home Production, U Cameco Corp. takes another hit, but production cuts positive for uranium market

Cameco Corp. takes another hit, but production cuts positive for uranium market

The patience of Cameco Corp. shareholders is being testing yet again, as the Saskatchewan-based uranium producer’s latest round of quarterly earnings fell short of expectations, the company cut its dividend, and now it has decided to temporarily suspend work at two operations.
The news sent Cameo shares higher, as the production cut is expected to be beneficial to a global uranium market that is widely forecast to be oversupplied by approximately 20 million pounds in 2018.

“This is the type of supply side shock that is positive for the market, but negative for Cameco in the short term,” said Rob Chang, an analyst at Cantor Fitzgerald.

Cameco’s Toronto-listed shares rose more than two per cent, or 25 cents, to $11.75 in morning trading on Thursday. The stock is down more than 12 per cent so far in 2017.

Suspending production at the flagship McArthur River mining and Key Lake milling operations in northern Saskatchewan for 10 months may not be well-received by the market, as the 80 per cent cut to Cameco’s annual dividend (to eight cents per share from 40 cents) came as a big disappointment. However, the removal of more than 13 million pounds of uranium from the company’s forecast production for 2018, will serve to better balance the market.

“This should place positive price pressure on spot uranium prices,” Chang told clients. “We believe this type of supply shock news is very positive for the market.”

Greg Barnes at TD Securities believes the decision to shutter these operations will likely take the entire uranium industry by surprise.

“As one of the lower cost operations on the cost curve, it would not normally be seen as a ’swing’ producer,” the analyst said, noting that the closure should reduce 2018 uranium mine supply by approximately 15 million pounds.

“And that may be enough to shock some utilities out of their complacency towards the market,” Barnes said in a research note.

While he doesn’t expect Cameco’s actions alone will re-balance the uranium market, it will nonetheless be much tighter.
Factoring in the production curtailment, the analyst estimates that the global uranium market will be in surplus by approximately five million pounds next year. That assumes the 10 per cent production cut (equivalent to about 5.2 million pounds) announced by Kazatomprom in January, is sustained into 2018.

“With the continued state of oversupply in the uranium market and no expectation of change on the immediate horizon, it does not make economic sense for us to continue producing at McArthur River and Key Lake when we are holding a large inventory, or paying dividends out of proportion with our earnings,” said Tim Gitzel, Cameco’s chief executive, said in a statement.

Barnes expects to see upward pressure on uranium prices in the coming days, but cautioned that any sustained gains will likely require supply cuts from other producers. If that doesn’t happen, the market could snap back into significant surpluses in 2019.

The decision by Kazatomprom, Kazakhstan’s state-owned uranium giant, to curb supply earlier this year, triggered a sharp rally in prices for the commodity. However, the move higher didn’t last because the production cut was not sufficient to rebalance the market. Other producers also failed to follow with supply cuts of their own – until now.

That event contrasted sharply with mine floods at Cameco operations in 2003 and 2006.
The collapse of a tunnel at the company’s McArthur River mine in 2003 was arguably the event that led to a uranium price rally that eventually saw prices hit almost US$140 per pound.

However, the flooding of the Cigar Lake project in April 2006 and again in October 2006 occurred when the uranium market was already starting to tighten. Barnes noted that China had emerged as a important player in terms of demand, following a 15-year price slump.

Source: Financial Post

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