When the USSR collapsed Russia inherited over a thousand tons of weapons-grade uranium and a massive nuclear refining and fabricating infrastructure – 40% of world total. During the twenty year Megatons to Megawatts Program Russia will convert 500 tonnes of highly enriched uranium (HEU – uranium 235 enriched to 90 percent) from dismantled Russian nuclear weapons into low enriched uranium (LEU – less than 5 percent uranium 235) for nuclear fuel and sell it to the US. The terms of the Megatons to Megawatts Program also required that the HEU be converted to LEU in Russian nuclear facilities.

The United States established a government corporation – United States Enrichment Corporation (USEC) to purchase and transport the LEU to the US. Russia designated Tekhsnabeksport (“Tenex”) a commercial subsidiary of its Ministry of Atomic Energy (MinAtom) to implement their side of the program.

The Megatons to Megawatts program had, as of August 2011, down-blended 425 tonnes of HEU – equivalent to 17,000 nuclear warheads. The twenty year program to down-blend 500 tonnes of weapons grade Russian HEU into fuel for nuclear reactors will eliminate the equivalent of 20,000 warheads by the time it comes to an end in 2013. Nuclear warheads that were once on Russian ICBMs aimed at American cities are now providing 50% of the electricity produced by America’s nuclear power plants.

Russian stockpiles of weapons grade material being down-blended for civil nuclear reactors has filled a very large part of global uranium demand. This has exerted significant downward pressure on uranium prices. Long term low uranium prices, which just starting to climb before the Japanese nuclear accident, seriously affected mining activity.

The world’s uranium miners currently produce 40 million pounds less than the world’s nuclear power plants need – this figure doesn’t include the power plants under construction or the hundreds in planning stages. According to the World Nuclear Association, China is currently building 26 reactors with plans for dozens more, the UK has plans to build eight more, Russia has 10 reactors under construction, 14 planned, and another 30 proposed. India has 6 reactors under construction, 17 planned, and another 40 proposed.

A host of other countries plan to build nuclear capacity, or expand upon their existing nuclear power capacities – emerging markets such as Brazil, Saudi Arabia, United Arab Emirates, Turkey, and Vietnam as well as developed nuclear markets such as South Korea, Canada and France. Some believe that Germany’s decision to close all of its reactors will be reversed and the Japanese closing all of their reactors is unlikely.

The Megatons to Megawatts Program, according to the USEC, was supplying roughly 50% of the US’s LEU demand. Mining accounted for 8% with the rest coming from other sources (rapidly depleting utility and government stockpiles).

A ten year replacement contract, signed in March 2011, will see Tenex continue to supply low-enriched uranium (LEU) from Russian commercial enrichment activities to the USEC after the Megatons to Megawatts program finishes. Under the terms of the contract, the supply of LEU to the USEC will begin in 2013 and ramp up until it reaches a level, in 2015, that is approximately one-half the level currently supplied by TENEX to the USEC under the Megatons to Megawatts program. There is an option clause to increase the quantities up to the same level of supply as the Megatons to Megawatts program.

Unlike the Megatons to Megawatts program, the LEU supplied under this new contract will come from Russia’s commercial enrichment activities rather than from down-blending of weapons grade material.

Because the allowed amount of Russian enriched uranium imports into the US is strictly limited through 2020, USEC will deliver only a portion of the enriched uranium to US utilities. Most of the enriched uranium will be delivered to USEC’s customers outside of the US in both existing and emerging markets. The uranium sourcing for the new contract is extremely significant.

The U.S. has 104 nuclear reactors operating, this is the largest fleet of nuclear reactors in the world making the U.S. the world’s largest uranium market. In 2010 the US nuclear reactor fleet required between 51 to 55 million pounds of uranium. The mined supply of uranium in the U.S. in 2010 was about four million pounds. The U.S. is producing only about eight percent of the required amount of uranium to keep the existing U.S. nuclear fleet running.

Russia doesn’t have a lot of domestic uranium, although the country does have almost half the worlds refining and processing capabilities. Russia is in the process of tying up uranium supply:

• Russia’s Rosatom, its nuclear agency, and Kazatomprom, Kazakhstan’s national nuclear development corporation, have set up a joint venture to market uranium and together will dominate the global uranium market;
• Russia and Mongolia, in April 2008, agreed to cooperate in identifying and developing Mongolia’s uranium resources. Further bilateral agreements were signed in August 2009 and December 2010. Russian legislation was signed into law in early 2011 ratifying establishment of a joint, limited liability company called Dornod Uran – 49% owned by ARMZ;
• ARMZ Uranium Holding Co. (AtomRedMetZoloto) is a Russian uranium mining company, its wholly owned by Atomenergoprom, a part of Rosatom, Russia’s state-owned atomic energy monopoly. Rosatom owns a 51 percent interest in Canada’s Uranium One (TSX: UUU);
• In December 2010 ARMZ made a $1.15 billion takeover bid for Australia’s Mantra Resources Ltd. Mantra had the Mkuju River project in southern Tanzania, which is expected to be in production in 2013 at 1400 tU/yr.

What conclusions can be drawn? Let’s consider the facts:

• The price of commercially mined uranium will no longer be depressed by a steady stream of HEU down-blends into the marketplace – the legacy feedstock kitty is going to come to an end. There is already an imbalance between mined supply and demand – the demand for uranium is higher than the supply. This difference is currently being met from the decommissioning of nuclear warheads but the Megatons to Megawatts Program is ending in 2013;
• Emphasis to meet growing demand will be on mined uranium but the world is already short 40m tonnes of mined uranium;
• Many of the world’s developing and developed countries will start or continue to build nuclear power plants further increasing the demand for mined uranium supply;
• Low uranium prices means there hasn’t been significant investment in new mines, lower prices make new projects less attractive – this will constrain the supply of uranium going forward;
• The Russians are tying up supply, soon they will be the dominant player in the global uranium market;
• Resource Nationalization, Country Risk and Security of Supply will mean areas of the globe will be off limits to western miners and countries will increasingly be looking after their own interests. Access to uranium deposits in safe, stable and secure environments will become increasingly dear;
• Many companies will find it challenging to get permits for uranium mines because of negative public sentiment.

RBC Capital Markets believes there is not enough uranium production from current or planned mines to; satisfy current reactor needs, meet new reactor start up initial core requirements (3x normal load for startup), and to build inventories for new reactors. RBC estimate there will be a global uranium shortfall of over 70 million pounds by 2020 and the uranium market will require substantial new sources of uranium to fuel the projected growth in the global nuclear reactor fleet.