Section 232 Petition: All Hype, No Substance

Background

In January 2018, two US based uranium producers Ur Energy (URG, MCap $153.4 million) and Energy Fuels (UUUU, MCap $327.7 million) filed a petition before the US Department of Commerce (DoC) seeking protectionist measures against import of uranium products by utilities. They invoked the long forgotten Section 232 of the Trade Expansion Act of 1962, claiming that the importation of uranium was a threat to national security.

The petition proposes that the US government force utilities to buy a minimum of 25% of their uranium requirement from mines in the US. The DoC has 270 days to respond to the petition; their report is expected by April 14th, following which the President has 90 days to consider the recommendations of the report. Looking at the charts of UUUU and URG, clearly the market is front running a favourable outcome to the petition. If the petition is successful, the price of uranium would diverge: there would be one spot price on the world market, and another (higher) price for US sourced uranium. The higher price is supposed to spur new supply, wean America off depending on uranium from hostile countries such as China and Russia, and create jobs in the uranium mining industry. It will Make America Great Again!

US utilities purchase over 50 million pounds of uranium annually. 25% of that represents 12.5 million pounds. The two petitioning companies, which are the #1 and #2 US uranium producers, produced a grand total of 795,000 pounds in 2018, or 6.3% of the mandate they seek to impose on utilities. At least the corn lobby does the hard job of actually producing enough ethanol to satisfy the biofuel mandate! In other words, this petition is a joke. It is protectionism disguised as a national security issue. None of the arguments advanced even make sense, it is simply a case of a company whining about life being unfair because they aren’t automatically profitable and relevant to the marketplace.

Whiny Argument #1: In a conference, a Russian company outlined its plan to offer end-to-end Enriched Uranium Product, so the utilities do not need to tie up capital in conversion or holding UF6.

For URG CEO Jeffrey Klenda, this was too much.

“I sat there in shock and somewhat disbelief as I watched our utility friends, nod their heads both in approval and agreement, it would appear that the Russians have a very strong game plan. Our utilities have bought into it hook line and sinker. And as I watched them, nod in approval and agreement as the Russians laid out their plans to become a one stop shop for all things EUP. I think that it was a very sad display that took place on American soil.”

Why was it a sad display? Them Russians! Not only do they elect Donald Trump by manipulating Facebook users, they also better meet the requirements of the owners of nuclear reactors. Mr. Klenda brought up Marin Katusa’s book The Colder War, and exhibited sufficient alarm at how Putin has orchestrated a Russian takeover of the nuclear supply chain. The US is in a perilous position because utilities purchase uranium from Russia, China and their allies, ergo the loss of uranium mining in the US is now a national security issue.

Perhaps utilities are just responding to market price signals, which happen to favour low-cost, long-life producers over high-cost, short-lived mines, regardless of where the mines are located. They could just as well buy from Cameco, or take inventory at spot prices off the hands of Japanese utilities. But presenting those alternatives doesn’t appeal to anyone’s emotion, and presenting reasoned arguments is detrimental to the outcome URG desires.

Whiny Argument #2: Kazakhstan has different environmental standards and devalues its currency. The difference in environmental standards alone amounts to a $10 difference in production cost per pound.

URG can’t compete because the Kazakh Tenge is weak. They get to incur costs in a devaluing currency and sell their product in a strong currency. They also don’t have to adhere to EPA standards, which lessens the regulatory burden on them, making them a more cost effective producer. Therefore, impose sanctions. URG probably borrowed Bastiat’s Candlemaker’s Petition, changed it to reflect the uranium industry, and presented it without realizing that it was a work of satire and not a template to follow.

It is indeed unfair to the candle makers that they cannot compete against the free lighting provided by the sun. If the sun were banned, candles could then become the cheapest source of lighting. Likewise, if it weren’t for the Kazakhs, URG claims that it would be the world’s lowest cost uranium producer. No, I’m not making this up. In Jeff Klenda’s own words in the Q4 2017 call: “…if we were not competing against entities that are being very heavily subsidized and benefiting from deeply devalued currencies, we might be the lowest cost producer in the world.”

In other words, if the mines better than ours cease to exist, we would be No. 1.

Fear Mongering #1: Beware of terrorists!

Jeff Klenda: “But politically we believe that that there is ulterior motives for the growth of this production coming from these parts of the world. And for us to become dependent on it is unsound foreign policy, particularly when we know that there is a rise of groups like ISIS in countries like Uzbekistan and other problems in some of those parts of the world and let’s face it. We have sanctions against the Russians and yet we allow ourselves to become dependent on Vladimir Putin for critical material coming into the United States.” – Q4 2017 earnings call.

According to the World Nuclear Association, Uzbekistan contributes about 9.25 million pounds, roughly 7% of global uranium production. Even if the Islamic State of Iraq and Syria (ISIS) decided overnight that it wants to get out of its westward expansion into Libya and North Africa, headed east, somehow managed to conquer Iran, Turkmenistan and jump over into Uzbekistan, world production shouldn’t be drastically affected.

Maybe Jeff Klenda has never seen a world map

The other bugaboo, Russia, barely accounts for 5% of worldwide production. There is simply nothing to these statements except for fear mongering.

The Bottom Line

The Section 232 petition has no fundamental merit. It took me only a few hours of research to study it and come to this conclusion. What are the odds the Department of Commerce will reach the same conclusion? At the peak of the cycle, the uranium mining sector employed about 21,000 people, according to URG estimates. That number is now down to 500, and this petition is all about bringing back the lost 20,500 jobs.

Even from a bureaucrat’s point of view, the decision is obvious – powering homes with cheap electricity should trump bringing back 20,500 jobs. There is no reason to impose a 25% domestic procurement mandate on utilities. If the Trump administration were indeed worried about the loss of domestic uranium supply, it is a simple matter to establish a strategic uranium reserve. The Department of Energy does have one – and it was selling its excess inventory in the spot market until the uranium miners lobbied to end it last year. They are following in the footsteps of the solar panel manufacturers who sought to end the import of cheaper Chinese panels. Protectionist measures such as this are only sought by companies which cannot compete in the marketplace, and would rather make money while hurting someone else than by actually offering better value.

The Section 232 petition is nothing but rent seeking behavior on the part of Energy Fuels and Ur Energy. It has worked in luring in speculators, one glance at the chart of UUUU and URG confirms that. Any upside from a positive recommendation is already priced in. If I were long, I would look to cash in my gains and take my speculative capital elsewhere.

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