Uranium market starts to fizz

"There is a basket of good news," said Grant Isaac, senior vice president and chief financial officer with Canadian producer Cameco."We have the possibility of a readily durable demand story in nuclear."In the past, we really needed government and public policy to take the lead on nuclear, but governments are shy of public acceptance. The difference this time is net zero, which is driving electron accountability. Questions are being asked by the biggest companies in the world about where their electrons come from."The global invisible enemy we all have to worry about isn't radiation anymore; it's carbon loading," Isaac said during a webinar briefing.Nuclear power provides 20% of electricity in the USA and the change in administration in the White House earlier this year typifies the shift in energy rhetoric.The administration of president Joe Biden supports taxpayer subsidies to keep nuclear power plants from closing as a step towards the US electricity sector becoming emissions free by 2035."I spoke with energy secretary Jennifer Granholm last week and she is very supportive of nuclear power," said Energy Fuels president and CEO Mark Chalmers in May.Production tax credits may be included in Biden's multi-trillion-dollar infrastructure and jobs stimulus package to subsidise the nation's 90 nuclear reactors in a similar way as wind and solar power plants have obtained tax rebates. "[Federal authorities] are stepping in to help struggling reactors. If they let reactors retire early, it would offset all the gains made by wind and solar," said Isaac.Ross McElvoy, president and CEO of Fission Uranium, told Mining Journal: "The results of [the US presidential] election were very favourable for the industry, which has had some effect on price. But it has a long way to go."Fission is working to complete a feasibility study on its near surface Triple R project in the Athabasca Basin in Saskatchewan, Canada.For Curtis Moore, VP marketing and corporate development at Energy Fuels, the logic is infallible. "There is a recognition that we will need to generate more electricity and nuclear is the best way to generate carbon free electricity. As nations around the world take climate change and carbon reduction more seriously, they can't deny nuclear is the best technology to do that," he told Mining Journal.Amir Adnani, president and CEO at Uranium Energy, believes the US government has now advanced a clear clean energy mandate."US leadership in a clean energy mandate is so important as it means nuclear is welcome. There is a pivot taking place in attitudes towards nuclear power," he told Mining Journal. "For first time in 48 years the government demonstrated bipartisan support for nuclear power. One of biggest themes in Washington and Ottawa is supply chain vulnerability."Cameco was very bullish during its March quarter conference call in May, despite its McArthur River/Key Lake and Cigar Lake operations being curtailed due to low prices and COVID-19 outbreaks, respectively."Globally, we see demand for both traditional and non-traditional uses of nuclear power growing as the increasing focus on electrification while phasing out carbon intensive sources of energy continues to take hold," said president and CEO, Tim Gitzel. "In Europe, we have seen nuclear move another step closer to being included in the EU sustainable finance taxonomy following a rigorous scientific assessment that concluded there are no scientific arguments supporting its exclusion."The outlook for uranium in the US was already looking sunnier under the Trump administration, albeit framed within a trade protectionism paradigm rather than climate change and decarbonisation (which it largely denied). Russia and Kazakhstan are suppliers to the US, which some view as a vulnerability for both power generation and military aspects given US aircraft carriers and submarines are powered by nuclear reactors. This rhetoric made an impact even though the US gets most of its uranium from North America, according to Energy Fuels, which says that since 2006, 85% of the US uranium supply has come from itself and Cameco.The change in outlook for nuclear energy is not just in the USA. Gitzel said both Russia and China were developing new nuclear reactors and nuclear was coming back into vogue in Japan. This added to the bullish global context. "The issue remains that, due to current oversupply and associated low market prices, very few participants are able or willing to begin investing to convert resources into reserves and ultimately into mines to keep the market in balance." The World Nuclear Association (WNA) says 54 new reactors are under construction around the world, 102 are planned, 325 proposed and 442 are in operation. In all, an estimated 160-180Mlb/y of uranium are required. But,the WNA observes there has been underinvestment in uranium exploration and mine development with expenditures falling 69% from $2.12 billion in 2014 to $663.7 million in 2016. Its upper demand scenario sees a doubling of uranium requirements within 15 years with a compound annual growth rate of 3.4% at a time when several mines are expected to close before the end of the decade due to resource depletion. "The issue remains that, due to current oversupply and associated low market prices, very few participants are able or willing to begin investing to convert resources into reserves and ultimately into mines to keep the market in balance," the WNA said in a report on global supply and demand scenarios between 2019 and 2040. "There continues to be a lack of long-term fixed-price contracts, which are needed to underpin new projects controlled by market-based companies."Strategic reserveDuring the Trump administration, the uranium industry sought to obtain support for the domestic uranium industry through tariffs and quotas under a section 262 petition filed in 2018 by