Cameco and the supply of yellow cake (part 2: Who has HEU?)

Previously I vowed to dig into the strategic stockpiles of highly enriched uranium (HEU), a secondary source of the U235 isotope that competes with uranium miners such as Cameco.  HEU can be down-blended into LEU by mixing with un-enriched uranium and processed into fuel rods.  In a future post I will discuss a third-source of nuclear fuel: recycling.

Uranium with greater than 20% U235 is considered highly enriched, while greater than 80% U235 is considered weapons-grade.  By contrast, the concentration of U235 in LEU nuclear fuel is typically around 5%.  Natural uranium contains about 0.7% of the isotope U235.

HEU can be down-blended into LEU for use in nuclear power reactors.  The most famous instance of this is the Megatons to Megawatts program.  By the end of the program 500 tons of weapons-grade Russian HEU was down-blended into LEU and is being used to produce 10% of the electricity in the United States over two decades.  That’s a significant amount of energy and at $8 billion the HEU has been a bargain for US consumers.  If a similar load is again marketed it will affect the supply and demand balance of LEU and hurt the dividend-paying potential of uranium miners.

A report by the James Martin Center for Nonproliferation Studies in 2011 took stock of the remaining “civilian” HEU held by states (i.e. non-weaponized).  The largest parts are unsurprisingly held by the US (c. 350 tons) and Russia (c. 150 tons).  Next, France, UK, Japan, Canada, and China have  an approximate combined 10 tons.  For simplicity, we can ignore all players except the largest two.

Arguably, the controlling entities such as the US Dept of Energy are holding their volumes with a future eye for value maximization.  If and when the spot value of U3O8 climbs again, these agencies should show up directly on the offer or else transfer their volumes to well-connected and formerly state-owned companies such as USEC or Rosatom.

But how much equivalent nuclear fuel is in one ton of HEU?  And what would be the market price?

Let’s assume that the concentration of the U235 isotope is 50%.  Then one ton HEU has the same U235 mass as ten to twelve tons of LEU in reactor fuel rods, and the same U235 mass as 71 tons of U3O8.  1 lb of U3O8 currently has a spot price of $19, thus just 71 tons would be only $3 million.  Clearly this understates the value of the HEU as it ignores the initial cost of enrichment.

Estimating value from the demand side, according to the World Nuclear Association, a 1000 MW reactor will probably have a core with 75 tons of low-enriched uranium.  One-third (25 tons) will be replaced each year, and the reactor will generate 8 TWh annually.  At 25$/MWh this 25 tons LEU generates $200 million worth of electricity.   Or: 1 ton of our HEU generates $80 million of electricity.  If nuclear fuel represents 25% of the cost of generation and the short run margin for nuclear plant operators is 100% then $10 million per ton HEU could be a conservative cost estimate.

As relations between the US and Russia have recently cooled the likelihood of a renewed Megatons to Megawatts deal seems unlikely.  In fact the existing HEU may be re-tasked for strategic purposes.  Then again, Iit will be interesting to see how this component of energy relations evolves during the Trump presidency, especially as his cabinet is stocked with energy-minded deal makers.

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