Resource Maven. Resource Maven News Adding Uranium Insight I commented on uranium just two weeks ago, but I uncovered some important new information this week. It is important enough to warrant not just this update, but quite likely some uranium recommendations in the near future. In my June 7th note, I went through how production cuts from Kazatomprom and Cameco are turning the uranium tide. The spot price has strengthened – in fits and starts, but strengthened – since those production cuts started in early 2017. That’s interesting but I have said for two years now that I’m waiting for utilities to start signing new long-term supply contracts before I will believe we’re looking at a new uranium bull market. That hasn’t happened yet – but a drastic change in the spot market suggests new contracts are around the corner. The spot market has been overflowing for years. The world was making too much uranium even before the Fukushima disaster prompted Japan to shut down all its reactors, which sent unneeded Japanese uranium into a spot market already filled to the brim. The spot price reacted appropriately, sliding consistently for five years…until those major producers decided to do something about it. Kazatomprom was first to act, cutting output by 10% in early 2017. Other producers followed suit: Cameco suspended McArthur River, the world’s largest uranium mine; Paladin cancelled the expansion and then shuttered the aged Langer Heinrich mine; Kazatomprom announced two additional production cuts bigger than the first. Collectively, since 2016 producers have erased or are in the process of erasing more than 30 million lbs. of annual production. Just Cameco shutting down McArthur River is the equivalent of Saudi Arabia halting oil production. Both produce 13% of global supply. And the market did take note on the McArthur news, but a small gain in the spot price soon subsided. Why should prices stay up in the face of so much spot supply? It would be a fair question…except those supplies have now disappeared.
4
The thing is, it’s not just producers cutting production. The biggest news in the uranium spot space – and the news that the market hasn’t noticed yet – is that Cameco plans to buy 10 million lbs. of U3O8 in the spot market this year. This is the factor I missed two weeks ago and it is huge. Cameco buying 10 million lbs. of U3O8 in the spot market this year will boost spot demand by 50%. The world’s second-largest uranium producer will produce 17 to 18 million lbs. this year, but it is contracted to supply 37 million lbs. The company can pull some from their inventory, on the order of 10 million lbs., but that still leaves it needing 10 million lbs. this year. If the spot market survives that, things only get more intense. By 2019 Cameco will have drawn its inventories as low as it wants to go, which means it will have to fill its entire production gap with spot purchases – on the order of 20 million lbs. That’s the entirety of the spot market today. The whole thing. Spot volumes are quoted as roughly 40 million lbs. a year but many pounds get bought and sold several times, so the rule of thumb is to take 50% of the buying as final. Cameco buying 10 million lbs. of uranium this year will boost spot demand by 50%. The spot market can’t handle that. It especially can’t handle it given that others are also stealing spot supplies. I’m talking about the several large new funds being established to hold physical uranium. The rationale is twofold. First, such funds give investors the chance to own direct exposure to a rising uranium price. Second, by holding physical uranium these funds will remove even more supply from the spot market, helping to bring forward the very bull market on which they are based. The biggest such fund is Yellow Cake, which is currently raising $200 million. Yellow Cake has already secured a deal to buy 25% of Kazatomprom’s production, which will lock away another 5% of global annual production. Utilities have been relying on the spot market to buy the uranium they aren’t getting through contracts. But nuclear reactors can’t run out of fuel or they melt down. So as soon as it becomes clear that the spot market is running out, utilities will rush to ink new contracts. And those contracts will not come at current spot prices. There’s no point in a producer agreeing to sell uranium at prices that guarantee it will run at a loss. And analysts estimate that producers need, on average, a uranium price of US$55 per lb. – more than double today’s spot price. So contract prices will be significantly stronger than current spot. Adding to the bullish vibe, producers will probably even demand that contract pricing is somehow linked to the spot price so they retain exposure to a market expected to shoot skyward. I kept saying I needed to see new contracts. However, this new information looks very likely the precursor to exactly that. And of course it’s always the goal to act before the market, which is why this situation – where Cameco’s huge spot market move hasn’t yet been noticed – is so interesting and deserving of attention. I haven’t spent enough time looking at uranium lately to be ready with a new pick. I am still very content to own NexGen Energy (TSX: NXE) and Uranium Energy (NYSE: UEC), but in light of this new information I’m now on the hunt for more. Stay tuned.