Uranium Bulls: The Queue Starts Here

Envelopment of the globe by COVID-19 has been swift, and unforgiving. Most markets, especially commodity markets (save gold), are beset by demand destruction never seen in modern times. The workings of the global nuclear energy market do allow such respite for the uranium market, higher prices ensue.

The 447 global active nuclear reactors (99 reactors or 40% in the USA, providing 20% of the USA energy needs) require their 140 million lbs. of U308 uranium per annum. New reactors planned in China, India, UAE and Russia will be the thumb on the scale demand-wise. COVID-19 has led to the closure of critical uranium mines, with more announcements expected. The near term drivers of spot (out to 1 year) uranium prices will likely be supply-driven. Uranium mines are typically remote, fly-in affairs with workers on monthly cycles in camps. Not ideal for social distancing, as you might guess. Cameco, Canada’s largest producer, and operator of the only operating uranium mine in Canada, Cigar Lake (18mm lbs/yr) is currently closed. There are only 40 operating uranium mines in the world.

U3O8 uranium currently trades at $32.25/lb. down 76% from the 2007 high of $136/lb., but up smartly from the high to mid $20’s where it languished for years. The entire uranium ecosystem is worth < US$10 billion, down from a peak of US$130 billion.

The uranium market has been in a funk ever since the 2011 Fukushima disaster in Japan. Fukushima is in the Tōhoku region of Japan, a couple of hundred kilometers north of Tokyo. It has been reeling not just from the earthquake and tsunami, but from the clean-up of the nuclear plant site. Japan used to get 40% of its energy from nuclear power, pre-Fukushima. Few Japanese nuclear plants have come back on-line in the interim, with LNG and coal providing the bridge fuel. The country with the highest % of power produced from nuclear power is France at > 70%. Globally, nuclear power is a stable 10% of the global energy mix.

The Uranium Supply Chain

The uranium supply chain web is complex and secretive. JV’s, off-take agreements and bi-lateral contracts. There is no futures market for uranium. Data on reserves is scant and dated, but all prognosticators see inventory levels at both the producer and utility level as relatively low and headed lower. EIA data from end of 2018 saw utility reserves at 110mm lbs., about 27 months' supply. They are assumed to be < 100mm now, hence inside of 24 months. 1/3 of the nuclear plants uranium needs are replaced on an 18 month cycle. Plants only close for scheduled maintenance, otherwise it is a 24/7/365 day commitment. Producer inventories are lower than historical levels; Cameco used to run 24mm lbs. before the McArthur River mine was closed and is now at 6 (2-3mm lbs. shy of their target). Barring the ability to negate some contracted volume via the enforcement of Force Majeure clauses in individual contracts (due to COVID-19),Cameco is expected to be a buyer of uranium in the spot market through 2020.

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