Investors might be having some trouble staying positive when it comes to the uranium market these days. Unfortunately, with the spot price insisting on moving lower, it can be hard to cast aside doubts that the market will turn around in the near future.
To help investors understand what has been keeping prices down and sentiment weak, Uranium Investing News spoke with David Sadowski, a mining analyst with Raymond James, who explained that beyond the spot price slump, negative sentiment has largely been driven by the lack of momentum in restarts of Japan’s nuclear fleet.
As most market watchers are aware, 2014 kicked off with what could be called a “reinvigoration” in the mining sector, with uranium playing a big part in that. By the end of February, Japan had released a draft energy plan, laying the groundwork for restarts in the near term. It looked like the cards were finally falling into place for uranium.
Unfortunately, as Sadowski explained, “over time it became increasingly clear that just because there is a draft energy plan in place doesn’t necessarily mean that all the hurdles are cleared for restarts.”
From what we have seen since February, the Nuclear Regulatory Authority is clearly reluctant to go ahead and greenlight the first reactors. “They’ve repeatedly requested more and more data from the utilities that have sought to restart their units. And that has slowed down the process,” said Sadowski.
So with that psychological barrier firmly in place, market sentiment quickly started to dwindle and prices started to fall.
Prices, producers and oversupply
Though Japanese reactor restarts are playing a definite role in keeping uranium prices from pulling ahead, they are not the only factor.
“You’ve got this overarching oversupply issue that is definitely a wet blanket on spot and term prices,” Sadowski said, adding, “there is simply too much supply out there and very limited and discretionary demand; it’s not enough demand to soak up that supply.”
When asked where that oversupply is coming from, Sadowski pointed at both primary and secondary supply sources.
While there have been some mine shutdowns and production cutbacks in the post-Fukushima uranium market, not many operations have closed. In fact, Sadowski explained, the uranium companies that have been hit the hardest by the weak price environment are those with projects in the pipeline — development-stage projects.
So how come some companies are still operating profitably? One reason, said Sadowski, is long-term, fixed-price contracts.
“A lot of companies, like Cameco (TSX:CCO,NYSE:CCJ) and Rio Tinto (NYSE:RIO,ASX:RIO,LSE:RIO), are delivering into contracts that are priced much higher than the $28 per pound that we are seeing in the spot market right now.”
Sadowski also highlighted new producers like Ur-Energy (TSX:URE) and a handful of other in situ leach companies that were savvy enough to sign fixed-price deals when prices weren’t as low. As a result of such contracts, those in situ leach companies have been able to weather the storm not only due to low production costs, but also due to contract pricing.
And though many companies have scaled back their production, state-backed entities such as in China and Russia “don’t care as much about the economics of their mines,” said Sadowski. As a result, continued production from them is adding to the already overflowing market.
With several avenues of primary supply impacting the market, the last thing we need are secondary sources adding to the equation. Unfortunately, that’s exactly what they’re doing.
Investors may have heard the term underfeeding being tossed around the marketplace lately. In the latest industry report from Raymond James, Sadowski highlights that many investors expected that with Japanese reactors offline, the reactors would no longer consume uranium and that would be the end of it. However, enrichment companies — which sell enriched uranium to the utilities — ended up with extra capacity at their plants, and since these enrichment plants run more efficiently with all their centrifuges spinning at the same time, they opted to run their centrifuges with smaller amounts of uranium, squeezing out more enriched end product and further adding to uranium supply.
As investors must, by this point, understand, producers and utilities didn’t halt their course just because demand from Japan stopped. The same applies to supply. When Russia’s HEU agreement ended in 2013, the overarching belief was that there would be a very sharp drop off in supply and that overnight 24 million pounds of uranium would vanish from the supply chain.
That’s not what happened.
As Sadowski explained, the “Russians were taking [uranium from warheads] and blending it with old blend stock to make low-enriched uranium that was being shipped to the US. But to create the blend stock, they had to enrich lower-grade uranium. A process that was taking up capacity at the enrichment plants. But now that that process is over and they are no longer enriching that blend stock, they have the spare capacity at the enrichment plants.”
Therefore, Russia is also running its centrifuges longer on smaller amounts of uranium, re-enriching tailings and adding yet again to the secondary supply.
“It’s not as if that 24 million pounds went to zero all of a sudden,” Sadowski said. And though specific numbers aren’t available, supply did not go from 24 million pounds to zero. “It’s more like it went from 24 million pounds down to 12 or 15 million pounds,” he noted.
So where does that leave us?
For years now, analysts have been touting the uranium supply shortage, but looking at the current market, that prospect no doubt seems laughable.
But that’s not to say it isn’t on the horizon — the timeline has just been pushed out a little. The supply deficit that was once expected to hit the market in 2018 has been delayed until 2020 at the earliest, according to Sadowski.
Of course, that prediction is based on today’s outlook, and we all know that can change without warning. Regardless, Sadowski believes that by the early 2020s, the market will be in a deficit from anywhere between 10 and 30 million pounds.
“That’s when we are going to need new projects. And existing operations cannot ramp up their production enough to offset that deficit, so we are going to have to see new mines up and running by that time,” he concluded.
With uranium’s long-term story a lot more positive that the short term, stay tuned for David Sadowski’s view on which companies he thinks can weather the storm.
Securities Disclosure: I, Vivien Diniz, hold no investment interest in any of the companies mentioned.