6 years of Crushing declines. Is now the time to buy this commodity?

Mar 15, 2017 | Securities

After 6 consecutive years of declining prices, uranium stocks have fallen around 90% on average, and the price of uranium has declined to all-time inflation adjusted lows.

However, there are signs that things might be starting to improve in the uranium market.

1. Background

Let’s have a look at uranium’s price history:

Source: indexmundi.com

After a peak in June 2007 of US$136 pp, uranium prices began to decline due to the global financial crisis and to buyers’ resistance to high prices. In the second half of 2010, prices began to rise following news that China was going to increase demand, until the Fukushima disaster in March 2011 caused another sharp decline.

With renewed fears over nuclear safety, countries started to move away from nuclear power, and uranium prices started a new downturn. Even worse, mining projects that started before the accident continued to increase supply even as demand was going down. The result: a 60% price decline over 6 years.

But in the past several months, the spot uranium price has begun to rebound from these all-time lows, albeit it’s still well below the 10-year average.

Source: RBC commodity monitor

2. Supply

Today, even after recovering to US$25 pp, the spot uranium price is so cheap that production just isn’t profitable for miners. With breakeven points of around US$60-70 per pound, the world’s largest uranium producers are cutting back supply and there are very few new mines entering the market.

Most significantly, mines such as Honeymoon, Beverly and Beverley North here in Australia, Kayelekera in Malawi, Alta Mesa in the US, and Azelik in Niger have all ceased production due to the crash in uranium prices.

More recently, Kazakhstan, the world’s largest uranium producer, announced a 10% cut to this year’s output due to oversupply. This is equivalent to about 3% of total global supply.

3. Demand

Demand for uranium is largely determined by the number of operating nuclear reactors. According to the International Atomic Energy Agency, there are currently 60 under construction:


Source: IAEA

If we add this to the number of reactors in planning and proposal phase, we get a very sizable amount. According to the World Nuclear Association, there are 160 reactors in “Planning” phase and over 300 more in the “Proposal” phase. Considering there are 449 reactors in operation globally, this amounts to a 116% increase over the long term.

4. Price turnaround?

With downward adjustments in supply and growth in demand, we might be at a turning point in the uranium market. In fact, there’s a chance that demand might overtake supply in the next few years. According to Cantor Fitzgerald Research, this gap might reach 10 million pounds in the next 3 years.

Source: mining.com

The OECD is more conservative, and projects two scenarios for demand until 2035 (“high” and “low”). It estimates that all “existing and committed production” should meet the low scenario until 2033, and satisfy about 60% of the high demand case in 2035.

Source: OECD

The OECD proceed to note that if we include “planned + prospective production”, supply would exceed the low demand scenario. They also note that:

“(…) mine production is rarely more than 85% of mine production capability, and (…) several challenges will need to be overcome in order for all planned and prospective uranium projects to be successfully brought into production.”

Also,

“(…) it should be noted that production capability is not production. The gap between production and requirements from 2008 (and earlier) to 2014 has been met by drawing down secondary supplies. (…) Maintaining production at the level required to meet reactor requirements in the coming years, particularly in light of declining market prices for uranium through 2015 and 2016, will be a challenge.

At UGC, we are aware that commodity prices are notoriously difficult to predict. We would classify a bet in the uranium market as “speculative” in the current conditions.

Still, there are important signs that the uranium market might tighten in the medium term, and that we are witnessing a turnaround in the spot price. Given the circumstances, we think uranium is a speculative buy.

If you want to learn how to invest in stocks and analyse the market to identify profitable and deadly turning points, contact United Global Capital today for a no cost, no obligation consultation on 03 8657 7640 or email info@ugc.net.au to learn more about Quality, Value, Trend (QVT) selection methodology.

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The information contained in this article is General in nature and has been prepared without taking into account your objectives, financial situation and needs.

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<a href="https://ugc.net.au/author/joel/" target="_self">Joel Hewish</a>

Joel Hewish

Joel is the founder and CEO of UGC. He is a licensed financial advisor with 15 years experience assisting clients grow, manage and protect their wealth.

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