Cameco and the supply of Yellow Cake

yellowcakeSome days ago I opened length in Cameco (CCJ), the Canadian uranium processor, with an initial belief that they could sustain their dividends and ride out the trough in U3O8 prices.  Uranium spot prices (as quoted by Ux Consulting) have fallen from $70 per pound in 2011 (pre-Fukushima disaster) to $19 per pound recently.  Cameco doesn’t deliver at these low spot prices but holds utility customers to long-term (and more expensive) supply contracts.  However, these customers would understandably like to renegotiate the level for the duration of their existing deals or threaten to find a new supplier when it is time to renew.  In other words, the plunging spot price does effect revenue. 

Those expecting an eventual rebound would consider that (i) China continues to approve and construct nuclear reactors at breakneck speed.  (ii) Several utilities have delayed renewal of long-term contracts while the spot Uranium has slid downward.  Eventually they will need to lock in a security of supply.  Also (iii) the Japanese government re-affirms their patient resolve to bring nuclear back to 20% of the power mix.  Considered together the demand for Cameco’s uranium and fuel processing services appears optimistic in the long run.

However, to be more confident about building this length, I will spend some days understanding the available global supply of nuclear fuel.  This supply includes production from mines, government held stockpiles of low-enriched uranium (LEU) and high-enriched uranium (HEU), and fuel recycled from fast neutron breeder reactors that includes a mix of fissionable uranium isotopes and plutonium.

First, the supply picture in broad strokes: we’re in a state of oversupply that may persist “for quite a while”, according to Ux Consulting.  There’s an excess near term supply of 25 to 30 million lb U3O8 until 2019.  A supply deficit will not reach the market until the late 2020s.  According to an April 2016 Platts report “There is so much EUP material that finding storage space is difficult, [Neely from UxC] said. Given current requirements, she said the inventory would only be drawn down by 2028.”  There is a stalemate now between utilities and producers.  Producers are unwilling to sign long term deals below $30/lb, and utilities seem patient to wait.

In the next post, I want to review the strategic holdings of HEU by governments.  A very interesting and pertinent story is the Megatons to Megawatts deal.  Inspired by MIT physicst Thomas Neff in a NY Times op-ed, the Megatons to Megawatts deal transferred 500 tons of weapons grade uranium (equivalent to 20,000 warheads) from Russia to the US for use in electricity generation. This deal spanned 20 years, from 1993 to 2013, and helped generate 10% of US electricity during this time. Approximately one-third of the estimated 2000 tons of HEU ever produced has been recycled into fuel rods.

 

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