The Burgeoning Uranium Renaissance
Anyone even remotely associated with the resource sector is well acquainted with the concept of patience. One interesting quote that probably sums up what’s required is as follows: “Patience is not the ability to wait, but the ability to keep a good attitude while waiting.” Nowhere is this more relevant than with respect to the uranium sector.
The graphic clearly illustrates the dramatic roller-coaster ride that the uranium price undertook during the period between 2003 and 2016. The period since 2011 has been characterized by overall market uncertainty in the wake of the Fukushima nuclear disaster in March of that year, with high-profiles examples like Germany abandoning their nuclear programs altogether. This has led to a period of uranium market oversupply, subsequent price falls and equity market decimation of uranium companies.
It’s therefore fair to say that uranium has been the most-despised commodity since 2011 – a point reinforced by the Global X Uranium ETF that tracks global uranium miners, which during a six-year period to late 2016 had plunged by 90%. Die-hard uranium supporters therefore needed patience in spades!
Uranium also managed to miss out on the energy sector commodity price rally that occurred during 2016. WTI oil near-term futures bottomed at just over $26 per barrel during February and peaked in the mid-50's before the end of the year. Natural gas prices also more-than-doubled from their bottom in March to their high in late December. Thermal coal prices also doubled in price during the course of last year.
Uranium on the other hand was the left-out member of the energy complex. It didn't confirm a possible bottom until the end of November 2016, with uranium equities bottoming a few weeks earlier and commencing a rally that coincide with Donald Trump winning the November 8th presidential election. Meaning uranium has the potential to play catch-up in the energy space, with investors beginning to take note.
Fundamentals Remain the Same
Interestingly, the overall energy conundrum remains the same - the world has relatively few immediate off-the-shelf alternatives in terms of significant, reliable base-load power generation. In a world with a burgeoning population of 7 billion that’s tipped to reach 10 billion by 2050 (accompanied by an exponential growth in energy demand), there will almost certainly be greater demands placed on all three forms of traditional energy - coal, gas and nuclear power.
Since the Fukushima disaster that forced all nations to undertake a more stringent examination of nuclear energy security, a more positive tone had gradually emerged within the nuclear sector. Japanese reactors have steadily coming back online, mainstream attitudes toward nuclear energy are beginning to shift in terms of providing ‘clean, green energy’ and countries such as China and India are increasingly incorporating nuclear into their energy mix.
The Trump Factor
The Trump election victory has provided a major boost for most commodities and uranium is no exception. Trump’s presidency has given uranium strong impetus from a potential demand perspective, with international uranium stocks soaring by 60% since his election in November. Markets are speculating that the Trump administration will be look much more favourably on nuclear power – resulting in less regulatory hurdles for nuclear power and even funding incentives to bring more nuclear power plants online in the USA.
On the supply side there have also been important developments, the most significant of which was the announcement by the world’s biggest producer, Kazakhstan, that it would implement production cuts. State-owned Kazatomprom has advised that it plans to cut its annual uranium production by 10% (representing 5.2M lbs U3O8) – which translates into roughly 3% of 2015 global production. This is an enormously important development, as it likely represents an inflection point in terms of the uranium price.
Since at least 2001, Kazatomprom has relentlessly increased production into an oversupplied market - arguably one of the single biggest causes of uranium weakness, along with the Fukushima disaster. Kazatomprom could afford to maintain full production, as its mines are the lowest-cost operators in the world (a little like the iron ore heavyweights Rio Tinto and BHP Billiton).
While the spot price has gained 45% from their November lows to a current price of $26.50/lb, this is still well short of the sorts of price levels required by most producers in the industry to remain in business.
Price Rises Needed to Guarantee Supply
As the above graphic demonstrates, most producers on a cash-cost basis are close to the break-even level at the current spot price. However, when factoring in all-in sustaining costs (which increases costs by US$3-10 per pound), most producers would still be losing money.
Furthermore, this does not even take into account the incentive price required for future supply to meet future demand. Based on broker Cantor Fitgerald’s global reactor-by-reactor analysis of demand, they estimate that the global annual demand for uranium will reach 228M lbs U3O8 by 2025 – compared to current demand around 175M lbs U3O8.
The net difference of 53M lbs U3O8 of additional annual demand will need to be met by sizeable production increase from some of the world’s largest uranium projects. However, aside from three in the Athabasca Basin that aren’t likely to produce until the middle of the decade at the earliest, the only current projects large enough to produce a meaningful amount of uranium to satisfy demand are located in Africa.
Cantor Fitzgerald estimates the incentive price for most African mining projects to be ‘green-lighted’ is US$80/lb - which is the basis of their long-term equilibrium price estimate. Based on data from the World Nuclear Association (WNA), there is likely to be a net increase of 21 new nuclear reactors during 2017, followed by an additional ten during 2018 and a further 12 during 2019. This would lead to demand rising from a forecast of 189M lbs U3O8 this year to 204M lbs U3O8 by 2019.
For the first time in a long while, I now believe that there’s a significant opportunity for investors to generate profits in the uranium equity sector. Over the coming week I’ll identify a few of the opportunities that I believe are worth putting on your radar screen.
Gavin has been a senior resources analyst following the mining and energy sectors for the past 25 years, working with Intersuisse and Fat Prophets. He is also the Executive Director, Mining & Metals with Independent Investment Research (IIR).