David Cates is president and CEO of Denison Mines (TSX: DML; NYSE-MKT: DNN) and president and CEO of Uranium Participation (TSX: U), a company focused on investing in uranium concentrates. He recently took time out from a busy marketing trip to Australia, Taiwan and Hong Kong to speak with The Northern Miner about the current state of the uranium market.
The Northern Miner: In late 2016, the spot price for uranium oxide (U3O8) dropped over 40% to hit a 12-year low below US$20 per pound. Is there anything encouraging about the uranium market today?
David Cates: I’m encouraged at how quickly the uranium market reacted in January and February when we saw meaningful production cuts from Kazatomprom, the world’s largest uranium producer, driving the spot price of uranium up 40% from its lows in late 2016.
It showed us that the market is quite thin, behaving in a way where small adjustments on either side of the supply-demand equation will result in volatility. We’ve always seen the uranium market as a thin and volatile market because there are only a few participants on either side, and the run in early 2017 reminded us why investing in uranium can be so exciting and have so much upside.
TNM: The price increase was short-lived. Ux Consulting and Trade Tech are reporting U3O8 spot prices at US$21.50 per pound.
DC: We needed the utilities to come in and buy material for the market to consolidate some of those gains. They didn’t rush into the market and so prices have come back to the current range. The reality is that there isn’t a uranium mine in the world today that makes money on an “all-in” basis at US$20 per lb. U3O8. Based on statistics, even the best mine in the world couldn’t be justified as a new project at today’s spot price. That’s a significant statement. I’m not worried that US$19 or US$20 is the new normal for the long term, but we do need actual buyers, particularly the utilities, to come out and buy so that we can discover a price that makes sense for both sides.
A cooling tower beside a reactor building at a nuclear power plant in Leibstadt, Switzerland. Credit: Thamerpic.
TNM: Any guess when the utilities might start buying?
DC: They don’t need to buy today, but they do have significant uncovered requirements in 2020, increasing dramatically to 2025 and beyond 2030. They definitely have to buy large quantities of uranium in the not too distant future. They buy on a long-term basis, and they need to move the material through the entire fuel cycle — so they can’t buy in 2020 for needs in 2020.
It’s impossible to guess when they cross the line and become sufficiently uncomfortable with their inventories and the state of the supply side that they start to do a lot of buying.
The reality is, however, that the longer they push out the start of the buying, the more likely they will meet a supply shortage, because they’re not giving producers reasonable time at a reasonable price to build the next generation of projects.
We can’t build projects overnight. The longer they wait to avoid a price recovery, the harsher the reality will be when they try to buy.
TNM: Where and when should investors consider putting their money into uranium stocks?
DC: There’s a void for investors in our market. There aren’t a lot of places where investors can invest in uranium companies — particularly producers. If you were to take the producers and list them by market capitalization, you’d have Cameco, a multibillion-dollar company, and then you’d drop all the way down to less than $200 million with Paladin and the small-scale U.S. producers.
We see merit in positioning Denison Mines as an intermediate uranium producer ahead of the next uranium bull market cycle, with a lean and clean production story that would look to claim that wide gap below Cameco and the others.
In the last cycle, we would have had Uranium One, for example, and everyone bought it because they had low costs of production and they were an alternative to Cameco.
There isn’t another producer that large-scale investors can buy outside of Cameco, and Denison’s Wheeler River would be a 6 to 7 million lb. U3O8 operation each year.
That’s not Cigar Lake, which is 18 million lb. a year, but it’s twice as large as the entire uranium market in the United States … it is a large-scale operation, and investors will look for that alternative in the next cycle.
“The reality is that there isn’t a uranium mine in the world today that makes money on an ‘all-in’ basis at US$20 per lb. U3O8.”
David Cates
President and CEO
Denison Mines and Uranium Participation
TNM: When do you want to see Wheeler River in production to make the most of the uranium price cycle?
DC: Here’s our thinking: we don’t want to be a producer today. The uranium price is at a record low. But we do want to become a producer in the next cycle.
Everyone producing uranium today, if they don’t have a contract, is losing money.
The challenge is that it takes seven to 10 years to build a mine in the eastern Athabasca basin, and potentially even longer in the western Athabasca basin, where there isn’t existing infrastructure.
So while the market is difficult today, this is the time that we have to find a way to push forward so that we can actually take advantage of the next cycle.
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