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Uranium’s Time is Now!

Fundamentals Signal a Looming Spike in the Price of Uranium

Exclusive to Sightline|U3O8 – Analysts and miners alike are predicting a smooth and steady comeback in uranium prices over the next 12-36 months… a prudent and conservative outlook.  The reality, however, is that uranium prices have never moved quietly or slowly.

After sitting at a price of approximately $10/lb for 20 years, the spot price of uranium took off in January 2003 topping out at $136.00/lb in June of 2007 and delivering an average return over that time period of 5% PER MONTH!  Over the following 12 months, the price toppled by 50% and ended 2008 at just over $50.00/lb.

Again, near the end of 2010, uranium took off running from $45.00/lb to $73.00/lb in just 6 months only to be halted by the shutdown of Japan’s nuclear reactor fleet.

As the $20 spot price of uranium now languishes at 13-year lows, investors are watching it like a ticking time bomb, waiting for its next explosive move.

That move may come sooner than expected as two events come together to ignite the next bull uranium market:

  1. While Japan shut down over 10% of the world’s nuclear power generation capacity in 2011, other countries did not slow down their nuclear expansion. As of 2017, the world has replaced Japan’s lost capacity.  Not only is the current nuclear fleet generating as much electricity as it did prior to the Fukushima meltdown but more reactors are powering up at an increasing pace.
  2. In response to the low prices, the world’s major uranium miners have finally reduced the production of U3O8 by over 7% in 2017, a trend expected to continue well into 2018 and beyond.

 

Today, for the first time in over 35 years, nuclear power generation is rapidly rising while the production of nuclear fuel is swiftly falling signaling a tipping point for investors!

 See “Turbocharging Your Uranium Portfolio”

 

The Price Inelasticity of Uranium Demand

Investors should understand what allows the price of uranium to rise so violently.  Quite simply – upward movements in price have no effect on demand.  When operating a multi-billion dollar nuclear reactor, the uranium fuel represents only 2-4% of the overall cost of power generation.

When gas prices rise, people use less gas.  The sale of big cars fall and commuters park their cars and take the bus.  But when uranium prices rise from $20 to $100 it is a small adjustment to the ultimate cost of a kilowatt hour of electricity.  The utilities keep the reactors running and continue to purchase the fuel at any cost without a second thought.

 

The Inventory Effects of Fukushima

When the tsunami struck Japan in March 2011, it resulted in the destruction of the Fukushima nuclear reactor.  As a precaution, Japan shut down all 45 of that country’s nuclear reactors for inspection.  That shutdown immediately eliminated over 10% of the world’s nuclear generating capacity.

Meanwhile, mining companies around the world were in the midst of a ramp up of uranium production necessary to meet the pending construction of 100’s of new reactors.  Moving these large uranium mines into production represented years of effort and billions of dollars of investment. Putting the brakes on that freight train would take years.

The combination of an immediate drop in demand, an unknown timetable to turn Japanese reactors back on and unstoppable production resulted in a growing volume of excess uranium fuel.

 

Re-Balancing Inventory

The market has three levers it can use to reduce and rebalance its inventory:

  1. Increase Demand – as pointed out, reactor construction has continued unabated, not only increasing the amount of fuel extracted from inventory but also increasing the inventory required within the fuel cycle pipeline. What many do not realize is that as of 2017, demand has returned to pre-Fukushima levels. As reactor construction continues to grow on top of the continuing Japanese reactor re-starts and the re-election of Japan’s pro-nuclear Prime Minister Shinzo Abe, the demand curve can only get steeper.
  2. Reduce Price – Dropping the price of a product is the quickest and easiest method of clearing out inventory. In the case of uranium, it allows countries with massive nuclear plans (such as China or India) to stockpile fuel at low prices in order to protect against future price spikes or supply shortages.  What we have witnessed over the past 5 years is a “liquidation price” for uranium bottoming out at about $20/lb. 50-75% lower than the manufacturing cost of the product.
  3. Reduce Production – This, of course, is the most difficult lever to pull as decisions to reduce or stop production are very costly exercises and can only be reversed with a reinvestment of significant time and money. That being said, miners can only afford to sell uranium at a loss for so long and those difficult decisions to reduce production have finally been made.

