This report draws largely on the presentation by Cameco’s Snr VP/CFO – Grant Isaac – from May 10, 2016 at the Bank of America/Merrill Lynch “Global Metals, Mining & Steel Conference.” The full item can be downloaded here.
Why am I using this report as a source? Well, unlike interest groups, lobbyist, news reporters, and government officials – Cameco executives would go to jail if they knowingly misled the public on the topic, since their earnings and stock priced are directly tied to it. They also need to know the topic since that is their sole business. And finally, I’ve known several of Cameco’s executives on both a business and personal level for several years – they are honest and nice people.
Long-run fundamentals – look great
- reactor growth right now is occurring at a rate we haven’t seen in the last 40 years, and reactors run on fuel created from uranium
- reactors are being built in several locations for several reasons
- replacement of baseload power
- incremental additions to the grid
- new growth is occurring, requiring a massive install of 24-hour baseload power
- the desire for 24-hour baseload power that contributes to clean air, in regions where pollution is an issue
- all these new reactors require fuel, seeing growth in uranium demand going from about 170 million pounds of uranium consumed—that’s the estimate for 2016—to about 220 million pounds of uranium 10 years from now; an increase of 29.4%
- But, these new reactor builds and thus demand growth, are not seeing a corresponding growth in future supply; since the current low spot-market price for uranium is hindering/stopping/not-incenting investment into mine expansion and/or development; this is causing a “depletion curve,” or slow a march to “not enough” from “too much” uranium supply
- We are witnessing the creation of a major future supply gap as demand grows from 170-million pounds per year up to 220 – or up 29.4% – over the next decade. Mine expansions are not happening anywhere to address this.
The spot-market – so why are prices low?
- Has only 2 reactors running now, 3 more approved, (but 30 – 35 look like they should open in the future)
- They are
- still taking deliveries and are stock-piling uranium, or
- deferring deliveries to the back-end of their contracts, which then causes
- some producers to have extra inventories and thus sell them on the spot market that is already oversupplied
- the enricher complex (process) causes excess material to exist
- There is a psychological impact on the market from their situation
- USA – has seen some early power plant shut downs causes fuel to be available back onto the market
- Global uranium production – has been steady so there is over capacity
So, Cameco – which is basically/sort-of the benchmark of Saskatchewan’s uranium mining industry – is in transition from a supply-driven to a demand driven industry. So, Cameco is going to focus on tier one assets, which ensures maximum rewards and risk mitigation.
- Tier one is:
- Athabasca Basin – the high-grade mines McArthur and Cigar
- within the Inkai corridor in Kazakhstan
- where you have about 40% of the world’s supply of uranium, coming from assets that on a life-of-mine basis are operating at $20 or under for mined and milled
- Tier two is:
- lower quality assets in Kazakhstan, some of the open pit, lower grade, high tonnage operations that you’d see in Western Australia, some of the ISR mines in the U.S
- $40 to $45 a pound mined and milled basis
- Tier three is
- A lot of these are in Africa
- Everything over $50 per pound
Now, given the current low prices – junior exploration is not blossoming as it was a few years ago.