Uranium. This Time for Real?
COVID-19 has accelerated new cycle timing
An event of far-reaching and devastating consequences is often metaphorically compared to an earthquake, disrupting all that is exposed to its force. For uranium and its fundamentals as a commodity, the decade ending in 2020 began with a real earthquake. On March 11th 2011, the magnitude 9.0-9.1 undersea event east of Japan’s Tōhoku coast provoked a devastating tsunami that caused widespread death and destruction and the meltdown of three reactors of the Fukushima Daiichi Nuclear complex. It was the worst nuclear accident since the 1986 Chernobyl disaster, and it altered the global energy policy debate pretty much overnight. “After Fukushima, the market swung from a very competitive market to one of excess supply due to the sudden closure of more than 50 reactors in Japan,” recalled Tim Gabruch, VP commercial at Denison Mines (TSE: DML).
Beyond Japan, the public’s horror caused other governments to react; Germany, for instance, committed to decommission all nuclear plants by the end of 2022, while other European counterparts including Belgium, Spain and Switzerland also plan to exit nuclear in the coming years. “These developments had an immediate impact on uranium producers because the demand predictions had to be readjusted, and that put pressure on the uranium price,” explained Jonathan Cobb, senior communication director of the World Nuclear Association, who added though that the bigger picture shows healthy demand for uranium: “Since 2012 nuclear generation has been on the rise and, with the preliminary data we have, 2019 probably has been a record year for nuclear energy.”
New demand is already in the pipeline: China leads the way with 11 nuclear reactors under construction, India follows suit with seven, and South Korea, Russia and the UAE have four reactors under construction each, according to July 2020 data from the International Atomic Energy Agency (IAEA-PRIS). In total, there are 54 reactors under construction globally for a total net electrical capacity of 54.4 gigawatts (GW). Adding the reactors already planned but not yet in construction, there are nearly 100 new reactors coming online between now and 2030. According to Askar Batyrbayev, managing director of marketing and sales at Kazatomprom (LSE: KAP), the world’s largest uranium producer that is controlled by the Kazakh government, “By 2030, the market will need new production equivalent to two additional Kazatomproms to fill the expected gap between supply and demand. Hence, the fundamentals of uranium look bullish.”
Supply woes and COVID-19
Prior to the Fukushima disaster, the spot price for uranium was around US$78/lb of U3O8, but fell below US$30/lb, where it remained until 2019. With strained supply due to coronavirus shutdowns, solid demand on the horizon and the spot price reaching US$33/lb by early-August 2020 (increasing more than 30% since the beginning of the year), the sentiment is that the market is finally coming back, even if cautious investors feel they have heard that story several times over the last years. “Many believed 2013 and then 2015 would be comeback years and they were disappointed when the anticipated rise did not take place,” said Chris Frostad, president and CEO of Purepoint Uranium Group (TSXV: PTU), a junior company exploring the Athabasca basin’s Patterson uranium district. “At this point, the uranium market is suffering from investor fatigue but over the past few months we have seen more indications that uranium supply levels are reaching the tipping point,” he added.
“Uranium is unique in that the price of the material that goes into the nuclear fuel cycle is actually lower than the cost of production, an imbalance that has continued for a decade and which is unsustainable in every thinkable way,” noted Roger Lemaitre, president and CEO of UEX Corporation (TSE: UEX), another player active in Saskatchewan. “Nuclear utilities seem to take the view that the world is awash with endless amounts of very cheap uranium,” he added, highlighting the fact that the supply scenario has suffered major disruptions in recent years, COVID-19 being the last one of them.
As the spot uranium price touched bottom at US$17/lb levels in late 2016, the world’s major producers realized they would be better off curtailing their own production and buying, if needed, uranium on the spot market to fulfill supply obligations of their long-term contracts with clients. “We understood that we needed to be much more market-centric,” related Askar Batyrbayev of Kazatomprom. Toward the end of 2017, the state-owned Kazakh producer announced a 20% reduction in its uranium production for the period 2018-2020, a measure now extended to 2021 and that amounts to about a 6,600 metric ton per year (mt/y) reduction in supply. Also in November 2017, Cameco (TSE: CCO) indefinitely suspended production at the McArthur River mine in Canada due to weak uranium prices, taking another 8,200 mt of annual production off the market as well.
Then came COVID-19 and the concerns about health and safety in camp locations with hundreds of workers that prompted further suspensions. In March 2020, again Cameco decided to put its 50%-owned Cigar Lake operation in care and maintenance. Cigar Lake had produced around 18 million pounds (8,200 mt) of uranium in 2019 (100% basis). In his presentation of Cameco’s Q1 2020 results to investors, president and CEO Tim Gitzel insisted on the need to keep the company’s best assets for more auspicious uranium cycles: “We have become reliant on market purchases of uranium to fulfill our delivery commitments, but that is a deliberate choice,” he declared, adding: “As prices rise, we believe [that our strategy will] allow us to layer in new long-term contracts at prices that recognize the value of our Tier 1 assets.”
Indeed, it will be the stability of long term contracts that will set the pace of the new uranium cycle, according to Frostad of Purepoint Uranium Group: “While the market watches the spot price carefully, a variation in long-term prices is a better indication. Only when we see utilities committing to long-term contracts rather than buying on the open spot market will we know we are coming out of the bottom of the cycle.”
So, is this time for real? Uranium may have been overshadowed by gold’s phenomenal bull run this year but, unlike gold, which is driven by speculation, uranium fundamentals rest primarily on demand for its power applications. In this respect, market dynamics are already offering interesting developments with increasing demand and decreasing production indicating that uranium is positioning itself as a commodity to follow in the years to come.