Ur-Energy and Energy Fuels Resources, who contended that imports push US uranium production to the brink of collapse. They requested a quota requiring 25% of domestic uranium consumption to be met by US producers. Trump rejected this but backed the creation of a strategic uranium reserve. "We made a good case to at least preserve a piece of the market for domestic producers. Instead of implementing tariffs and quotas Trump created the inter-agency nuclear fuel working group to restore US leadership in nuclear fuel. The main takeaway was to create a strategic uranium reserve to supply utilities in the event of supply disruption," Energy Fuels' Curtis Moore told Mining Journal.The strategic reserve initiative was passed by Congress in December 2020 and signed by the president with $1.5 billion of funding to be appropriated over 10 years to buy uranium, with $75 million earmarked for 2021. Energy Fuels is looking to be one of the companies to benefit from this as the biggest uranium producer in the US. "We are ready to expand production in Utah, Wyoming and Texas. We have a number of projects on standby, idled capacity that we can start quicker and at a lower cost than others," said Moore.Anfield Energy believes the reserve will benefit those companies able to bring production to market quickly. "The uranium reserve is a catalyst for us as only those projects with a realistic short-term path to production, like Anfield, will be considered for a long-term sales contract with the government," said CEO Corey Dias. Anfield aims to bring its Charlie ISR [in-situ recovery] project in Wyoming into production within 24 months.Cameco's Isaac Grant, believes a focus on the creation of an uranium reserve could be misplaced, however. "The money allotted for uranium may be better spent keeping nuclear reactors alive. Once their demand is there, the [uranium] market will be shored up," he said. Investors tend to agree. "Make no mistake, nuclear is anticipated to be a shrinking industry in the US," said Adam Rodman, founder and chief investment officer at Segra Capital Management. Arthur Hyde, partner and portfolio manager at Segra Capital Management, said, "utilities with reactors which are due to close are not thinking about [uranium] contracting. If they can extend the reactor life to 20 years, they suddenly have to think about contracting."Incentive priceWhile the share prices of uranium companies have been rising as investors and management look forward to better days ahead, uranium prices are providing a reality check as they continue to languish around $30/lb, well below the incentive price many deem necessary to bring new production on stream. Current pricing is about half what most industry participants believe the minimum incentive price is. Indeed, Cameco mothballed its McArthur River/Key Lake operation in Saskatchewan in July 2018, due to low pricing. "Mining operations are not making money at the moment," said Fission's McElvoy. "Activity in public markets is a leading indicator on where the price is going because the demand is certainly there and supply is going to continue to be constrained by low prices. The spot price has increased but it has a long way to go to get meaningful production online," he said.The global average incentive price is given as $60/lb with regional variation such as $40-50/lb for projects in Canada's Athabasca Basin, $60-70/lb in the US and $80/lb in Africa. Low prices have seen companies mothball operations. "For anyone in the free world who is not state-owned, the free-market incentive price we all need is north of $50/lb to turn on idled capacity [which applies to Cameco and Energy Fuels] and north of $60/lb to build new capacity," said Energy Fuels' Moore.In its corporate presentation, Fission Uranium reports estimated operating costs for several mines in the Athabasca Basin ranging from $7.58/lb to $18.75/lb at McArthur River, where production is currently on hold. The company estimates its Triple R project in the Athabasca Basin will have a bottom quartile production cost of $7.18/lb.Thinning secondary marketHigher prices are expected to be just around the corner. With global uranium demand estimated at 160-180Mlb and production estimated at about 130Mlb, the secondary market has been filling the gap. "We are in a surplus disposal market which is about who happens to show up with material in a given week. Uranium tends to be incredibly range bound so US$31/lb is as rational as $25/lb," said Arthur Hyde, partner and portfolio manager at Segra Capital Management."We haven't seen normalised run-rate demand from industry. 2020 was the lowest amount of contracted uranium in the post-Fukushima years. We haven't had the demand to test the price sensitivity of the market," said Adam Rodman, founder and chief investment officer at Segra Capital Management.The uranium market has been weak since Fukushima and weakness has persisted due to doubts about how long the secondary market can fill the supply gap. The question uranium companies are asking is how long inventories will last before utilities need to plunge back into the market? "There is a big [supply] gap and it has been there for the several years. The size of inventories is the million-dollar question that no-one really knows the answer to," said Moore.Cameco said the uncovered requirements of power utilities are increasing, that is the amount of their demand not covered by long-term contracts. The company said 1.4Blb needs to be procured between 2021 and 2035 and by 2035 the annual outlook of uncovered requirements is 166Mlb. "I have optimism for the future. Demand is becoming more certain due to the electrification mega trend while the uranium supply is becoming less certain due to a lack of investment, shrinking secondary supply and trade policy issues. … Demand for uranium is rising at the same time that supply is becoming less certain. Utilities