Uranium prices continue downward creep as buyers await bargains

VANCOUVER (miningweekly.com) – Uranium oxide (U₃O₈) prices remain under significant pressure as a significant contango persists and falling spot prices are pulling the long-term contract price lower.

“There’s a price-off bias. Customers believe if they wait a bit longer they will realise a lower price,” Canadian uranium miner Cameco’s senior VP and CFO, Grant Isaac, stated Monday.

Speaking during a Cameco investor workshop held Monday, in which Mining Weekly Online participated, Isaac noted that further investor panic was caused by several analysts having already called a bottom for uranium in the summer, and now into the fall, these investors want to offload long positions before year-end, as spot prices continue to fall.

Since the start of the year, spot prices fell 37% from $34.70/lb to $18.50/lb on November 14, according to independent market consultant UX Consulting. Contract prices fell 57% from $44 to $18.75, as at October 1.

Isaac noted that term contracting was "not happening", adding that, while buyers bought contracts totalling about 600-million pounds between 2010 and 2012, term contracts for 2013, 2014 and 2015 were "exceptionally low", at around 75-million pounds a year.

“None of it is fundamental, but it puts pressure on the spot market and contracts.” He explained that Cameco liked being oversold, where it had more contracted sales before the material was even mined, because the company does not want to be in a position to have to sell output from its portfolio of Tier 1 assets into the lower-priced spot market.

Isaac noted that nuclear utilities had “gone into the spot market” and “purchased well beyond current requirements”, which weighed on contracting.

According to Isaac, by 2021, there would be some 20-million pounds of U₃O₈ that had not been contracted yet.

“There’s a lot of five-year contract buying supposed to happen, but it seems buyers are taking a break, testing riskier supply chains over three- and four-year contracting runways.

“We are not seeing ‘security of supply-sensitive’ buyers out there, who tend to buy at higher prices, as opposed to ‘price sensitive’ buyers, who are waiting for bargains,” he said.

Cameco deliveries account for more than 25% of global U₃O₈ market share, comprising primary production and refined production from Nukem, in a market requiring about 160 000-million pounds a year.

Isaac noted that yearly oversupply was about 15-million pounds to 20-million pounds of U₃O₈, while demand would probably climb to 220-million pounds U₃O₈ by 2025 – outstripping the forecast supply of only 140-million pounds U₃O₈.

Isaac further stated that there were few signs of industry discipline, as the current oversupply was exacerbated by mines such as BHP Billiton’s Olympic Dam mine, which is producing uranium as a by-product, making curtailments nonviable. Richer underfeeding is also expected to reverse as soon as contracting activities resume, said Isaac.

FLEXIBLE STRATEGY
Cameco has, in recent years, moved away from the strategic absolute production goals it aimed for before the global uranium market was stumped by Japan's March 2011 earthquake-induced Fukushima Daiichi nuclear disaster, which prompted all nuclear reactors to be shut down in Japan.

The natural-disaster-induced crisis created significant global uranium market backlash and public opinions about the safety of using nuclear-derived power took a beating. This eroded demand and caused a global supply glut, as the Japanese nuclear fleet remained largely offline.

Japan accounts for a non-buying market worth about 13-million pounds, which creates a significant overhang. The country currently has about three reactors operating today, versus 54 reactors pre-Fukushima.

Meanwhile, Monday’s 7.3 magnitude earthquake that hit Japan in the same area as the previous natural disaster, sparked renewed fears of nuclear catastrophe at Fukushima when media reports noted cooling systems being offline for a storage bath of about 2 500 spent radioactive fuel rods.

Cameco president and CEO Tim Gitzel pointed out that the company had now transitioned to a flexible production model supported by its portfolio of Tier 1 assets, including McArthur River/Key Lake (the world’s largest uranium mine); its 60% share in joint venture Inkai's in situ recovery uranium mine, in south central Kazakhstan, with partner Kazatomprom; and Cigar Lake, which is expected to produce 60-million pounds of U₃O₈ this year and 80-million pounds next year at full production.

Gitzel noted that, despite significant curtailments across its portfolio, such as at Rabbit Lake and its US operations, it required the output from its remaining Tier 1 assets to deliver on existing contract obligations.

“We continue to right-size the company for the current market while remaining vigilant to costs and looking at opportunities to increase shareholder value,” he said, noting that Cameco had pulled cash production costs back to 2011 levels, reduced capital expenditure by about 50%, and reduced exploration spending by about half.

Gitzel continues to believe in the strong future fundamentals of the uranium market and expects it to grow by 2% to 3% a year on average to 2025.

Near-term catalysts include Japanese reactor restarts; supply performance; a return to long-term contracting; access to inventories; and reactor construction, which saw nine new starts so far this year in China, India, South Korea, Russia and the US.