Palisade Research - Thu, Jan 25, 2018

Killing The Bear: How Cameco Is Forcing Up Uranium Prices

article title text over a picture of a barrel of yellow cake uranium

Uranium was in the midst of a renaissance when the Fukushima meltdown derailed the rally in 2011.

Since then, uranium has been in a slump. . .

This isn't surprising as every nuclear meltdown in the past has been followed by an extended uranium 'recession'.

For uranium producers - it was not an immediate problem.

The majority of producers sell uranium that is locked in at a higher price through long-term contracts.

But here's the problem. . .

The long-term, higher-priced, contracts are now expiring - and producers are freaking out.

Take a look at Cameco.

With average production costs including D&A at US$28/lb of uranium, and spot prices at $23/lb, Cameco can't make any money at the current spot price.

That's why with their long-term contracts expiring in 2020 - 2021, Cameco is trying to create a floor and drive prices up. Their current long-term contract book is around $40-$45/lb.

And things have already started. . .

  • In April 2016 Cameco suspended production at the Rabbit Lake operation in Saskatchewan and curtailed production at their US mines.

  • In December 2016, Kazakhstan - the world's largest uranium producing country - announced it would be cutting 10% of their uranium output in 2017.

  • A few months later in November 2017, Cameco shocked the markets by also suspending production from the McArthur River mine and the Key Lake milling operation.

  • Finally, in December 2017, Kazakhstan announced they would by cutting uranium output again by 20% in 2018.

Each announcement they made about cutting output caused uranium prices to spike.

line chart of uranium prices from January 2017 showing spikes as various production cuts were annonced

Why did prices react so violently?

That's because Kazakhstan produces 40% of the world's uranium output and Cameco's McArthur River mine alone produces 12%.

That's more than half the world's uranium production. . .

area chart shows global uranium supply from 2014 projected to 2025, and reflects supply declines from recent production cuts

Further production cuts are still on the table.

At these prices, it's literally cheaper for Cameco to buy uranium on the open market than produce it themselves.

"To meet our delivery commitments, we make use of our mined production and inventories, and we purchase material where it is beneficial to do so. The cost of purchased material may be higher or lower than our other sources of supply, depending on market conditions."

Cameco is projected to produce 13.8 million pounds in 2018 but has fixed delivery obligations of 26 million. . .

Considering there is 65 million traded on the spot market - 75% of which by speculative traders - after selling their inventory, the spot market purchase Cameco will need to buy for their obligations will certainly drive prices up.

The general consensus was a supply gap in 2020 & 2021. However, Cameco is readying the markets and politics now for a major price push now. Cameco made it clear that the McArthur shut down was initially 10 months and this will be extended until they get price recovery they need.

Long-term contracts are crucial to uranium producers.

Not because profit margins can be locked in, but they are predominantly for resource replacement.

This means the uranium being extracted today will be replaced by drilling and finding more uranium reserves underground.

Considering that uranium projects can cost billions to develop - long-term contracts are the lifelines for producer.

line chart shows uranium spot vs. long-term contract prices from January 2013

Cameco needs higher prices to survive.

We believe they will continue to drive prices up to at least $50/lb in the near-term, and then let the supply gap exaggerate price volatility.

So, The Companies That Will Benefit From Higher Uranium Prices?

One cornerstone company in our uranium portfolio is Goviex Uranium (CVE:GXU, OTC:GVXXF, 7GU:FRA).

You need to read our in-depth write up here.

GoviEx has now amassed one of the largest publicly-held combined uranium resources, with M&I resources of 143.5 million pounds U3O8, and inferred resources of 86 million pounds U3O8.

Each of the company's properties has significant exploration upside - with numerous drill-ready targets.

While most uranium explorers have ceased operations, GoviEx has been adding the most value it can with minimal spending in preparation for higher uranium prices.

2017 has been a very productive year for them.

In Niger, GoviEx has received significant interest from multiple institutions that would like to arrange $220-million of senior debt financing for the construction of the Madaouela uranium project.

The project has a PFS, highlighted by an after-tax NPV8 of US$340 million with an IRR of 21.9%. The project economics are at a long-term uranium price of US$70/lb U3O8, and cash operating costs of US$24.49/lb excluding royalties.

To move forward, GoviEx must now work towards a bankable feasibility study following continued programs focused on optimizing the operating and capital costs of the project. These programs include the assessment of nanofiltration - a technology that targets the recovery of sulphuric acid used to leach uranium.

Another condition for financing is having an 'offtake' in place.

GoviEx has already engaged Houlihan Lokey EMEA LLP as financial adviser to assist in securing long-term offtake agreements.

In Zambia, GoviEx acquired the Chirundu and Kiraba valley properties, which significantly expand and improve the potential economies of scale of the Mutanga project.

The Mutanga project now consists of three contiguous, fully-permitted mining licences in a contiguous property of approximately 140 kilometres in strike length.

Following the acquisition, GoviEx was able to report a PEA for the expanded Mutanga project. Highlights included: an after-tax NPV8 of $112 million with an IRR of 25%, at a long-term uranium price of US$58/lb U3O8.

To top it all off, GovEx is headed into 2018 with a very strong cash position, having closed a $5.4 million at the end of the year.

We believe GoviEx is one of the premier exploration companies leveraged to the inevitable rise in uranium prices. The company has proven it can get things done, regardless of economic environment, and the news flow in 2018 looks strong.

We have emphasized this before, if you are contrarian and enjoy the uranium narrative, GoviEx is one of the go-to names.

Palisade Global Investments Limited holds shares of GoviEx Uranium. We receive either monetary or securities compensation for our services. We stand to benefit from any volume this write-up may generate. The information contained in such write-ups is not intended as individual investment advice and is not designed to meet your personal financial situation. Information contained in this report is obtained from sources we believe to be reliable, but its accuracy cannot be guaranteed. The opinions expressed in this report are those of Palisade Global Investments and are subject to change without notice. The information in this report may become outdated and there is no obligation to update any such information. Do your own due diligence. publishes interesting contributor articles in addition to its own content. We have not verified any of the above details.

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