are not replacing under long term contracts what they consume annually," said Gitzel.Fission's McElvoy agrees. "Stockpiles are very limited so eventually we will see more pressure to get primary supply back online. Demand is probably 65-70% met by primary supply and 30% by secondary supply [inventories]. Fukushima disrupted the overall system and the contract basis for how utilities buy uranium fell out of kilter. They are working on historical contracts and not forming new ones. That is starting to change and there are pressures around the corner for a significant increase in the price of uranium," he said.Adnani also sees inventories shrinking and believes the Fukushima market disruption was compounded more recently by the potential for trade remedies under Trump. "We definitely consume more uranium than we mine and inventories are not enough to meet demand. We are looking at a 330Mlb deficit towards the end of the decade as you cannot build new mines at the flick of a switch. The section 232 process began within a year of the Trump presidency and the balance of his term was about whether the US would introduce trade sanctions or quotas. The US represents 25% of global demand and so this created uncertainty and kept utilities at bay from developing long-term contracts," he said.Nuclear power utilities tend to buy uranium on long-term contracts of around 10 years duration. With inventories tightening, uranium juniors anticipate the moment when utilities enter the market again and create a demand surge. "The uranium market has a sufficient supply deficit that we are close to the beginning of a new contracting cycle which will start to drive the price higher. At $30/lb, when big mines are shut, what supplier will commit to pricing at sub-incentive levels? When buyers start looking for higher volumes they will drive prices and commit to prices which allow miners to get the returns that meet their objectives," said Adnani.Isaac at Cameco believes the delay is because utilities don't see the supply situation as critical yet. "There is a critical mass of utilities who still don't see the urgency because they get several responses when they seek material. Utilities, as fuel buyers, are on the wrong side of the trade and they are willing to take the bet that supply will front run demand. They can take that bet because there is zero consequence if they are wrong. If they are wrong, they buy under a security of supply mandate. In the 2000s, this meant they ended-up buying uranium at $50/lb rather than in the teens," he said.While the market price languishes under incentive levels, investment in new capacity is not happening, and could lag any eventual price rise to incentive levels. Large investments and long-lead times have induced investment caution under the banner of capital discipline in other mining markets forecasting supply shortfalls and uranium may prove to be no different. The $60/lb incentive price may be a notional value that does not stimulate new investment. Copper producers, for example, talk of a $3.50/lb incentive price to stimulate new development or merger activity yet the market has sailed about 35% past that and producers are still sitting on their hands. Will the uranium spot price have to spike to $100/lb before new capacity is built? This last happened in 2007 and brought the long-term uranium price to $95/lb for several months in 2007-2008.Canadian companies with projects in the Athabasca Basin believe they are well-positioned to benefit from future price increases due to their higher grade and production cost advantage over projects to the south. "The US cannot ramp-up to meet anything like what they consume annually which is where countries such as Canada with huge uranium resources come into play. Canada is a favoured trading nation for the US with greater quantities of uranium and operations able to make a profit at lower cost," said Fission's McElvoy.Uranium companies become buyersFacing the prospect of prices having to double to reach the minimum incentive price to invest in new capacity, some uranium companies are benefiting from current prices and the expected future price run-up by buying uranium. Uranium Energy initiated a physical uranium programme buying 2.1Mlb at $30/lb to add flexibility to its intention to eventually restart production in the US, where it stopped production in 2013. "We recognised 15 years ago the shortage of US supply and focused on acquiring and developing US-based uranium projects. If it weren't for Fukushima we would be on our way as a growing producer," said Adnani. "With those setbacks we put production on hold and committed to growing our resource and asset base to be ahead of the curve in Texas and Wyoming when the market comes back. We have acquired uranium and are storing it which has created a pure play US uranium platform with permitted projects and warehoused uranium which can be utilised for marketing to US utilities and generating cash flow," he said.Investors see this as a positive, although unprecedented. Development. "It is a good investment for juniors. There is a disconnect in the market with very limited downside and significant upside. They can use that uranium as collateral when they go to finance their projects," said Michael Alkin, chief investment officer and Sachem Cover Partners. Rodman at Segra Capital Management agrees. "We are thrilled to have juniors use uranium as a cash alternative on their balance sheets with uranium at below the incentive price," said Adam Rodman, founder and chief investment officer at Segra Capital Management.Cameco has a different view and has voiced some concerns about juniors buying uranium during its March quarter results conference call. The company has bought uranium in the spot market to meet its contractual requirements following unforeseen production curtailments at its Cigar Lake operation due to