Gayed opines in mid-2019 that pricing on uranium can be notoriously difficult since trading is much less frequent, and most services quote monthly prices instead of daily ones. Companies, which had been mining uranium in anticipation of higher prices were sitting on unprofitable stockpiles. But the future for uranium may be finally looking brighter. After years of extremely negative sentiment and declining prices, the industry may be forming a bottom.
When one thinks about uranium, the first thought that comes to mind might be the material used in nuclear weapons. In reality, uranium has a number of more benevolent uses. It's a clean energy (PBW) that can be used to power nuclear submarines and generate electrical power. It's also used in everything from ammunition to aircraft, and even glassware.
Pricing on uranium can be notoriously difficult since trading is much less frequent, and most services quote monthly prices instead of daily ones. Available prices can become stale, but there's one thing we know for sure. Uranium prices have been in a deep bear market, and the supply/demand imbalance is the main culprit.
To lay a little groundwork, let's start by looking at the history of the uranium market over the past 50 years. Uranium hit the $140/lb. level in 2007 right before the financial crisis knocked down prices on almost every asset class. In 2011, the Fukushima disaster happened, and the uranium market overnight became, pardon the pun, radioactive. Companies which had been mining uranium in anticipation of higher prices were sitting on unprofitable stockpiles. The number of miners declined precipitously. Reactors went offline. The demand for nuclear materials dried up. It's an imbalance that's still being worked through today as uranium prices hover around the $25 mark.
Uranium (URA) is now being dragged into the political arena. The United States is just the 9th largest uranium producer worldwide. As a result, most of the country's uranium supply comes from bigger producers, such as Canada, Russia, and Australia. Just 7% of U.S. uranium is sourced domestically. Uranium miners Energy Fuels and Ur-Energy petitioned the White House to establish a quota requiring that 25% of U.S. supplies be sourced domestically. In a somewhat surprising decision, the White House declined to make rules changes to uranium supply rules. You can probably guess looking at the chart here when the decision came down.
The decision is one of the rare few in which Washington lawmakers declined to put rules in place protecting U.S. businesses. This story is a mere blip on the screen of the uranium industry since the U.S. (SPY) represents just a tiny percentage of the global supply. The broader theme at play that will impact the uranium industry from here is the ability of miners to balance supply and demand. Producers have been outproducing demand annually for most of the past decade when uranium prices were much higher than they are now. Supply and demand were finally balanced in 2017, but 2018 was the year when producers really tried to clear out the supply glut with prices down in the $20s.
So far, it hasn't done much to lift uranium prices which remain stubbornly stuck below the $30 mark. The best way to play the uranium stocks is the Global X Uranium ETF. Since its inception in 2010, the fund has averaged a return of 20% annually or a total return of 85%. But the future for uranium may be finally looking brighter. After years of extremely negative sentiment and declining prices, the sector may be forming a bottom and ready to begin its long-awaited recovery.
The industry has already begun taking necessary steps to address its global oversupply. The number of active uranium miners post-Fukushima has already shrunk by more than half. Kazakhstan, the world's largest uranium-producing nation, has already announced that it will cut production by 20% over the next three years. Cameco, easily the largest uranium mining company in the world, also announced it will indefinitely shutter its McArthur mine, the largest in the world, until business conditions improve. The target number here is $60. That's the price level that uranium needs to reach before miners start making money and the price level that the markets will aim for in order to reach balance again.
Even more encouraging is the fact that demand is rising again. The push towards clean and renewable energy has improved the demand for solar, wind, and nuclear power solutions. Additional nuclear reactors, especially those in Japan, are slowly coming back online which should help eventually spur uranium demand. Uranium demand growth over the long term is forecast to be slow and steady, not rapid, but given where the industry is sitting right now, it should be enough to fuel a turnaround once companies work off their supply excesses.
The sector to watch here to gauge the sentiment of the uranium space isn't energy. It's utilities. The industry's big names, such as Duke Energy and FirstEnergy, operate nuclear facilities and could have been adversely affected if the White House approved the domestic quota request. Utility companies could have seen their costs rise if they needed to use higher-cost U.S.-sourced uranium. Now that this cloud of uncertainty has been lifted, utilities may be interested in reentering the market in order to lock in lower cost contracts. This additional demand could be the impetus to push uranium prices back up again.
The Uranium ETF has been tracking more closely with the utilities sector in 2019, possibly with respect to this situation, although correlations are still relatively modest. Uranium generally tracks more closely with the energy sector, but I think the utilities group is really the one to watch here. Of course, the uranium industry is always just one disaster away from becoming the black sheep of the commodities space again. But after years of struggles, the economics are finally lining up once more that could lead to a resurgence in this high potential sector.
Original working URL: https://seekingalpha.com/article/4278262-uranium-long-awaited-rebound-be-imminent
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