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.



Comments

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David Rahnejat

There are holes with all theses rosesy predictions. First kazakstan said last month they will not cut20 percent but increase production in 2019. They produce a lot more than cameco about 40 percent of worldproduction. Unless Japanese’s reactors come on quickly which is not going to be the case this market is stuck in mud. A lot of uranium in the past 8 years got accumulated over150 million pounds which is not going to disappear so quickly even with cameco cuts even though its has helped somewhat. The funds can dump all the uranium quickly if prices go up ., and Paladin has said they are looking to restart which is really stupid for the market. As to 232. No one knows how it will affect the market probably us producers will do much better but it will create two tier market and screw up the uranium market for a long time. Us miners will produce over a time 15 million pounds which in other words is an extra 15 million pounds in the market. This sector sorry will not recover in day or months but many years.

Rafael Siqueira

David, why don't you publish a piece with your thoughts? Opposite views and arguments on this matter would be very helpful to investors. Regards

Marcelo Lopez

Thanks for your comments, David. In my opinion, you are making the mistake most people who don't look into depth end up making - I would be happy to discuss this with you, you can follow me on Twitter and DM me. But basically, Kazakh production HAS been cut (please notice that some of the mines that were treated like financial investment are now consolidated, including Inkai - the JV with Cameco) - this creates an impression of more uranium, when in fact there is less. They have mined the "easy and cheap" uranium and from now on, costs will have a big impact (attention to the tenge). Japanese reactors restarts would be nice, but that's not what will trigger the next bull market. Japanese inventory is around 126m lbs, but the majority was acquired at US$70 and above and most likely will not see the light of the day - definitely not at these levels. Paladin has its own problems (which I'm happy to discuss) and utilities are not buying because of the uncertainty created by S232. Cheers

Jak Crook

Any recommendations on low priced companies as a 10+ year investment?

Marcelo Lopez

Hi, Jak. I'm sorry, but I cannot give investment advice. I am sure your financial advisor will help you with that. Good luck and thanks for the interest.

Marcus Johns

Marcelo, some of the things you have stated about Kazatomprom appear incorrect. Their 100% basis output in 2018 was 21,705 tU and their guide is 22,750 – 22,800 tU for 2019 (David was right in stating that their production is increasing, and it will increase again in 2020). Whilst they have cut production by 20% from it's subsoil use licenses, their subsoil use licenses were growing at reasonable rates, and hence their production will continue to grow even if the cuts are here to stay. "In 2019, Kazatomprom expects to remain consistent with its previously announced intention to flex down planned production volumes by 20% for 2018 through 2020 (versus consolidated planned production levels under subsoil use licenses, which were increasing annually over that period). With the flex down, under the existing subsoil use licenses, production is expected to total approximately 22,750 to 22,800 tU (100% basis) in 2019; without the reduction, production would have exceeded 28,500 tU (100% basis) in 2019." I'm also interested to hear your thesis behind the assertion that 'They have mined the "easy and cheap" uranium and from now on, costs will have a big impact.' Their prospectus outlook does not suggest this to be true, but could you please outline why you hold a contrary view?

Marcelo Lopez

Hi, Marcus. Thanks for your comments. Kazatomprom really cut production - please see link of their own presentation, page 3 (http://www.kazatomprom.kz/en/content/investoram/investora.... They are cutting production this year, as you mentioned, from their subsoil use licenses. When a mine license is granted in Kaz, they outline the production for the life of the mine and the company has the ability to increase/decrease production by 20%, as they (and their JVs) see fit. I spoke to many geologists in the sector (this week I spoke to KAP too) who have worked for KAP and they reaffirm that the easy and cheap uranium is coming to an end. Some of their mines have a cash cost above $22/lb - you can ask them directly, they will confirm this. If you want to discuss this further, it will be my pleasure. I am on twitter malopez1975. Cheers

Marcus Johns

Marcelo, mine and David’s point was that their production is increasing on a sequential basis, which is true. I have arranged a call with KAP IR and will be pressing them on this issue. I find it strange that they would project such low cash costs in their prospectus and then tell investors that those projections aren’t true. Alas, shall be an interesting conversation.

Marcelo Lopez

Great, Marcus. And your point is correct, as well as mine. They have reduced the production and will now start increasing it at a slower rate. This is because in Kazakhstan, when the license is granted, the JV has to sign a contract with the state stating what the production will be every single year for the duration of the mine - and they have the discretion to increase /decrease it by 20%, no more, no less. So, a 20% cut from what was planned is the most bearish scenario. I have spoken to KAP last week and also met with CCJ (co-owner of Inkai), and they both reaffirmed this point. I'm happy to chat, if you want. Again, thanks for the comments