J. Birks Bovaird opines that over the past 6 years, the words “up” and “uranium” have seldom been used in the same sentence. It’s been a long, hard slog for uranium miners. However, global events are currently occurring that may possibly signal the long-awaited fundamental shift. Indeed, announcements from Kazatomprom and Cameco over the past month signal the elimination of approximately 24 million pounds of uranium from the global market in 2018 alone.
As an experienced member of our industry, Bovaird has believed for some time that history is in the process of repeating itself. Uranium markets simply cannot be sustained when the price of uranium is below the cost of production – like it is today. We’ve seen this movie before. Expected uranium demand increases, resulting in uranium price increases. Production also increases – but with a lag. However, you don’t license, finance, and build new uranium mines overnight. Because there is a lag in new, needed production, uranium prices can spike to unsustainable levels, as was the case in 2007 when the spot price hit $137 per pound. Due to these high prices, miners, investors, and even governments like Kazakhstan sense opportunity and bring on substantially greater levels of production. As is often the case, the industry brings on too much production, especially when uranium demand fails to meet expectations. This is exactly what happened subsequent to the Fukushima accident in March 2011. As a result of all this new uranium production coming online – much of it excess – prices predictably decrease. Like clockwork, production decreases as well – but again, with a lag. It’s hard for miners to halt production after expending so much time and capital on their projects. But, also uranium production is often supported by long-term contracts signed during high-price market environments when utilities get nervous about supply and uranium appears scarce. These contracts have deliveries over a number of years at prices that prevailed at the time the contract was signed. After these contracts expire, the miners shut their mines down – which is exactly what the industry is currently experiencing. Wash. Rinse. History repeats.
2017 has seen three major uranium production cuts announced. In January 2017, Kazakhstan announced a 10% production cut for 2017 equating to about 5 million lbs. On that news alone, the spot price of uranium rose from about $18 per pound in November 2016 to over $26 per pound in February 2017. Then, on November 8, 2017, Cameco announced it would be suspending production at McArthur River for 10 months starting in February 2018. This is the world’s largest uranium mine, accounting for roughly 10% of the World’s uranium mine production. If Cameco restarts operations at McArthur River after 10 months (a big “if”) about 15 million pounds of uranium will have been lost to the market. On this news, the spot price rose from about $20 per pound to about $26 per pound. According to TradeTech, it dropped back to about $22.50 on November 27, likely due to some month-end trading activity. But, it snapped right back up to over $24 on November 28, likely based on these new market fundamentals.
And, then on December 4, 2017, Kazatomprom (Kazakhstan’s state-owned uranium production company) announced that it was cutting 2018 – 2020 production by a further 20%, including over 10 million pounds of uranium in 2018 and nearly 20 million more pounds in total for 2019 and 2020. We have yet to see how this news ripples through the spot market, but on Dec. 4, we saw the spot price close at $26.50 per pound. The Kazatomprom news also potentially ‘multiplies’ the Cameco news, in that it removes any worry that Kazakhstan might increase production on the back of the Cameco news to increase market share.
We’ve also seen Areva announce some cuts at their mines in Niger. China’s Husab mine in Namibia isn’t meeting its early, lofty expectations. We’ve also heard rumors about the potential for further production cuts elsewhere. Production cuts should ultimately generate a price recovery. If the recently announced cuts don’t do the trick, there is a very real chance that Cameco may keep McArthur River shut down and/or other production cuts will likely be announced. It seems almost inevitable – amidst today’s inexorably rising uranium demand – the cycle described above will begin anew and uranium prices should recover.
Bovaird also believes that the Kazakh, Cameco and other production cuts will have a major impact on the spot, mid-term, and long-term uranium market dynamics and their relative importance to utilities, traders, and producers. Producers like Cameco and Energy Fuels need utilities to return to the long-term market to sustain a market recovery and incentivize needed production. However, even though the spot market only accounts for a small proportion of the broader uranium and nuclear fuel markets, it has an outsized influence. Everyone follows the daily, weekly and monthly spot market prices. Stocks rise and fall on spot market activity. Uranium changes hands, not on the spot market itself, but under contracts with pricing determined by reported spot prices. Term contracts often have a spot price component. Given how small and relatively thin the spot market actually is, it exerts a disproportionate amount of influence.
Original URL: https://investorintel.com/sectors/uranium-energy/uranium-energy-intel/stars-may-aligning-long-awaited-uranium-market-recovery/
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