U3O8 Price Update: Q2 2020 in Review

Energy Investing
Uranium Investing

Steady growth in April pushed uranium to a four year high of US$33.25, a 35 percent increase from its January value.

Click here to read the latest U3O8 price update.

Following years of sluggish activity, the U3O8 spot price began moving higher in 2020, adding 11 percent to its value in Q1.

Steady growth in April pushed the price to a four year high of US$33.25 per pound, a 35 percent increase from its January value. The uptrend continued in May when the price topped US$33.93 to end the month.

But by the end of June, uranium had pulled back, slipping below US$33 to hit US$32.80. Keep reading to learn what events have contributed to the U3O8 spot price’s movement so far in 2020.

U3O8 price update: Key closures moving market

Uranium’s long-awaited price movement in 2020 has been the result of two factors. The first and most significant is mine and project closures, both new and longer term.

While COVID-19 lockdowns have forced miners and explorers to curtail their endeavors, uranium mines have been closing for the better part of a decade due to low prices.

Most notable is Cameco’s (TSX:CCO,NYSE:CCJ) closure of the Saskatchewan-based McArthur River mine in 2018. More recently, the sector major announced plans this past March to curtail production at its remaining operational Canadian mine, Cigar Lake. The decision was a response to the Canadian government’s mandate to shut down all non-essential services.

In 2018, Cigar Lake was the most prolific uranium-producing mine with output topping 6,924 tonnes.

For market watcher Mickey Fulp, the Cigar Lake closure was one of the most prominent catalysts for U3O8 prices in Q2.

“I don’t think there’s any uranium being produced in Canada right now,” said Fulp of the country that ranks number two in annual production.

The Mercenary Geologist also pointed to top producer Kazakhstan’s decision to reduce its output as another price motivator. “The Kazakhs took some production offline, supposedly because of the virus, but I would guess it’s really because of economics,” he added.

With prices sitting below the US$50 threshold since 2012, sector participants have struggled to make projects economical in the low price environment.

The curtailments by Kazakhstan’s Kazatomprom and Cameco’s decision to shutter Cigar Lake are expected send both companies to the spot market to fulfill contracts, another catalyst for present and future price growth.

When asked what led to U3O8’s double-digit price growth in the early part of Q2, Lobo Tiggre also cited the moves by Kazakhstan and Canada.

“Kazatomprom, the world’s largest and lowest-cost producer, reported that it stopped selling uranium into the spot market. The CEO even said they might have to buy some uranium off the spot market in order to meet some of their contractual obligations,” said the founder and editor of Independent Speculator.

He also referenced Cameco closing its two top-producing assets, McArthur River and Cigar Lake.

“Meanwhile, projections remain that there will be more nuclear power plants built over the next 10 to 15 years than retired, so the writing is on the wall,” said Tiggre via email.

U3O8 price update: Section 232 and NFWG reports

The end of April brought a U3O8 price of US$33.25, as well as the release of the anticipated US Nuclear Fuel Working Group (NFWG) report. The report was the final step in a Section 232 uranium import investigation that was initiated in 2018.

Watch the video above to learn more about the US Section 232 uranium investigation.

As the sector waited for the report, which was delayed a number of times, speculation about a potential domestic production quota was rife.

Ahead of the NFWG release, US President Donald Trump added a 2021 budget proposal item that would see US$150 million earmarked annually for a decade to purchase US-mined uranium. The uranium would then be stored in a strategic stockpile in the country.

The NFWG overview discussed reclaiming America’s nuclear leadership and security, but did not include actionable measures, aside from the stockpile.

“I think that working group report was kind of a non-starter,” said Fulp. “It was anticipated for so long and it did not deliver … we knew about that US$1.5 million over 10 years that that was laid down a long time before it happened.”

For Outsider Club Founder Nick Hodge, despite being devoid of concrete steps, the conclusion of the investigation was good news for the sector.

