Goehring & Rozencwajg summarized in late 2020 (on pp. 15-16 of the report) their views on the uranium market, as follows:
"Spot uranium prices fell by 10% during the third quarter to finish at $30 per pound after having risen sharply by 20% during the second quarter. Term contract prices were flat during the quarter after having advanced by 9% during the second quarter. Year-to-date, spot uranium prices have advanced by 20% while term contact prices are 8% higher. Shares of uranium producers were mostly flat during the quarter and are up 15% for the year-to-date.
The most important recent supply development was Cameco’s decision to restart the Cigar Lake mine in Saskatchewan.
The most important recent supply development was Cameco’s decision to restart the Cigar Lake mine in Saskatchewan. Operations at the mine were suspended in March due to COVID-19 concerns, removing 18 mm lbs. of annualized mine supply (12%) from the market. The mine closure was categorized as “indefinite” when first announced and most analysts expected the closure to last only several weeks. Instead, Cameco opted to extend the shut-down through the summer and only ramp up production again in September. Uranium prices and the related equities sold off when the restart was ultimately announced at the end of July, [but in the Q4 they decided to again suspend production due to COVID-19 issues (more)]
On the regulatory front, the U.S. Department of Commerce extended the Russian Suspension Agreement through 2040 (more). The new agreement takes effect in 2021 and limits the volume of Russian uranium allowed into the US. Furthermore, the agreement makes a distinction between so-called “natural uranium” (or mine supply) and enriched uranium. The agreement could require US buyers of Russian enriched uranium to send non-Russian “natural uranium” back in exchange. Since Russia controls much-needed enrichment capacity, there is no straightforward way for US fuel buyers to circumvent this dynamic. Similar provisions in European-Russian trade agreements make it unclear what will happen to the “natural uranium” that is imported into Russia but the agreement could in theory take these volumes out of practical circulation, artificially tightening the market. [History of previous agreements (more).]
Meanwhile, China is pushing ahead with its nuclear power ambitions, approving several more reactors this year. Emerging market demand growth (most notably from China and India) will ultimately drive demand growth over the coming years and so this represents a continued bullish development.
The authors have written that Cameco needs to procure uranium on the spot market to fulfill its obligations. After curtailing production at McArthur River in 2018 and Cigar Lake this spring, Cameco found themselves unable to produce enough mine supply to meet long-term contractual agreements. In 2019, Cameco announced they would meet the shortfall by purchasing material in the spot market instead of drawing down their commercial inventories. Cameco’s stockpiles nevertheless declined by 75% last year as they seemed unable to source the necessary material in the spot market.
Given their depleted inventories, we argued Cameco would finally be forced into the spot market to meet its obligations. Over the past several months, it appears this is exactly what happened. Cameco’s stockpiles bottomed in March at 7 mm pounds while purchased spot market material surged to 19 mm pounds through June. It is unclear who provided this material, but it is interesting to note that Kazatomprom’s stockpiles have moved materially lower. Most of the industry’s excess material -- whether it be from US or European utilities or producers -- has now likely been absorbed.
The uranium market has stabilized ahead of another move higher. Cigar Lake’s restarting caused some price weakness, but we expect that will be short lived. Even with the restart, Cameco must buy significant spot volumes next year. Given the lack of readily available material, we expect this will help lift prices. Q4 is typically a period of robust fuel buying activity and we would not be surprised if prices began to rise again in the near future as buyers are faced with a tight physical market. We continue to believe that uranium has started its bull market—prices have already risen 60% off their lows established three years ago, and yet, investor interest in both the uranium metal and in the uranium equites remains near zero. For example, Uranium Participation Corp., the listed vehicle on the Toronto stock exchange that holds physical uranium, recently traded at the biggest discount to net asset value since the Fukushima nuclear plant meltdown in 2011—a clear sign of extreme investor disinterest. We recommend large investment exposure to uranium and to the related equites. [For additional perspectives from the uranium mining industry, see (here)]
[Incorporating commodities, in general, the authors concluded] that the lack of capital in the industry over the last decade has had a huge impact on new projects. Before COVID started, gold production had peaked as had US oil production, gas production. Copper production was likely set to peak in 2021. COVID has simply served to pull all these trends forward. We have actively curtailed nearly 15% of existing global oil production, and reduced drilling activity by 60%. Several large-scale mining operations have been curtailed and new projects have been shelved. This has always laid the groundwork for commodity bull markets and this time will be no exception. Production across the board is set to slow dramatically after a decade of fairly sizable growth.
Demand on the other hand has rebounded faster than most have thought possible and this will continue. There are currently nearly 4 billion people going through their period of intense commodity consumption – nearly 6 times the number of people historically at any one time. This is a unique moment in the history of commodity demand that has not been and cannot be repeated again.
Commodities go through large cycles that last decades. The authors' research tells us that we have clearly reached the bottom of this cycle today. As I outlined in this presentation, this cycle has been just like all the other before. Multiple factors seem to repeat themselves time and again and all of these factors are in place today. The catalyst that historically ends one bear market and ushers in a new bull market has revolved around a shift in the monetary regime – and while it may have been audacious to say so even a year ago, we find ourselves at that point today.
Very few investors have any exposure to this sector, but if history is any guide it may be the only way to generate returns over the coming decade. The next commodity bull market is now upon weather investors recognize it or not. Gold is certainly telling you so and over the coming years most every other commodity is likely to follow. Most investors have become used to a mild deflationary environment, low input prices and ample growth. That roadmap
is now behind us and a new period of inflationary pressure lays ahead. Even a small allocation to this sector will help fulfill its roll to diversify returns and help maintain long-term value. How you are positioned today could make all of the difference going forward. Unfortunately, as of today no one is heeding the warning – that will change as the cycle progresses and weather you recognize it today will make the difference for your clients."
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