The Fundamental Uranium News That No One Has Noticed
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Cameco is buying out the spot market – and no one has noticed
The investing world has failed to recognize a piece of news that is fundamentally changing the uranium space – and finally setting that market up to soar.
To explain the new news, let me take a step back.
The uranium spot market has been overflowing for years. The world was making too much uranium even before the 2011 Fukushima disaster prompted Japan to shut down all its reactors, which sent unneeded Japanese uranium into a spot market already filled to the brim.
The price reacted appropriately, sliding consistently for five years…until the world’s major uranium producers decided to do something about it.
Kazatomprom was first to act, cutting output by 10% in early 2017. Other producers followed suit: Cameco suspended McArthur River, the world’s largest uranium mine; Paladin cancelled a planned expansion and then just shuttered the aged Langer Heinrich mine; Kazatomprom announced two additional production cuts bigger than the first.
Collectively, since 2016 producers have erased or are in the process of erasing more than 30 million lbs. of annual production. That’s really significant.
Take just one of those: just Cameco shutting down McArthur River is the equivalent of Saudi Arabia halting oil production. Both produce 13% of global supply. And the market did take note on the McArthur news, but a small price gain soon subsided. Why should prices stay up in the face of so much spot supply?
It was a fair question and appropriate response…except that those spot supplies have now disappeared.
That brings me to the big news, the thing that is turning the uranium spot market upside own. The biggest news in the uranium spot space – and the news that the market hasn’t noticed yet – is that Cameco plans to buy 10 million lbs. of U3O8 in the spot market this year.
This is huge. Cameco buying 10 million lbs. of U3O8 will boost spot demand by 50%.
It’s all part of Cameco’s plan to revive this sagging sector. Cameco, the world’s second-largest uranium producer, will produce some 17 million lbs. U3O8 this year, but it is contracted to supply 37 million lbs. The company can pull some from their inventory, on the order of 10 million lbs., but that still leaves it needing about 10 million additional lbs. this year.
It said in a recent analyst call that it plans to buy those pounds in the spot market. That will overwhelm spot demand.
The spot market only has some 20 million lbs. on offer. That’s it. Spot volumes are quoted as 40 million lbs. a year but many pounds get bought and sold several times, so the rule of thumb is that 50% of the buying is final.
So Cameco buying 10 million lbs. of uranium this year will boost spot demand by 50%. The spot market can’t handle that.
It especially can’t handle it given that others are also stealing spot supplies. I’m talking about the several large new funds being established to hold physical uranium. The rationale there is twofold.
First, such funds give investors the chance to own direct exposure to a rising uranium price. Second, by holding physical uranium these funds will remove even more supply from the spot market, helping to bring forward the very bull market on which they are based.
The biggest such fund is Yellow Cake, which is currently raising $200 million. Yellow Cake has already secured a deal to buy 25% of Kazatomprom’s production, which will lock away another 5% of global annual production.
For years now utilities have been relying on the spot market to buy the uranium they aren’t getting through contracts. But nuclear reactors can’t run out of fuel or they melt down. So as soon as it becomes clear that the spot market is running out, utilities will rush to ink new contracts.
And those contracts will not come at current spot prices. There’s no point in a producer agreeing to sell uranium at prices that guarantee it will run at a loss. And analysts estimate that producers need, on average, a uranium price of US$55 per lb. – more than double today’s spot price.
So contract prices will be significantly stronger than current spot. Adding to the bullish vibe, producers will probably even demand that contract pricing is somehow linked to the spot price so they retain exposure to a market expected to shoot skyward.
I have been saying for two years now that I needed to see new contracts before I would believe in a new uranium bull market. However, this new information looks very likely the precursor to exactly that.
Of course it’s always the goal to act before the market. That is why this situation – where investors haven’t yet noticed Cameco’s huge spot market move – is so interesting and deserving of attention.