From the offices of Amir Adnani:
There are a couple of uranium related items to share with you:
First, spot uranium is showing noticeable signs of recovery with a breakout this past week above previous highs seen in 2016 and 2017 at $26.50/lb U3O8 (TradeTech). This week we’re continuing to see good action in the spot price with it climbing above the $27/lb U3O8 level.
Second, Barron’s published an article recently on the latest uranium market developments, worth a read. Scott Melbye, our Executive VP, was a reference for the article and is quoted; “We are now seeing an accelerated rebalancing of the uranium market fundamentals that will provide the basis for a sustained and substantial uranium market recovery.”
Barron’s: Uranium Prices Poised to Power Higher
The suspension of operations at the world’s largest uranium mine in February and major output cutbacks from the biggest national producer have sparked a recovery in the market for the radioactive metal.
“We are now seeing an accelerated rebalancing of the uranium market fundamentals that will provide the basis for a sustained and substantial uranium market recovery,” says Scott Melbye, executive vice president of U.S. producer Uranium Energy (ticker: UEC).
Weekly spot prices for uranium have climbed by 11.6% for the year so far to $26.50 on Sept. 3, from $23.75 on Dec. 25, 2017, according to nuclear-fuel consultancy Ux Consulting.
The key price “drivers have been the reduction in supply and the increase in demand,” says Jonathan Hinze, president of Ux Consulting.
A temporary suspension of uranium production at Cameco ’s(CCJ) McArthur River mine in Canada, the world’s biggest, that began in February, has since been extended for an “indeterminate duration.” That follows a late 2017 announcement that Kazakhstan’s Kazatomprom would cut uranium output by 20% over three years. Kazakhstan is the world’s top producing country.
The industry had gone through what Joseph Reagor, managing director and senior research analyst at Roth Capital Partners, refers to as a “reluctance to accept reality.” Since 2011, uranium producers “have been reluctant to make the necessary production cuts to balance the supply and demand,” he says.
A massive earthquake on March 11, 2011, in Japan led to a nuclear disaster, the world’s worst in a quarter-century, at the Fukushima Daiichi power plant. That reduced demand. All of Japan’s nuclear facilities were eventually shut down, and none of the country’s nuclear units came back on-line until 2015.
“While nuclear growth slowed following Fukushima, global production expanded at an accelerated rate, incentivized by a previous period of higher uranium prices,” Melbye says. As prices fell to about $20 a pound, around “95% of global production found itself ‘under water,’ ” with production costs exceeding spot and long-term prices. The result has been substantial reduction in global uranium production, he says, with output expected to decline to 135 million pounds this year, from a global peak at 161 million in 2016, he says.
“The events of Fukushima, close to eight years ago, certainly were a setback for the industry, as the impacts on supply and demand put into motion the bear market that we are only now recovering from,” Melbye says.
Contributing further to that recovery will be the expiration of long-term uranium procurement contracts.
“Utility companies in the U.S. and elsewhere typically hedge their uranium needs many years out to not only lock in price but also assure supply from reliable producers,” says Jeff Wright, chief investment officer at Wolfpack Capital. “The reason the timing is right for uranium to go higher is a supply deficit after the current production hedges expire in 2020-21 at a number of uranium producers.”
Meanwhile, the Trump administration has called attention to the market in the past few weeks. U.S. Secretary of Commerce Wilbur Ross on July 18 said he had launched an investigation into whether the amount and circumstances of uranium ore and product imports into the U.S. “impair national security.”
The proposal would also require that federal government procurement would be 100% of U.S. origin, says Melbye. All told, this would require “around 15 million pounds of domestically mined uranium to be ramped up in the next few years, and likely a substantial premium would evolve for U.S.-origin uranium.”
For U.S. utility companies, however, “any increase to their costs in terms of higher uranium prices for domestic consumption would not be favorable,” says Hinze.
Some analysts remain wary of uranium’s price gains. They’ve tested current levels “three times in the past three years only to continue basing,” says Jeb Handwerger, editor of natural-resources newsletter publisher Gold Stock Trades. Still, this “could be the start of a new uptrend, as demand is increasing yet oversupply may be ending.”
Myra P. Saefong writes about commodities for MarketWatch.