Forbes Feb 28, 2019,4:10 am U-Turn For Uranium As U.S. Decides...

Forbes

Feb 28, 2019,4:10 am

U-Turn For Uranium As U.S. Decides If Miners Pose National Security Threat
Rainer Michael PreissContributor



A Kazatomprom employee monitors the uranium pellet making process from a computer station at the Ulba Metallurgical Plant in Ust-Kamenogorsk, Kazakhstan. (Photo: Daniel Acker/Bloomberg News)

Uranium is a commodity that trades in niche markets that are often overlooked and under-researched by global investors. This was especially true during its bear market decline in recent years, but that now seems to be changing.

The radioactive material used in nuclear reactors was the best performing hard commodity in 2018, a year in which, according to Bloomberg data, over 95% of all asset classes posted negative returns. Renewed interest among investors in uranium has been sparked by a decline in supplies of the commodity at a time when geopolitical tensions are stoking demand.

Uranium had peaked at $152 a pound in June 2007, but tumbled over the following ten years by 87% to as low as $19.75 in May 2017. It’s now trading at around $29. Bank of America’s commodities team has increased its price estimates for uranium concentrate, known as “yellowcake,” for 2019 and 2020 by 22% and 32%, respectively.

Rising geopolitical tensions, particularly between the U.S. and China, and the potential for a “second Cold War” could lead to a resurgence in the production of nuclear-based weapons and navel vessels. Both countries currently import more than 90% of the uranium they consume.

The U.S. Department of Commerce has been investigating whether uranium imports constitute a national security risk and is expected to make a recommendation on April 14. President Trump then has 90 days to decide whether to enforce tariffs, based on the agency’s findings.

The administration is also considering a 25% domestic production quota for national security reasons under a Section 232 petition, a trade law that allows imports to be subject to duties if they are deemed to be a threat to U.S. national security. It was the clause under which President Donald Trump imposed tariffs on imports of steel and aluminum last year.

The uranium market has a relatively small group of mines that produce and then sell to global utilities and defense suppliers. But unlike other commodities, uranium demand is inelastic. And the ongoing uncertainty over potential U.S. import quotas and tariffs has contributed to a continued lack of significant long-term development in market supplies.

Fundamental catalysts for the expected price increase in uranium are based on estimates that global demand is expected to rise 44% by 2035, according to World Nuclear Association, while the largest producers, Kazakhstan’s Kazatomprom and Canada’s Cameco, have been cutting production aggressively in 2018, leading to favorable supply and demand dynamics.

According to J.P. Morgan’s research, Kazatomprom is the largest and lowest cost uranium producer globally. Based in Kazakhstan, the company accounted for about 40% of global production in 2017, and is projected to produce about 59 million to 60 million pounds of uranium concentrate in 2019 and 2020. Kazatomprom‘s stock currently trades at an estimated price to earnings ratio of 8.6 and dividend yield of 8.7% in U.S. dollars.

In the years following the Fukushima nuclear disaster in April 2011, uranium demand dropped dramatically. All of Japan’s nuclear facilities were eventually shut down, and none of the country’s nuclear units came back on line until 2015. As uranium prices fell to about $20 a pound, a great deal of global production became economically unviable because production costs exceeded the spot and long-term prices. This resulted in a substantial reduction in global uranium production and mine closures.

The market capitalization of uranium stocks was approximately $130 billion pre-Fukushima with 450-plus companies in the uranium space. Today it’s about 40 companies with a market cap of under $10 billion, and Kazatomprom accounts for $3 billion of that total following its dual-listing in London and Astana.

Another factor contributing to its price discovery will be the expiration of long-term uranium procurement contracts. Many utility companies around the world tend to hedge their uranium needs years in advance in order to guarantee future prices and ensure a steady supply from reliable producers. In 2020-21, many of these supply contracts are expected to expire and hence might lead to a larger supply deficit.



Uranium concentrate, commonly known as U3O8 or yellowcake, sits in the Uvanas processing facility near the East Mynkuduk uranium deposit in Kyzemshek, Kazakhstan. (Photo: Daniel Acker/Bloomberg News)

Geopolitics in 2019 will also play are key role for the outlook of uranium prices. U.S. nuclear power is at risk as many local producers have shut down, and the country imports 95% of its uranium, half of which comes from Russia and ex-Soviet Union states like Kazakhstan, which includes the world’s largest single producer Kazatomprom. Against this backdrop, the Trump administration launched the Section 232 probe that could force U.S. utilities to buy 25% of their uranium from domestic producers.

Because of this and for the first time in a decade, the market is going into a deficit, with demand of 180 million pounds exceeding supply 140 million pounds, according to the World Nuclear Association’s report titled “The World Nuclear Supply Chain: Outlook 2035.” In addition, China and India are investing heavily in the nuclear sector in order to reduce carbon emissions. China is widely believed to have 19 nuclear reactors under construction and 41 planned.

China is also likely to recommit to the use of nuclear power as the country is weighing off the macro impact of the U.S.- China Trade War on global energy supplies. Uranium demand should increase as a result of new nuclear-power plants in China that are shown in the central government’s plan. If its 2020 target is achieved, China would jump to second in the world from fourth in terms of nuclear-power plant capacity.

China National Uranium Corporation (CNUC) at the end of last year bought controlling stake in the Rössing uranium in Namibia from Rio Tinto. Rössing is the world’s longest-running open pit uranium mine, and produces around 3% of global supply.

In January 2019, India and Uzbekistan signed a deal for the long-term supply of uranium from the resource rich Central Asian country to power India’s domestic atomic reactors. After Kazakhstan, Uzbekistan will become the second country to supply India with uranium. The country has recently commissioned its first nuclear submarine, making India the first sovereign nation to construct a nuclear-powered submarine that is not one of the five members of the UN’s Security Council.

Often in financial markets, the trend is your friend, and the uranium thematic investment theme could continue to offer the most asymmetric payoff across all other commodities. For 2019, I estimate the normalized spot price should be between $45 to $75, and the uranium industry should return between 3 to 5 times if the price is normalized in that range over the next 2 years.

As the supply and demand dynamics in 2019 shift back to the suppliers’ favor as the economic (marginal) cost price could be close to 100% higher than the current spot price, uranium producers could have their (proverbial) yellowcake and eat it, too. Hence, in terms of any investment thesis for 2019, there is perhaps no better commodity than uranium with its bull market finally under way on tightening fundamentals.