Russian Suspension Agreement - Uranium Investors Want Answers

September 21 2020, 12:58 GMT+01:00

In news that many uranium investors may already be aware of, the US Department of Commerce (DoC) has announced a draft amendment to the 1992 suspension agreement on uranium products supplied by the Russian Federation. We look at the implications for existing contracts with US utilities, the long-term outlook for supply contracts, and general geopolitical dynamics.

If finalised, this amendment will continue to suspend the antidumping investigation on uranium from the Russian Federation, originally signed in 1992. As some investors and uranium executives had already suspected, this is a move that will extend the Russian Suspension Agreement (RSA) to 2040, with the aim of reducing US reliance on Russian uranium and oversupply of cheap uranium into the US market.

Since the Nuclear Fuel Working Group (NFWG) policy document was released several months ago, American uranium junior miners want to restore America's nuclear energy capabilities. This amendment appears to be one of the first major, palpable modifications made to America's uranium policies.

What does the new RSA draft mean for existing contracts utilities have made?

The Dept of Commerce increased the quota from 20% of US requirements under the previous RSA to 24% of US requirements in 2021 and 2023, and kept the quota at 20% for 2022 and 2025 to 2027, in order to accommodate, or “grandfather,” existing contracts between US utilities and RosAtom. However, to their credit, we do not believe the DoC “grandfathered” any optional, desired, or “flex-up” quantities that US utilities and Russia wanted.

Furthermore, the DoC limited the U3O8 and conversion components of enriched uranium product (EUP) to about 15% of US requirements in 2021, 10% in 2022 and 2023, 5.7% in 2024, and about 5% thereafter. Interestingly, this ramp-down was also intended to “grandfather” some existing EUP contracts, slowly pushing Russia and US utilities into SWU-only contracts for enrichment services that don’t include any U3O8 and conversion services. This is important because it will limit Russia’s ability to package all the components of enriched fuel (U3O8, conversion, and enrichment) and offer steep discounts that unfairly undercut the prices of U.S. producers.

Russia was previously offering U3O8 and conversion services to US utilities for almost free in order to gain market share for their enrichment. It is tough for non-Russian suppliers to compete against this. The new RSA will stop this practice and increase global demand for U3O8 and conversion. It will also prevent feedstock produced from Russian underfeeding and tails re-enrichment to enter the US.

How much has really changed? 

An awful lot has changed.

If no agreement had been reached, unlimited Russian uranium could have entered the US market unabated starting in 2021. This would obviously have been devastating to US producers and other non-Russian suppliers to US utilities. This is no longer the case.

Another important component of this development is that for the first time, Commerce has created a separate cap for EUP. This is a complicated concept to explain, but in effect, this will reduce the amount of Russian U3O8 and conversion that can enter the US market, and prevent the “packaging” of EUP discussed above.

In addition, Commerce placed strict limits on how “returned feed” under separative work units (SWU)-only (enrichment services) contracts is handled. Namely, that this feedstock will be deemed Russian origin and, if purchased in the US, immediately exported out of the US, thereby making it subject to the quota for it to re-enter the US.

Under SWU-only contracts, US utilities only buy enrichment services from Russia, and not the feedstock (U3O8 and conversion services) that goes into the EUP. Utilities isolate the SWU component by purchasing/importing EUP from Russia and then buying U3O8, UF6 and/or conversion services from other non-Russian suppliers that are then returned to Russia. Under the previous RSA, that returned feed (typically UF6) could be kept in the US and enriched at the Urenco enrichment facility in New Mexico, or exported out of the US, enriched in Europe, and re-imported back into the US, which would all occur outside the quota. The new RSA closes these loopholes. The bottom line is that the new RSA will create additional demand for non-Russian U3O8 and conversion.

If we are to conglomerate all of these changes into one cohesive strategic shift, it becomes very clear that this is much more than a mere PR exercise. American uranium producers could well be coming back into fashion.

