UUUU - Uranium Outlook 2021: Positive Fundamentals Point to Growth

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The uranium spot price has held firmly in the US$29 per pound range since September, solidifying a stellar performance in a year rampant with disruptions and production issues.

Despite being US$21 short of the US$50 threshold we often hear is needed to incentivize projects, the U3O8 spot price has added 21 percent to its value year-to-date, and 37 percent from its January low to its May high.

The start of the year saw depressed prices sitting in at the US$24 mark. Supply constraints related to transport began to emerge in March pushing prices to US$27 per pound.

COVID-19 lockdowns in Canada forced Cameco (TSX: CCO ,NYSE:CCJ), a leading producer, to curtail its only operating mine in Canada, which significantly impacted global supply and pushed prices north of US$30 for the first time since 2016.

As nuclear cycle research firm UxC’s Philip Johnson explained, Cameco’s temporary shuttering of the Cigar Lake mine in Saskatchewan, was just one of the catalysts that propelled U3O8 values to a four-year high.

The VP of fuel cycle, pointed to Kazakhstan’s Kazatomprom (the largest uranium producer globally) halting development into 2021 as well as reducing its 2020 guidance as another catalyst.

“Other uranium projects in Namibia and South Africa experienced COVID-19 pandemic-related production declines, albeit to a lesser extent,” said Johnson. “The market is also preparing for imminent loss of production of two long-standing mines in Australia (Ranger) and Niger (Arlit).”

The massive output decline pushed prices to US$33.93 in May, its highest value year-to-date.

Not only were the two largest companies in the sector required to drastically reduce production, both were then forced to the spot market to make purchases, adding more demand in a poorly supplied market.

Uranium outlook 2021: Bull market or short-term rally?

Complete output numbers from 2020 are still a few months away, however, during an April webinar , Johnson and UxC estimated that production would be reduced by as much as 13.1 million pounds. Representing a 9-12 percent drop from the pre-pandemic forecast.

In 2019, output from all countries was 64,566 tonnes or 142.3 million pounds, accounting for 81 percent of all global demand. A 13 million pound decline into 2021 will likely continue to support a higher price.

“When they (prices) recovered, I think people started to take more notice,” said Nicolas Piquard, vice president, portfolio manager and options strategist at Horizons ETFs (TSX: HURA ). “Uranium was one of the best performing commodities (in 2020) with gold , one of the few commodities that was up on the year.”

Another factor that could motivate prices is an increase in demand, which as we have seen current supply can’t meet.

Persistent production disruptions in 2020 into 2021 may be the catalyst that brings utility companies to the table after years of speculation about when they would draft new supply deals.

It is believed that a sinking uranium price in 2018 and 2019 kept the electricity generation companies from penning deals, something that Piquard thinks will change as prices continue to climb.

The potential for utility companies to come to market will also be intensified by a decrease in the amount of U3O8 Japan is selling into the market.

“All those things are kind of changing,” he said. “Now, when they (utilities) see the price go up, they might decide, well, maybe now it’s time for us to make sure the supply is there for us as well. So I think it changes the dynamic a little bit.”

Independent Speculator Lobo Tiggre also sees these pending contracts as a price catalyst.

“In my opinion, the biggest factor is that secondary supply is no longer flooding the market,” said Tiggre.

When asked what factors he would be watching in terms of price motivators into 2021, the CEO of Louis James was adamant about utility contracting.

“The big one is news of new long-term contracts between the utilities and the big miners,” he said. “This is the logjam that changes everything when it breaks.”

Uranium outlook 2021: Juniors anticipate bull run

As majors curtailed production and redrafted yearly guidance, juniors were also left in a precarious position. A rising spot price did improve their endeavors, however, with travel restrictions and lockdowns in place advancing projects was challenging.

While spot prices did increase considerably over the year from January, Curtis Moore of Energy Fuels (TSX: EFR ,NYSEAmerican:UUUU) explained that is only a small part of the larger sector.

“The spot market is driven mainly by traders and intermediaries, often transacting the same material amongst themselves,” explained Moore. “Utilities and producers occasionally dip their toes into the spot market to transact small quantities. But, the ‘real’ market among suppliers and utilities is opaque, and many transactions involving utilities are not reported.”

Moore, the VP of marketing and corporate development for the American resource company went on to note that prices still remain below what is needed to ramp-up production.

“We have seen activity increase in 2020, but prices are still below the global cost of production indicating that there is still inventory being fed into the market, including underfeeding and lowered tails assays (features of enrichment that compete with uranium mining),” said Moore.

“However, by their nature, inventories are finite. They are depleting and must be replaced at some point at a price that incentivizes mine production. And, this price level is much higher than what we see reported today.”

For Canadian explorer and developer IsoEnergy (TSXV: ISO ) the wide spread disruptions of 2020 are laying the foundation for better prices ahead.

