Disruptive Discoveries Journal

How to Interpret the Funk in the Uranium Market

Shelley Chen

By Chris Berry

Despite numerous statements by market commentators (myself included) on the looming “nuclear renaissance”, the uranium market remains stuck in neutral:

  • The real catalyst for higher uranium prices is the restart of a portion of the Japanese reactor fleet.

  • Recent elections in Tokyo hint that the political ruling class is in favor of nuclear reactor restarts – but when? 

  • Cameco (CCJ:NYSE, CCO:TSX) held their quarterly and year end results conference call on Monday and announced a scrapping of their plan to produce 36M lbs of U3O8 by 2018.

  • This is not positive news for the uranium sector in the intermediate-term and has us sticking to the belief that focusing on near-term in-situ production stories in reliable political jurisdictions is the most sensible “investment” over the long-term with high grade hard rock discoveries in the Athabasca Basin serving as a good “trade.”

Grinding The Gears

I want to start today’s Note out with a clear statement of whom or what the culprit is for uranium’s relative underperformance. This is the lack of Japanese reactor restarts (but by no means the only culprit). Many market commentators (me included) had anticipated at least some of the reactors coming back on line at this point. This was one of the mistakes I made in 2013.While it’s also clear that the ENTIRE Japanese fleet will never come back online, anywhere from 20 to 30 reactors are anticipated to restart in the coming years. The thinking here is that once some of the Japanese reactors come back on line, this will breathe life into the uranium price and, coupled with the emerging market embrace of nuclear power, push spot and term uranium prices higher, enticing more exploration and production. 
 
In the wake of Cameco’s pronouncements from their quarterly earnings call this week (discussed below) it would appear that our initial estimate of a uranium supply and demand imbalance asserting itself by 2016 is still on target. There will certainly be trading opportunities in the interim, but investors should not likely expect much before then. 

A Mixed Bag of News in a Long-Term Positive Story

Lest you think I’m painting some sort of a “doom and gloom” picture here, let me be clear that I am not. There are several developments in the uranium space which investors should be aware of including: 

  • Paladin Energy Ltd. (PDN:TSX, PDN:ASX) announced the mothballing of its Kayelekera uranium mine in Malawi. Management stated that at current uranium prices, the mine was a loss-maker and wouldn’t be reopened until the uranium price rose to $75 per pound. This will take approximately 3 million pounds of uranium off of world markets. Other majors in the uranium space have also announced plans in recent months to curtail or halt production until a higher uranium price returns. PDN’s one-year price performance is shown below: 
MNs_Wednesday_February_12_2014.jpg
  • Exelon (EXC:NYSE), one of the largest electricity producers in the United States, recently  announced intentions to possibly shut down some of the nuclear power plants it runs (it owns 10) in the face of nuclear energy’s inability to compete with heavily subsidized renewables and cheap natural gas in the US. EXC’s one-year price performance:
MNs_Wednesday_February_12_2014_exelon.jpg
  • In recent elections in Japan, Yoichi Masuzoe, an ally of Prime Minister Shinzo Abe, won election to the Governorship of Tokyo. Many believe this victory to be a repudiation of anti-nuclear sentiment in Japan, however roughly half of Japanese citizens polled want the country to move away from nuclear power in the future. A weak Japanese Yen is increasing the cost of fossil fuels imported to take the place of nuclear generated electricity. This is hammering the Japanese current account balance, not to mention making electricity more expensive. 
  • The US Department of Energy (DoE) is slowly unloading their stockpile of uranium on to the US domestic market. This is managed, but will amount to at least 5 million pounds of additional uranium supply in the US going forward. This disposition could last for up to 25 years. 

  • Cameco, one of the largest producers of uranium in the world, used their quarterly earnings call earlier this week to throw cold water on any immediate move higher for uranium pricing or uranium equities. 

Reading Between the Lines 

I have said many times before that I find listening to company earnings calls to be an extremely beneficial exercise. The rationale here is that though it does require the ability to “read between the lines” in some cases, the discussion of a commodity or industry from a major producer in that industry helps to balance much of the noise we hear from the junior space. 

Cameco’s (CCJ) earnings call last Monday was important if for no other reason that they publicly scrapped their stated goal of producing 36 million pounds of uranium by 2018 saying “it no longer makes sense.” 

