Summary
- The 2021 U.S. budget earmarks $150 million for the creation of a national uranium reserve.
- At current uranium sport prices this is equal to six million pounds, or just over 4% of global mine output.
- The move removes a lot of uncertainty and should free U.S. utilities to enter into new long-term contracts.
Investment thesis
There are two main companies which provide direct exposure to uranium prices, namely Yellow Cake (YLLXF) and Uranium Participation Corp (OTCPK:URPTF) . I think the former is the better option as its holdings are more stable and it invests only in uranium. Uranium Participation Corp also invests in uranium hexafluoride (hex). This means that the calculation of the net asset value of Yellow Cake is much easier to calculate at any given time.
The uraniummarket has been in a tough spot ever since the Fukushima disaster of 2011 and the production cuts made by Cameco (CCJ) and Kazatomprom have so far failed to bring any relief.
However, this may change soon as the proposed 2021 U.S. budget includes $150 million for the creation of a national uranium reserve. With the spot price of uranium lingering near the $25 per pound mark, this would be equal to six million pounds. It might not sound a lot, but this is equivalent to more than 4% of annual mine output and it could become the event needed to finally push uranium prices higher. It removes a lot of uncertainty and should free U.S. utilities to enter into new long-term contracts.
(Source: U.S. Department of Energy)
Supply and demand in the uranium market
Global uranium mine supply rose by just two million pounds to 140 million pounds in 2019, according to data from market analyst UxC.
Over the past four years, around 35 million pounds of annual production have been removed from the market. A significant part of this comes from Cameco’s McArthur River mine, whichhas an annual capacity of some18 million pounds.
(Source: Uranium Participation Corp)
Around 175 million pounds of uranium is required to power today’s fleet of 442 nuclear reactors around the world. However, the market is still oversupplied due to secondary supply. With few projects in the development stage, the market should remain in oversupply until around 2023.
(Source: Yellow Cake)
Global inventories stand at around 800 million pounds of uranium, but around 30-40% of that could be Chinese strategic supply. This means that inventory available for utilities is equal to less than three years of demand.
The U.S. uranium reserve
Back in 2018, two U.S. uranium companies submitted a petition to the Department of Commerce for a quota that would guarantee that 25% of uranium sold in the country comes from local mines.
This falls under Section 232 of the Trade Expansion Act of 1962, which gives the president the authority to enact restrictions on imports, if the restriction is deemed necessary for national security following an investigation and report by the secretary of commerce.
There will be no quota or tariffs on imports, but the 2021 budget earmarks $150 million for the creation of a national uranium reserve. It’s unclear where the reserve would be built and the budget would first need to pass through Congress. However, note that the document doesn’t guarantee that uranium would have to be bought from local producers. Considering U.S. uranium production is almost non-existent due to high production costs, this means that those $150 million of uranium purchases this year could boost demand by around six million pounds using current spot prices.
However, the more important effect from the resolution of the whole Section 232 saga is this will remove a lot of uncertainty and free U.S. utilities to enter into new long-term contracts. Usually, utilities opt for stockpiling two to three years of inventory and long-term contracts take more than two years for first delivery. There was a noticeable surge in uranium prices during the last large long-term contract cycle of 2005-2012.
(Source: Uranium Participation Corp)
At the moment, U.S. utilities need to replace a much higher volume of long-term contract compared to their European counterparts.
(Source: Yellow Cake)
Conclusion
The creation of a $150 million uranium reserve in the U.S. will remove a significant part of oversupply in the market and will free U.S. utilities to enter into new long-term contracts. This could lead to a new super-cycle in contracting like in 2005-2012, which back then resulted in much higher prices compared to previous years.
As of the end of 2019, Yellow Cake had a net asset value of $2.78per share, consisting of 9,616,385 pounds of uranium valued at $25 per pound, a derivative financial liability of $2.7 million and other net assets of$7.6 million. If uranium prices rose to $40 per pound, the net asset value would increase to $4.42 per share. This is an upside potential of 59%.
Source: Seeking Alpha