Will this spur utilities to come back to long-term contracting before 2021?

This is the question that uranium investors want answers to. This new RSA may create a bifurcated market for uranium in the US where there is one price for Russian material and one price for non-Russian material. The new RSA is likely to create considerable quantities of Russian uranium that will need to find a home outside the US.

At the same time, there will be increased US demand for non-Russian uranium, including from the US, Canada, Australia, Kazakhstan, Namibia. US, Canadian, and Australian suppliers are certainly predisposed to signing long-term contracts. Namibian uranium is basically owned by China, and that material goes into their nuclear energy program.  All non-Russian suppliers will all be competing for additional US business and assuming US utilities just don’t buy everything from Kazakhstan, we should see an meaningful increase in long-term contracts by Q3/21.

The new extension requires TENEX to bring some of the UF6 physically back to Russia. Implications?

This refers to the SWU-only contracts discussed above. The RSA extension does not require the UF6 (return feed) to be physically returned to Russia, it just needs to be exported out of the US and returned to a facility where a Russian entity has an account, in Russia or elsewhere. Importantly, this material will be flagged as Russian-origin, it must be exported out of the US, and it will be subject to the quotas to be imported back into the US.

How much of the expected demand for the next 2 to 3 years for US Utilities has been filled by Russian Uranium and to be grandfathered, and how will that affect US utilities buying from either spot or term in that time period?

As stated above, US utilities will be able to fulfil an average of 22.6% of their requirements with Russian material (24% in 2021, 20% in 2022, and 24% in 2023). We also believe that they were hoping to receive additional material from Russia as optional, desired, or flex-up quantities under those existing contracts. To their credit, Commerce did not “grandfather” those amounts. We do not know how much material this represents; however, we have heard rumours that US utilities were thinking about importing up to 40% of US uranium requirements from Russia, if the RSA was not extended. Why not? It's cheaper than US producers can sell. But the DoC says no; therefore, there is likely that there is considerable unfilled demand by US utilities in the next few years that US utilities were hoping to receive, but they cannot now, as it needs to be filled by non-Russian suppliers.

In addition, the Russian quotas get ratcheted down even further in 2025 and beyond, creating even more demand for non-Russian material. It looks like Energy Fuels could well be the best-positioned US uranium producer to compete for these deals.

How significant is the US feedstock provision to TENEX? Are the contracted volumes low enough that they perhaps don’t care if the feedstock material is quarantined and shipped to Russia to be kept out of the market?

Again, as described above, there is going to be a lot of Russian material, U3O8, conversion and enrichment, that needs a home outside of the US. Russia is likely to offer steep discounts on this material to other nations, like South Korea, India, and the like. This will hurt Russia’s bottom line, and we don’t know if that will have an effect on their behaviour.  Nonetheless, as stated above, there will be increased demand for non-Russian material, which could benefit American uranium players. Investors may want to look towards the major North American uranium companies for their ability to insert themselves in to the mix.

Under the new amendment, all contracts must be approved by the DoC in order to secure an export license to allow imports to enter the USA. Does that mean contracts signed without the DOC approval will need to be sent to DOC to get the approval? What impact will this have on utilities?

Precisely.  Commerce will be required to review all contracts between the US and Russia for compliance with the new agreement. That said, Crux Investor believes that US utilities are required to do that now. So, we would not expect this feature to have much of an impact on their behaviour.

We have 4 Exclusive interviews on the topic with ISR genius Wayne Heili of Peninsula Energy; term-contract expert Dustin Garrow, the mega mind of Brandon Munro of Bannerman Resources and our man in the Hill, Curtis Moore of Energy Fuels, were we get into the detail of what this means for Uranium investors and perhaps where they should be looking. You can sign up for a 7-day trial on cruxinvestor.com/club and see lots more exclusive content on uranium investments and other commodities.

What do you make of this amendment to the RSA? We would love to get your take, so comment below and we will respond.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

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Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

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