Uranium spot prices have shown more life recently, says David Sadowski, mining equity research analyst at Raymond James, and he expects upward pressure to continue as utilities resume buying to meet future needs. In this interview, he tells The Energy Report the time is ripe to invest in uranium company stocks.
The Energy Report: David, the price of uranium has been volatile recently. What's behind that?
David Sadowski: Spot prices ran in late 2014, touching $44/pound ($44/lb) as a handful of utilities entered the market, either expressing buying interest or buying material outright. At the time, supplies available to the market for spot delivery were quite thin, leading to upward pressure on prices.
But the price ran pretty quickly, and as the calendar and financial end-of-year approached, we saw a big drop-off in volume as buyers retreated to the sidelines. The timing caused the price to move around drastically. This type of thing isn't entirely unusual, if you pull up a 10-year price chart. Right now, the spot price is about $37/lb, and the long-term contract price, which has been a lot less volatile, is $49-50/lb.
TER: Do the sanctions on Russia have any effect on the price?
DS: Right now I would say no, but they could. Russia controls a huge chunk of global uranium supply. Not all of it leaves the country, because Russia has a decent-size, 25 gigawatt (25 GW) domestic nuclear fleet. That's about 7% of global operating capacity. But a lot of that material does get exported both to other countries and to client states, where Russia has constructed reactors and is under contract to supply fuel for the life of a unit under the build/own/operate model.
Quantifying the uranium supply from Russia, we estimate about 8 million pounds per year (8 Mlb/year) is mined annually within Russia, 60 Mlb is mined in Kazakhstan, which has very close ties to Russia, and the country has another 15-20 Mlb from underfeeding and coming out of stockpiles. That's about 45% of the global supply of natural uranium right there. On the enrichment side, a key part of the fuel cycle, Russia controls about half the world's operating capacity. It contributes roughly 20% of the U.S. requirements for enriched uranium product, and about a third of the European Union's. Remember, about 11% of the world's power comes from nuclear. Russia's dominant position in the nuclear fuel cycle could be key if it chooses to exert pressure on the West. If it chooses to cut back on exports, that would have a very positive impact on prices, in our view.
TER: I read that Rosatom is talking about renewing cooperation with the U.S. on nuclear material. Is that anything substantial?
DS: I would say, with the state of Russia-U.S. relations at the moment, we're very unlikely to see another agreement such as the U.S.-Russian Highly Enriched Uranium (HEU) deal, which saw the downblending of about 20,000 warheads and supplied U.S. reactors with fuel from those warheads for about two decades. It was good to see the two major nuclear powers cooperating. But I wouldn't expect another major nuclear or uranium-related deal any time soon because of the relationship today. There are also other geopolitical and economic disincentives that should cause Russia to hesitate from starting a similar HEU program.
TER: Is the price volatility going to continue? What is your forecast for 2015?
DS: 2015 should be a good year. We think we're off the bottom, and we expect utilities to pick up buying activity with renewed annual budgets in the first part of this year. We've already seen increased interest, with Duke Energy Corp. (DUK) notably buying 150,000 pounds (150 Klb) and others talking about midterm deals. We're looking for both term and spot buying activity to increase. With spot supplies thinned, buyers will be less likely to dump material at fire sale prices, so we should see the price move upward. The utilities, after all, have been pretty quiet the past couple of years. They need to buy to cover future needs-particularly to meet requirements into 2018 and beyond. Given that the contracting window starts three to four years in advance, we're into that period now.
We project spot prices to average $38/lb in 2015. But I think there's real potential for spot to rocket through the $40/lb level before the year is out. We've all seen how quickly spot can move. With utilities poised to jump back in and supplies thinned by throttle-backs at mines, the spring is coiled pretty tightly. It's just hard to time the move. With another supply side shock-like a win by ConverDyn Corp. (private) in its suit against the U.S. Department of Energy, which is dumping into the market, reduced supply out of Russia in response to Western sanctions, or a disappointment in the planned ramp-up at Cigar Lake, which we think is a 50/50 bet-spot prices could skyrocket.
TER: Nuclear power plants in the U.S. seem to be closing down gradually. What effect is that having on companies in the uranium space?
DS: In the U.S., we've seen some half-dozen reactors announce shutdowns. More are possible, but not many. The most vulnerable are small, old, single-reactor plants with high operating expenses relative to typical U.S. plants, and reactors located in unregulated merchant electricity markets where they get outcompeted by cheap natural gas power plants. Post-Fukushima safety upgrades are also playing a small role at reactors with slim operating margins and short remaining operating lives. The closures will be offset by five new reactors under construction at Watts Bar, V.C. Summer and Vogtle.
"If Russia chooses to cut back on uranium exports, that would have a very positive impact on prices."
