Uranium bull market is being confirmed as prices approach ATHs - Sprott's Jacob White
|Get all the essential market news and expert opinions in one place with our daily newsletter. Receive a comprehensive recap of the day's top stories directly to your inbox. Sign up here!|
(Kitco News) - After uranium prices surged by nearly 8% in August to over $60 per pound and drove mining stocks to double-digit gains, analysts at Sprott see several reasons why demand for the metal should remain strong for years to come.
“Uranium's impressive uptick in August set it apart from many other commodities, which faced declines due to the strengthening USD and China's softening economy,” wrote Jacob White, ETF Product Manager at Sprott Asset Management. “Decade-high uranium contracting levels by utilities, coupled with supply disruptions and risks, are helping to create a robust demand market.”
White noted the strong performance for both the metal and the miners in August. “This upward trend in uranium stocks underscores the sector's strengthening fundamentals,” he said. “It also signals a growing reality that the future of uranium supply will hinge on the revival of dormant mines and the inception of new mining projects.”
He pointed out that uranium’s fundamental outlook makes it among the least susceptible of all the industrial metals to China's ongoing economic challenges.
“Year to date, as of August 31, 2023, spot uranium and uranium mining stocks have gained 25.49% and 21.52%, respectively, and have outperformed the frothy S&P 500 TR Index's YTD gain of 18.73%,” he said, noting that uranium’s performance is even more impressive when measured over longer timeframes. “For the five years ended August 31, 2023, U3O8 spot price appreciated a cumulative 132.39% compared to 26.62% for the BCOM.”
White believes that the metal is approaching a “pivotal juncture” as it gets closer to its 2022 peak of $63.77. “Our analysis suggests that uranium is in its third bull market phase since 1968,” he said. “With the global primary mine supply consistently falling short of the world's reactor uranium needs, we anticipate even more growth potential for the commodity.”
On the demand side, he noted “an unprecedented number of announcements for nuclear power plant restarts, life extensions and new builds,” which should support incremental growth for uranium demand. “Consequently, utilities are accelerating their purchases under long-term agreements, which are on track to exceed last year's 10-year high at 107MM lbs. of U3O8e YTD,” White said. “Notably, increasing contracting from utilities, as opposed to financial entities, has been the primary driver for the rise in the uranium price year to date.”
The supply side of the equation, on the other hand, is already trailing this growing demand “with a cumulative forecasted supply shortfall of approximately 1.5 billion pounds by 2040,” and the gap is expected to widen in the coming years.
“The industry is recognizing the need for more uranium mining,” White said, with even Sweden moderating its decades-long anti-nuclear stance to lift its mining ban and increase its nuclear output. “Yet, despite such announcements, the sector continues to grapple with pronounced supply challenges,” he wrote.
White said that the miners are recognizing the need and the opportunity and have begun restarting dormant mines, including Cameco's McArthur River and Cigar Lake mines, but these and other projects have faced challenges resulting in postponements and lower-than-anticipated production.
Geopolitical challenges have also impacted uranium supplies, White said, pointing to the recent coup in Niger, which accounts for 4% of the world’s uranium production.
“Compounding the uranium supply's geopolitical risks is the question of Russian supply,” he said. “Western utilities have been self-sanctioning, albeit taking deliveries of uranium under existing contracts while not signing any new contracts. Further, legislation to reshore the U.S. nuclear supply chain away from Russia has been advancing, such as the Nuclear Security Act, which helped start the current rally in uranium on July 31, 2023.”
As a result, he said power utilities are refocusing their attention on uranium inventory management to ensure a more secure supply and to avoid price shocks. “Utilities consistently maintain inventory stocks of uranium in various forms, whether in uranium concentrate (U3O8), natural UF6, enriched UF6 or fabricated fuel (not inserted into a reactor),” White said. “This results in a situation opposite to just-in-time inventory and ensures that the utilities can run their nuclear power plants almost continuously. Such stockpiles have been indispensable in bridging supply-demand gaps amidst disruptions.”
But after years of relying on secondary supplies as primary mining production failed to meet global reactor needs, White said the former have peaked and will not be able to fill the supply gap. “The era of taking uranium stockpiles and procurement strategies for granted seems to be ending,” he said.
“Over the long term, increased demand in the face of an uncertain uranium supply are likely to continue to support a sustained bull market.”