All Eyes on Uranium Part 2

Thursday, 7 March 2024 |  39 | 19:13

Podcast Transcript

Ed Coyne: Hello and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott Asset Management. I’m pleased today to welcome back Per Jander, director at WMC, for part two of our most recent podcast on uranium. Per, thanks again for joining Sprott Radio.

Per Jander: Thanks for having me back, Ed. It feels like it wasn't that long ago, but a lot of stuff has happened, so it's a timely update.

Ed Coyne: Yes, and yes. Since our last conversation, several key producers have offered some production guidance. Can you talk about that and what that may mean for investors?

Per Jander: Yes, for sure. We had the warning from Kazatomprom that came out in January, and there was a bit of a market response to that. I believe Kazatomprom said it was going to ramp up production in one of its press releases in early October last year. Then, a few months later, it said: "Well, it's going to be quite challenging; there's a shortage of sulfuric acid,” and then provided some numbers on that in a call in early February. It turns out that there is only going to be a marginal increase. Originally, it said it was going to ramp up by 10%, but it seems like it's more or less going to be flat for this year. That's going to be a shortfall of 7 or 8 million pounds, which is fairly significant.

The market did react to that. I thought the reaction was going to be stronger than it was, as it's a significant shortfall. It will be interesting to follow how that will play out this year because I think it will impact the market at some point. It hasn't done it just yet, but I think it will become more obvious as the year goes forward, what impact that will have on the market. Interesting to follow, but that was the news from Kazatomprom, and I think the shortfall was bigger than people expected, so that's why you had a bit of an uptick in equities.

Then, a week later, it was the Cameco's turn. A large Canadian miner came out with their news release, and I think there have been a lot of rumors beforehand. There was a lot of maybe generalist money or new money to the sector and thought, "Oh, this is going to be another shortfall from this big producer. The market's going to spike." Many people were positioned for that, but Cameco did not disappoint. Cameco is a very good production company, and it did not have a shortfall, just a minor one from last year. I think that the market overall was disappointed in that, whereas I don't think anyone in the physical market or on the utility side was too surprised. It did, however, have a very big impact on equities, and it was a very red day across the board.

There was a lot of volatility and talks of potential hedge funds coming in and playing short-term maturity options, adding to a little bit of the action and volatility around that. It seems that a lot of that fast money has come in and has now been flushed out. But it's been a couple of weeks, and it's been pretty choppy on the equity side, and it has spilled over a little bit in the spot market as well.

Ed Coyne: Let's talk about that volatility because the most recent price was around $106 or $107 in the last month or two. Where is spot trading now? What kind of price were we looking at?

Per Jander: Yes, I think today we're at $95.

Ed Coyne: Okay.

Per Jander: It's been there for a couple of days now. There was a dip towards the end of February when there was a $5 drop in the market, but it was on basically no volume. There were no trades that day; the last trade before that was $101, and then absolutely nothing traded, but there were pretty aggressive offers in the market, even though there was no actual transaction. Those offers alone drove down the price by about $5. After the close, there were a couple of transactions at $94 and $95, but it's been very quiet since then. Right now, we're looking at a spread of $3 or $4, so it's been very quiet, and I think it's been a very sharp move from $60 to $107 over six months. Now it's a bit of a pullback, even though it's basically on no volume whatsoever. People are trying to find out where the market is. There's been big fundamental news in the market.

My view is that I'm surprised. I thought the spot price would be higher than what it is now. Whether you want to see that as a purchase opportunity or whether it's, "We are going to sit here for a bit," my personal view is that as much production has disappeared this year because of the challenges that Kazatomprom has, I think that tightness is going to shine through a bit later on.

The year will tell, so we'll see. Right now, we're sitting at $95, which is, of course, higher than when the year closed. We're still up on the year, but I still think there's a fair bit of upside on this anyway, but time will tell.

Ed Coyne: That's a great point you just made, that we're still up on the year, and as people invest in these things longer term, going from $60 to $107 and then $107 down to $95 seems pretty typical. Forgetting the announcements and what's going on is typical ebb and flow in an investment. The fact that it's still up for the year speaks volumes of that.

Let's talk about that for a second. As these announcements come out, and I'm not sure if any smaller producers announced or had any significance, but as that continues to play itself out in the market, in your mind, does this change the mid-term or long-term outlook for uranium?

Per Jander: Considering the challenges that the big producers are having, clearly, that means everybody's going to be struggling. I think, if nothing else, the supply shortage is just going to be extended, and there is no clear relief in sight. When is this relief going to come? The year's out, so we're looking at a structural supply deficit that is going to run for years to come. I think the takeaway for us is prices are going to be higher for longer. That's essentially it.