In the U.S., nuclear power represents about 100 GW of operating capacity. We expect that to pick up slightly over the next several years. Aside from a small amount of inventory that was potentially being sold as a result of shutdowns, things remain really positive for U.S. uranium demand. We continue to expect the U.S. to be the top dog in the world of nuclear power until surpassed by China in the mid-2020s, so uranium investors shouldn't be overly concerned by U.S. shutdowns.
TER: What are the prospects for restarting Japanese nuclear power plants?
DS: We expect at least four restarts this year-Sendai 1 and 2 and Takahama 3 and 4-and there is potential to get several more by year-end. We expect the pace of restarts to accelerate after the first handful, as utilities and the Japanese Nuclear Regulation Authority learn the process of how best to submit and approve restart applications. It is, after all, a brand-new process for both sides.
Further out, at least a third of the pre-Fukushima 54-reactor fleet should return to operation. Another third is more uncertain, based on the reactor locations and design of the units. The world's biggest plant, Kashiwazaki-Kariwa, is a good example. But we continue to view the restart of reactors as a critical psychological event for the uranium space. It's unlikely to result in an immediate jump in the uranium price or a surge in contracting by Japanese utilities, but it should provide comfort that Japan won't dump its significant inventories, and that delivery deferral requests will slow down further.
TER: You said it's not likely to result in a jump in new orders. Is that because the utilities are using up the stockpiled inventories?
DS: That's right. We expect the utilities in Japan to slowly chew through their existing inventories, for the most part.
TER: Is Japan still deferring fuel deliveries?
DS: Getting firm data on that subject is a little tricky, but indications from producers are that Japanese utilities have stopped requesting new deferrals. Undoubtedly, some of the material destined for delivery in 2015 will now be delivered in the future-or perhaps not at all. But new requests for deferrals, based on what we're hearing, have dwindled. And that's a positive sign. It shows that Japan's utilities see nuclear restarts as inevitable.
TER: There has been a merger in the uranium space recently, Energy Fuels Inc. (UUUU) and Uranerz Energy Corp. (URZ). Will it have an impact on the uranium space generally?
DS: The merger could spur additional deals in the space, which have slowed down somewhat in the last year or two. There is a lot of logical consolidation potential remaining in the U.S., particularly among the assets amenable to ISL production. The company that's most affected in our coverage universe is Ur-Energy. Given the success that Ur-Energy has had in ramping up Lost Creek, we see it as moving into a position of equity price and balance strength. It could facilitate takeouts of some of the smaller ISL players in Wyoming over the next 12-18 months.
On the flip side, as Lost Creek proves its technical worth, wastewater issues diminish and the company provides clear demonstration of stable cash flow, Ur-Energy is a logical takeout candidate, too. Bigger companies now operating ISL in the U.S. could include Energy Fuels, with Uranerz's Nichols Ranch mine now in the stable, assuming the merger closes successfully.
TER: In the Raymond James uranium industry analysis issued in October, it was observed that "equities and fundamentals have diverged." What opportunities are in this for investors?
DS: We were describing the different paths in the space. The spot price was rising and supply/demand fundamentals were improving, whereas equities got pummeled after highs touched earlier in the year. This is still the case. Spot is 30% above its bottom, and yet indicator stocks like Cameco recently reset 52-week lows, and the share price of the UPC fund is implying a discount to its NAV.
The downdraft in oil prices has also had a dampening effect on uranium stocks, widening the divergence, despite the fact there's no relationship and very little global competition between the two commodities. Nuclear, after all, is a stable generator of emissions-free baseload power, the plants can operate reliably and inexpensively for more than 60 years, and investment decisions on new reactors are made on these criteria.
We expect this year to benefit uranium equities, as a series of developments should support a positive story for prices in the medium term, derisking a trajectory toward the $70/lb equilibrium price level, which is the level where enough development is incentivized on new mine supply to meet long-term demand. These 2015 developments include the long-awaited restarts of Japanese reactors, a surge of new grid connections in Asia, further rationalization on the supply side and, most critically, a wave of nuclear utility buying after a long hiatus.
Accordingly, we are quite confident in a reversal in the divergent trend. The stocks are washed out and have a limited downside risk, but the upside potential, with several tailwinds brewing on the macroeconomic level, appears very compelling. We think investors should be buying these stocks right now.
TER: David, thanks for your time.
David Sadowski is a mining equity research analyst at Raymond James Ltd. covering the uranium and junior precious metals spaces. Prior to joining the firm, Sadowski worked as a geologist in western Canada with multiple Vancouver-based junior exploration companies, focused on base and precious metals. He holds a bachelor's degree in geological sciences from the University of British Columbia.
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