By: The Energy Report and Rob Chang
Source: Tom Armistead of The Energy Report
Uranium's price has been low and stagnant for years, but that's going to change, says Rob Chang of Cantor Fitzgerald Canada. Chang foresees volatility as the 2020 uranium deficit draws closer and demand for the limited stockpile drives the price up. In this interview with The Energy Report, the analyst points out that investors can find bargains throughout the space.
The Energy Report: The uranium spot price balloon has lost air again and is back down in the mid-$30/pound (mid-$30/lb) range. It was stalled there for months last year. What pushed the spot price up in the first place? Why is it falling now?
Rob Chang: The uranium spot market is generally pretty thin, and any number of transactions on either the buy or sell side could push it in any direction. What's moved it higher recently could be the news of Japanese reactor restarts happening this summer. A couple of reactors are set to restart in the next few months or so, and we believe that helped push the price along a little bit.
But the spot price really depends on near-term utility demand. I think that's the key point here. In terms of utility demand, according to the numbers that we've seen, globally about 15–20% of uranium requirements for 2016 onward are still uncovered. Between now and the end of 2016, there needs to be some buying, either in the spot market or through some other means, to cover those requirements. We saw a bit of a lift because of that need, but certainly there hasn't been a big rush back toward buying uranium ex-spot yet.
TER: I've heard repeatedly that the deficit is going to occur in 2019 or 2020. Why aren't the mining companies moving ahead to address the deficit they know is coming?
RC: Right now, there is no incentive. For them to spend the money to do the exploration or to develop a uranium project, they need to have a price that justifies the capital that's required to get that going. Based on what I've seen, that magic number is probably in the $80/lb range for a meaningful amount of supply to come online. Currently, we're sitting in the mid-$30s/lb. To justify any project, a company would need a return of, let's say, at least 20%, but likely much, much higher. At a $35/lb, why would anyone spend the money to develop a project? That's where we're stuck.
Everyone knows that prices need to move higher for additional supply to come, but utilities, seeing excess inventory in the market, have been sitting back and only buying what they need when they need it. At some point this will come to a head, and prices will need to move simply because utilities will need to buy and the spot market is thin. At that point there will be a big scramble to see who can put on production quickly enough to satisfy the demand. It will be very interesting, and it's the primary reason why I believe there's going to be a violent price increase.
TER: Is the long-term price following the same trajectory?
RC: We believe it will. Currently, it has not. It's been pretty static. However, as activity in the spot market picks up, we expect to see term prices move higher as well.
TER: The Nuclear Regulation Authority just approved restart for Japan's reactors. What will that do to the uranium price?
RC: The approval wasn't for the entire fleet. It would be great if it were. It's actually on a case-by-case basis. The recent restart approval news was for two Sendai reactors, but the agency has also given partial approval to the Takahama reactors, and to Ikata 3 as well. So restarts are moving along.
The key will be seeing some reactors actually turn on. That's going to be the first domino to fall, and we expect many dominoes to follow. But the first one is the hardest to get over the line. Once we see that, we think restarts would occur on a much more frequent basis.
TER: What effect do you expect on the uranium price from that?
RC: It's funny. On a supply-and-demand basis, it really wouldn't move the price too much because, as I said, Japan has a lot of inventory already. It's not as if the restart of just two reactors—or four or even six—is going to significantly impact the overall market.
What it does do, however, is bring back a lot more investor attention. There are some out there who still are skeptical that Japan will turn on any reactors. I believe they're wrong, but we need to see the reactors turned on before that can be proved. Seeing that Japan is actually going to start consuming uranium, rather than just deferring it or stockpiling it, is certainly a positive in that the global inventory won't just keep on growing and we'll start to see some usage out of Japan.
As we know, the spot market is really just between producers, utilities and a few market players. There isn't much investor speculation, so it's not as if a restart will cause more buying unless we start seeing investors step into the market and buy, like we saw in uranium's heyday during the mid-2000s.
TER: How will the price slump affect the companies you cover?
RC: What we're seeing now is a slight step back in some of the uranium equities that moved higher earlier this year because of the expectation of restarts and an improving supply-and-demand picture. What I do think, though, is that the downside is limited. Uranium prices really don't have much downside from here, in my opinion, simply because there isn't a large amount of supply coming out of nowhere, which was the catalyst for prices to move down before. Now, when I speak to producers and utilities alike, many expect prices to stay the same and, long term, to move a lot higher. I think the volatility is going to be on the upside.
TER: Would you consider any of the companies that you cover bargains or deadwood?
RC: Actually, given the way the whole sector has been beaten up, I think the entire space is a bargain. Some companies, depending on an investor's appetite, are more appealing. But across the board, the uranium companies that I cover are still excellent values at the price points that they're currently trading at.
TER: How should investors approach the uranium space going forward?
RC: The way I look at it generally is in terms of upside versus downside. From what I see in the uranium market, there is limited downside. I do not see a catalyst that would push prices significantly downward, say into the $20/lb range. But I see many opportunities for uranium to move higher. Uranium moved significantly down before because Japanese utilities were sending material back into the market, and that material had to be resold. On top of that, some uranium companies were in slightly distressed situations and were selling uranium because they needed to raise capital to maintain operations. Right now, we're not seeing that as much.
On the flip side, we're seeing 15–20% uncovered requirements beginning in 2016, and we're seeing uncovered requirements continuing to grow as the years go out from 2017 and onward. We need to see some uranium buying to shore those requirements up at the very least.
On top of that, based on our forecasts for uranium production and global reactor growth, including reactor shutdowns, there is an unavoidable supply deficit in 2020, no matter what happens. Layer on the fact that, because of the low uranium price environment, there has been very little exploration and there are only a handful of identified large-scale projects in the world.
And there will be increasing demand from countries such as India and China. Even if all the uranium projects around the world were put on a path to production as quickly as possible, you're looking at 2023–2025 before those projects get online. But the deficit kicks into gear in 2020.
These are pretty compelling reasons for uranium prices to move higher sometime within the next year or two. On top of that, for more event-driven investors, there is the fact that the Japanese Sendai reactors are expected to turn on in the next couple of months—the operator is hoping for July, we're thinking it's probably August/September. It'll be a front-page news item when those reactors turn on. There will be a big rush into the space on that news. We think the time is right for uranium investing because we see the volatility on the upside rather than on the downside. We expect a violent increase in the price of uranium in the near future.
TER: Rob, thank you very much for your comments.
Cantor Fitzgerald Canada's Senior Analyst and Head of Metals and Mining Rob Chang has covered the metals and mining space for over eight years for the sellside and the buyside. Prior to Cantor, Chang served on the equity research teams at Versant Partners, Octagon Capital and BMO Capital Markets. His buyside experience includes managing $3 billion in assets as a director of research/portfolio manager at Middlefield Capital, where his primary resource portfolio outperformed its direct peer and benchmark by over 28% and 18%, respectively. He was also on a five-person multistrategy hedge fund team, where he specialized in equity and derivative investments. He completed his master's degree in business administration at the University of Toronto's Rotman School of Management.
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