Scotia Capital analyst Ben Isaacson recently sat down with
Cameco Corp.’s (
TSX: T.CCO,
Stock Forum) chief financial officer Grant Isaac and asked him to address five key questions facing the uranium market.
Implications
Mr. Isaac addressed a number of important questions that Scotia Capital believes are on the minds of investors, including the timing of when utilities will return to the market, Japanese and Chinese uranium inventories, the Cigar Lake ramp, and whether Russia will continue down-blending HEU tonnes.
While Japanese restarts remain a major overhang/catalyst for the industry, Cameco’s CFO believes the most important demand driver is when utilities begin to restock, as most only have enough strategic inventories to last until 2015.
Additionally the market is unlikely to see HEU lbs still hit the market, as Russia is focused on the development of new mines.
As for Cameo, Cigar Lake continues to be on track for a first quarter 2014 start-up, with milling slated for the second quarter of 2014. However, we would not be surprised to see this pushed back slightly due to mill challenges (Scotia’s view, not Cameco’s).
Scotia’s uranium sector coverage universe
Cameco Corp. (
TSX: T.CCO,
Stock Forum), which traded this week at $24.41 is rated sector outperform with a one year target of $27.
Denison Mines Inc. (
TSX: T.DML,
Stock Forum), which traded this week at $1.52, is rated as a focus stock with a one year target price of $1.80.
Paladin Energy Ltd. (
TSX: T.PDN,
Stock Forum) is rated sector perform with a one-year target of 70 cents.
How large are Japanese inventories and will they hit the market?
Japan holds about 100 million pounds of inventory. Prior to Fukushima, Japanese utilities consumed an average of 20 million pounds of U3O8 per year, or about 500,000 pounds per reactor. In addition to run-rate requirements, Japanese utilities also maintained strategic inventories equivalent to three years of annual consumption or 60 million pounds.
Following the Fukushima accident, Japanese utilities have refused to officially disclose their uranium inventories; however, Cameco estimates that these utilities no hold about five years of inventory or 100 million pounds of U3O8.
Japan could face hurdles selling uranium. Given expectations Japan will eventually restart most of its reactors, we believe it is unlikely it would choose to sell its inventory on the term-market, which typically consists of long-term, large volume contracts.
Instead, investors have been concerned that Japan may look to sell small quantities on the spot market, which may ease pressure on the otherwise tightening supply/demand balance, particularly in light of the expired HEU agreement.
However, Cameco indicated that many producers have existing supply contracts with Japan. These contracts have strict clauses in place limiting the use of uranium exclusively for power generation. Accordingly, the resale of a sizeable quantity of purchased pounds could result in penalties or cancellation of existing contracts.
Can Russia continue to sell HEU into the market?
Technically yes, but unlikely. Although the HEU agreement with the U.S. expired at the end of 2013, Russia continues to hold nearly 1.54 million pounds of HEU in stockpiles ( or 20 million to 30 million pounds of U3O8). However, Cameco believes it is unlikely that these pounds will hit the market. First, before HEU can be used in reactors, it must be reprocessed into lower enriched uranium (LEU), through a process called down-blending. However, the cost of down-blending is currently significantly higher that primary production.
By drawing pounds out of the HEU program, Russia prevented resources from being being allocated to develop primary production. It’s clear that the ARMZ acquisition of Uranium One indicates Russia’s intention to develop its production capabilities, as opposed to resorting to secondary supplies.
When will utilities begin restocking?
Utilities typically pre-purchase uranium. Utilities have typically strategically built inventories in anticipation of future consumption by buying pounds up to four to five years before they will actually need them.
Spot prices move lower on light volumes. Following the Fukushima disaster, most utilities stopped purchasing uranium on spot markets, in anticipation of further price declines. More importantly, given their tendancy to purchase volumes in advance, most utilities have enough strategic inventories to cover their requirements until 2015. The spot market has been marked by relatively small transactions at declining prices over the past two years.
Uncovered demand increases beyond 2015: As near-term inventories are consumed, Cameco expects utilities will once again return to the market their future needs.
How much uranium does China Possess?
The million dollar question. Chinese utilities and stage agencies have been reluctant to disclose the level of inventories held under fears that revealing the total could impact global market prices. Looking ahead, Cameco estimates that China will have as many as 73 operable nuclear reactors in place by 2022, up from about 18 today. If we assume China will once again enter the market five years before it requires the uranium, it’s possible to see a demand surge in the next couple of years.
Is Cigar Lake on track?
Technically challenging. In September 2013, Cameco announced that production at Cigar Lake would be delayed to the first quarter of 2014, and milling of Cigar Lake ore would not begin until the second quarter of 2014. Jet boring is currently underway as commissioning at the mine remains on track.
However in December, AREVA, which manages the McClean Lake mill, reported that work on the required mill modifications was expected not to be completed by the end of the second quarter of 2014.
“Our read on this is that the market should not be surprised if Cigar Lake is pushed back on or two quarters,'' Isaacson said in his report. "To be clear, this is our own view, and not that of Cameco’s CFO," he said. " We also think bringing Cigar Lake too soon could further depress the spot market, which is in no producer’s interest."