2018, Uranium will Rise Again

Uranium (Nuclear Minerals) / Exploration, Mining, Marketing, & Acquisitions

Peter Bell reports that copper prices are up 60 percent in 24 months and zinc has gained 140 percent in two years. Gold is up too, 20 percent in two years. But one of the best performing miners on the Toronto Stock Exchange doesn’t produce any of those metals. It is Cameco and it produces uranium. Cameco hasn’t gained 36 percent year-to-date by leveraging a rising uranium price. In fact, on first glance the uranium spot price chart still looks pretty darn bad. But savvy investors look past the price chart and see a sector poised to break out.

The large uranium producers have drastically cut production. Big funds are being established to hold physical U₃O₈, removing more supply. And Cameco is buying large volumes in the spot market to fulfill its contracts. Against all of that, demand keeps rising. Utilities have been buying spot supplies for several years now to take advantage of low prices. But in the last six months, the spot market has been turned upside-down – and those supplies have basically vanished. In very short order, the spot market will dry up completely and utilities will have to face the music and sign new long-term supply contracts… in the shadow of a looming deficit.

Many investors have been waiting for those contracts as a clear sign that uranium is back. But when uranium moves, it moves fast. By the time contracts are announced, the sector could already have made massive moves. That’s why the spot market shift is so important. The disappearance of spot supplies is the force that will make utilities sign contracts. Acting now means being ahead of the crowd. And the crowd will pile in, because uranium bull markets are a favorite of legendary investors. The last uranium supply squeeze pushed the spot price from US$20 per lb. to US$138 per lb. in just two years. Uranium stocks multiplied that rise: leading producers gained tenfold while top explorers and developers doubled that.

The last hot uranium market was short lived. Supplies had been ramping up, from Kazakhstan to Saskatchewan, and so supply overwhelmed demand in short order. Then the Fukushima Daiichi nuclear disaster acted as the nail in the coffin. Oversupply plus extremely negative sentiment decimated the market for six years:

• - 500 uranium stocks worth $125 billion dwindled down to 40 stocks worth perhaps $6 billion.
• Spot prices slid from $138 per lb. to $20 per lb. rendering 75 percent of global production uneconomic.
• Projects that once supported companies with market capitalizations in the tens or even hundreds of millions of dollars were available for hardly anything, or even for staking.

And so IsoEnergy staked. And bought. And built a portfolio of uranium projects that would have collectively carried a billion dollars of valuation in the last uranium market. Not only does IsoEnergy have those projects, it has the best possible team to advance them. This group has discovered more pounds of basement-hosted uranium in the Athabasca Basin than anyone else and now they are applying their knowledge to a huge portfolio of projects.

The odds of success are high. The market is primed to carry a new discovery to ridiculous heights. And yet investors haven’t quite realized that the uranium game is on. The spot market has been overflowing with supply for years. The world was already producing too much uranium in 2011 – and then the Fukushima disaster prompted Japan to shut down all its reactors releasing unneeded Japanese uranium flowed into a spot market already filled to the brim.

It didn’t help that Kazatomprom, the state-owned uranium company of Kazakhstan, had been ramping up production as fast as possible as it worked to grab market share, impact on prices be damned. All told, there was uranium everywhere and the spot price responded, sliding consistently from 2012 until 2017… when producers collectively decided to do something about it.

The first to act was Kazatomprom, which cut output by 10 percent in early 2017. Other producers followed suit: Cameco suspended McArthur River, the world’s largest uranium mine, in November; Paladin cancelled a planned expansion and then just shuttered the aged Langer Heinrich mine; Kazatomprom announced two additional production cuts bigger than the first.

Collectively, producers have erased or are in the process of erasing more than 30 million lbs. of annual production since 2016. That’s huge against a market that consumes 155 million lbs. a year. In fact, just Cameco shutting down McArthur River is the equivalent of Saudi Arabia halting oil production entirely. Both produce 13 percent of global supply. The market did take note when Cameco shuttered McArthur, but a small gain in the spot price soon subsided. Why should prices stay up if there’s so much supply?

It would be a fair question, except those supplies have now disappeared. The reason represents the biggest news in the uranium space for a decade – and it is news that the market hasn’t noticed yet: Cameco is buying 10 million lbs. of U₃O₈ in the spot market this year. Cameco’s buying will increase spot market demand by 50 percent. If that isn’t enough to dry up supplies, nothing is.

Cameco will churn out some 17 million lbs. of U₃O₈ this year, but it is contracted to supply 37 million lbs. The company can pull some from inventory on the order of 10 million lbs., but that still leaves a gap of 10 million lbs. The spot market is only 20 million lbs. total. And it plans to buy all of those pounds in the spot market, specifically to dry up supplies. Without spot supplies, utilities will have to sign contracts again. Cameco’s intent is clear – it is doing its best to cure the ailing market, and when you are the world’s second-largest uranium producer your best is very powerful. If the market survives that, things only get more intense in 2019. By then, Cameco would have drawn its inventories as low as it wants to go, so it would have to fill its entire production gap with spot purchases – on the order of 20 million lbs.

That’s the entirety of the spot market today. The whole thing. Spot volumes are quoted as roughly 40 million lbs. a year but many pounds get bought and sold several times, so the rule of thumb is that 50 percent of the buying is final. Cameco buying 10 million lbs. of uranium this year will boost spot demand by 50 percent. There is nothing more bullish than that. To add fuel to the fire, several large new funds are being established to hold physical uranium.  Their rationale is twofold. First, such funds give investors the chance to own direct exposure to a rising uranium price. Second, by holding physical uranium these funds will remove even more supply from the spot market, helping to bring forward the very bull market on which they are based.

The biggest such fund is Yellow Cake, which just raised $200-million. Yellow Cake has already secured a deal to buy 25 percent of Kazatomprom’s production, which will lock away another 5 percent of global annual production. From production cuts to funds secreting away supplies to Cameco buying up half the spot market – spot uranium is about to disappear.

There are nuclear reactors under construction all over the world. China leads the pack with 19 followed by India, Russia, and a few other Asian and Middle Eastern countries that are collectively building 27 reactors. Japan has restarted 7 reactors since 2015 and is working to restart 17 more, though it will need 30 back in operation to achieve its goal of powering 20 percent of domestic needs from nuclear by 2030.