Why KazAtomProm matters to NexGen investors Previously on this board I have noted that KazAtomProm, the state owned Uranium company of Kazakhstan has established a trading arm in Switzerland that will be fully operational in Q3. Several commentators have argued that this will be the catalyst that will spark the Uranium bull market so I looked into this in more detail to see why that might or might not be the case.
One of the peculiarities of the Uranium Business is the large difference between the spot price of the commodity and the term or contract price. The average June spot price was $20.29 while the average June long term price was $32.83....a $12.54 per pound difference. Numbers are from the Cameco website. Mr Rizvi of KazAtomProm has stated the reason for this. He says "The problem is the fact that we are not buying and selling material". In other words the spot market is very thinly traded. Apart from UPC and a few others there are few companies that buy Uranium at low prices, store it and sell it into a future market. So what effect will the new trading arm of KazAtomProm have. It is clearly in the best interests of the Kazakh government (and Vladimirf Putin) to have much higher Uranium prices. Up until now the Kazakhs have sold into the spot market primarily...but there are few buyers so the price is forced lower.
All that changes dramatically with KazAtomProm. Firstly they have the financial resources to stockpile Uranium to sell it in the future. That means there will be (a) less Uranium coming into the spot market and (b) a large scale buyer to take up what is sold there by others at currently less than the cost of production.
What that will do is create scarcity. Utilities will no longer be able to top up their reserves on the spot market or wait it out. They will be forced to buy it at much higher prices on spot OR enter into long term contract because the price difference between spot and term will become much closer.
Since the Kazakhs and Russians control 60% of world Uranium production they are easily able to manipulate this market to their advantage.There is no advantage to them in producing Uranium and selling it for $20/lb.
So let's look at the timing of all this. It is no coincidence that KazAtomProm is being listed in London in 2018. Ahead of that an increase in the price of Uranium would be very beneficial to their IPO. Moving the spot price closer to the term price will add billions to the IPO valuation and therefore billions to the coffers of their owner...the Kazakh Government.
So let's say for arguments sake that KazAtomProm dries up the spot market supply. Utilities, whose uncovered requirements are increasing daily, will have no other option but to buy on contract. There will be no spot Uranium to buy.
So the fall back option for fuel buyers disappears. No miner of course is going to write term contracts for $32/lb when it costs $70/lb to produce once Capex is included. They will write them for $70, $80, $90 or more...or the utilities will have no supply and their reactors WILL shutdown. As a former reactor operator I can attest to the fact that no uranium means no electricity.
So here is how I see it affecting our NexGen investment. Of course we do not have a mine and are not selling Uranium yet.but we do have a very strategic resource that appears to be profitable at U prices of $50/lb or thereabouts and that resource is growing.
Western Utilities notably the French and US will want to do business with stable operators in stable mining jurisdictions. Areva for example has mostly pulled out of Niger due to political unrest...France had to send in troops as I recall. Saskatchewan is a very stable and mining friendly region.
So the contracts that NexGen will write will be much much higher than the current spot price making this Company a very lucratice investment once it goes into production in a few years time.
Long term prices of most commodities are only marginally above the cost of storage. For Uranium that cost is about 25c/lb...not $12.54/lb. The Kazakhs and the Russians have many reasons to force the price of Uranium up. Its is in the financial interests of KazAtomProm and the Kazakh Government and it is in the political interests of Russia and nations under their influence. They not only have the financial clout to make this happen but also the political will to do it....an unstoppable combination.
So the significance of this trading arm should not be underestimated and KazAtomProm is going to bring this strategy to the market in Q3. They will force the gap between spot and term to close rapidly which in turn will force buyers into long term contracts at much higher prices.
As in previous bull markets all you need is a catalyst. Last time it was the problems with Cigar Lake flooding twice. This time it will be the absence of ANY mines coming on line and the supply destruction that has occurred in recent years.
With the large number of reactoirs coming on line, Japan restarting its fleet and the sheer size of new reactors the demand is going to outstrip supply and KazAtomProm will make very sure that it and their financial backers...the Russians are going to make a great deal of money.
If NexGen can pull off getting a mine into production by 2025 that will be right at the peak of contracting prices. Commodities always spectacularly overshoot the median price of production. Last time it hit $132/lb. This time it will be over $200/lb or 4 times the PEA estimate for NexGen profitability.
Do you think the share price might move up a tad?
To quote Mr. Rick Rule of you are not a contrarian in this market you will be a victim of it.
The most hated commodity in the world right now is Uranium and I cannot think of a better reason to buy it.
While all Uranium stocks will benefit, NexGen due to the size and quality of their assets will do extraordinarliy well.
Malcolm