Executive Q&A with Anthony Milewski
Anthony Milewski is an acknowledged expert in the Metals, Mining and Energy markets. He is currently a member of the advisory board of
Fission Uranium (
TSX: V.FCU,
Stock Forum) – a Canadian uranium explorer with the world’s most exciting high-grade, shallow depth uranium discovery. Anthony started his career as a banker at Renaissance Capital, focused on the mining and oil gas industries.
He later worked for Skadden, Arps in Moscow working on mining transactions before moving to a hedge fund in New York, Firebird, where he was part of an investment team. Over the course of his career Anthony developed a deep interest in both uranium equities and the physical and derivatives market for uranium.
Q: What was it that attracted you to the uranium and energy sectors?
Anthony Milewski: When it comes to any market, I’m all about the fundamentals. World energy demand has been increasing year on year for decades and it’s not slowing down. If you look at where energy supply is coming from, you’ll see that nuclear is a strong part of the energy mix for a lot of countries. For some, like France, the US, Russia and South Korea, you’re looking a large proportion of energy generation from nuclear. You also have a huge international build program led by China, Russia and India. Even the US, which already has a fleet of 100 operable reactors, has announced new builds.
I also had some early insight into the sector that I guess put me ahead of the curve. I grew up in Washington and had a number of relatives working on the Hanford Nuclear Reservation. I started out as a lawyer and because of my background it made sense for me to specialize in the energy and resource sectors. I ended up in New York working for a fund focused on natural resources. Through the investment process and industry exposure I developed a detailed knowledge of the markets and what it took for a companies to succeed in the industry – whether explorer, developer or producer.
I spent a significant amount of time speaking to industry executives and experts as well as thinking about the capital markets and mining side of the business that it was a natural progression to become interested in physical trading and derivatives aspects the commodities business. With my connections in the industry, more and more companies began approaching me for advice on the markets. I’m now on the advisory boards of several successful micro and small cap corporations, one of which is Fission Uranium which has been making big waves in the uranium exploration space.
Q: You’re bullish on uranium. With the spot price at a low point, why are you so excited now?
Anthony Milewski: Well first, let’s be clear: no one is making money at $35 per pound. When you have demand that is not only strong but growing then it’s not hard to work out that the current situation won’t continue for much longer. We are already seeing producers delaying or shutting down certain operations and even refusing to enter into new long-term contracts until prices rise – these are all signals that a price correction is coming. However, to me that’s only part of the story. A lot people don’t realize just how fragile the uranium industry is on the supply side. There really is a big issue in terms of security of supply. It’s very vulnerable to disruption and less production is ultimately going to result in upwards pressure on price.
Q: So you’re saying uranium production could be disrupted. Have there been many production issues recently?
Anthony Milewski: Absolutely. You’ve got the Olympic Dam expansion on hold – that’s 32M lbs per year, Imouraren – that’s another 11M lbs per year and then Trekkopje for 8M lbs. That’s just three that come to mind. Now subtract a further 24M lbs for the end of the HEU agreement and we’re looking at some pretty dramatic hits on the supply side. Kazakhstan, the number one country for uranium supply, has made it clear they are not interested in seeing any production increases until prices rise. It goes on and on.
As it happens, production hasn’t been able to keep up with demand for many years and the shortfall (around 21%) has been made up from secondary sources. The HEU is gone but there are others – underfeeding from the West and Russia, US DoE inflows, ERU/MOX fuel – but these will not be enough to cope for much longer. In fact, the World Nuclear Association (WNA) forecasts that secondary sources will drop by about 10% between now and 2020 which is a problem when you consider that demand is growing.
Q: You mentioned you see security of supply as a serious issue that could push uranium prices upwards. Can you elaborate?
Anthony Milewski: For a utility running a nuclear power station, uranium is actually a very small part of operational costs but it’s the most important. You cannot run a reactor without it and that’s why the bulk of uranium is bought and sold through long-term contracting… utilities are securing their supply.
However, we are in a situation where approximately 40 percent of world production comes from two countries in Eastern Europe (Kazakhstan and Uzbekistan) and another eight percent from Nigeria. When it comes to secondary sources – Russia accounts for approximately 50% of supply. To make matters even more interesting, around 90 percent of future world production will come from just three projects. The bottom line is that the concentration of supply needs to become more diversified.
Any time you are forced to rely on just a few sources for a crucial resource you are running serious risks to the security of supply. We’ve got a perfect example going on right now. Look at Areva not being able to renew their agreement with Niger. 40% of Areva’s production comes from Niger and it’s said that one in three light bulbs in France is powered by uranium from Niger. They’ve been negotiating for two years and still no agreement.
Cigar Lake is another great example. What you’ve got there is a very complex, highly technical mine with all the associated issues that come with that type of operation. So, what I’m saying is when you look at world uranium supply you’re looking at something that is concentrated in a few mines in a few countries. There could easily be another destabilizing event in supply.
Q: Can you go into more detail on what’s going on between suppliers and utilities at this time and how that affects uranium prices?
Anthony Milewski: Well you have to realize that this is not a transparent market. However, as I said, very little uranium trades on the spot market so you have to look at the term contracts because that’s where all the uranium gets purchased. Now, the ten year average will show you that about 160M lbs a year is contracted under term. However, last year, only 20M lbs got contracted. That means there is a huge uncovered forward demand and this year utilities have to come into the market to start to buy for 2016 to 2018.
Remember, utilities don’t have huge balance sheets that can be used for buying uranium and by nature, most of them are large, conservative organizations. In the past, some have tried the fully integrated approach and it didn’t work out so they have to rely on the suppliers.
However, those suppliers won’t contract at current prices and I personally believe that buyers at utilities are trying to protect themselves from internal scrutiny and don’t want to buy via more expensive long term contracts when spot price is so much lower. It’s not unlike a game of chicken and everyone’s wondering who’s going to blink first but the longer they wait, the sharper the price rise is going to be. One important point I want to make is the longer we go with uranium at these current price levels the sharper and faster the correction in the price will be. By putting off coming into the term market, utilities are ensuring a price spike.
Q: There’s obviously growing pressure on uranium pricing. Are there any short-term factors?
Anthony Milewski: Japan is an obvious catalyst. Nuclear energy is critical to Japan. There was a huge relief when the Japanese government announced its Basic Energy Plan recently which confirmed its commitment to Nuclear Energy. It’s inevitable they will restart because the current situation is strangling them. They are an export-based economy and domestic energy prices are seriously impacting their ability to compete. On top of that, the amount of fossil fuel they have to import in order to keep the lights on isn’t sustainable in the long term.
Q: Do you see anything that could negatively impact the uranium market?
Anthony Milewski: The fundamentals are very strong so I think the worst that could happen is things get pushed out further. Maybe japan is slower to restart its reactors or reactor construction in places like China is slower than expected. Maybe the US DoE releases more uranium onto the market or Russia underfeeds more. I think these things are unlikely but even if they occur, all they do is push the timeline out – they don’t stop the inevitable.
In 2016 – 17 there is going to be a shortfall of 5-7ml lbs. In 2020 that could double if something doesn’t change. New supply cannot come online at current levels. There is fundamentally a supply side issue in the uranium sector.
Disclosure: Fission Uranium is a Stockhouse client.