Raymond James: Uranium supply uncertain in coming years

Despite meaningful global inventories of uranium, supply uncertainty in the coming years may lead to price increases, Raymond James states in a newly updated review of the sector.

The brokerage forecasts that uranium prices “could rise from depressed levels, especially over the next few years, as uncovered demand becomes more of a concern, and trend upwards to our incentive price of US$50 per lb.”

“We acknowledge that there is still a large inventory overhang built up after the Fukushima accident and sentiment remains negative in some countries given comments from a number of governments (e.g. Germany) about reducing their nuclear fleets and the growth of renewables and natural gas,” Raymond James’ mining analyst Brian MacArthur writes in the report.

“On the other hand, given recent production cuts, potential new sources of demand from funds and producer buying and the lack of uranium production in consuming regions, combined with unknown political policies, the availability/reliability of uranium supply is becoming more uncertain and could lead to price increases.”

Demand for uranium has been weak in Japan since the Fukushima disaster in March 2011 — by some estimates about 140 million pounds of U₃O₈ is held in inventory by utilities in Japan, “which represents about 14 years of uranium requirements assuming half the reactors are restarted,” MacArthur notes.

Global inventories have also grown, with global utility inventories sitting at about 750 million lbs, “or over four years of primary supply,” MacArthur states, while at the same time countries like France and Germany have said they want to cut back their reliance on nuclear power.

Nevertheless, consumption “continues to grow at a rapid pace in other regions with new reactors being built in China, Russia, India, Europe, the United Arab Emirates and Saudi Arabia,” he writes, adding that 57 new reactors are currently under construction worldwide.

Overall, MacArthur expects global consumption to increase from about 172 million lbs in 2017 to about 190 million lbs. in 2019 and anticipates a supply gap emerging in 2022-2023.

“Uncovered demand post-2022 continues to grow with over 40% of reactor demand uncovered,” he states.

In addition, the industry is concentrated to the point where the top producing countries control over 85% of primary world production.

“Given the concentration of production in a few regions (Kazakhstan and Russia now represent over 50% of global primary production), any supply disruptions could lead to meaningful price moves as security of supply concerns return,” the analyst contends.

“The source of uranium supply has changed dramatically over the last decade, creating a situation where security of supply issues could quickly return if supplies to the west from Russia and Kazakhstan were cut off,” he maintains. “In fact, the United States (which consumes about 45 million pounds annually) is reliant for about 35%-40% of their supply from Kazakhstan, Uzbekistan, and Russia.”

Cameco’s (TSX: CCO) decision last year to suspend production at McArthur River and supply cuts from other producers, including Kazatomprom and Areva, further cloud the supply picture.

MacArthur has six-twelve month target prices on Cameco of $16 per share, Denison Mines (TSX: DML) 90¢ per share, NexGen Energy (TSX: NXE) $5.00 per share, and Uranium Participation Corp. (TSX: U) $5.25 per share.