MNs_Wednesday_February_12_2014_ccj.jpg

As a point of reference, CCJ produced 23.6 million pounds of uranium in 2013 at an average realized price of $48.35 per pound. The costs were approximately $34 per pound (all figures for the year and in USD). 

Tim Glitzel, the company CEO stated, “There has been little to no improvement on the issues needed to help clear the oversupply and uncertainty the industry continues to face,” 

He went on to outline the company’s plans going forward. Listening to this and reading through the company’s MD&A1 was also telling:

  • Exploration expenses down by 35 to 40%
  • CCJ announced the sale of its interest in Bruce Power which will net the company $129 million. This move was undertaken so the company could focus its efforts on uranium production. Restructuring like this is done to enhance financial flexibility and is the type of move many other majors involved with other commodities are undertaking
  • CCJ is content with its composition of reserves and resources and didn’t sound particularly interested in any M&A in this market. This is bad for the juniors who look at a takeout as one of the typical exit strategies for shareholders 
  • Long term contracting for uranium supply has slowed to a crawl. According to the company, while roughly 170 million pounds of uranium is under contract in any given year, in 2013 only 20 million pounds was contracted. The nuclear industry usually enters into supply contracts with a 2 to 5 year window. This implies less need for uranium in the near-term and is likely another major reason why the uranium spot and term prices haven’t rebounded faster. 
MNs_Wednesday_February_12_2014_yellowchart.jpg

The chart above shows anticipated uranium requirements for US nuclear power plants. Though a small amount of uranium is currently being contracted, it is encouraging to see the gap between uranium pounds under contract and unfilled widening substantially starting in 2015-2016. This implies a need for additional contracted supply. With only four million pounds of domestic uranium production, it will be interesting to see the source of the uranium needed to fill this looming gap. 

Facts like the ones listed above paint the picture of a company (CCJ) focusing on sustainability rather than survivability. Survival is the specter haunting most junior mining companies today. Clearly, CCJ will survive the current malaise in the commodity markets given its opportunistic positioning. 

What To Do Now? 

With a moribund uranium price, I still believe that finding the lowest-cost producers or near-term production stories offers the greatest potential for long-term after tax returns. I continue to believe that stories like UR-Energy (URG:NYSE, URE:TSX) and Uranerz (URZ:NYSE, URZ,TSX) require your attention as they are well run companies that offer the ability to produce uranium at a low cost in a reliable geopolitical jurisdiction. Both companies have had great runs of late, but as production continues (in the case of URG) and commences soon (in the case of URZ) cash flow generation and low operating costs should lead to a higher share price. I own shares in URZ. 

URG’s one-year price performance: 

MNs_Wednesday_February_12_2014_urg.jpg

URZ’s one-year price performance: 

MNs_Wednesday_February_12_2014_urz.jpg

Special attention should also be paid to the discoveries in the Athabasca Basin. The discoveries in this part of the world are truly world class based on grade and location. That said, it will take a much higher uranium price to make any of these discoveries “economic” and therefore, I would take profits immediately upon any discovery and subsequent share price appreciation. 

The Takeaway 

Despite the “seesawing” in this Note, I am still bullish on uranium, but continue to believe that the payoff will be delayed somewhat. As I have said numerous times in recent Notes, selectivity in investments is crucial. Specifically, selectivity in the type of uranium mining, in the market cap of a company, and in the geopolitical jurisdiction where a deposit is located must all factor into your analysis. 

In a recent video interview2, I called uranium a “contrarian’s dream”. Many market participants, with other agendas or biases absolutely hate it. I admit that waste disposal, permitting, and several other factors do make uranium investing treacherous territory. That said, there are long-term reasons to seriously consider uranium companies in your portfolio. Even the most sanguine analysts forecast uranium demand to reach up to 240 million pounds in the next ten years over 170 million pounds today. Low prices are closing mines and delaying expansion. A lack of financing (with Uranium Participation Corp’s (U:TSX) $50 million bought deal being a notable exception) is making it hard for exploration to continue. Finally, the nuclear power build out in Emerging Markets combines with the other factors I mentioned to paint a positive outlook for uranium going forward despite the low current spot price. 

Geoffrey Chaucer was right when he wrote, “Patience is a virtue.” 


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