U3O8 Price Update: Q1 2019 in Review

The U3O8 spot price started 2019 strong, trading at its second highest price in 12 months at US$28.90 per pound. In February, theenergy fuel lost US$0.90, slipping to US$28.

The uranium spot price continued its downward descent over March to hit US$25.33, its lowest point since June 2018.

The price hasn’t moved much since the end of March, sitting at US$25.75 as of April 8, 2019. The long-term price is also hovering at US$25.75.

Sector analysts and companies see the poor U3O8 spot price performance over Q1 as the bottom of the cycle, and expect uranium to rebound over the remaining three quarters of 2019.

U3O8 price update: Supply

Anticipation for the US Department of Commerce’s announcement on the Section 232 investigation into foreign uranium imports has loomed over the sector since last summer; US utilities that usually purchase from the spot market in Q1 have postponed acquisitions until the decision is passed.

The absence of power companies purchasing on the spot market has kept the price low and reserves full. However, when American electricity producers do begin to purchase again, the price should be driven higher as supply dwindles.

Supply scarcity will continue to be a concern this year, due in part to Cameco’s (TSX:CCO,NYSE:CCJ) indefinite shuttering of its McArthur River mine and Key Lake mill in Saskatechewan’s Athabasca Basin.

The Canadian miner is the world’s largest uranium producer, supplying 17 percent of all global demand.

While the decision to halt production at the key asset has helped the spot price move upwards, it has forced Cameco to purchase out of that same market in order to fulfil contractual obligations.

Shortage of supply is a concern that was reiterated at the March 2019Prospectors & Developers Association of Canada (PDAC) convention.

Nick Carter, executive vice president, uranium, at UxC, spoke to the Investing News Network (INN) about some of the factors weighing on the spot price.

“I think it will continue to trend a little bit higher as Cameco has to buy for 2019 and potentially into 2020,” explained Carter. “It’s really going to depend; it’s becoming a little bit of a complicated market with Section 232.”

While he credited Section 232 with creating opaqueness in the sector, he was adamant that more supply cuts are needed.

“Annual demand for 2019 is going to be about 190 million pounds, but last year for 2018 overall production was about 138 million pounds. But then we had secondary supplies, which are stockpiled inventories that range from 45 to 50 million pounds, so it’s been fairly balanced,” he said.

“Moving into this year, we’ll see a little bit more inventory utilization, several million pounds will continue to be drawn down, but it’s a slow market in terms of an actual turnaround.”

Uranium stockpiles will play a large role in the performance of the spot price this year, especially since output from Cameco and Kazakhstan has dramatically decreased over the last few years.

Worry over supply shortages has always been top of mind for US electric companies and has resulted in them creating their own stockpiles to ward off potential brown and blackouts.

“US utilities are sitting on probably over two and a half to three years’ worth of inventory that they have on hand. They probably want to draw that down to about two years, same thing with the European utilities; they’re sitting on about three years,” Carter added.

The analyst similarly pointed out that uranium enrichers are also bringing excess supply to market, further impacting the supply/demand dynamic.

“That amounts to about 20 to 25 million pounds right there of just inventory supplies coming into the market,” he said.

U3O8 price update: Demand

While the state of U308 supply may seem vague and opaque, the need for the energy fuel to power reactors and provide electricity is clear. Most of the market watchers and analysts INN spoke with at PDAC were steadfast in their belief that increased demand is imminent and will drive up the spot price.

Mercenary Geologist Mickey Fulp explained to INN that now is an ideal time for investors to capitalize on low spot prices, because there will be a demand surge in the future that current output cannot meet.

“I can’t tell you when it’s going to come, but there will be a uranium shortage, there will be great demand, the price will go up and stocks are very dependent on the spot price,” said Fulp.

Demand may be further compounded, as Fulp explained, by the US Department of Energy (DoE).

“The DoE is no longer selling surplus uranium in the markets, taking 5 to 7 million pounds off the market in the Trump administration.”

This disruption is in addition to the Section 232 investigation. The issue around the security of foreign uranium imports was raised by Ur-Energy (TSX:URE,NYSEAMERICAN:URG) and Energy Fuels (TSX:EFR,NYSEAMERICAN:UUUU), US uranium producers concerned that imported uranium may be of inferior quality.

One of the proposals put forth in Section 232 is the creation of a 25 percent domestic uranium quota.

The US is the world’s largest consumer of uranium, using it to generate 1,888 kilowatt hours of electricity each year, about 20 percent of the country’s total electricity output. However, the US produces less than 5 percent of what it consumes, relying on imports for more than 90 percent of its supply.

Even though a domestic quota may address issues around uranium quality, it raises another issue: Are there enough uranium producers in the country to meet the 25 percent quota?

“It’ll take awhile to do,” explained Fulp. “[The US] uses about 55 million pounds a year. Last year we produced about 1.1 million pounds; we were producing about 5 million pounds pre-Fukushima, so you could expect it to ramp up relatively quickly.”

Although going from less than 2 percent of annual demand to a quarter will be tricky and take time, Fulp sees three American companies taking the lead early on.

“You’re going to end up with three uranium producers, Energy Fuels, Ur-Energy and UEC (NYSEAMERICAN:UEC), initially, and certainly they cannot produce 10 or 12 million pounds or 13 or 14 million pounds to be 25 percent,” said Fulp. “It’s going to take a few years for that to happen, but it will give an incentive for them to produce. It will at least shoot up a price in the US, and you would figure that the world’s spot market would follow.”

Increased US production to fulfill quotas may buoy the world market or may only be advantageous to US companies, Carter went on to say. “It could end up in a bifurcated market if there’s a quota situation, where you could have a much higher US price than you would a non-US price.”

Overall, Carter doesn’t expect much change in market fundamentals early on.

“We’re expecting to see demand over the next few to several years being relatively flat, although we’re seeing tremendous growth in China right now. They have about 46 reactors online for 46 gigawatts,” said Carter.

He expects demand to grow to 90 gigawatts by 2030. Nuclear reactor deployment is also expected to climb across the globe. Currently there are 450 operational reactors in 31 countries, with at least 50 more in various stages of construction.

“There’s tremendous growth in India, you have new reactors in the United Arab Emirates coming online [and] a couple new reactors in Georgia,” he said.

U3O8 price update: Time to buy?

While supply/demand dynamics have created some uncertainty for the sector, Lobo Tiggre, CEO of Louis James LLC, sees the confusion in the market as an opportunity for investors to get in while prices are low, ahead of what he believes will be a bullish trend.

“I do think uranium’s time has come,” said Tiggre. “I think there’s a particularly great opportunity for investors in that the stocks have been hammered with the broader equities. You could see this [in Q4 2018] … The uranium stocks would go down with everything else, even if uranium was up at that time. So, a divergence in price and value is an opportunity for investors.”

However, it will take spot prices growing to an incentive level of at least US$50 to US$60 in order to get more output from producers and new projects from explorers.

He explained that for shuttered mines like the mega producer McArthur River and Kazakhstan there will be a delay between price strength and new production.

“It’s not simply flipping a switch,” said Tiggre, adding, “I think you’ll see a considerable time between prices reaching that incentive level and actual production coming back online, so that’s very bullish.”

Tiggre believes that once the spot price hits US$40 producers will be enticed to ramp up production.  

“[At the] US$40 level, it starts making more sense for existing producers, so that’s probably the first real threshold. US$40 uranium makes a difference for this market.”

Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: Energy Fuels is a client of the Investing News Network. This article is not paid-for content.

The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.