COVID-19. "I can understand how advanced exploration companies took advantage of financings and were willing to buy forward, which took pressure off the spot curve," he said. "If [their buying] had of been focused on the front end it would have proved how thin the spot market is. Their buying supports the forward price of uranium as there won't be material coming in that doesn't have a home and so it creates a stronger floor in the future. But will those pounds come back into the market? That is a worry. It would be disappointing if [their purchases] simply came back into the market. They should dispose to an end user where it is never going to come back rather than to a trader who is just going to churn it," he said.Cameco is looking to maximise its exposure to a new price cycle and changed its sales model. In April, it added contracts for 9Mlb to its portfolio, pursuing a strategy with a 60:40 split between long-term contracts and short-term price exposure. "The market can go through fairly significant price transitions fairly rapidly so it is important to have exposure to the movements where you see a rapid transition in the price," said Isaac. "The price is insufficient at the moment so we are not anxious to lock in today's price [in long-term contracts]. The price mechanism is central right now, to get the pricing mechanism right to get exposure to an improving market," said Isaac.As the uranium market positions for another up-cycle, money is flowing into the uranium space, with market observers commenting that more than C$1 billion has been raised so far in 2021. Fission Uranium announced a C$30 million bought deal financing in May to fund the further development of its Triple R deposit in Saskatchewan and repay a credit facility. Fission aims to embark on a feasibility study this year on its Triple R project, with a view to commencing production of 13Mlb/y at the end of the decade. "There is a great increase in the sentiment in the sector which is allowing us to go forward," said McElvoy.Other recent raises include Denison Mines raising US$86.3 million to buy up to 2.5Mlb of uranium, Nexgen Energy raised C$150 million to advance its Rook I project in the Athabasca Basin, enCore Energy raised C$15 million to refurbish its Rosita plant in Texas, and Uranium Energy raised C$12 million.Denison Mines made a hostile bid to acquire the 10% of its Wheeler River project it doesn't own for C$41 million via the purchase of JCU from Overseas Uranium Resources Development. JCU holds interests in early-stage uranium assets in the Athabasca Basin including Wheeler River and a 31% interest in Cameco's Millennium project. Dennison tabled a bid after UEX bid C$12.5 million in April.Market evolutionUranium has also drawn interest from one of the most important financial firms in the precious metals space, Sprott. The Sprott group owns one of the most important physical gold exchange traded funds, provides debt financing and equity investments. Now, Sprott Asset Management has created the Sprott Physical Uranium Trust, an entity which is taking over Uranium Participation Corporation (UPC), the world's largest publicly traded investment vehicle providing investors exposure to physical uranium. At the end of March, UPC held 16.3Mlb U3O8 and other products with a market value of about C$665 million. "Sprott taking over UPC management has tremendous potential upside. Bringing in an experienced professional manager in the physical metals space will bring access to a broad base of investors," said Cameco's Gitzel. "Very active management from a fund could result in a situation where the spot market isn't five traders offering with one person with a bid to buy. We could see some balance which would create transparency in the spot price and remove the ability of intermediaries to move the market without making a transaction," said Cameco's Isaac.Investors see the entrance of Sprott has heralding a new age of price transparency, while the deployment of investment capital will put the cat among the utility pigeons. "Sprott coming in means there is an actor with a view on daily price discovery. The utilities don't have a birth right to pounds of uranium anymore and you have competition for pounds," said Michael Alkin, chief investment officer and Sachem Cover Partners.Rodman, of Segra Capital foresees large amounts of capital potentially entering the physical market. "Sprott is taking over UPC and converting it into to a unit trust structure dual-listed in Canada and the US. It will be the only game in town so how much capital will flow into it? There is enough institutional capital that has done the basic algebra to say that uranium prices won't stay here for the next several years, and now it has a direct market vehicle. This is an evolution in physical uranium purchasing and price discovery as it will buy uranium every time people invest in the trust," he said.

ABOUT

SOLUTIONS

LEGAL

SOCIAL

ENERGY MINERALS

Uranium market starts to fizz

Already have an account? Sign in here

MORE ON THIS TOPIC

FROM OUR PARTNERS

RESOURCE STOCKS

Forsys Metals' pipeline of catalysts to excite the market

RESOURCE STOCKS

The largest mineable measured uranium deposit in the USA

MOST POPULAR

MINERS

Anglo American shares tumble on planned production cuts

REGULATION

Peru reforms formalisation process following deadly attack

MINER'S RIGHT

Iron ore's unexpected boom rumbles on, defying experts

EXPLORATION & DEVELOPMENT

Ivanhoe quadrupling exploration budget for 2024

RESEARCH

Premium subscribers only

View more

Mining Journal Intelligence World Risk Report 2023 (feat. MineHutte ratings)

Mining Journal Intelligence Mining Equities Report 2023

Mining Journal Intelligence Global Leadership Report 2023: Social licence

Mining Journal Intelligence Project Pipeline Handbook 2023

THE ASPERMONT BRAND PORTFOLIO

Login

Not a Subscriber?

Subscribe Now