Uranium sector ‘scrambling’ to fill supply gap

A uranium supply gap will widen by 2030 as more nuclear plants come online, analysts say. Credit: Adobe Stock

The price of uranium will hit triple-digits for the first time since 2007 as nations weaning off oil and seeking energy security deplete nuclear fuel supplies, the world’s largest investment fund in the physical metal says.

The spot price for uranium should rise from $80 per lb. this week to $100 or more per lb. within a year to 18 months, John Ciampaglia, CEO of Sprott Asset Management, which runs the Sprott Physical Uranium Trust (TSX: U.U for USD;  U.UN for CAD), said by phone on Monday. The trust holds 62 million lb. of yellowcake uranium valued at $4.9 billion.

Global yellowcake supply might reach 145 million lb. this year or next, Ciampaglia said, citing the World Nuclear Association. But annual demand is already at 180 million lb. and the industry group expects it to nearly double to 300 million lb. by 2040. Some 60 nuclear plants are under construction globally and more are planned. Countries like Germany and Japan that considered phasing them out are reversing course.

“You’ve got an industry that’s scrambling to meet the supply requirement that’s forming and the market today is already out of balance,” Ciampaglia said in Toronto where he’s based. “Around 2030, there’s a very large supply deficit that could play out and that’s why the price of uranium is obviously starting to move.”

The price of yellowcake, also known as triuranium octoxide or U3O8, has increased more than 50% this year. The green energy transition is gathering pace as governments from California to Europe ease aversion to nuclear power more than a decade after the Fukushima disaster. They also want reliable and independent backups to wind and solar energy grids after the war in Ukraine showed the pitfall of relying on Russian natural gas.

Stock surge

The upshot is a surge in the stocks of uranium miners and developers. Canada’s largest producers, Cameco (TSX: CCO; NYSE: CCJ), NexGen Energy (TSX: NXE; NYSE: NXE; ASX: NXG) and Uranium Energy (NYSE: UEC) are at or approaching their all-time highs. Others such as Denison Mines (TSX: DML; NYSE: DNN) and Energy Fuels (TSX: EFR; NYSE: UUUU) are building momentum, if at less historic rates.

“It’s really important because these equities, many of them are previous producers so they need to raise capital to restart mines that have been on care and maintenance,” Ciampaglia said. “You’re starting to see the light at the end of the tunnel in terms of actually building some new mines in Canada and other places, so it’s an exciting time against a backdrop where some of the other more traditional mining sectors are not having the same kind of momentum.”

Boss Energy (ASX: BOE; US-OTC: BQSSF) is planning to restart its Honeymoon operation in South Australia before year-end; Paladin Energy (ASX: PDN) plans to reopen its Langer Heinrich mine in Namibia early next year; in Texas, EnCore Energy (TSXV: EU; NYSE-AM: EU) is on track to start output from its Rosita uranium processing plant this quarter and its Alta Mesa plant next quarter.

Uranium hotspot

Activity in northern Saskatchewan’s Athabasca uranium hotspot is intensifying. NexGen received environmental approval for its Rook I project in November, the province’s first OK for such a project in two decades. Denison Mines released a feasibility study for its Wheeler River project before investing in junior explorer F3 Uranium’s (TSXV: FUU; US-OTC: FUUF) Patterson Lake North property.

Also, IsoEnergy (TSXV: ISO; US-OTC: ISENF) took over Consolidated Uranium (TSXV: CUR; US-OTC: CURUF) in September. Uranium Energy spent C$570 million over the past two years buying Uranium One, UEX Corp. and Rio Tinto’s (ASX: RIO) Roughrider project. Cameco and Brookfield Renewable Partners last month closed their deal to buy Westinghouse’s nuclear plant construction unit for $7.9 billion.

BMO Capital Markets picks Cameco, which led the latest round of restarts with its McArthur River mine a year ago, as the go-to stock in the sector.

“Cameco’s advantageous geographical production base, its position as the largest and most liquid uranium stock, as well as attractive earnings before interest, taxes, depreciation and amortization growth should support further upside to its stock price,” mining analyst Alexander Pearce wrote in a Nov. 8 note to clients.

Cameco closed McArthur River in 2018 because of low uranium prices and even shuttered its Cigar Lake mine, world-beating in output, for a time in 2020 because of Covid-19. Now, the metal’s decade-high price while utilities and governments pursue low-carbon nuclear power and security of supply show the sector’s changed environment, Pearce said.

2017 entry

Sanctions against Russia don’t play a large part in supply bottlenecks, Ciampaglia said. They skirt former Soviet republic Kazakhstan, which produces a world-leading 45% of all uranium, although Russia itself produces about 8% of world output. However, the country accounts for about 40% of global uranium enrichment plants needed to make fuel, which is forcing the West to rapidly invest and develop its own, he said.

Goehring & Rozencwajg, a New York-based fund manager, began investing about a fifth of its $500 million in assets under management in the uranium sector in late 2017. Cameco had stated its closure plans and state-owned Kazatomprom (LSE: KAP) of Kazakhstan said it would curb output.

A coup in July in Niger, which produces 4% of the metal, has prevented its output from reaching the market. The lack of supply is exacerbated by funds like Sprott that buy the physical asset and take it off the market, Goehring & Rozencwajg said in a report.

“Financial accumulation is likely to accelerate once speculators realize the small size of the market and the precarious commercial inventory situation,” the company said. “Fuel buyers feel insecure and under-covered for the first time in nearly 15 years. Although it is an opaque market, all signs point to uranium entering into a sustained and frenetic bull market.”

Sprott says it’s considering a 5% part of its fund that could be bought by, say, a utility or government, at a discount to the spot market price and actually be used in a power plant. The concept must be approved by regulators, Ciampaglia said. The firm also offers two exchange-traded funds of uranium company equities. About 80% of the trust’s investors are large institutions, hedge funds or family offices, he said.

“Our goal is to have as large a vehicle as possible, as liquid as possible so that more and more investors can participate in the sector, which is obviously going through a renewed level of interest,” the CEO said. “Most of the world is pivoting back to nuclear energy after largely ignoring it for 10 years.”