“Uncertainty was the biggest challenge for 2020 in the uranium industry. Uncertainty around COVID-19 related mine shutdowns, signing of the Russian Suppression Agreement, US Election, and overall volatility of the stock market,” said Keith Bodnarchuck, corporate development manager. “As 2020 comes to an end, clarity is starting to appear for some of these uncertainties, which should allow for the underlying fundamentals of a uranium bull market to once again become the focus.”

Energy Fuels’ Moore, also shares the sentiment that years of stagnation have led to uranium’s moment.

“We think there are definitely better uranium markets ahead,” he said, citing demand outstripping supply, inventory shrinkage, deposit depletion and continued high-grading as signs that point to price increase ahead.

“The realizable sales price for uranium is below most miners’ cost of production, which is unsustainable,” he said. “In many ways, history is repeating, and we might be in the beginning of the next run in uranium prices. We don’t know when the market will recover, but it will.”

That optimism was also echoed by James Sykes, CEO and President, Baselode Energy (TSXV: FIND ). The Canadian focused explorer had anticipated utilities to sign contracts in 2020, something he now expects to happen in 2021.

“(Long-term) contracts sound like they will start being signed,” he said. The Baselode head believes the spot market will appreciate, and government green energy deals will help encourage the erection of new nuclear projects, including small modular reactors.

Ultimately all three companies remain hopeful that 2021 will be a better year for the overall uranium market.

Uranium outlook 2021: Energy security issues

In addition to COVID-19 dominating headlines, the US presidential election was also a major topic in the energy sector . Prior to the November vote, president Trump had called for the building of a strategic uranium stockpile .

US$150 million was to be spent annually over a decade to amass the reserve, a proposal born out of the president’s section 232 investigation into the security of uranium imports.

With president-elect Biden winning the election the sector wasn’t sure if he would back Trump’s stockpile proposal. The newly elected president appeared to be pro-nuclear energy on the campaign trail, noting he would support the advancement and implementation of small modular reactors (SMRs).

Whether nuclear energy will be a top priority of the Biden administration remains to be seen, but as Piquard pointed out, for a president inheriting a deeply divided government, nuclear may be the one issue everyone can get behind.

“I think there’s a real need for the Biden administration to work together with Congress, which is going to be a Republican Senate for now, anyway, and a democratic house,” he said, noting it may be diplomatically advantageous for the incoming head of state to choose an agenda that can be viewed as nonpartisan.

“Nuclear energy is one of the things where they might be able to get along and work on something together and, and have, you know, I think there’s a real need for, for more, you know, kind of bipartisan action.”

For Johnson, whether it’s Biden’s positive attitude towards nuclear or Trump’s stockpile neither will lead to significant growth overnight.

“Establishing a uranium reserve in addition to a somewhat nuclear-friendly incoming presidential administration are definitely positive influences on the market at hand,” he said. “However, it’s important to note that both initiatives will likely only show real market impacts over the longer-term.”

In terms of SMRs, Johnson also expects a more prolonged timeline, especially in light of recent developments.

“The US’ best chance to get an SMR online in the near-term involves UAMPS project to build NuScale SMRs at Idaho National Lab,” said the nuclear fuel cycle expert. “However, even under the current pro-nuclear Trump administration, the project is encountering some serious headwinds, as several of the municipalities behind the project have recently backed out due to rising project costs.”

He continued, “Thus, the SMR project, much like the uranium reserve, will likely only impact the market over a longer-term horizon, if at all.”

Uranium outlook 2021: The year ahead

Looking into the New Year sector participants and analysts see prolonged production constraints pushing prices higher.

UxC’s Johnson pointed to Cameco’s decision to shut Cigar Lake down again following the September restart, as evidence we are not out of the woods in terms of COVID-19 impacts.

“The event underscores the fact that while many people believe the pandemic is nearing an end, there’s still a long way to go before it’s actually behind us,” he said. “Thus, the potential for suspensions or disruptions at other major uranium projects is still on the table to some degree. This will definitely be a major issue to monitor in at least the first half of 2021.”

When asked if 2021 will be the year utilities sign contracts, Tiggre responded jokingly.

“Yes. I can’t prove it, but I think so.”

With prices steady at the US$29 range, another price rally could even bring some sidelined projects back online.

“But it takes the better part of a year for even a mothballed ISR mine to ramp back up to full speed, so those are the ones I expect to deliver new uranium projects first,” said Tiggre. “Anything that still needs to be built will take much longer.”

Global demand is also anticipated to grow in the coming years. According to the World Nuclear Association there are more than a dozen nuclear reactors slated to come online, followed by two years of steady rollouts.

These developments are especially promising to junior companies.

“I am extremely bullish on the 2021 uranium market; new reactors are continually coming online, and sentiment towards nuclear is improving because nuclear power offers the only reliable carbon-free energy source,” said IsoEnergy’s Bodnarchuck.

“There will need to be a major price adjustment of uranium soon to accommodate an undersupplied market with growing demand.”

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: Baselode Energy, Energy Fuels and IsoEnergy are clients of the Investing News Network. This article is not paid-for content.

The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.