DEATH OF URANIUM AND RENAISSANCE OF VANADIUM IN ENERGY STORAGE - PART1

Ihave owned shares of uranium mining companies in the past, anticipating the inevitable rebound of nuclear energy following the Fukushima nuclear plant accident. However, through my recent research into the renewable energy sector and vanadium batteries, I became bearish on nuclear energy and sold my shares in Energy Fuel Inc. (TSX: EFR) and Fission Uranium Corp. (TSX: FCU) in February 2017.

Why? In this article, I will discuss:

1. The state of the big four nuclear power houses (Westinghouse, Toshiba, Areva and EDF), and the rising costs and long delays associated with nuclear power plant construction; 2. The case for uranium bulls;

3. The Nuclear Power Generating Capacity Growth Forecasts by 2030 issued by the International Atomic Energy Agency (IAEA) which, over the years, turned me into a uranium bear;

4. The rapidly decreasing cost of renewable energy and its deployment on a worldwide scale as the green energy of choice; and

5. The emergence of utility-scale batteries that improve the availability factor of wind and solar power to serve as base load energy.

1. THE RISING COSTS AND LONG DELAYS ASSOCIATED WITH NUCLEAR POWER PLANT CONSTRUCTION

I shall start by quoting a Financial Times article dated February 16, 2017 by Ed Crooks and Kana Inagaki, titled “Toshiba brought to its knees by two US nuclear plants”:

“Westinghouse, Toshiba’s US-based nuclear engineering subsidiary, is building at Vogtle two of its new AP1000 reactors, a “generation III plus” design that was intended to be the flagship of its expansion into markets around the world. Two more are being built about a hundred miles away in South Carolina at a plant called VC Summer….The projects are already more than three years behind schedule and, on a combined basis, more than $10bn over their original budgets. This week the timetable for the Summer project was pushed back again, and there were warnings that construction at Vogtle could also slip further.

… The contracts for the new reactors were signed in 2008 by the plants’ owners, led by Southern Company for Vogtle, and Scana for Summer….

Scana said on Tuesday that it now expected the first new reactor at Summer to be in service in 2020, not 2019 as it had previously planned.

At Vogtle, the plan to start the first new reactor in 2019 looks ‘extremely challenging’, Mr Jacobs and MrRoetger (Georgia Public Service Commission) warned on Monday, as a result of a ‘lack of construction progress’ since their previous report last August.

If construction continues to fall behind schedule, Westinghouse’s losses on the two contracts could grow even larger.

[Gregory Jaczko, who was chairman in 2009-12 of the Nuclear Regulatory Commission] says the problems of Vogtle and Summer have probably stopped any new nuclear development in the US for a generation.

‘These projects are killing construction, because nobody can finance new reactors,’ he says. ‘It may be 20 or 30 years before investors will be interested again.’”1

E. Crooks & K. Inagaki, “Toshiba brought to its knees by two US nuclear plants” (February 16, 2017) Financial Times.

A month later, according to the Asia Nikkei article dated March 11, 2017, titled “Toshiba scrambles to stem further bleeding from Westinghouse”:

“Toshiba is considering having subsidiary Westinghouse Electric file for Chapter 11 bankruptcy protection to limit liability for future cost overruns on long-delayed U.S. nuclear projects. Yet loan guarantees and potential compensation claims could still prove costly if progress remains slow.

Cutting losses

Westinghouse signed fixed-price agreements in the fall of 2015 for two ongoing nuclear power projects in the U.S. The power companies operating the plants agreed to pay more for construction work in exchange for the Toshiba unit covering any additional costs.

Less than a year and a half later, Toshiba announced an estimated 712.5 billion yen ($6.18 billion) impairment loss on its American nuclear operations for the nine months through Decem- ber, stemming from sluggish demand and soaring costs to comply with higher safety standards. Liabilities will likely exceed assets by 150 billion yen when the company closes its books for the fiscal year this month.

…U.S. government guarantees on $8.3 billion in loans for one project in Georgia. If Westinghouse cannot finish the job, repayment of these loans will likely be delayed, in which case the government would take on the debt.

It remains unclear how Washington and Toshiba would split the costs in this case. But the possibility that American taxpayers could bear some of the burden has spurred negotiations involving the U.S. and Japanese governments to settle the matter.”

Toshiba is reported to exit the nuclear power business in an article dated January 29 2017, at neutronbytes.com titled

“Toshiba to withdraw from nuclear plant construction”:

“The company’s decision to cease taking orders effectively marks its withdrawal from the nuclear energy business. It also apparently ends the so-called nuclear renaissance in the U.S. for full size reactors.

During 2007-2010 there were more than two dozen applications expected for new reactors, but now only a few licenses that have been completed and they do not have any links to near term plans to build the units.”2

D. Yurman, “Toshiba to withdraw from nuclear plant construction” (January 29, 2017) Neutron Bytes.

Almost half of the reactors in the United States have been operating for 40 years or more and are nearing retirement. Yet the four AP1000 reactors are the only ones under construction.

