Since January 1, 2014, the Russian ruble has depreciated by almost 10% against the US dollar. And more importantly, the countries that are strategically aligned with the Russians, such as Kazakhstan, have seen their currencies suffer a similar fate.
Is a depreciating currency bad?
Not if you’re an exporting nation, such as Kazakhstan, which is the world’s largest producer of uranium.
Kazakhstan’s currency, the tenge, has depreciated at twice the Russian ruble’s rate, down by almost 20% since January. This past quarter, the Kazakhs have produced almost 15 million pounds of uranium and are on target to produce just under 60 million pounds for the year. That’s almost 40% of the world’s primary uranium production.
Having a currency that has depreciated that much means the Kazakhs are now making almost 20% more for every pound of uranium they sell. Who controls all of the Kazakh uranium production? Mother Russia, that’s who.
So how does this affect America? In a very serious way, which will have serious, long-term, negative effects.
It’s not just I who thinks this. Former Texas Congressman Ron Paul had this to say:
The US government’s decision to apply more sanctions on Russia is a grave mistake and will only escalate an already tense situation, ultimately harming the US economy itself. While the effect of sanctions on the dollar may not be appreciated in the short term, in the long run these sanctions are just another step toward the dollar’s eventual demise as the world’s reserve currency.
How are the sanctions already hitting home? Well, for example, one in every five American homes is powered by nuclear energy, and almost half of that derives from Russia-controlled uranium mines. 10% of all homes in the US depend on nuclear energy that gets its feedstock—uranium—via Russia or a close ally.
And that’s not about to change.
There is no new mine or existing producing uranium mine in America today that can make a decent profit at current spot uranium prices of US$28.75 per pound. To make matters worse, Obama and his administration have been flooding the domestic market with sales of uranium from the Department of Energy stockpiles. Why is the DoE selling off its inventory? Here’s our take on the subject in detail, but essentially the DOE is selling uranium into the market to raise money to fix past problems.
To accomplish that, the DoE isn’t just sacrificing current uranium mines, but also most of the future US deposits. I’ll explain why.
The absolute most difficult mine to put into production is a uranium mine. The permitting hurdles are much higher and more difficult than for any other metal, such as copper, gold, and iron. Before a mine gets to the production stage, it takes about 10 years to develop the asset, obtain all permits, and then construct the mine. Fewer than 1 in 1,000 projects ever becomes an economic mine.
Because the uranium sector has been so beaten down, most US producers have had to hedge a portion of their production to utilities to get money and lock in a price for a portion of future production.
Unfortunately, the current underfeeding market means the Russians can reprocess five times more uranium, from tails instead of mines, for essentially no cost increase. Uranium has become supercharged because of the depreciating Russian and Kazakh currencies, combined with Obama’s genius move of dumping DoE’s uranium into a historically low price market. Net result: producers are essentially depleting their US domestic permitted uranium reserves for no economic benefit.
The Cure for Low Prices Is Low Prices
The Russians have received a pleasant reward from the sanctions—a devalued currency which now makes their uranium exports more profitable. Why does this matter to Americans?
Eventually, the underfeeding uranium market will transition to overfeeding, which will cause a big spike in the uranium spot price, as it always has in the past. The current US production is around 4 million pounds of uranium annually, which is almost 15 times less than what Kazakhstan produces in a year.
Current US producers are being forced to deplete their reserves at historic lows if they’re hedged. And, also because of uneconomic current prices, very few new projects are moving forward in the US.
At some point, America will be squeezed for uranium, as it is the world’s largest consumer, and it currently imports 90% of what it consumes annually.
With only modest domestic production and the drawdown of DoE stockpiles, where will the metal come from? Russia and Russian-influenced sources. When overfeeding hits and the spot price turns around, US producers that have remained unhedged will benefit. Those that have mines which are built, permitted, and in a position to produce uranium will return significant gains for shareholders.
from: "The World of Energy"
by Marin Katusa, Chief Energy Investment Strategist