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Cameco announced Wednesday that it has inked a deal with the Department of Atomic Energy of India. The company will supply 7.1 million pounds of uranium concentrate to India through 2020.
The agreement is garnering plenty of attention as it represents the end of a lengthy dispute over uranium supply between Canada and India. Canada banned uranium and nuclear hardware exports to India in the 1970s, and Wednesday’s deal has been pegged as a vote of confidence in India by both parties, according to the Financial Post. ”Canada is providing uranium to India as a mark of its trust and confidence in India,” Indian Prime Minister Narendra Modi is quoted as saying.
The deal comes as India moves to ramp up its clean energy strategy. Currently the world’s second-fastest-growing market for nuclear fuel behind China, India operates 21 nuclear reactors that meet roughly 3 percent of the country’s electrical needs. However, another six reactors are set to come online by 2017, and by 2032, the country expects to up its nuclear capacity from 6,000 megawatts to 45,000 megawatts.
“This contract opens the door to a dynamic and expanding uranium market,” said Cameco’s president and CEO, Tim Gitzel, in a company release Wednesday. “Much of the long-term growth we see coming in our industry will happen in India and this emerging market is key to our strategy.”
Rob Chang of Cantor Fitzgerald certainly agrees with that statement, and in a research note calls the agreement a “landmark deal” for Cameco. ”The long-term supply agreement will provide revenue security at profitable prices for the company that could underpin its financial position, possible acquisitions, or even a dividend increase,” he states.
In terms of demand growth from the country, research from Cantor Fitzgerald suggests that U3O8 demand from India could increase from 4.1 million pounds per year to 6 million once the country’s next six reactors come online. By 2023, that number could grow to as much as 20 million pounds if 53 planned and proposed reactors come online.
Furthermore, Chang notes that the main impact for the company is the securing of a long-term supply agreement, pointing out that “[t]here have been fewer transactions of this variety over the past few years as utilities have opted for shorter contracts or spot market purchases to take advantage of the lower prices in the current excess inventory environment.”
While Chang states in his note that Cameco’s deal with India will use market-related pricing, he adds that the current long-term price referenced by industry publications is US$49 per pound, much higher than the current spot price of US$39 per pound.
The deal could potentially have implications for the broader uranium market as well. Chang notes that Cameco is “certainly one of the preferred sources of supply,” meaning that most of the company’s yearly output is often largely spoken for. With India taking another 7 million pounds out of the mix for the next five years, some customers may need to look elsewhere, meaning that there could be potential for “a bit of a bidding war” to get uranium from other safe sources. “It could potentially be a bit of a tailwind for prices,” suggested Chang.
David Talbot of Dundee Securities also believes that the news is important, suggesting in his own research note that the news could mean a pick up in term contracting. That “could help kick start the market … as end users start to worry about securing supply,” he states. Certainly, uranium investors will be keeping a close watch for any changes.
Beyond that, Chang suggests that the deal, along with others in the future, “could perhaps underpin acquisitions of current and up-and-coming world-class projects” such as those owned by Denison Mines (TSX:DML), Fission Uranium (TSX:FCU) and NexGen Energy (TSXV:NXE).
Not surprisingly, both analysts are positive on the company overall. Cantor has rated the stock a “buy” with a one-year price target of $26.15, while Dundee has also given Cameco a “buy” rating and a $23.50 target price.
Cameco’s share price was up 5.69 percent, or $1.08, to close at $20.07 on Wednesday, with over 2 million shares of the company trading hands.
Securities Disclosure: I, Teresa Matich, hold no direct investment in any of the companies mentioned in this article.
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