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Cameco’s inability to reach a deal with its unionized employees will result in a strike at its McArthur River and Key Lake operations.
The company announced today that it will be putting a stop to operations at the McArthur River uranium mine and Key Lake mill in the Athabasca Basin due to a labor-management dispute. Cameco received a strike notice from United Steelworkers Union Local 8914 employees for Saturday night. In response, the company issued a lockout notice.
Raymond James’ David Sadowski said today in a note to clients that the firm is only anticipating a slightly negative impact for Cameco. The closures should not detract from the company’s ability to meet its sales obligations due to other sources and the company’s existing inventories.
“[W]e value the company on 2015E cash flows, but a 3-month McArthur disruption that affects ‘current year’ output has a <0.5% negative impact on our NAV,” Sadowski said.
On the other hand, given that the closures are at the world’s largest uranium mining operation, the market overall could find some support as reduced supply enters the market. Cantor Fitzgerald’s Rob Change highlighted in a note to clients that any “prolonged shutdown at Cameco will provide a positive impact to the supply and demand fundamentals of uranium, which is in near-term and intermediate-term surplus but set for a dramatic shortfall beginning in 2020.”
The Athabasca Basin is expected to produce 16.3 percent of global uranium supply in 2014, according to Raymond James, with McArthur/Key Lake being by and large the most significant contributors to the market. However, as Sadowski says in his note, in recent years, global reliance on McArthur/Key Lake has ebbed due to the rise of Kazakh output. Nonetheless, the firm is still expecting output of 19.2 million ounces in 2014, which is roughly 12.8 percent of the world’s mine supply and 10.2 percent of total supply, including secondary sources.
That being said, “[a] protracted strike should there fore have a meaningfully positive impact on uranium prices if Cameco chooses to immediately buy material in the spot market to meet contractual obligations (or buys on the spot later on to replenish down-drawn inventory levels), especially given currently depressed spot price of US$31.50/lb.”
While no impact to the market can be seen just yet, the expectation is that with the approaching supply shortage and the possibility of Cameco taking uranium off the spot market, prices overall could benefit. Furthermore, a bigger future gap in supply could bode well for companies whose production timelines coincide with when the market will be looking to fill more orders.
Securities Disclosure: I, Vivien Diniz, hold no investment interest in any company mentioned in this article.
