Editorial: Kazatomprom’s cuts and uranium’s rebound

What a difference a month makes. After an absolutely desultory past few years for uranium oxide prices — which saw the spot price of yellowcake hit 11-year lows of only US$18 per lb. in December 2016 — by Jan. 16 the price was back up to US$22.50 per lb. (a 25% rise from the low), after four straight weeks of advances.

On a wider scale, the price chart for uranium looks like it may have reversed its downward trend since the Fukushima nuclear disaster in 2011, which prompted Japan to take all its reactors offline and made countries such as Germany forsake peaceful nuclear power altogether.

One catalyst for the strengthened uranium price was the surprise decision on Jan. 10 by Kazakhstani state-owned Kazatomprom to lower its 2017 uranium production 10% — equating to 5.2 million lb. U₃O₈, or 3% of global mine supply.

More conservative commentators are at least conceding that Kazatomprom’s move puts a US$18 per lb. floor on the uranium spot price, with Kazatomprom selling most of its output at spot prices. This US$18 level is a 75% decline from pre-Fukushima price levels.

Kazatomprom chairman Askar Zhumagaliyev said the drastic cut was “due to the prolonged recovery in the uranium market,” and said the exact production levels for each mine owned or partly owned by the firm would differ from mine to mine, as determined and approved by their respective management boards.

“While the outlook for nuclear energy growth continues as strong as it has been in many years, the realities of the near-term uranium market remain in oversupply,” Zhumagaliyev said in a release. “Kazatomprom, and its joint-venture partners, have had to make responsible decisions in light of these market challenges. These strategic Kazakh mineral assets are far more valuable to our shareholders and stakeholders being left in the ground for the time being, rather than adding to the current oversupply situation. Their greater value will instead be realized when produced into improved markets in the coming years.”

This decision by the world’s largest uranium miner in the world’s largest uranium mining country sets the tone for the whole uranium subsector, especially given that Kazatomprom’s business plan for the past several years had been to produce as much uranium as possible, no matter the price or how weak the market.

Cantor Fitzgerald mining analyst Rob Chang calls Kazatomprom’s disciplined production cuts a “game changer” and an “inflection point in the uranium space.”

BMO Capital Markets estimates that Kazatomprom’s 5.2 million lb. U₃O₈ cutback for 2017 equates to 20-45% of BMO’s previous projected 2017 global oversupply of 11.5 million lb. U₃O₈ (including buffer inventories for new reactors, or 25.6 million lb., excluding the buffer inventories).

BMO also makes the point that Kazatomprom’s cutbacks will likely affect the spot price more than cuts by a producer such as Cameco that primarily sells into long-term contracts. For instance, Cameco announced annual production cuts of 7.5 million lb. U₃O₈ on April 21, 2016, with little effect on the spot price, even if price support is felt longer-term.

In Canada, it was only six months ago that Cameco tabled its worst financial quarter since 2005, with CEO Tim Gitzel saying that “this second quarter has probably been the toughest quarter in the toughest market we’ve seen in the last decade, and our results reflect just how challenging the environment is … uranium demand remains low and prices are very depressed.”

If the mood isn’t yet rosy for uranium miners on the ground, it has at least improved dramatically for their shareholders and stock traders. Uranium stocks are up sharply across the board, with the following one-month share price gains on Canadian exchanges: Cameco, 20%; Denison Mines, 35%; Azarga Uranium, 71%; Energy Fuels, 29%; Fission Uranium, 18%; Kivalliq Energy, 47%; Laramide Resources, 48%; NexGen Energy, 44%; Purepoint Uranium, 39%; U3O8 Corp., 50%; UEX, 27%; U.S.-traded Uranium Energy, 44%; Uranium Participation, 8%; and Ur-Energy, 33%.

One wild card is incoming U.S. president-elect Donald J. Trump’s attitude towards nuclear power and nuclear weapons. Cutting subsidies to alternative energy could bolster more traditional power sources such as nuclear, though other pro-coal and natural gas policies could leave nuclear on the sidelines. In terms of defence, Trump tweeted on Dec. 22 that the U.S. “must greatly expand and strengthen its nuclear capability.”

If such a nuclear weapons upgrade and expansion indeed takes place in the years to come, we may find this Dec. 22 tweet to be the exact inflection point for uranium prices this decade.