“United States of America.” iaea.org. Power Reactor Information System (PRIS), International Atomic Energy Agency (IAEA), 14 March 2017.

I believe that nuclear power is certain to continue its downward slide in the US for the reasons I will explain.

How about EDF and Areva, two of the remaining global nuclear industry giants?

According to an article by Mycle Schneider posted at worldnuclearreport.org dated April 14, 2016, titled “Asahi WebRonza (Japan): After the Paris-Agreement: Corporate Meltdown in the Nuclear Industry”:

“Launched as a response to the Chernobyl accident, at the brink of the 30th anniversary of the disaster in Ukraine, not a single so-called Generation-III+ EPR reactor is generating power anywhere in the world.

In the meantime, the self-proclaimed ‘global leader in nuclear energy,’ the French state-controlled AREVA, went bankrupt. After a cumulate loss of €10 billion ($11.4 billion) over the past five years, significantly exceeding its peak annual turnover, and a debt load of €6 billion ($6.8 billion), the company will be taken apart. Its share value has eroded by 95 percent over the past eight years—a plunge exceeding TEPCO’s fall after the Fukushima crisis hit the company and prior to its de-facto nationalization— hitting a new historic low on February 19, 2016. The government’s rescue strategy—injecting €5 billion and forcing EDF to absorb AREVA’s reactor business—is in-turn increasing the risk for EDF. Another significant barrier for the conclusion of the rescue deal remains the multibillion-euro liability of the Hinkley Point predecessor projects in Olkiluoto, Finland, and Flamanville, France. The EPR construction in Finland started over ten years ago. The plant was to begin generating carbon-free electricity by 2009 and was part of the country’s greenhouse gas abatement strategy under the Kyoto Protocol. Now, the plant is scheduled to produce power in ‘late 2018.’

The sister plant in France is not doing any better—on the contrary. Construction started in 2007 with completion planned for 2012. Officially, the target date currently is the same as for the Finnish project. The investment-cost estimate since construction start, exploded by more than a factor of three to €10.5 billion ($12 billion)…. In addition, EDF struggles with a €37.4 billion ($42.6 billion) debt burden, rapidly increasing production costs in its aging nuclear fleet, significant post-Fukushima and other investment needs, and a shrinking client base with stagnating or declining consumption levels over the past five years in a row.

The international outlook is not any rosier. There have been 40 reactors connected to the world’s power grids in ten years after an average construction time of close to 10 years. Compare this with the four climate heros’ ‘illustrative scenario’ of 115 startups per year to 2050. Too little renewal to avoid the continuous aging of the world nuclear fleet whose average age is now standing at around 30 years. Some 60 units under construction have been in the building stage for an average of around eight years; at least three-quarters are delayed, four have been listed as ‘under construction’ for over 30 years. The Organisation for Economic Co-operation and Development’s International Energy Agency projects in its ‘New Policy Scenario’ a net addition of 222 nuclear gigawatts (GW) over the coming 25 years. This compares with the net nuclear addition of 22 GW over the past 25 years—another illustration of the level of wishful thinking in current international projections.

On the other side, the renewable energy sector is booming and the worldwide investment levels increased by 4% to reach a new record level in 2015 with an estimated $329 billion. The numbers are all the more remarkable as fossil fuel prices were low and renewable energy system costs continued to fall, leading to a 30% increase of installed capacity in wind (+64 GW) and solar (+57 GW), sixteen times the quite exceptional net nuclear addition (+6.7 GW). Even with three to eight timeslower power generation per installed GW, renewable electricity production is growing much faster than nuclear. At least eight countries, one quarter of the nuclear nations, including three of the four largest economies in the world (China, Germany, Japan) are already generating more power from renewables than from nuclear.

…renewables—are not only considerably cheaper, they are also much faster to implement….

…the reactor-building industry might want to turn to a safe haven: decommissioning….

“Indeed, Masayoshi Hirata, Toshiba’s senior Vice-President, told analysts in November 2015: ’We believe there will be a more global demand for the nuclear decommissioning’. JP Morgan Securities Japan responded by issuing a research note entitled ’First Step Toward Change’”.

M. Schneider, “Asahi WebRonza (Japan): After the Paris-Agreement: Corporate Meltdown in the Nuclear Industry” (April 14, 2016) worldnuclearreport.org.

Continuing the debate over nuclear energy versus renewable energy, EDF Vice President, Mark Boillot opined on February 15, 2017, in his article published on lesechos.fr titled “Le solairepeut-il tout emporterdans l’énergie?”5 (the following is a Google translation):

“Can solar energy carry everything?” “Over the last twelve months in France, more than 2 GW of solar and wind power have been put into service, ie more than one EPR reactor (1.7 GW)….

