Utilities vs. Uranium Miners: A Mexican Standoff

If you’re new to the uranium thesis, you might be a bit perplexed after reading my recent notes, and then watching the price action in the spot market and uranium mining stocks over the last couple of weeks. If you’ve been invested in uranium for the past couple of years, you’ve been here before: the unique nature of the uranium fuel cycle and spot market vs. other commodities often leads to a timing mismatch between fundamental developments and movements in the price of uranium.

In 2023, despite a constant stream of bullish developments, prices went nowhere for almost 7 months. Just as many investors / traders were starting to give up, the market woke up in August when a number of utility RFPs (most prominently, Diablo Canyon) came to market, leading to price discovery. The price movement got additional momentum from Kazatomprom’s (KAP) downgraded production guidance, which surprised the market (but not those who had been following developments in Kazakhstan more closely). In just 5 months, from August to the end of the year, uranium spot price rose ~63%.

It’s important to recognize that fuel buyers operate on a different timeline relative to investors, who often expect markets to react immediately to fundamental developments. Take the recent World Nuclear Fuel Market (WNFM) conference, for example. Given the recent Russia uranium ban, and the constant stream of bullish developments on the demand side, investors were expecting fireworks at the meeting. Instead, the mood in the room was quite calm, with utilities communicating a sense of skepticism regarding claims that high uranium prices are here to stay. In response to the sharp rise in prices from last year, utilities have gone on a ‘buyers strike’, stepping away from the spot market as well as the LT contracting market. Contracting volumes YTD are anemic (30mm lbs) relative to annual consumption (180mm lbs). A fuel buyer from one of the larger utilities was quoted as saying “I’m not going to chase uranium higher just because of some retail traders on Reddit/Twitter”.

Utilities are bureaucratic institutions, and are not prone to change their minds quickly. Many fuel buyers have been around for decades, and experienced the sharp spike and drop in prices during 2006-07. During the 2006 spike, they heard a similar narrative around shortages due to the Cigar Lake flood, which never panned out. Some made the mistake of signing LT contracts near the top, and want to avoid the embarrassment of making the same mistake again. Utilizing flex provisions in their fuel contracts, many US utilities are now covered until 2026 and therefore don’t feel the need to show much urgency. They are hoping for the current ‘bubble’ in prices to pop and push prices lower.

Meanwhile the messaging from uranium miners and fuel consultant UxC was clear: it is likely that there won’t be sufficient uranium produced in time to meet the rising future demands from reactor extensions, restarts, and newbuilds (both conventional and SMRs). Existing supply will also continue to face bottlenecks from higher costs of production, labor shortages and depleting grades. It was also made clear that after more than a decade of experiencing uranium prices that were below the marginal cost of production, it’s the miners’ time to ‘get paid’.

Over the last two weeks, supply came into the spot market from a couple of unexpected sources: a financial player / hedge fund wanted sell, and a Japanese utility (Hokkaido) with shuttered reactors wanted to raise cash from its excess fuel inventory. In the absence of commercial / utility buying, uranium traders took advantage of the situation and pulled their bids all the way back to the low-80s, where spot price had bottom’ed earlier in mid-March. Uranium stocks dropped in sympathy with the spot price, erasing most of the their YTD gains.

While this price action is frustrating as a uranium investor, these ‘flushes’ are important for price discovery. Where is the floor, where is the ceiling? After the bid / ask dropped to $82 / $83.50 at the beginning of the week, buyers started stepping in. Based on my intel, a Chinese utility stepped in with significant volume on Friday, pushing the ask back to $90. The spot price closed the week at $86 at Numerco, $86.50 at Evolution Markets and $87 at Uranium Markets.

While it’s disappointing that the U.S. utilities are taking a ‘wait and see’ approach, the current Mexican standoff is unsustainable. Utilities may have bolstered inventories through flex contracts last year, but by the end of this year, they will be back to square one. Sooner or later, a large number of utilities will have to re-enter the term and spot markets in size, as they did in the second half of last year, leading to the next leg higher in uranium price. Exercising flex contracts also increases pressure on the fuel suppliers. I’ve highlighted before that both Cameco and KAP have been supplying more uranium than they’ve been producing, drawing down their working inventory and dipping into the spot market to make up for the difference. Increased supply commitments due to flex provisions will likely result in more spot purchasing by the uranium miners to meet those commitments, which will increase the spot price, and therefore the reference price at which utilities ultimately sign new contracts. There is no free lunch.

It’s also important to keep in mind that while the US is the largest market, it’s not the only market. We are likely to see life extensions for multiple reactors in France, UK, and the bulk of the South Korean fleet. There are multiple term contracting discussions currently happening in Europe. 10 reactors in Japan are in process of obtaining approvals for restart, and a major Japanese utility has been sending a large delegation of fuel buyers to mining conferences to discuss new contracts. A couple of uranium traders have mentioned that despite the lackluster start to the contracting cycle this year, they are witnessing more term contracting discussions at the moment than they ever have in their careers.

It’s often helpful to take a step back from the daily noise and look at some longer-term charts to judge the health of the current bull trend. From a technical perspective, the current pullback is well within the norms of historical price action. URNM pulled back to its 200dma, but remains firmly in an uptrend.

Given the extreme illiquidity of the spot market, technical analysis on SPUT / U.UN is less relevant, but it’s still worthwhile mentioning that SPUT’s daily relative strength index (RSI) last Friday was the most oversold since March 2023. The RSI pushing down to the 30 mark usually indicates that the sell off is closer to the end, than the beginning.

The summer months are typically a slow period for the uranium market, therefore I don’t expect a V-shaped recovery from here. We could go sideways, or drift lower over the coming months. However, I’m confident that by the end of the year, fuel buyers will have to step up to the plate, as they did last year. When the tide goes out, some utilities will find that they’ve been swimming naked, and will be forced to pay significantly higher prices to secure fuel supplies. Contracting with Western miners will accelerate in light of the Russian ban, and Western enrichment will be forced to overfeed and require more U3O8 to satisfy the demand for Western-sourced EUP. Uranium producers Cameco and Kazatomprom will also have to step into the spot market for uncovered supplies.

While the short term volatility can be unnerving, it pays to revisit the fundamental thesis and understand the short-term pricing dynamics that are causing market fluctuations. Public markets are designed to shake out the weak hands that lack conviction, creating opportunities for those who have done their homework. The current uranium bull market has been a decade in the making, and deficits will not be cured at the flick of a switch. Many years of high uranium prices and handsome returns are ahead of us, before supply / demand reach equilibrium.