It’s been a while since OM last talked about Uranium in depth – over 2.5 years(!) – and with it closing in on becoming the largest position in the portfolio, what better time for an update!
Demand
The demand for uranium comes from one source – nuclear power plants, which generate ~10% of the world’s electricity, and show consistent and steadily increasing demand.
Since the Fukushima tsunami in 2011, the trend in the US & Europe had been towards closing nuclear power plants leading to a belief (and lots of press articles!) that nuclear was being phased out. Since OM started investing in uranium this has changed, with existing plants seeing extensions and projects being planned. The change has been driven by a recent focus on ‘clean energy’ (vs. ‘green’ energy) that values nuclear’s carbon-free, safe(!) and low cost provision of base power, coupled with the beginning of the development of small and advanced modular nuclear reactors.
While the Western world and press was focused on the decline of nuclear, the same was not true in Asia where countries, led by India and China, continued to plan and construct nuclear power plants.
Finally, nuclear utilities typically purchase uranium through primarily through long-term contacts and the cost of uranium is a small % of their total costs. The chart below shows the long-term contracting boom of the last cycle, with the recontracting phase expected to be begin in the next 18 months.
Supply Side
While demand for uranium has been a nice gentle incline, the attractiveness of the opportunity reflects that supply is constrained! Almost 2.5 years ago, OM discussed how the 2 largest miners – Cameco (through its Mcarthur River/Key Lake mine) and Kazataprom – both cut supply by a combined 20% in an economically rational attempt to help bring the market back towards balance.
The magnitude of these supply cuts has seen the Uranium market shift from being oversupplied to a supply deficit of ~20mn lbs (or 15% of global production) before COVID-19! COVID-19 had a major impact on uranium mining with Cameco closing its remaining flagship Cigar Lake mine (12% of primary uranium supply!), and Kazataprom having to reduce both its production targets (by 10mn lbs, or 8% of annual primary supply) and its 2020 wellfield development (which will reduce its 2021 production capacity). This led to fears of a potential supply shortfall of ~40mn lbs in 2020! The cutbacks also led to both Cameco (especially in Q2) and Kazatprom (beginning in late Q2) entering the spot market to fulfil existing contracts.
This short video from Purepoint Uranium shows the impact of the cuts.
Eagle-eyed readers will have noted (i) the importance of Kazataprom and Cameco (Cigar Lake & McArthur River) due to both their size and as the lowest cost producers and (ii) that almost half of the existing & idled production is uneconomic at today’s prices!
While Cigar Lake will start coming back online in September 2020, the market is expected to remain in significant deficit, which is exacerbated by major mines (Ranger in Australia & COMINAK in Niger, which are a combined >5% of primary supply) permanently closing at the start of 2021 and Kazataprom confirming low 2022 production levels (i.e. no attempt at trying to recover from 2020/21 production losses).
Why Now?
Earlier this year, before the impacts of COVID were fully felt, the World Nuclear Association published its biennial "Nuclear Fuel Report", and for the first time made the Expanded Summary available publicly. For those who don't follow the space, charts such as the below helped codify the supply gap.
However, even the WNA report was overshadowed by the impacts of COVID-19 - demand for nuclear power remained largely unchanged, while the impact on supply pulled everything forwards. The Uranium spot price jumped ~50% after Cameco started purchasing in the open market, and both Cameco & Kazataprom will be doing so in the second half. OM suspects Cameco is re-opening Cigar Lake, both due to the costs of keeping it in care & maintenance but also for security of supply (to meeting existing contracts) given the limited inventory in spot markets, and Kazataprom needing to buy.
- It’s long been claimed the secondary supply, or spot market traders, will make up the difference. With both Cameco & Kazataprom in the spot market during H2-20, we will find out.
- Idled supply will rush back into production though this is largely Cameco and Kazataprom. It reflects a belief that Kazataprom will return to its 2014-era behavior of maximizing supply, despite the firm's changes (no longer selling in spot market, IPO, etc) and statement/behavior (supply cuts and statement re. supply through 2022).
- Less uranium being required (i.e. following the WNA’s lower scenario for reactor requirements) due to fewer nuclear reactors being built or greater efficiency.
- Another Fukushima!