CS opines that as the market siphons through all the various mining disruptions and curtailments, there are some companies that stand above the rest, in their view. In the past 2 weeks, they have observed almost 20% of global uranium supply put on care and maintenance in what was already a balanced market. Uranium prices are already well below what is sustainable for the industry long term and so CS concludes that these outages may be the encouragement needed for utilities to negotiate longer-term contracts with producers. This is ultimately the key catalyst needed to push spot prices of uranium higher. Large supply outages can lead to significant spikes in uranium prices as they observed in 2006/07 and in the conversion market since 2018 and Kazatomprom, with predominantly spot exposure, offers clear exposure to this. CS increased their 2020/21 EBITDA ~5% and maintain their Outperform rating on the market.
Given the importance for utilities to secure long-term supply, the uranium market has historically had significant long-term contracting. As CS looks back at the last time the market saw supply shortages in 2005/6, they can see that this led to a big increase in contracting activity, long-term prices increased sharply and spot prices followed. While significant contracting activity was occurring through 2005/06, in 2006 the long-term price averaged ~$70/lb U3O8 while the spot price only averaged $45/lb and didn’t move above $60/lb until December that year. Therefore, while some analysts are perplexed about why spot prices haven’t reacted to positive news flow over the past month, in the view of CS analysts it may just be a matter of waiting for contracts to be negotiated.
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