Why uranium above US$100 per lb. is ‘sustainable’ — and likely headed higher

Mining analyst David Talbot began covering the uranium sector in June 2007 – the same month uranium prices reached their all-time high of US$136 per lb., then rapidly retreated. Prices are once again on the move, rising above US$100 per lb. in January for the first time in over 16 years, but this time Talbot says it’s different. Nuclear energy, which accounts for 10% of the world’s electricity, is enjoying a renewed push as a baseload, low-carbon power source and 62 new nuclear reactors are under construction, with hundreds more planned or proposed. At the same time, however, a supply gap is emerging.   

Talbot, now managing director and head of equity research with Red Cloud Securities, has just released a 32-page report outlining what he expects for the uranium sector going forward, including his top stock picks. The Northern Miner’s editor-in-chief Alisha Hiyate spoke with him in February about the uranium price rise, the role of geopolitics and how investors can play the space. 

The Northern Miner: Uranium prices have now been in quite a dramatic upswing for the past year, the price has roughly doubled. Can you walk us through what’s happened over the last year that has pushed prices higher? 

David Talbot: Sure, we’ve seen quite a few movements over the past year or so. Prices have risen from US$48 a lb. at the beginning of 2023 to about US$103 a lb. in mid-February. Supply/demand, particularly physical uranium purchases, really drove prices earlier in 2023. Not quite as much as in 2020-2021, but financial companies were buying at least up until April. Then prices trickled upwards consistently to US$60-65 per lb. by September.

Then in September, the World Nuclear Association Symposium (WNA) released a statement saying that not all nuclear utilities would get the uranium they require. We’ve never seen that kind of bold commentary from what’s really been a conservative group. That’s when we started to see some serious buying by some of the end users and prices started to rise even quicker.

David Talbot

And in Q4, the uranium price spikes were largely due to speculation around positive U.S. government funding and policies, as well as a potential U.S. import ban on Russian uranium. So, we’re only halfway through Q1 of 2024, but uranium price fluctuations seem even more volatile, but I think they are still biased to the upside and those biases are really on supply side disruption. Specifically, we have seen supply side challenges in Canada (at Cameco’s [TSX: CCO; NYSE: CCJ] Cigar Lake mine) and Kazakhstan (at Kazatomprom’s [LSE: KAP] operations).  

TNM: Last year we saw a pretty big decline in the prices of two battery metals — lithium and nickel — because of oversupply in those markets. Could something similar happen in uranium?

DT: We did see oversupply in nickel and lithium last year, partly because nickel is being renewed by HPAL (high-pressure acid leach) production in Indonesia and lithium production capacity was overbuilt very quickly. And demand for EV’s hasn’t been quite as hot as expected.

The lithium price just swung too high — it went to about US$70,000 and US$90,000 a tonne (lithium carbonate equivalent), but we never moved our estimates here at Red Cloud above US$26,000 a tonne. We just thought the market was too overheated.

Uranium is different. First of all, we don’t have nearly enough mined supply as we do nuclear utility demand. Production is estimated at between 135 and 160 million lb. this year, whereas demand is really close to it — 175 to 200 million lb. per year. At Red Cloud, we’re at the lower end of those numbers, but whoever you listen to, there’s about a supply gap in there of 40 million lb. from the mines. Secondary supply has filled the gap up to this point, but that’s disappearing. Inventories largely aren’t that mobile, so they can’t be drawn down anymore. And enrichment demand is high, so there isn’t that opportunity for underfeeding to create excess material for sale into the market.

So we do expect that mine gap to persist through 2028 or so. UX Consulting says we’re short a billion pounds of uranium between now and 2040. On top of that, nuclear utilities have not purchased the uranium they need so there’s about a billion and a quarter pounds of uncommitted demand by 2035 or so. 

Yellowcake uranium. Credit: Energy Fuels

TNM: So oversupply isn’t a danger. But is this price above US$100 a pound sustainable? 

DT: I think it is. Like I said, not all utilities have the pounds they need, so they’re going to have to come into the market, and production is becoming more challenging, especially in the important jurisdictions like Saskatchewan and Kazakhstan.

