“Not another uranium article,” I hear you shout at your screen. This isn’t just another piece based on nothing more than speculation and gut feeling. In this series of articles for generalist investors and people new to the uranium space, we will try to shine a light on all aspects of the current uranium impasse, leading us (hopefully) to an answer.
Uranium, to invest or not to invest?
At US$10Bn total market size, uranium is small relative to commodities such as gold, copper or even silver.
However, there is no shortage of volume when it comes to uranium opinions. Investors can’t make investment decisions without good quality information, but how can investors discern the quality of information when the discourse around a subject features nothing but mixed messages? Even the most informed voices in this space are only now admitting that they had not realised the volume of U308 available in 2019 and possibly in 2020.
We’ve spoken to some of the biggest names in the uranium business. What facts did they provide us with? Is it enough to form a useful conclusion, or do we remain in the dark?
Macro Macro Macro
Let’s start at the outermost circle of the uranium sphere: the macro story.
There is an almost unanimous belief in the credence of it. However, there are outlying arguments. There was negative sentiment in the uranium market after the Fukushima disaster in 2011, and some countries and investors made it their strategic doctrine. Germany pledging to shut down every single nuclear reactor by 2022 is a good example.
The demand reality is that the nuclear macro story is strong: it is the only carbon-neutral solution that can efficiently provide the energy needs of our growing population. In December, German officials remarked that their anti-nuclear stance was a mistake. Nuclear power plant production is being ramped up hugely in Asia, with around 35 under construction with firm plans to build another 70-80. Billions of dollars of nuclear fission reactors, large and small, are being built as developed countries look to fill the energy needs of the growing and ever more demanding population.
The Supply reality has come in to close focus in the past few weeks with the temporary (how long we do not know) shutdown of Cameco’s Cigar Lake and impacted production at Olympic Dam and Kazatomprom, in light of the coronavirus pandemic. Could this be the white swan that uranium investors have been looking for? In part. We still don’t know how much inventory is out there and when utility buying will start to get nervous. We’ve seen a small rise in the spot price of uranium this week to $27.50/lb, but is this a blip or the start of a sustained growth curve? It’s too early to say. What we can say is that long-suffering uranium equities are watching the screen go green for the first time in a long time. In the words of Energy Fuels CEO, Mark Chalmers, in a recent interview with us, if anyone states uranium won’t see price discovery, “that’s baloney.”
Solar, wind and hydroelectric, whilst green and abundant, are faced with criticism based on the carbon footprint required to mine the materials to build this ‘green’ energy story.
Dreaming Of A Fifty-Bagger
So, we’ve made the assumption that demand for new nuclear material is making a comeback. The next two questions are the focus of this article. When, and how dramatic will the price discovery be? This article will explore the question of WHEN?
There are opinions from all over the spectrum flying around when it comes to the timescale of uranium price discovery. Seasoned insiders, industry professionals and casual commentators all have plenty to say. What does the evidence tell us?
Well, let’s start with the most important thing. Existing and prospective uranium investors have to be comfortable with this fact: nobody knows when uranium price discovery will happen.
There are so many variables in this situation, and many of them are unknown. What we do know is the groups with the greatest level of market control: on the demand side, utility companies, and on the supply side, state-backed Kazak uranium producer (the world’s largest), Kazatomprom.
In terms of demand, the utility companies hold all the cards. They have been making use of their inventories for some time, but when will these reserves run out? When will they need to dip into the market? Hardly anyone truly knows, but here is what well-known uranium expert, Brandon Munro, states:
- All indications of price discovery are happening “behind a curtain.” Investors need to look deeper into the intricacies of the uranium market to extract any useful knowledge.
- U.S, Russian and Chinese stockpiles are being locked away for strategic purposes and will not dictate the timescale of uranium price discovery; they will only come into play once the bull is running.
- The relevant part of the market for investors is “mobile inventory.” What inventory is available to either suppress demand, or is available to be sold once the price goes up? Will this quantity of material supress a price increase?
- Uranium inventories are tightening. U3O8 (triuranium octoxide) inventories have been depleted by the supply/demand deficit. “Even after allowing for secondary supplies,” the U3O8 sector has operated a deficit of 20M lbs for the “last couple of years.” The deficit has been created by utilities underbuying.
