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In order to fully understand the rationale for Cameco’s (CCJ) joint bid to take over Westinghouse, one needs to understand some of the most fundamental concepts of downstream uranium refining. Specifically, concepts such as conversion, enrichment, SWU and fuel fabrication are paramount in order to fully understand the lifecycle of uranium ore and the rationale for the deal. This nuclear fuel lifecycle begins with the hardrock (or ISR) uranium mining and ultimately ends with the sale to the end customer – the nuclear reactors. By looking at the uranium lifecycle and ultimate transformation to usable nuclear fuel in the form of pellets stacked in rods, one can fully appreciate the global scarcity in conversion, enrichment and fabrication. This sets the stage for Cameco’s Westinghouse acquisition.
Step 1 Conversion: Conversion from uranium oxide, U3O8 to a different compound, uranium hexafluoride, UF6. The enrichment process requires the uranium to be in a gaseous form, uranium hexafluoride can be turned into a gas in low temperature industrial ovens. As can be seen below, as per data from the World Nuclear Association, global conversion capacity is dominated by Russia (Rosatom) with 38% total capacity utilization. The good news however is that conversion from Canada (Cameco), France (Orano) and even China can ramp up significantly seeing as the utilization rates (in 2020 at least) were considerably below the 96% from Rosatom. Note that conversion contracts are typically signed for fixed price, 5-7 year terms thus mitigating any logistical problems so long as contracts are honored.
Step 2 Enrichment: The UF6 in gaseous form is then fed into a centrifuge in order to separate the U235 from the heavier U238 isotope. This process in the centrifuge separates the uranium into two streams: one is enriched U235 while the other stream consists of “tails” which contain a lower concentration of U235. This strain is also known as depleted uranium. As can be seen below, once again as per 2020 data from the World Nuclear Association, global enrichment capacity is dominated by Russia (via Tenex, a subsidiary of Rosatom) at 43%, followed by capacity in Europe (both Urenco and Orano) and then China (CNNC). Though the United States (Urenco USA) only contributed to 7% of global enrichment capacity in 2020, enrichment plants from Centrus (formerly USEC) and the Global Laser Enrichment are expected to start in 2023. Note that Urenco USA is a partnership comprising Urenco, Exelon, Duke Power, Entergy and Westinghouse.
Enrichment capacity is measured in SWU (Separative Work Units). In brief, SWU is defined as the effort required in the enrichment process in which U235 and U238 are separated. The amount of uranium required to be fed into the enrichment plant in order to obtain a desired amount of enriched product depends on the desired enrichment level of the product, the original enrichment of the feed and the enrichment of the depleted uranium (the tails).
For example, if one would want to make 20 kg of uranium enriched to 3.8% U235 by weight (with a tailing fraction at 0.2% by weight), how much uranium feed would be needed ?
Applying the mass conversion formula, one would ultimately need 140.9 kg of feed uranium at a concentration of 0.711% in order to produce 20 kg of 3.8% enriched U235 uranium.
SWU makes its way into another more complex equation which will essentially answer how much energy would be required to make the needed enriched uranium and at what cost. More SWU capacity means that more enriching can take place.
Step 3 Fuel Fabrication: The enriched uranium is then transported to a fuel fabrication plant where it is cooled and then converted to uranium dioxide powder. This powder is then pressed to form small fuel pellets and heated to make a type of hard ceramic material. The pellets are subsequently inserted into fuel rods, which are then grouped together to form fuel assemblies (as illustrated below). At this point, the product is ready for use at a nuclear power plant. Note that the United States currently has three main fuel fabrication facilities which can convert the enriched uranium into these solid pellets – these facilities are operated by Framatome (formerly Areva), Global Nuclear Fuel USA (owned by GE, Hitachi and Toshiba) and Westinghouse, which has 49% of US fabrication capacity.
For context, 27 tonnes of uranium can be converted to 18.0M fuel pellets housed in over 50,000 fuel rods. This is enough to power a 1.0Gw pressurized water reactor for a whole year. Note as well that one single pellet contains as much potential energy as a ton of coal. For even further context, to power a coal plant of equivalent output to the 1.0Gw pressurized water reactor, more than 2.5M tonnes of coal would be needed.
Ultimately, the point here is that a combined Cameco/Westinghouse entity will have exposure to all facets of the nuclear fuel cycle from uranium mining to conversion, enrichment and fuel fabrication. Not only is there extreme tightness in the conversion/enrichment and fabrication sectors but capacity is currently very limited in the United States. Combining these elements (along with the Westinghouse AP1000 power plant offering) elevates Cameco to the level of an Orano or Rosatom. Now Cameco/Westinghouse can not only offer nuclear power plant construction but it can also complement that sales pitch by offering the critical ancillary services just mentioned above, while also having mining access for the needed raw uranium oxide material. Signing global orders while offering a full suite of end-to-end solutions is a much more compelling sales pitch.
Cameco’ proposed purchase for 49% of Westinghouse has to be viewed as much more than the 11.2x TTM EV/EBITDA multiple or the 10.0x FY/2024 EV/EBITDA multiple. The increased value chain proposition and sales opportunities from the combined entity are extremely timely given the current themes of energy security and Russian sanctions. In the short term, Cameco sees approximately $50M in new revenue opportunities however the longer term play is much more compelling. Particularly in energy deprived Eastern Europe (where Rosatom has a stranglehold on nuclear builds and services), Westinghouse does have a foothold in the Czech Republic, Ukraine and Finland.
Yes, Cameco becomes less of a pure-play miner however we see this transaction as solidifying Cameco’s entire nuclear value chain. There is considerable margin to make in all steps of the nuclear fuel conversion cycle, even more so if one owns the entire value chain in this high barrier to entry business. Though an exit from Bruce Power and electricity generation was more than welcomed in 2014 (as was Cameco's re-established pure play status), this recent pivot into Westinghouse makes much more strategic and long term sense.
* The fuel rod assembly graphic is courtesy of Deep Isolation.