I was just at a big commodities investor conference in Florida for the last two days. It's quite clear that, at these prices, you have renewed interest in smaller uranium companies because it'll be easier for them to raise capital for their projects. There is a supply response, but it's years out in time. At least it's a healthy sign that they're starting to move on this anyway.

It's also not a concern necessarily, but for someone who's doing the research on the supply-demand picture, the big suppliers are good companies, and they're good at what they do, but it's not a given that they're going to be able to produce exactly as much as they want to do. Or, if they choose not to produce and just have less supply in the market, prices will probably go up, and they capture revenue that way.

It's a little unclear what's going on, and it's not a simple story. It's worth doing some due diligence on your own and just trying to get the supply-demand picture clear in your head and form your own view. It's a very interesting time in the market, but I also think we're starting to see healthy responses on the supply side, but those are quite a few years out.

Ed Coyne: Given the prices are sitting in the $95 range, and we've talked about this over the last year or two, at what price point do new producers come in, or at what price point do new mines get discovered or developed? Are we starting to see that at all? Are you seeing that in the news flow now? Are you seeing that, "Hey, we're sitting in this $90 to $100 range. This can be profitable if you and I decide to go into the mining business tomorrow," or is that still too soon?

Per Jander: There is definitely noise. The junior miners are getting more attention, which is a healthy sign. I think most mines will be profitable at $100 a pound. No mines will come to the market faster if the price is $150 a pound. It's more of a time constraint, and that won't solve itself. We're going to be in a deficit for quite some time, and we'll see where the price ends up during this period.

Of course, utilities are still active in the market with RFPs; even though the spot activity itself has slowed down here for a few weeks, it'll pick back up. As we come into March and April, I think the spot activity is probably going to pick back up, and then we'll have to take it from there.

Ed Coyne: I was going back and rereading some of our commentaries, and utilities are becoming a common theme that, two years ago, we didn't really talk about that much. Is anything changing there? Are you seeing more companies come in? Are they going for longer-term contracts? Spend a few minutes on that, if you don't mind.

Per Jander: Most of the utilities contract in the term market. It's bilateral negotiations; it's very opaque. The spot market in uranium is opaque on its own, but then you add the term market, which is more opaque than that. It is very hard to get a sense of what's going on. There is what's called a term price published that is reflecting what's the base escalator price. This is a price that's agreed to today, but you're not thinking of taking delivery for another three or four years out in time. The duration has to be for at least four or five years.

Today's escalation rates are going to be 5% or 6%. The price itself is $75, the last published now, so, of course, you're going to escalate that for three or four years at 5% or 6%. It's not $75—it’s something completely different.

Also, the big producers will be the first to tell you that we're not agreeing to any fixed or base escalated prices either. What we are looking for now is market exposure. Then, what's more interesting is the floors and the ceilings in these index-related prices.

I think Cameco said it is riding $130 ceilings and about $70 or $75 floors at its most recent call. Go back about six months ago, and then that number was $50 and $80 ceilings. Now we're at $75 and $130. That's clearly a reflection of the spot price environment, which will impact these terms in the long-term contracts.

Ed Coyne: It seems like an option trader's dream to get this movement in the market. I suspect Wall Street's taking notice of this. Are you noticing that at all when you go to these conferences? Are you seeing more non-utility, non-producers walking around? Given all this activity, are you seeing more of a Wall Street presence these days?

Per Jander: No, it's very hard for investing companies to have a frank discussion with the utilities because there are simply not many touching points. We're obviously interacting with them because we're taking in these tenders and on the contract, so we know what's being contracted. Still, unless you're in that physical supply market, you're not going to see these things.

Some of them become a little bit more public. There is a very large tender that just came out from a European utility for over 20 million pounds for a delivery period of 14 years. They don't happen very often, so this is clearly something the market is noticing. It's nothing that directly impacts the spot market, but it clearly indicates that utilities are very actively contracting at this moment.

Ed Coyne: It's amazing, looking out 14 years. Any given day, you're not thinking about 14 minutes, what the market is going to do, so certainly a different environment for sure. I also have to ask you because you seem to be someplace different every time I see you on a video screen. What's going on from the road? Where are you now, and where are you headed? What do the next couple of weeks or months look like for you regarding activity?

Per Jander: I used to live in Cape Town, South Africa, so I always go there every year, but I also was there for a big mining conference called Indaba, and it just happened to coincide with all my vacation, but I got some meetings there too. African projects are very interesting at these price levels, so there's activity there, too. It's not just in Kazakhstan, Canada or the U.S. It's also very much in Africa.

