National Bank National Bank Financial analyst Mohamed Sidib is constructive on both the uranium market and prices going forward, seeing the chemical “powering the energy revolution.”
“The renewed global focus on nuclear energy as a key source of low carbon power has pushed the demand for nuclear energy and propelled the uranium market back into focus,” he said. “This, coupled with rising geopolitical tensions affecting supply security and an underinvestment in new mines and projects since the Fukushima incident has led to a tight market, pushing uranium prices higher. With demand expected to continue to grow as the number of reactors under construction increases, we expect prices to remain higher for longer to incentivize the right supply response.”
In a research report released Wednesday, Mr. Sidib said demand is largely supported by new reactor builds “dominated by China and India and elevated uncovered uranium requirements.” However, he thinks the primary supply will remain “tight” in the near-term, “driven by geopolitical tensions and [a] lack of investment in exploration/development.”
“Uranium supply is heavily concentrated geographically and by companies with Kazakhstan, Canada and Australia representing 69 per cent of total 2023 primary production of 143 million pounds,” he said. “Over the past decade, primary supply has not been able to meet the total uranium demand from reactors driven by a decrease in reinvestment into exploration, brownfield and greenfield projects, as well as production curtailments, following the Fukushima accident in 2011 which pushed countries to rethink their nuclear strategies. This was further exacerbated by geopolitical events such as the Russia-Ukraine conflict and the Niger military coup which impacted overall supply. Uranium supply remains tight near term with no new major projects expected to come online until later in the decade, but that could still be impacted by permitting and financing issues. We expect uranium production to continue to not be able to meet total uranium demand in the near term, with the secondary supplies expected to continue to fill the gap but not for too long given energy security concerns. All eyes will be on greenfield projects that will be key in closing the supply gap starting in 2029. We forecast a CAGR [compound annual growth rate] of 6 per cent to reach production of 232 million pounds by 2030, primarily driven by new production out of Canada and Kazakhstan.”
With that expectations of prices remaining “higher for longer to incentivize supply growth that will be needed to fill the deficit,” Mr. Sidib thinks there’s “plenty of upside left” in uranium-related equities. He initiated coverage of “a proven leader” as well as two “rising stars in the space.”
Calling it “a fully integrated player with the uranium/nuclear space,” he gave Cameco Corp.) with an “outperform” rating and $74 target. The average on the Street is $74.90, according to LSEG data.
“We use a 1.7 times NAV [net asset value] target multiple and an 18 times EV/EBITDA 2025 vs. the company’s current valuation of 1.35 times and 13 times, respectively,” he said. “Our target multiples represent a premium to our coverage universe given Cameco’s position as one of the largest uranium producers and refiners in the world and a key player in the nuclear fuel cycle through its fuel services business and Westinghouse ownership.”
“We believe that Cameco is well-positioned in the uranium market to capture meaningful value in the nuclear fuel cycle. The company maintains a disciplined approach to operations at every cycle of its involvement in the nuclear fuel cycle and provides investors with upside to the overall positive outlook in the uranium market, while limiting downside. It often faces criticism for its overly cautious approach to contracting given the lower leverage provided to the uranium spot price; however, this strategy does provide investors good visibility into earnings and profitability over a meaningful period of time. When looking at the last three years, CCO has outperformed peers and uranium spot prices, despite its lower leverage profile. We would also note that 57 per cent of the company’s total reserves of 485 million pounds of U3O8 remain uncontracted, providing exposure to potentially higher spot prices. We expect the company could rerate towards our target multiple as it enters new contracts at higher prices, return to its tier-one cost structure within its portfolio and advance organic growth opportunities within its existing portfolio.”
Touting the potential from its Arrow depot in Saskatchewan, Mr. Sidib started coverage of NexGen Energy Ltd. with an “outperform” rating and $11 target. The average is $13.26.