Insight into Cameco’s strategy & discussion on the recent (and very bullish) developments

Our house view is still that the major catalyst to drive a Uranium rally is the striking of a new LONG-TERM contract…….Cameco is determined to do its part to clean up the spot market (see below) but really the main objective is spooking the utilities into a new set of contracts as the old contract book rolls over. We have a very cynical view of the spot market that has no relevance to the cost of production.

• Cameco’s CEO dropped multiple strong hints at recent mining conferences that the flagship McArthur River mine will stay shut as long as it takes to establish new contracts……….here is the link to his Whistler presentation as an example (LINK).

“we said 10 months…we will see…..our resolve is strong on this”

• This is key as it further supports our view that the 2 largest and lowest cost producers are determined to clean-up the spot price and would rather buy in the spot market than deplete a Tier-1 resource.
• Recall that McArthur was put on care & maintenance for an initial 10 months (starting Nov/17) to take 18 MMlb out of the market in 2018……..the initial U price response to this move was strong (from US$19.5/lb to US$26/lb) but we do not believe the potential for an extended shutdown is priced in yet.
• Additionally, tradetech reports that increased buying by producers emerged in 2018 suggesting that Cameco has followed through on its suggestion that it would rather enter the spot-market than deplete stockpiles (inventory is carried at C$31.50/lb).

• Last week, 6 buyers purchased over 0.8 MMlbs on Friday March 30th alone, bringing the monthly total number of transactions to 6.3 MMlbs of U3O8e, the second highest number of monthly transactions on record.
• One potential driver for the increased volumes is the section 232 Petition (following Trump’s protectionist stance) that would force US utilities to buy US Uranium as well as a temporary suspension to the US Dept of Energy’s Uranium barter program….this adds to moves by Cameco & Kazatomprom.

•  Since 2016 over 30 MMlb of U3O8 has been removed from the market, this trend is unlikely to change (Figure 1).
• We note that mine production (has not met demand for decades) and utility growth (accelerating every year and led by the developing world) are hugely supportive of a higher Uranium price……it is the surface inventories that are more problematic and opaque.
• This malaise all started with Fukushima and the link between Japanese utilities and the enrichment facilities is the most substantial culprit in our view……hence we are hugely encouraged to see the 7th reactor come online in Japan in March…..(well ahead of the 2017 pace of restarts)…Figure 2.