It's good to see that there are global projects and they're very interested, and we're going to need them. We're going to need them all, even though if all the big projects started, all ones the analysts are forecasting are going to come online by 2030, we'll still be at a deficit.

Then, I went to the big Bank of Montreal (BMO) Global Metals, Mining & Critical Minerals Conference in Florida. It's one of the most impressive conferences I've ever attended. It's 2,000 people, all the best in the business are all there, we had about 40 meetings in two and a half days. It's like speed dating; you get a lot of information, and you get to answer a lot of questions. It's very interesting to see.

It's funny; it was our third year there and John Ciampaglia and I were laughing that there was no panel discussion on uranium the first year we went, and no one cared. The second year, there was a breakfast, and it was like 7:00 AM; it was like a few tired people sitting drinking coffee, barely taking notes. This time around, we had a lunch panel, and it was a packed room.

Uranium has shifted in the attention span, but it's also one of the best-performing commodities, so it is doing well. We see a lot of investors who are quite new to this space, and they're rotating in. Obviously, at spot, we started at $25 or $30 and people were quite happy with the money they made. More than quite a few that we met said, "Uranium saved my portfolio last year," and now they're taking some profit, and quite frankly, I don't blame them.

We're seeing days where you have $100 or $200 million trade in spot. It's great to see because it's a lot more liquid on the spot market, like multiples, almost 10x sometimes. We're also seeing new interest entering the market at the equivalent of $90 uranium. There is still interest, and people realize we're early on, and they do a quick analysis and realize, "Yes, this supply problem is not going to solve itself anytime soon." It's a very interesting outlook for the market.

One of the more profound moments I had at this conference was a Swiss uranium trader who has been in the business for 20 years at least. He was there for the last spike and said, "Yes, everybody makes the comparison to 2007 where we are right now. This is not 2007; this is 1970 when the birth of nuclear energy occurred." We had a decade-long bull market because of all the ramp-ups and all the demand increase. That's the demand increase we're seeing now.

2007, there was no demand increase; there was a short-term supply shortage, and then the Kazakhs ramped up. Cameco de-flooded Cigar Lake and got that back up and running. But it's a completely different setup, and he said, "I'm drawing much more parallels to 1970 than 2007," which is quite an eye-opener. That says something about this thesis for this market.

Ed Coyne: That's an amazing statement you just made because it's assumed we're back to the future here as far as looking at the opportunity, the price. You said something interesting. People who were early are taking profits—the ones who were the sleepy-eyed person in the conference a year, year and a half ago, two years ago, having coffee listening to you guys have a morning session.

Now, new people are entering the market at $95, and to your point, even at $95, this looks like a very attractive allocation, given the long-term outlook. Is that fair to say, is that it's stairs stepping up? Do I hear that correctly?

Per Jander: That's spot on. That's exactly what it is. They're looking at all the new reactors being announced, projects having life extensions, decommissionings being reversed and talk of SMRs. This is a multi-decade development story we're seeing in nuclear energy, and we're only at the beginning of it, and we're at $95. If inflation adjusts that price back in the '70s I was talking about, you're ending up $175 to $200 for a decade.

When you look at the price sensitivity of nuclear energy's fuel cost, it's very low. There's no demand destruction going on at $100, $150, or even $200 a pound. It's something that you can handle as a nuclear power station operator. It's a very interesting time in the market.

Ed Coyne: Per, I always look forward to seeing you and hearing your thoughts on what's going on in uranium. If there's anything out there that you'd want to leave us with, we're all ears.

Per Jander: Keep an eye on the potential sanctions, such as U.S. sanctions on Russian supply. That's something that can certainly trigger some more price movements. Other than that, look at production guidance from the big suppliers and keep an eye on the spot market because I think we'll see some movement for sure. It's a fun time in the industry, but there are some very good investment opportunities if you do your due diligence.

Ed Coyne: Well, we'll certainly drag you back here at some point this year. I'll be looking forward to hearing how the summer shapes up. Maybe we'll get you back in the fall to talk more about this. I always encourage people to check out what you guys are doing at WMC. You do a phenomenal job as far as really having your hand on the pulse.

I always tell people to go check out wmcgroup.com to learn more about what's going on with not just your firm but really what's happening in the energy market and uranium in particular. As always, Per, thank you for taking the time today to talk to us on Sprott Radio.

Per Jander: Thanks a lot, Ed, and I'm happy to come back anytime.

Ed Coyne: Awesome. Once again, I'm Ed Coyne, and thank you for listening to Sprott Radio.