Final HEU shipment a catalyst for uranium industry

The final shipment of highly enriched uranium (HEU) to the U.S. from nuclear disarmament and military stockpiles in Russia under the 1993 Megatons to Megawatts agreement left St. Petersburg on Aug. 21, and analysts believe the end of the 20-year program will serve as a catalyst for the industry.

“While well-known, the completion of this program marks the mental kick-off point, in our opinion, for general interest in the uranium space,” mining analyst Rob Chang of Cantor Fitzgerald says in a research note. “We believe the fundamentals are compelling and are pounding the table on the space.”

The end of the program signals the end of the annual supply of 24 million lb. uranium oxide (U₃O₈) to the market, Chang says, and while global inventory levels remain high, he says that “primary mine supply does not currently meet global requirements.”

Chang forecasts a supply deficit next year and a “large, unavoidable deficit” in 2019.

He says that next year the U.S. would need 49.1 million lb. U₃O₈ to supply the country’s nuclear power reactors, while domestic production is expected at 5 million lb. U₃O₈.

Global production in 2014 is likely to be 172 million lb. U₃O₈ compared with demand of 184 million lb. U₃O₈, he adds, while “combined with secondary supply sources amounting to about 8 million lb., we estimate a supply deficit of nearly 5 million lb. U₃O₈ next year.”

Chang estimates that the marginal cost of production is US$40 per lb. U₃O₈.

While some of the shortfall will be met with new projects coming online, such as Cameco’s (TSX: CCO; NYSE: CCJ) Cigar Lake and China Guangdong Nuclear’s Husab project, he adds that “the mining industry has a history of slower-than-expected new mine production ramp-ups.”

Chang has a “buy” on Cameco, Uranium Participation (TSX: U); Denison Mines (TSX: DML; NYSE-MKT: DNN), Fission Uranium (TSXV: FCU; US-OTC: FCUUF) and Alpha Minerals (TSXV: AMW; US-OTC: ESOFF), with target prices of $26.50, $6.25, $1.60, $1.29 and $6.84.

According to Chang’s estimates, over the last two decades, the HEU that Russia supplied to the U.S. under the Megatons to Megawatts program provided 10% of electricity in the U.S.