Over the past year, the world’s largest producers including Kazakhstan, Cameco, BHP Billiton, Rio Tinto and Paladin announced the closure of mines and reduced productions across the board resulting in a supply drop in excess of 7%.  With AREVA’s recent announcement to shut down production in Niger (the 4th largest producing country) we expect to see production drops continue into 2018.

If we look at supply and demand numbers in 2011 (Pre-Fukushima) and follow their change over the last 7 years we see a rare event occurring – the lines are crossing right now!  Supply and demand are steeply heading in the exact opposite directions.


As we cross this tipping point, we expect to see uranium prices rise back to profitable levels, however, it is unlikely that prices will move in the smooth flowing manner most pricing models would typically calculate.

  1. With no resistance from demand, the price of uranium is free to soar up as high as it likes from its current price of $20/lb.;
  2. As miners require a profit, the price is unlikely to stop at the marginal cost of production (currently around $40/lb.); and
  3. If history is any indication, the price will move quickly and well overshoot its natural equilibrium.


Investors like to get in at the bottom of a cycle, and uranium investors in particular have been watching the price of U3O8 skip along that bottom for many years now – waiting for the appropriate time to re-enter.

As all of the variables line up to kick off uranium’s journey back to normal price levels, investors should be preparing themselves to board the train before it abruptly leaves the station one more time.


17 thoughts on “Uranium’s Time is Now!

  1. For those patient enough to wait this out the profits to be made will be staggering. As always the time to buy is at the point of maximum pessimism. What is very different THIS time around is that there are so few Uranium stocks to choose from. There are only a few pure Uranium plays (Cameco, Uranium Participation and Denison mines) all the rest are juniors at various stages and risk profiles. When large amounts of money chase very few stocks the results are entirely predictable. A few thousand dollars can turn into millions. When a material is so unloved as Uranium is but is an essential and increasing part of our electricity production system there is only one way this is going to go and that is up…dramatically up. This time around (and we have seen this TWICE before) the price rise will be dramatic. Inventory is being consumed, production is going down and demand is going up.
    Timing this has been extremely difficult and an investor needs to have nerves of steel but that is what separates the winners from the losers. Those that know what is going to happen buy at low prices and wait for the inevitable is the way millionaires are made.
    It is going to be a very wild ride for the next few years. I think 2018 will be the turning point with more Japanese reactors coming back on line and large numbers of Chinese Reactors joining the grid. More countries are embracing nuclear power and it will be just a matter of time before the stockpile cupboards are bare.

    Malcolm

  2. This article is very optimistic about demand at a time when reactors are shutting down at a record rate in the US, France, and elsewhere across the globe, far outnumbering new reactors to come online globally. This particular optimism has been rampant for the last six years, and we have seen how correct it has been thus far. I remain quite skeptical that uranium production will rebound any time soon.

    1. Thank you for your note Harold, but there are currently 447 operable reactors in the world whereas in Sept 2012 (5 years ago) there were only 433. In fact there have been more than 30 new reactors turned on over the past 5 years (not including 5 Japanese restarts). Although France is currently discussing lowering their dependence on nuclear power, they have not yet shut down any of their 58 reactors. The United States has, however, shut down 5 of their 104 reactors over the last 5 years (with one currently under construction). This hardly represents a record rate of shut down.

      Having said all that, nuclear power is certainly being reconsidered all over the planet – in S. Korea for instance the government is looking at shutting down many of their 24 reactors.

      In the end, it is not really the reactor demand that will trigger a quick rise in uranium prices. It will be the reduction in supply/production that creates the tipping point. You are correct in saying that production will not rebound soon – in fact it will undoubtedly continue to fall. Demand up + supply down = price up.

      Our opinion is that prices are at the bottom of the cycle and will return. Further, history and economics have demonstrated that when it moves, it will move quickly.