And yet, solar electricity production and wind power are becoming less and less expensive. Microgrids, electrical islets at the scale of a neighborhood or a village, are multiplying. Battery storage is expanding massively in the United States. Large nuclear or thermal power plants designed to function as a base are chal- lenged by the more flexible decentralized model….

Citizens are seduced by this decentralized model. They are willing to pay more for solar electricity. They want to be able to become actors of the electrical system by acting at the right time on their electrical appliances by delaying or reducing their consumption, by charging their electric car when the wind blows or the summer when the sun is shining.”6

M. Boillot, “Le solairepeut-il tout emporterdansl’énergie?” (February 15, 2017) LesEchos.fr.

At Hinkley Point in the UK, where EDF has a contract to build two EPR reactors at an estimated construction cost of £18 billion, or £24.5 billion including financing costs. The National Audit Office estimates the additional cost to consumers under the “strike price” will be £29.7 billion.7 Any hiccup at Hinkley Point could spell the end of nuclear power in the UK.

Wikipedia contributors. “Hinkley Point C nuclear power station.” Wikipedia, The Free Encyclopedia. Wikipedia, The Free Encyclopedia, 11 Mar. 2017. Web. 15 Mar. 2017.

What is the future of nuclear power and who are the players? According to a Financial Times article dated February 14, 2017, by Kana Inagaki, Leo Lewis, and Ed Crooks titled “Downfall of Toshiba, a nuclear industry titan”:

“’From now on, there are only three major players in the global nuclear power plant market: Korea, China and Russia,’” says Michael Shellenberger of Environmental Progress, a pro-nuclear campaign group. ‘The US, the EU and Japan are just out of the game. France could get back in, but they are not competitive today.’

Toshiba bought the US-based Westinghouse nuclear business from the British government’s BNFL for $5.4bn in 2006, in the hope of profiting from an upturn in reactor construction that was optimistically dubbed the ‘nuclear renaissance’.

Instead, the Westinghouse deal has brought Toshiba to its knees.”8

K. Inagaki, L. Lewis & E. Crooks, “Downfall of Toshiba, a nuclear industry titan” (February 14, 2017) Financial Times.

But they might end up squabbling over scraps ?there were just three reactor construction starts last year around the world.

A wave of retirement of aging nuclear reactors is approaching: almost 200 of the 434 reactors operating at the end of 2013 are set to be retired in the period to 2040 according to The International Energy Agency.9

“WORLD ENERGY OUTLOOK 2014 FACTSHEET Nuclear power: retreat, revival or renaissance?” International Energy Agency

While nuclear accidents are few and far between, the recent The New York Times article dated March 11, 2017 by Motoko Rich, titled “Struggling With Japan’s Nuclear Waste, Six Years After Disaster”, remind us of the devastating economic and environmental impacts of a nuclear accident: “FUKUSHIMA DAIICHI NUCLEAR POWER STATION — Six years after the largest nuclear disaster in a quarter-century, Japanese officials have still not solved a basic problem: what to do with an ever-growing pile of radioactive waste. Each form of waste at the Fukushima Daiichi Nuclear Power Station, where three reactors melted down after an earthquake and a tsunami on March 11, 2011, presents its own challenges.

400 Tons of Contaminated Water Per Day… 3,519 Containers of Radioactive Sludge… 64,700 Cubic Meters of Discarded Protective Clothing…

Branches and Logs From 220 Acres of Deforested Land…

200,400 Cubic Meters of Radioactive Rubble… 3.5 Billion Gallons of Soil…

1,573 Nuclear Fuel Rods…

But the Japanese government and Tokyo Electric say they are committed to removing all the waste and cleaning the site, estimated at a cost of $188.6 billion.”10

M. Rich, “Struggling With Japan’s Nuclear Waste, Six Years After Disaster” (March 11, 2017) The New York Times.

The New York Times quotes Mark Cooper in its article dated February 18, 2017 titled “The Murky Future of Nuclear Power in the United States”:

“’You can make it go fast, and you can make it be cheap — but not if you adhere to the standard of care that we do,’ said Mark Cooper of the Institute for Energy and the Environment at Vermont Law School, referring to the United States regulatory body, which is considered one of the most meticulous in the world. ‘Nuclear safety always undermines nuclear economics. Inherently, it’s a technology whose time never comes.’”11

D. Cardwell, “The Murky Future of Nuclear Power in the United States” (February 18, 2017) The New York Times.

John Lee, CFA is an accredited investor with over 2 decades of investing experience in metals and mining equities. Mr. Lee joined Prophecy Development Corp. (www.prophecydev.com) in 2009 as the Company’s Chairman. Under John Lee’s leadership, Prophecy raised over $100 million through the Toronto Stock Exchange and acquired a portfolio of silver assets in Bolivia, coal assets in Mongolia, and a Titanium project in Canada. John Lee is a Rice University graduate with degrees in

economics and engineering.