Uranium: the bull market is upon us

Marcelo Lopez

L2 Capital Partners

Nuclear reactors are in vogue again. The need for clean energy has led the world into the renewables, which include solar and wind power. The problem with these technologies is that they are not cheap, nor reliable. Nuclear is the only source of energy that provides clean and abundant energy – not to mention safe and cheap.

Today there are 450 nuclear reactors in operation and another 50 being built in 15 countries – from these 50 being built, 13 new reactors should be ready this year and another 13 in 2020. Besides this, there are 126 reactors planned and another 383 proposed. These new reactors, together with the ones that are already in operation, means that the demand for uranium should increase even more.

One could imagine that the price of uranium is too high and that the market has already priced in all this growth – but no! Uranium is trading now at around US$28/lb and according to the International Energy Agency, it should be at least US$60/lb, so that miners are able to recover their cost.

As the saying goes, the cure for low prices is low prices. After achieving the low of this cycle at around US$17/lb, uranium is now in a bull market, having risen by almost 40% since last year’s lows – and more than 60% since the lows a few months before. 

Most of the small uranium companies have either shut down operations, mothballed the mines or diversified into other minerals, to survive. The big companies have finally followed the lead, with Cameco announcing in late 2017 the suspension of the production of uranium for 10 months in the biggest mine in the world: MacArthur River.

MacArthur River mine represents 13% of all uranium production in the world. It is to the uranium market what Saudi Arabia is to the oil market. Now, one can only imagine what would happen to the oil market if Saudi Arabia announced that they would not produce one single barrel of oil for 10 months. But the uranium market barely moved.

Soon after Cameco’s announcement, Kazatomprom, the largest company in the sector, also announced a cut in production. In May it was the time for Paladin, which owns Langer Heinrich, one of the biggest mines in Africa, to say that they were putting it in care and maintenance for an undefined period of time.

But what got the market really going was the announcement in late July from Cameco that they would not restart MacArthur River mine and would leave the mine in care and maintenance for the foreseeable future, until they could enter into long-term contracts at a price way above the current one. Unfortunately, this decision caused hundreds of people to lose their jobs (imagine how well this decision went down with the unions), but it showed that Cameco, a Canadian producer, has discipline and is focused on increasing the price of the metal.

So, to deliver the uranium that has been already contracted, Cameco is delving into its own inventory (which has been reduced a lot) and also buying material in the spot market, helping push the price up. People have not realized yet that the biggest mine in the world is now not producing and its owner is in the market buying uranium – in other words, Cameco is not only contributing to the lack of material, but it is also contributing to the increase in demand. 

Despite what might look like a huge inventory, uranium takes in between 1.5 to 2 years to leave the mine and arrive at the nuclear reactor. In the process, it is transformed into a gas, enriched and fabricated into fuel rods.

Also, 2018 saw the emergence of another buyer: the financial buyer. Funds like Yellow Cake, which was listed in London in mid-2018, raised approximately US$200million and used this money to buy 8.1million pounds of uranium from Kazatomprom. So, demand is going through the roof, why is the price not going up?

Well, early last year, two US uranium producers, Ur-Energy and Energy Fuels filed a petition with the Department of Commerce in the US under Section 232. They alleged that unfair competition has destroyed the capacity of US mines to produce and wanted an investigation on the grounds of national security. These petitioners are asking for the US government to oblige the utility companies (nuclear reactors) to buy at least 25% of their uranium demand from US mines.

This generated an incredible uncertainty in the sector, causing a halt in the long-term contracts. The norm in the sector, long-term contracts, gave way to the spot market. The spot market has traditionally been only circa 10% of the overall market, used to settle unexpected demand or excess production. Now it has become the norm – a funny case of the tail wagging the dog.

Because of all this uncertainty, utilities have contracted very little since, using up more than a year (and counting) of their inventory. Uranium inventories were less last year than they were pre-Fukushima and also at the peak of the last bull market. Yet, they came down a bit more, as 2018 was the first year in 10 in which the consumption outstripped the supply (primary production) by a large amount – the consumption of uranium in 2018, including the financial buyers, was close to 200million lbs and the production was circa 140million lbs. The gap between demand and supply, which was huge last year, is due to increase even more in 2019 and beyond. 

A recommendation from the Department of Commerce is expected by April the 12th and then president Trump has another 90 days to come up with a decision. But whatever the decision, this should clear the way for new contracts, and the utility companies desperately need it. Most of them will be out of a contract in the next 3 years and they cannot afford to run out of uranium (uranium represents less than 5% of the cost of operating a nuclear reactor). The level of complacency on the side of the utilities could not be higher, in my opinion.

I believe we are in front of what might be the best investment opportunity of this decade. In the last bull market, Cameco, the largest company in the sector then, went up by more than 1,200% - and it was the least profitable investment position. Paladin went up by almost 90,000%. Although I believe this kind of returns will not happen again, I do believe that they will be extraordinary. The time to look at the sector is now, before the elephant in the room (resolution of Section 232) is taken away by mid-2019.

Marcelo Lopez
Marcelo Lopez
Portfolio Manager
L2 Capital Partners

Marcelo Lopez, CFA, has been a portfolio manager at L2 Capital Partners since 2009 and focuses on opportunities globally. Prior to that he was a portfolio manager at Gartmore Investment Management in London.

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