U3O8 Price Update: Q1 2020 in Review

Energy Investing
Uranium Investing

The U3O8 spot price has begun to exhibit strength in a quarter filled with geopolitical tensions, energy issues and a global pandemic

Click here to read the previous uranium price update.

After ending 2019 down almost US$3 year-over-year, the U3O8 spot price has begun to exhibit strength in a quarter filled with geopolitical tensions, energy issues and a global pandemic.

The economic unrest created by the coronavirus has paralyzed growth and tanked markets, while also forcing uranium producers and explorers to reduce or outright halt work.

A dramatic dip in projected uranium production, along with logistical woes and broken supply chains, has been beneficial for U3O8 in the last five weeks, pushing the energy metal towards its most significant month-over-month growth since June 2010.

The current U3O8 spot price of US$29.50 per pound is 19 percent higher than the January value of US$24.63 — not to mention the highest price the fuel has seen since February 2016.

U3O8 price update: US/Iran tensions dampen sector

In January, markets worldwide felt the pressure from growing hostility between the US and Iran, which drove up prices for gold and oil, but left uranium stagnating. Tempers were ratcheted up when the US ordered a drone strike that killed Iranian general Qasem Soleimani.

An aerial attack on a passenger jet by Iran further escalated the situation, as did the Islamic Republic’s decision to back away of the Joint Comprehensive Plan of Action, better known as the nuclear pact.

The multinational agreement, which was signed in 2015, limited the amount and type of centrifuges in Iran, as well as the level of uranium enrichment the country was allowed to engage in.

Ultimately cooler heads prevailed, but the plan of action, which the US unilaterally pulled out of in 2018, is still in need of ratification and redrafting.

And for some the activity between the US and Iran was another blow for uranium’s fragile reputation.

“If we were beginning to make any progress globally in the uranium sector … an event like this — one, it gives pause to business leaders and deal makers, so things don’t happen because there’s uncertainty. And the other thing it does is it puts the negative taste of uranium back in the public’s mouth, and that’s not good for the sector either,” Nick Hodge of the Outsider Club said at the time.

By the end of January, the U3O8 spot price had slipped 30 cents from the end of the year to US$24.63.

While the price remained flat early in 2020, some market watchers were still optimistic about the energy metal, including Rick Rule of Sprott (TSX:SII,OTC Pink:SPOXF).

“I would encourage speculators who can afford the risk and are patient to participate, because the universe of good uranium issuers is very small. And when the market returns, which it will, the upside could be absolutely dramatic. But if you’re impatient it’s the wrong game,” he said.

U3O8 price update: Trump plans US uranium stockpile

The second month of the year was also marked with activity for the uranium sector, as US President Donald Trump announced plans for a proposed domestic uranium stockpile.

Likely born out of the Section 232 uranium import investigation and the subsequent US Nuclear Fuel Working Group, the plan is for the stockpile to be funded to the tune of US$150 million annually.

Though vague, the news was well-received by US uranium producers, which have been outspoken about the country’s dependence on foreign entities to supply its nuclear fuel cycle.

For Independent Speculator Lobo Tiggre, the stockpile sounds like a good idea and would bode well for the industry, but it still has hurdles to pass.

“There’s Trump’s proposal that the US should spend US$150 million per year for 10 years building a domestically sourced stockpile. But that’s just an idea, which Congress has yet to even consider, let alone act upon. I think it’s a non-starter in the House,” he said.

Waiting continued to be the theme of the sector throughout February, and speculation about when utilities companies may come to market kept prices below US$25.

By the end of the month, the U3O8 spot price had climbed slightly to end the period at US$24.80.

U3O8 price update: Pandemic pummels production

March was a volatile month for the global economy as COVID-19 began its rapid global spread.

Early in the month, at the Prospectors & Developers Association of Canada convention, Nick Carter of UxC spoke about the growing output shortfall in the sector as a potential price catalyst.

“We do see a tightening of supply,” he said. “I think 2020 will be a little tighter, and then continuing into 2021, but then starting in 2022 through 2025 we could potentially see some supply deficit. But we do think that could easily be made up for by a ramp up in Kazakh production.

The uranium analyst went on to note that US$24 was a pretty hard bottom for the energy material and offered a price forecast. “We need to sort of break that US$26 resistance point,” he added. “But we do think we could potentially push as high as US$29.”

Less than two weeks later, producers began reducing and shuttering projects in response to country-led initiatives to stop the spread of the coronavirus.

Most notably, Cameco (TSX:CCO,NYSE:CCJ) the largest publicly traded uranium producer, temporarily closed its Cigar Lake mine, one the world’s highest-grade uranium deposits.

The closure marked the second time in less than two years the miner had indefinitely closed a high-profile uranium project. In 2018, Cameco shuttered the McArthur River mine and Key Lake mill, which lie in close proximity to Cigar Lake.

More closures followed, ultimately helping the U3O8 spot price begin a rally. According to Mickey Fulp, three of the world’s largest uranium projects are now offline.

“Cameco shut down the world’s largest uranium mine, there’s no uranium production in Canada now,” said the Mercenary Geologist. “Namibia essentially ordered the shutdown of all its mines … So you take all that supply off and the price goes up.”

And indeed, it has.

In the weeks since then, Kazakhstan’s state-owned uranium producer, Kazatomprom, has also reduced its production and dropped its annual guidance by 4,000 tonnes.

By the end of March, the U3O8 spot price had climbed to US$27.35, enjoying its greatest month-on-month increase since June 2018.

Now market watchers are pointing out that even if pandemic-related closures are short-lived, bringing production back online will take time and will further exacerbate a supply deficit in the meantime.

In terms of restarts, Tiggre explained, “The shortest timeframe I’ve seen is six months, and that’s for a simple in situ recovery mine in recent operation, kept at a high level of care and maintenance. I’ve heard 12 to 18 months for more complex mines.”

The sector is still waiting to see utilities companies contract, which could draw thousands of pounds out of producer inventories.

“US utilities evidently still have some sort of supply because they haven’t started to buy,” said Fulp. “According to Canaccord, they have less than three years of inventories, but that’s all they ever had anyway — they never maintain more than two to three years of inventory.”

Canaccord also noted that 50 percent of new US contracts will expire by 2023.

Demand from the energy-generation sector could be offset by a drop in industrial output, where a great deal of nuclear generated electricity is used.

Currently the U3O8 spot price is US$29.50.

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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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