“The initial reaction from me was it’s good that at least it’s over now,” said Hodge. “That is probably the biggest positive that came from it — just closing this chapter of the uranium market and being able to let companies, investors and fuel buyers look ahead to what’s next.”

U3O8 price update: The makings of a bull market

As the U3O8 spot price trended higher from January to May, the sector began to garner attention from diverse market watchers.

In January, Rick Rule of Sprott (TSX:SII,OTC Pink:SPOXF) advised investors who like the long position to consider the energy metal.

Watch the video above to hear more from Rule on gold and uranium.

Later in the year, during a Metals Investor Forum webinar focused on gold, Gwen Preston took the time to talk about U3O8 price growth.

“Yes, uranium has moved from US$24 to US$32, and in the spot market that’s a big move, no doubt,” said the Resource Maven. “But a uranium market when it goes, goes absolutely wild. And so there’s a huge amount of room left when this happens.”

Preston quoted Rule when she noted that during the last bull market the uranium space’s worst performers gained 800 percent. “The best obviously gained thousands of percent. So uranium markets are crazy, and this one has been setting up for a long time,” she added.

By the end of May, uranium had climbed more than US$1 month-over-month to hit US$33.93.

However, after spending the first five months of 2020 progressively moving higher, uranium prices fell back in June, just below US$33, prompting speculation that the market had run out of steam.

But as Fulp explained, the spot price is prone to seasonality; he called the recent 4 percent decrease the “summer doldrums.”

“(Spot prices have) been flatlined at US$33.90 or US$32.95 for about 10 days,” he said during a July 9 interview. “I just don’t think there’s anything going on in the spot market right now. And that’s not too unusual for the beginning of this summer.”

He expects prices to regain strength in the fall following the World Nuclear Association Conference, which usually spurs a spot price rally.

“Then as we go further into Q3 and Q4, all the miners that have to fulfill their contracts (have) to come in and start buying uranium on the spot market to fulfill their long-term contracts by year end.”

Of these contractual purchases, Cameco is anticipated to be a major buyer. Last year, the company purchased 12 million pounds from the market in addition to what it produced. And with this year’s production curtailments, that number could be much higher.

Spot market purchases will be further compounded by an overall sector-wide output slump.

In late April, Philip Johnson of nuclear cycle firm UxC forecasted an output decline of 13.1 million pounds for 2020. UxC’s original forecast had to be reduced by 9 to 12 percent due to COVID-19.

U3O8 price update: Opaque market hard to gauge

Tiggre said he expects uranium prices to pick up again, but anticipates a period of reversals.

“I’m not ruling out more correction first,” he said. “If there’s no news or material change in the market, uranium prices could drift lower for months without breaking the multi-year upward pattern.”

He continued, “This may even be the most likely outcome — until buyers are forced by the supply shortfall to contract with miners. When that happens, miners will demand — and get — much higher long-term prices, which will drag spot prices up in response.”

With two of the most dominant U3O8 price motivators now locked in place, the sector is waiting for utility companies to come to market.

The nuclear fuel sector is the primary end user of U3O8, with participants signing large, multi-year contracts to secure the energy fuel. As a result, when these firms decide to purchase years in advance, the spot price ultimately trends higher.

Hodge, who has long believed that the return to buying will be a significant price catalyst, sees utility companies coming to market sooner than later.

“I think higher prices beget higher prices, especially once the utilities come back in, because the reason why prices can move so high so quickly in the uranium space is because utilities really don’t care what they are paying,” he told INN in an April interview.

“(That’s) because the price of the uranium is such a small component of building and operating and maintaining a nuclear plant.”

In terms of price predictions, Tiggre pointed to the well-known opaqueness of the market, but did note that the cycle has displayed higher bottoms.

“I can say with more certainty that commodity prices never go up in straight lines,” he said.

“Uranium has been rising to new highs and retreating to a series of higher lows since 2016. To me, the breather after this spring’s big rally looks perfectly normal — and I see it as an opportunity.”

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

Editorial Disclosure: 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.

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