Source: McAlinden Research for Streetwise Reports 04/22/2020
With the supply/demand balance moving in favor of miners, the outlook for uranium stocks is the brightest it has been in years, according to McAlinden Research Partners.
SUMMARY: Uranium has been enjoying a stealth bull market due to the coronavirus outbreak. Temporary mine closures to slow the spread of the virus at production facilities have triggered an unexpected supply squeeze, sending the price of uranium up nearly 30% since the beginning of March. According to one analyst, half of global production has been cut. With the supply/demand balance moving in favor of miners, the outlook for uranium stocks is the brightest it has been in years.
An ongoing supply shock is moving the uranium market’s demand/supply balance in favor of miners, strengthening their pricing power in the process.
2020 Supply Shock
The world relies on four countries for 75% of its uranium supply: Kazakhstan (40% of global supply), Canada (13%), Australia (12%) and Namibia (10%). What’s more, about 65% of global output is sourced from just six mines. Following the example of millions of other businesses around the planet, some of those mines have temporarily suspended operations to slow the spread of COVID-19 infections at their facilities.
In Kazakhstan, all uranium mines will cease production for a three-month period, according to an announcement made last week by the country’s national atomic company, known as Kazatomprom. For 2020, Kazatomprom had planned to churn out about 22,800 tonnes of uranium (50.3 million lbs), but that volume will be lower by as much as 4,000 tonnnes (8.8 million lbs) or 17.5% due to the mine closures.
Over in North America, Canada-based producer Cameco has suspended operations at Cigar Lake—the world’s single largest uranium mine—for an indeterminate period, or until such time as “a safe and sustainable restart is possible.” The Cigar Lake mine produces 18 million lbs of uranium annually, equivalent to 13% of global supply. With this decision, Cigar Lake joins other Cameco-owned mines and milling operations that have been reduced to care-and-maintenance activity levels since 2016.
On the African continent, mines in Namibia and South Africa are also on lockdown to protect workers from the virus’ spread.
Shifting Demand/Supply Balance
Output curbs are not unusual in the uranium world. After nearly ten years of price declines, most mines are operating at loss-levels. In response to these market conditions, miners have been curtailing production for several years already.
Global uranium output stood at 53,500 tonnes in 2018, down 10% from a year earlier and down 14% from the year before that. The quantity extracted was enough to fulfill just 83% of global demand at the time. To meet consumption needs, the market has had to tap into existing stockpiles and recycled material to make up the difference.
Annual global demand for uranium now stands closer to 150 million lbs or 68,000 tonnes. That reflects a demand increase of 8% in two years without a commensurate increase in global production, which at the moment amounts to about 125.5 million lbs of uranium. Accounting for this year’s unexpected output disruptions due to the COVID-19 pandemic, the supply deficit will only grow larger and global stockpiles will be depleted at a faster rate.
We mentioned earlier that Kazatomprom’s output for 2020 will decrease by 8.8 million lbs because of its three-month-long mine closures. That alone translates to 7% of global output disappearing, which is quite significant.
Upward Pressure on Uranium Prices
On March 16, 2020, uranium was trading at $23.90/lb according to Trading Economics. Now, just one month later, the price of uranium has reached $32.00/lbs. The 33% price jump reflects the market’s reaction to the temporary supply shock. While the current price is still below the $40–$60 breakeven level for most mines, the upward pop certainly improves their prospects.
If production remains below pre-COVID-19 levels even after the shuttered mines resume operations, some power companies will draw down their inventories to the point at which it becomes urgent for them to secure new long-term supply contracts with miners. When that happens, uranium producers will enjoy stronger pricing power than they have seen in at least four years.
Another catalyst on our radar is the possibility of the United States building up stockpiles for its national uranium reserve. In his latest proposed budget, President Trump has earmarked $150 million a year for that purpose. Whether Congress approves the request remains to be seen. The biggest beneficiaries would be U.S. producers as well as some Canadian miners, since the most economically viable deposits of uranium in North America happen to be in Saskatchewan, Canada.
How to Invest
The Global X Uranium ETF (URA) and the more recently launched North Shore Global Uranium Mining ETF (URNM) both provide exposure to uranium miners. Investors looking for single-stock exposure will find that most of the pure-play names have become penny stocks following the industry’s almost decade-long bear market. One of the rare exceptions is Cameco (NYSE: CCJ).
This content was delivered to McAlinden Research Partners clients on April 16.
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McAlinden Research Partners (MRP) provides independent investment strategy research to investors worldwide. The firm’s mission is to identify alpha-generating investment themes early in their unfolding and bring them to its clients’ attention. MRP’s research process reflects founder Joe McAlinden’s 50 years of experience on Wall Street. The methodologies he developed as chief investment officer of Morgan Stanley Investment Management, where he oversaw more than $400 billion in assets, provide the foundation for the strategy research MRP now brings to hedge funds, pension funds, sovereign wealth funds and other asset managers around the globe.
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