Secondly, we’ve also got East versus West, so here we have a security of supply issue. Forty per cent of U.S. uranium comes from Russia, Kazakhstan and Uzbekistan. So Western utilities really need to keep ahead of this rapid new reactor build in China, Russia and soon India as well. 

Third, I’d say prices aren’t too high at all, considering inflation. The all-time high price of US$136 per lb. came in June 2007. With inflation, that’s about US$195 a pound today. So prices today at US$103 are essentially half of that.
Also, today, prices are rising on real demand. The WNA said in September that demand is rising at about 3.6% compounded annually. Compare that to prior growth rates of about 2.9%.

So yes, I do think these prices are sustainable if not going higher. At Red Cloud we use US$85 a pound in our DCF models for uranium companies as a realized price forecast, but our spot forecasts are US$120 for this year, US$135 for next year, US$150 in 2026 and US$175 for 2027. They don’t drive our valuations, but they may drive market sentiment and more offtake contracts are likely to incorporate purely market-related pricing metrics going forward.

TNM: Can you speak a little more about the geopolitics at play? The United States is the world’s largest uranium consumer, and there’s a bill before the Senate that would ban Russian uranium from that market. What effect would that have on the uranium market? 

DT: Security of energy supply is huge. You saw what happened to gas prices in Europe after the Ukraine War started in 2022 and that’s also when uranium prices started to rise. Western governments are now throwing money at the nuclear fuel cycle. Western conversion and enrichment capacity is starting to expand as well, but in the U.S. specifically, over US$2 billion was approved for spending in the U.S. nuclear industry in December and it’s notable that the Nuclear Fuel Safety Act piggybacked on the National Defense Funding Act, which almost ensures funding.

In Q4 of ‘23 the threat of a Russian ban drove prices up even further as the Russian Uranium Imports Act would take effect within 90 days. The nuclear industry probably isn’t ready to lose 24 million lb. of supply Russia currently provides, plus the enrichment capacity that it brings, that quickly. That bill is still working its way through Washington, but I think it will eventually pass. And the Russians would likely halt uranium deliveries even sooner if it does pass, which could have an even more profound effect on prices. 

TNM: The rising uranium price and fundamentals in the sector have brought more speculators into the market. You cover the junior space very closely. How do you recommend investors screen their options and pick quality uranium exploration or development companies? 

DT: Right now, we are seeing a rising tide lifting all boats. The go-to peer group has been the producers. More recently, we’ve seen huge movement in the explorer group, but our beta analysis shows that the developer group is really most reactive to rising uranium prices.

Early on as uranium prices ran up, a lot of money went to producers and large cap developers — Cameco, which has a $25-billion market cap and NexGen Energy (TSX: NXE), a developer with a $5.4-billion market cap, for example. Many generalists are starting to enter the sector, investing in these go-to names.

In our latest sector report, we found that the companies that see the most lift from rising uranium prices are the developer group. We are starting to see incentive for uranium companies to start dusting off projects and even mine sites. And companies with higher cost expectations typically had better leverage to rising prices — and that would be expected as a price rise has more impact on their margins. 

Investors have different reasons for buying — producers are relatively safe, they should be creating cash flow.
Developers come in all shapes and sizes, jurisdictions and time horizons, so we tell investors to be a little bit more selective. Look at management, look at permitting status, look at jurisdiction, time to production. And then the explorers are the furthest from production, so short-term price fluctuations should be less impactful. Some have resources or discoveries and some might be grassroots, so we’d argue that investors should really pick a basket of exploration stocks.

You never know who’s going to make that next big discovery. I’ll point to F3 Uranium (CSE: FUU) for example. Ten years ago, there were no major discoveries in the southwest Athabasca. Now there are three big ones. The JR zone of F3 was the last big discovery in the Athabasca Basin made before Christmas 2022. It’s on the other side or the west side of that Clearwater domain from NexGen’s Arrow and Fission Uranium’s (TSX: FCU) Triple R discoveries. Ideas change as you go along, so you never know.