Sprott - Thoughts on Uranium
https://www.sprottglobal.com/thoughts/
There is only one topic being discussed amongst the mining crowd today: gold. And fair enough, since the yellow metal has shot up to start the New Year, busting through resistance levels and bringing miners along for the ride. Dont get me wrong I am very pleased to see gold gain. But rather than join that crowded discussion, I thought Id talk about the other commodity that has my attention this year: uranium. Lets start at the beginning: Between 2005 and 2007 uranium prices spiked. The move was sparked by a legitimate supply crunch, but the mining markets were hot and so a uranium price bubble was born. The spot price should never have reached such heights but contracts signed during that run-up still in effect today are helping to keep many producers alive, so yay for bubbles (more on those contracts later). The problem, of course, is that bubbles burst, and so mid-2007 the uranium price turned down of its own accord. The turn might have been just a correction, but then the global economic crisis hit and amplified the slide. By 2010 uranium had bottomed just below US$40 per lb. It started to creep back up, searching for a reasonable level after such an intense spike-and-correct. Thats when the Fukushima Daiichi disaster happened. The fallout from that has lasted years. For 3.5 years the price ebbed, bottoming at just US$27 per lb. in mid-2014. (It has gained 28% since then to sit near US$34.60 per lb. U3O8.) Fair enough. Nuclear reactors are discomforting to most and scary to many; nuclear disasters are terrifying. In the face of a meltdown, all of the logic that backs nuclear power is forgotten. And it simply takes time for such reactions to calm. But now they have. Today there are more reactors operating and in the pipeline (meaning under construction, planned, or proposed) than there were before Fukushima. Where are all these reactors coming from? China certainly leads the pack: if all of Chinas planned, proposed, and under construction reactors are built, that country alone would boost the global reactor count by 51%. But China actually only represents 36% of the global pipeline. Other biggies on the nuclear build list include India, South Korea, Russia, the UAE, and the US. To expand on just one of those, India just ratified a new nuclear liability law that addresses an issue that has been stymieing deals for new reactors. The old law put liability in the event of an accident on reactor vendors, rather than operators as is the norm, and that liability had deterred foreign vendors from signing up to sell reactors to India for decades. Now, with that rule changed, there should be a flood of new Indian reactor deals. That matters, because India is right behind China in terms of planned reactors over the next decade, with plans to construct about 60 reactors. Around the world, not every reactor in the pipeline will happen. However, those already under construction will most likely get finished and they on their own boosted uranium demand 8% last year and will probably lift it another 14% this year. As this nice chart from Raymond James shows, uranium demand is going to gap way above supply but the gap is not going to appear until 2020. So why am I so bullish today? Because of who uses uranium and how they secure it. The people who operate nuclear reactors dont mess around with running out of fuel, because that would cause a meltdown. And they cant just put U3O8 into their reactors they need fuel rods, which are made from U3O8 in a process that takes between a year and a year and a half. To provide a buffer, operators cover their uranium needs at least three years out and often as much as a decade out. Three years from now is 2019, right before the shortfall hits, according to Raymond James chart. Thats not all. Remember that 2007 price spike? When that was happening, operators raced to sign supply deals out of fear prices would stay sky high and they would go broke. Of course they were wrong; prices quickly reversed. Nevertheless, those deals were binding and many of them were ten-year terms. That means that whole raft of supply contracts will run out next year. As a result, nuclear operators are uncomfortably uncovered three years out. They havent signed new contracts to replace those about to expire because they have been able to pick up cheap uranium on the spot market for years. But time is running out for this easy come, easy go setup. Operators are looking at supply and demand data, at contract timelines and price predictions, and they know the market is set to tighten. New contracts are imminent. And those new contracts will support higher prices because producers will demand it. Why? Because they need higher prices if they want to build new mines. This great chart from David Sadowski at Raymond James shows all the advanced uranium assets around. Sadowskis team modeled each project and determined what uranium price would be needed to incent development by generating a baseline rate of return. The lower dashed line is the spot price; the upper line is the contract price (still buoyed by those 2007 ten-year contracts). The point is that almost no new production can be built economically at current prices. Producers know a supply gap is coming. They want to start building projects now, to be ready to pour new supply into that gap. The only thing they need are higher prices and utilities will agree to higher prices, because (1) they know new production is needed and (2) uranium represents a very small part of their operating costs, so higher prices are not that significant to them. The summary: we could expect the prices to rise soon, based on contract timing, lack of new supply, and rising demand. Uranium equities cannot wait. Even as the price of uranium has recovered some in the last 18 months, uranium stocks have continued to languish. I blame that on fatigue: even die-hard contrarian investors are tired of waiting for the uranium turnaround! As the uranium price starts to strengthen this year, we could expect uranium stocks to respond.