Uranium has endured a brutal decade-long bear market exacerbated by numerous calls for an imminent price rise over the last couple of years – and we’re still waiting for that to happen. The early stages of a bull market are often inconspicuous as the market gradually rises despite negative sentiment – it climbs the proverbial wall of worry. Are we starting to climb? The last nine months suggest that we are.
Nuclear power generation increased again last year – it has risen steadily for the past five years. Despite this, low uranium prices forced production cuts that have accelerated since 2016. They started with relatively small producers in the US and elsewhere, but what really caught the market’s attention was the decision, announced in December 2017, by the world’s two largest producers, KazAtomProm and Cameco, to cut mine production. Cameco has subsequently announced that its McArthur River Mine, one of the highest-grade mines in the world, will remain closed until uranium prices improve to the extent that mining this quality asset is less akin to flushing wads of money down the drain. Mined uranium production has fallen 16% in the last two years, a decline that is estimated to accelerate in 2019. And let’s not forget that two thirds of the world’s uranium comes from countries that have a much closer relationship to Russia than the US, so the more sabre-rattling that goes on at a political level, the greater the risk of a supply disruption.
That’s supply – but what about demand? After taking forever to get reactors approved for restart on the completion of upgrades designed to increase their resistance to tsunamis and earthquakes, Japan has restarted 5 reactors in 2018, bringing to 9 the number of reactors operating there. Another 2 are expected to come back into service later this year. Turning to China: so far in August alone, the world’s first AP-1000 reactor reached full power, a second AP-1000 reached first criticality (sustained a chain reaction for the first time) and fuel rods were loaded into a third unit. These are the same model of reactors that are being built at Vogtle in the US. China is going gangbusters on nuclear, as well as with other clean power sources, driven by the crisis of overwhelming air and water pollution.
New reactor build continues to outpace closures. The 3.4 Gigawatts (GW) of power brought on-stream with the commissioning of four reactors outpaced the loss of 3.0 GW of capacity from the closure of five older, smaller and generally single-unit nuclear power plants in 2017. New York, Illinois and New Jersey, however, have extended the lives of some reactors that were targeted for closure, by adopting legislation that recognizes the carbon-free, baseload nature of nuclear – the fact that these plants operate 24/7 irrespective of weather conditions.
The Uranium Market
Uranium reached a low of $18.50 in late 2016 and has been range-bound between $20 and $25 per pound (/lb) until the last couple of weeks. Not even the announcement of the KazAtomProm – Cameco production cuts propelled the price out of this range. Positive sentiment from the production cuts was overshadowed by concern that Japan’s inventory of uranium fuel, that has been delivered to idled reactors, could be dumped on the market.
Enter the investment funds – and the appearance of risk-takers that can move very quickly – should get the attention of the utilities who have been lulled into a sense of false security by the low uranium prices. Many utilities, which are the end-buyers of uranium for their nuclear plants – some of the most conservative groups out there – have let their long-term supply contracts expire. They seem to feel that they can buy cheap uranium on the spot market, so why bother entering into long-term supply contracts at fixed (higher) price? This attitude is absolutely shocking since uranium represents only a few percent of the cost of operating a reactor, whereas without fuel, 100% of their power generation ceases.
A new fund had a successful IPO in London, raising $200 million from institutions and ordinary investors like you and me. Appropriately named, Yellowcake PLC, raised the funds with the express purpose of buying and holding the physical commodity to be sold into the market at a higher price. Yellowcake bought 8.1Mlbs, followed by the purchase of a further 0.35Mlbs a few weeks ago. Tribeca, a fund out of Australia, intends to raise $100 million for the same purpose. Toronto-based Uranium Participation Corp., which has been in that business for years, raised $23 million in May 2018 and purchased 0.6Mlbs of uranium with the proceeds.
Finally, KazAtomProm, which produces over 40% of the world’s uranium, and which has shown utter contempt for the markets until their surprise production cutback in December 2017, is now preparing for a listing – its IPO is expected before year-end. Changes have been made to the board to ensure that the company focuses on profitability for its shareholders, going forward. The person who is tipped to be chairman of the board held management positions with BHP Billiton.
Despite the prevailing sentiment, the uranium price has started to move up: the saw-tooth price pattern is tracing out higher highs, and each time the price pulls back, it does so to level that is slightly higher than the last low. Is this not the definition of a rising price-channel?