.
To diversify market risks, producers and utility customers often
maintain a mix of contract terms and pricing mechanisms in their
contract portfolios. Buyers are often willing to pay a premium in
long-term contracts, compared to spot prices, because they can achieve
secure supply at prices that are more predictable.
Cameco sells uranium on the long-term market. However, spot
prices do affect Cameco's revenue, as about 60% of its contracts
have pricing mechanisms that reference the spot market price at
the time of delivery or the long term price indicator. The remaining 40% of Cameco's contract portfolio
is sold at fixed prices escalated by an inflation index.
What is the US-Russia HEU agreement?
HEU stands for highly enriched uranium. In 1993, the US and Russia
entered into an agreement whereby the Russians would dismantle a
significant portion of their nuclear weapons by 2013. This agreement
is known as the US-Russia Highly Enriched Uranium agreement or the
megatons-to-megawatts agreement. It stipulates the annual quantities
of HEU that may be delivered to the US by Russia. The dismantled
weapons contain a valuable resource for Russia. HEU can be blended
down into low enriched uranium (LEU) and sold in the western world
market as reactor fuel for hard currency.
There are three main components that make up LEU: natural uranium
(the mine concentrates or U3O8); conversion services that convert
U3O8 to UF6; and enrichment, the process of enriching UF6 to LEU.
Together, U3O8 plus UF6 conversion is referred to as the natural
uranium feed component of the fuel. This feed displaces primary
U3O8 production and uranium conversion services.
This agreement provided a major source of new supply - the equivalent
of one major mine. Since new supplies of this magnitude can be disruptive
in the uranium market, Cameco placed a high priority on ensuring
this material was marketed in the western world market in a disciplined
fashion and sought participation in the marketing of the natural
feed component.
In 1994, the United States Enrichment Corporation (USEC) as agent
for the US government, and Russia, signed an agreement whereby USEC
would purchase the enrichment component of the LEU upon delivery
to the US. In 1999, Cameco and two other western companies, AREVA
and NUKEM, Inc. concluded an agreement with Russia whereby they have
the option to purchase the majority of the natural feed component
of LEU. This agreement is officially called the UF6 Feed Component
Implementing Contract. In November 2001, the western companies agreed
to exercise a portion of their options to bring predictability to
the program - predictable supply to the western market and predictable
revenue to the Russians.
As of March, 2008 325 metric tons of weapons grade HEU from the former Soviet Union has been recycled which is equivalent to eliminating 13,000 nuclear warheads. For a chronology and progress report please go to www.usec.com.
