Uranium Price Spikes Above $100/lb, And Equities Will Quickly Catch up

• Uranium prices increased over 85% in 2023 due to rising demand and constrained supply. Additional demand is expected from countries pledging to expand nuclear capacity.
• Major uranium producers like Kazatomprom and Cameco have cut production forecasts, citing issues securing sulfuric acid and other complications. This has further tightened the market.
• The spot price has risen to over $100/lb, indicating strong near-term demand. However, most uranium is traded via long-term contracts which are seeing more market-related pricing.
• Enrichment and conversion markets are also very tight due to Western utilities moving away from Russian suppliers after the Ukraine invasion. Expansion projects have been announced.
• Market fundamentals point to a widening supply deficit in coming years. However, new mines will take time to develop. Equity valuations do not seem to fully reflect higher uranium prices yet.

With uranium prices having increased over 85% in 2023 to now trade above $100/lb, it is clear there is resurgent interest in nuclear power. Additional tailwinds are expected from government policies aimed at expanding nuclear capacity to meet decarbonization and energy security goals. However, meeting this rising demand could prove challenging given existing supply constraints. This article will analyze the key market fundamentals to assess the investment case for uranium.

Demand Drivers

There are currently 440 nuclear reactors in operation globally, with another 60 under construction. Notably, 26 new reactors are expected to come online in the next 3 years. The startup of these plants will require sizable quantities of uranium to build initial inventories and fuel loads. For context, a typical 1 GW reactor may consume around 500,000 to 1 million lb of U3O8 annually.

This growth trend is set to continue in the years ahead. At the recent UN climate conference, a group of 24 countries backed a plan to triple nuclear energy capacity by 2050. Such pledges create greater long-term demand visibility for the nuclear fuel chain. In addition, smaller next-generation advanced and small modular reactors are garnering increasing interest, helped by government funding support. These smaller plants have the benefits of reduced upfront capital costs, shorter construction times and scalability.

Supply Issues

While demand outlooks remain constructive, uranium supplies are struggling to keep pace. Both Kazatomprom and Cameco – the world’s top 2 producers – have downgraded their 2024-2025 production forecasts. Kazatomprom stated it has been unable to source sufficient quantities of sulfuric acid, a key material required in mining production processes.

Sulfuric acid – 60% of worldwide sulfuric acid consumption is used for fertilizer production...Food supplies are always being prioritized so they have to compete with consumers operating in the food industry. Such shortfalls from the biggest mining player are significant given Kazakhstan accounts for over 40% of global output. Even at reduced rates, it will be challenging for other operations to offset this deficit, especially given long permitting and development lead times. Aside from primary supply shortages, secondary inventories have also declined after years of destocking.

Spot Market Developments

In the spot market, availability has rapidly contracted as a result. After trading around $60/lb in September 2022, the spot price has since vaulted above $100/lb in January 2024. While reasonable volumes have traded through this period, willing buyers have consistently had to lift offer prices to secure material. The average transaction size is 100-150,000 lb, with larger volumes becoming costlier.

Potentially the dramatic spot price surge is attributable to falling stock levels rather than speculative activity. In particular, large above-ground inventories held by the likes of Sprott Physical Uranium Trust were drawn down in recent years. With much less overhang, traders and end-users alike are now competing more fiercely for limited pounds in circulation.

Term Market Developments

In contrast to the spot market, most uranium is delivered to utilities via long-term supply contracts with producers. In 2023, around 160 million lb were locked in at an average price of approximately $68/lb. While lower than prevailing spot levels, these deals include annual pricing escalators. UxC expects another active year of contracting in 2024 as uncovered utility requirements grow. Especially in Europe, securing non-Russian supplies has become a priority since the Ukraine invasion. Already this year, conversion and enrichment spot prices have made substantial upward moves in response.

However, the transition towards a predominance of term-based pricing will be positive for the industry. By locking in future cash flows, miners can budget, fund projects and ensure security of supply for utilities. Investors also gain cash flow clarity when assessing financial returns. Compared to the high price volatility seen last cycle, current structural changes are laying the foundations for more sustainable expansion.

Equity Valuations

Despite robust uranium prices, valuations for mining stocks have lagged so far. Look for large upside potential as analysts update financial models. Assuming $100-150/lb pricing, net asset values for pre-production developers could appreciate markedly. As market observers gain confidence that elevated prices can endure, significant sector re-ratings may occur.

To capitalize, focus on miners with management experience, quality assets, scale potential and identifiable value disconnects. With supply-demand projections extremely tight in the mid-2020s even assuming some supply response, uranium exposure remains in the early-to-mid stage.

Uranium is undergoing a structural shift concerning both pricing mechanisms and market balance. Key indicators suggest meaningful supply deficits emerging as nuclear power capacity expands. Although miners require time to sufficiently respond, tighter conditions may be more sustained versus prior cycles. Equities still appear to offer relative value at present levels if pricing normalizes above incentive levels. For investors, it seems an opportune moment to gain selected exposure to this evolving energy commodity.

The Investment Thesis for Uranium

• Global nuclear energy growth will require substantial new uranium to fuel both existing and future reactors. Most projections point to widening near-term and long-run supply shortages.
• After years of overcapacity, secondary supplies have normalized lower. Destocking is mostly completed. A lack of secondary inventory cushions means acute demand is flowing directly into the primary market.
• Supply is struggling to expand sufficiently. Permitting, financing, and developing new mines takes up to 10 years. Existing operations face declining ore quality or are reducing forecasts.
• The Ukraine invasion increased Western sensitivity toward Russian fuel supplies. Now only about 25% of demand originates from countries deemed low-risk. Policies aim to diversify sourcing, but this will take time and investment.
• The market structure is shifting, with term-based prices increasingly linked to market rates. This permits fairer returns for miners and greater planning visibility for utilities. It signals a less speculative market condition compared to prior uranium bull cycles.
• Equity valuations do not seem to adequately reflect higher probable incentive pricing of $100-150 per pound. Investors able to tolerate potential volatility should consider exposure ahead of this opportunity.

Key Takeaways

1. Rising long-term uranium demand to fuel nuclear expansion requires new supply sources to avoid even larger deficits
2. Existing inventories have declined and secondary supplies are limited going forward
3. Despite significant price gains, valuations for miners do not fully reflect projections closer to $100+ on a term basis
4. The return of contractual uranium commitments should result in more stable and investment-friendly market characteristics versus last cycle’s speculation-driven rally