Impacts of Interest Rates in the Nuclear Sector
Timothy Y. McGraw
Executive Vice President, Nukem, Inc. International Uranium Fuel Seminar
• Front End of Fuel cycle: Interest Rate Impacts on Uranium Mining
• Nuclear Plant Construction: Capital Intensive
• Nuclear Fuel Market:
What have low rates done?
What would high (or higher) rates do?
• Two key aspects: Cost of credit and access to credit – Cost of credit determined by:
Risk-free rate (including inflation perception) plus projected default risk
– If project seen as “risky”
(“discovery” risk, technical factors, level of equity, commodity price
volatility, etc.) credit can be scarce or costly
• Uranium juniors finance largely with equity as it is—few have access to debt financing
• When borrowing available, rates can be onerous. (E. G: LIBOR+6% + another LIBOR-Plus-6 “arrangement fee”)
• Rising rates could have indirect impact, by drawing away pool of available equity capital
• Uranium seniors have seen borrowing costs come down over the last several years
• Lower interest rates add to the bottom line— and higher rates would reverse that—but uranium prices more important
• Higher financing costs could impact timing decisions for new projects— would not affect existing projects well along in pipeline
• NPPs almost the opposite of ISL mining projects: Very large capital upfront, relatively low Op-Ex going forward
• Capital cost recovery can be 60%-75%
of total generation cost
• For planned NPPs, higher borrowing
costs could make output uncompetitive with alternatives
• Current plants under construction locking in low, long term rates
• Other factors—such as low gas prices or political barriers—
equally or more important
• For many years, only a small gap between spot and term (and no quoted mid-term price)
• High financing costs discouraged buy-and-hold for longer than a year or so
• Low-cost financing, and large price gaps between spot and longer term quotes, supports buy-and-hold strategies
• Post-2007/2008, huge drop in interest rates, large gaps open between spot, mid-term and long term price quotes
• Buy-and-hold assuages future delivery risk
• Financing cost like an insurance premium against future price increases
A Word on Price Curves:
What They Are and Aren’t
•
Curves show a snapshot of future prices at a given point in time as determined by spot price and possible interestrates. They do not predict the future.
•
Curves change every day with fluctuations in the spot price and prevailing interest rates•
Actual transaction prices would be higher—must reflect overheads like storage, insurance and shipping, adjusted for discount utility wants and margin that supplier seeks.•
Implied interest rates not the same for all buyers—they change with the borrower’s credit ratingsCredit: What You Pay Depends on Who You Are
30 32 34 36 38 40 42 44 46 48 50Spot 6 mos 1 yr 18 mos 2 yr 30 mos 3 yr 42 mos 4 yr 54 mos 5 yr
Pr ic e p e r p o u n d U3 O8
Theoretical Credit Cost Impact on U3O8 Price (from $34 spot)
Bank Fuel Financing BBB Curve
•
Both uranium and uranium financing remain niche markets•
Financing uranium purchases a relatively new business for banks•
This is not copper, gold or oil, that areeasier to explain to upper management or
banks’ financial counter-parties
•
Illiquidity and unfamiliarity predict tohigher rates and shorter terms
2012 Price Curve (Five Years): 8/31/2012 (Spot $48)
vs. Mid and Long-Term Quotes
30 35 40 45 50 55 60 65 Spot 6 mos 1 yr 18 mos 2 yr 30 mos 3 yr 42 mos 4 yr 54 mos 5 yr Dol la rs per pou nd U 3O 8
2012: $48 Spot vs. Diff. Credit Costs
8/31/12 LT 8/31/12 MT
Bnk Fuel Financing BBB Curve
2013 Price Curve (Five Years): 8/31/2013 (Spot: $34)
vs. Mid and LT Quotes
30 35 40 45 50 55 60 65
Spot 6 mos 1 yr 18 mos 2 yr 30 mos 3 yr 42 mos 4 yr 54 mos 5 yr
Dol la rs per pou nd U 3O 8
2013: $34 Spot vs. Different Credit Costs
8/31/13 LT 8/31/13 MT
Bnk Fuel Financing BBB Curve
More Transactions Down the Curve
0 5 10 15 20 25Multiannual Single delivery Year
First half-year reported transactions with delivery in
next calendar year or later
2011 2012 2013
2012 vs. 2013
30 35 40 45 50 55 60 65 Spot 6 mos 1 yr 18 mos 2 yr 30 mos 3 yr 42 mos 4 yr 54 mos 5 yr Dol la rs per pou nd U 3O 8 2012 (Top) vs. 2013 (Bottom) 8/31/12 LT 8/31/12 MT Bnk Fuel Financing BBB Curve AA/A Curve 8/31/13 LT 8/31/13 MT Bnk Fuel Financing BBB Curve AA/A CurveSharp Interest Rate Rise Scenario (Starting with $34 spot)
30 35 40 45 50 55 60 65Spot Six Mos. 1 yr 18 mos 2 yr 30 mos 3 yr 42 mos 4 yr 54 mos 5 yr
D o llar s/p o u n d U3 O8
4% first year, 100 basis pt. increase every six months to 12% in year 5
LT price ($53) MT price ($38)
Forward Uncovered Demand
0 5 10 15 20 25 30 35 40 45 Q3 2010 Q3 2011 Q3 2012 Q3 2013 M ill ion P ou n d sUncovered Demand: Third Year Forward
0 10 20 30 40 50 60 70 80 90 Q3 2010 Q3 2011 Q3 2012 Q3 2013 M ill ion P ou n d s
Three Years Cumulative