- U3O8 is subject to conversion as part of the nuclear fuel cycle. This is a process that was historically paid for by utility companies to convert U3O8/yellowcake into a gas, UF6 (uranium hexafluoride).
- Utility companies then paid for the enrichment service. Uranium bought off mines is enriched to the specifications required for their particular type of reactor technology.
- This all changed after Fukushima. Stockpiles of U3O8, UF6 and EUP (enriched uranium product) have been building up ever since.
Because all three of these stockpiles have been increasing in recent years, it has given utility companies substitutability between the three forms of nuclear power.
Now companies can arbitrage between the three forms to get the best deals for themselves. They can also avoid the “time criticality of planning.” For example, utility companies used to have to purchase U3O8 at least 2 years in advance of nuclear power production; if they planned poorly, they would suffer the consequences. However, it has stopped mattering if utility companies make a planning error, because UF6 (buy 1 year out) and EUP (buy 6 months out) have been available to them. This has been a large contributing factor in allowing utility companies to avoid restarting uranium contracts with producers.
- UF6 inventories have “tightened, almost entirely.” A few months ago, Uranium Participation Corporation (UPC) switched out their UF6 for U3O8, to take advantage of the arbitrage.
- There has also been a tightening in enrichment, which has been exacerbated by geopolitical concerns around Iran’s nuclear sanction waivers.
- EUP and U3O8 inventories are also tightening, but not to the same extent as UF6.
- The spot conversion price between U3O8 and UF6 (the difference between what consumers pay for each)has increased by 400% in the past couple of years.
- The price for EUP has gone up from the “mid-30s, to about US$50/lb,” another “healthy increase?”
What this means for investors
Investors will want to know what the “critical threshold” is, that will force utility companies to start buying again.
- There is an inverse relationship between the mobility of inventory, and the spot price. Logic would denote that dwindling inventories and increasing conversion/enrichment prices would cause a price hike.
- Munro states the following: “you only need a sentiment shift for this market to tighten.” Specifically, the purchasing tactics of utility buyers needs to change. Retail buyers aren’t impactful in this equation. Utility companies will do whatever is best for themselves at an optimal time; do they have complete control over this market?
Let’s look at some “rough” numbers regarding how utility companies could modify their behaviour. As mentioned before, the U3O8 sector is currently running a supply deficit of 20Mlbs: the “reactor burn-up” rate is 180Mlbs, but U3O8 demand levels are at 160Mlbs. This has been caused by preferential buying of UF6 and EUP over U3O8, and utilities wearing down inventories.
- In 2016, the sector was producing 160Mlbs of U3O8 mined production.
- This has now reduced by around 25M bs because of supply destruction instigated by reductions in Kazak U3O8 production, and care & maintenance programs beginning at uranium mines like Cameco’s McArthur River asset.
- Secondary supplies currently run at 25Mlbs.
- At present, there is not enough demand at the U3O8 level to put pressure on the price.
Is there a realistic example of buying habits changing that could impact price positively? It appears so.
- The United States military fleet consumes c. 50Mlbs of uranium per annum.
- It has been underbuying for the last few years by around 20%, or 10Mlbs.
- If it chooses to change its policy from underbuying to full coverage, 10Mlbs of extra demand for U3O8 will result in the current U3O8 deficit being halved.
Alternatively, we could see financial plays enter the market again.
- In 2018, 10Mlbs of U3O8 was taken out of the market by UPC and Yellow Cake plc, as they topped up their supplies.
Both of these examples seem possible. Just one of these possibilities occurring would be enough to generate a “very sharp price response,” which will then affect secondary buying. However, the cost of raising capital at the moment renders the second possibility more unlikely. There are groups interested in purchases, but these are private arrangements with multiple family offices, banks and hedge funds, but this is not the same model and would not deliver the same outcome. Investor sentiment is currently at an all-time low, and for generalists to get involved in the commodity, price discovery and contracts are a necessity.
To conclude, the timescale of price discovery is still uncertain. While the information we have acquired has not given us much to go on, it has provided us with a set of criteria to look out for and knowledge of all the moving pieces of the uranium sector that can impact price. However, when these movements will occur remains pure guesswork, but if you ask me, nothing meaningful is going to happen to uranium equities, and even then just for producers, until the end of 2020 when utilities start issuing contracts +US$45/lb.
Company Website: https://www.bannermanresources.com.au/
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