  3. please be reminded that the Husab mine went operational not long ago. This mine will add much more than 7 % of world’s annual demand. So far they haven’t ramped up production completely yet because of depressed prices.
    I agree with you on that Uranium is very interesting but I think recovery of price won’t start very soon.

    1. Seb – that’s a great point. The Husab mine has been an outrageously time-consuming and expensive disaster up until now but is finally up and running and did off-set a lot of the production reductions seen this year. Our figures are currently assuming production of approximately 2MM lbs. per quarter and we will watch it closely as it ramps up in the coming year.

      1. when I looked at the latest quarterly of Kazatomprom it appeared to me that they have not reduced output as announced in January but increased it. Do you know if their production has actually been reduced as promised?

        1. The reductions in Kazakhstan began in 2017 but are not nearly the 10% they announced. We are expecting them to hit their lower levels by year end. There have also been mentions that they will reduce further. It certainly appears to be their intention to take control of prices this coming year.

          1. Looks like things start moving in in the right direction with Cameco beginning to work substantially faster through their inventories.

  4. @Sightline – I’m loving your website ever since finding it a few weeks ago. There aren’t many places to find uranium related news and having another source has been great.

    Are you under the impression that Kazatomprom will want to control prices in the upcoming year in order to benefit their plans for an IPO? Any idea when that IPO is going to happen? Last I read I believe it was going to take place in late 2018 or 2019.

    What are the methods by which Kazatomprom might control prices other than production cuts or buying up spot uranium? Do you know the extent to which their Swiss trading arm has been buying spot U lately, if at all?

    1. Eric, the IPO is scheduled for Q3 2018 and yes, we certainly believe that Kazatomprom will work to move the price up. They will be able to sell their U from Kaz to the Swiss arm at low prices but then the Swiss company can sell into the term market at much higher prices. Not only does this move Kazakh U into the term market (and out of the spot market) but it also allows for their profits to be taxed in Switzerland where the rates are lower.

  5. You guys are forgetting about Paladin’s mines that are currently in bankruptcy. Nobody is going to want to run a uranium mine given environmental risks through bankruptcy. Not to mention its not profitable so it doesn’t make sense. Original Poster it would actually be beneficial to all if you can find any information on the Paladin bankruptcy proceedings and any plans with their operational mines.

  6. The Japanese have been accumulating lots of uranium past 6 years and selling on the spot market, and concurrently. Kazakstan has been folding the market from 8percent to 40 percent of world production. This combination has decimated the uranium market. Unless all of those reactors in japan come back on which only 7 have,and kazakstan cuts back at least 50 percent of it’s mine production we are swimming in a sea of oversupplyfor a long time. The last beat market took from 1981 to1999. Uranium can stay low much longer than people expect. Japan and kazakstan unfortunately are the culprits. Kazakstan basically self inflicted these prices they are almost selling there uranium for free pretty soon. What are they thinking?

    1. You have a valid point, I have no idea what these guys are thinking. If they cut their production by 50% the prices would likely go up more than 100% and they would be net positive on the whole thing.

  7. I would like to add one item that I think is of major importance that wasn’t mentioned. Most utilities don’t normally buy on the spot market. They contract for extended periods to insure delivery. Many of the mines still in operation are scraping by on old contracts. As those roll off they’ll have to shut down production because they won’t be able to sell at the spot market. When most of these contract have expired I think you’ll see the biggest leg up in the price of U.

    Also, China has an enormous supply of U stockpiled already in addition to Husab. Demand growth is going to have to come from other countries.

  8. kAzakstan is the bad apple. That is causing this price suppression. Even with cameco cut of 50 percent you will have a couple more years before the inventory is cleared up and demand and supply balance. Right now kazakstan has not only cut their 10 percent,they will wait till the end of the year and do it. And then they will dump the last quarter into January. In essence they will cheat and not cut , but produce the same amount. The other big producers in Australia, and other locations need to follow cameco. They can cannot do this alone. They were courageous. And did the right thing even though should have been done 3 years ago. The rest of theses miners are sitting with there head under the sand hoping things will get better.

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