Uranium Week: Reasons To Be Cheerful

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Brokers are increasingly emphasising the global uranium demand/supply imbalance, and getting on board the market.

-SPUT back in buying uranium
-Utilities failing to meet supply requirements
-Production downgrades diminish supply
-Morgan Stanley initiates coverage

By Greg Peel

Physical uranium investment funds have made their mark over the past few years, and none more so than the Sprott Physical Uranium Trust.

During its first year, SPUT purchased an average of 149,000lbs U3O8 per day, industry consultant TradeTech notes. Since then, shares in the fund have traded at a discount to net asset value more often, and this has restricted its buying activity. Since August 2022, SPUT has purchased an average of 14,900lbs per day.

However, share prices entered premium territory for brief periods last week and fund managers were able to capitalise, issuing 1.7m shares and buying 200,00lbs U3O8 in two transactions. SPUT now holds nearly 64mlbs U3O8 and approximately US$47m in cash.

Aside from this activity, sellers continue to hold back given uncertainty over Russian supply. And the collapse of the bridge in Baltimore is expected to add delays and increased costs to shipments destined for North America in the coming weeks and months.

TradeTech's weekly spot price indicator rose US$1.75 last week to US$88.75/lb.

Term Markets

TradeTech's term price indicators remain at US$95/lb (mid-term) and US$80/lb (long).

The uranium price has risen strongly since mid-2023, notes Petra Capital. With spot pricing at historically elevated nominal levels – and having pulled back from a peak of US$107/lb – it is natural to think the bull market is relatively mature, or even over, the broker suggests.

Petra points out term contracts were signed for approximately 160mlbs in 2023, well below the annualised rate suggested by earlier 2023 performance. While the highest level since 2012, this does not reflect replacement rate contracting (utilities' required supply) of 180mlbs.

The uranium bull market cannot be mature if utilities are not even contracting what they currently consume each year, ignoring the needs of future growth, Petra suggests.

Demand/Supply

Nuclear power is increasingly being viewed as critical to global decarbonisation and energy security. At COP28, over 20 countries launched a declaration to triple installed nuclear energy capacity by 2050. This, among other developments, has led Canaccord Genuity to upgrade demand forecasts.

Key drivers of demand include new reactor builds (in China/India), extensions of operating lives, and restarts of idled reactors. Conservatively, Canaccord's forecasts do not include the deployment of small module reactors (SMR), but the broker does, however, highlight recent announcements by major companies like Google and Microsoft that are looking at advanced nuclear as a way to power their AI ambitions.

"We cannot stress enough the fragility of primary mine supply," says Canaccord. This has become particularly clear in the last twelve months, which have been marked by several production downgrades from incumbent producers including majors Kazatomprom and Cameco.

The broker will be closely watching for a revision to Kazatomprom's 2025 production target in August as the company has already flagged its 2025 target of 81mlbs as "at risk". Canaccord expects a material downgrade.

Given such downgrades, the broker sees a "material risk" that producers will need to re-enter the spot market (as they did back when U3O8 prices were too low to justify production), to fulfill contracted volumes.

Canaccord does not see planned production restarts to date to be sufficient to cover the supply deficit, and thus new production will need to be developed.

Australian-Listed Preferences

When U3O8 prices fell to historical lows post-Fukushima, reactors were shut down and mines put into care & maintenance, brokers abandoned their coverage of the uranium sector. But as prices hit historical highs, and reactors and mines are restarting, there is a rush to get back on board.

Last week, Morgan Stanley initiated coverage of two Australian-listed miners set to restart production; Paladin Energy ((PDN)) and Boss Energy ((BOE)).

Paladin Energy and Boss Energy share prices have risen 40% and 18% respectively year to date, compared to the average share prices of ASX300 miners falling -9%, Morgan Stanley notes. Both are trading on consensus enterprise value to earnings ratios below their one-year averages, and also below the international peer multiple average.

The broker has initiated on Paladin with an Overweight rating and Boss with Equal-weight.

Paladin's Langer Heinrich mine in Namibia has a more defined resource than Boss Energy's Honeymoon mine in South Australia, Morgan Stanley notes. Paladin has a higher proportion of contracted sales, helping de-risk the Langer Heinrich restart, while the broker sees risks to Boss Energy's 2021 Feasibility Study cost savings being realised, especially in an inflationary environment.

Paladin's key growth project is Michelin in Canada, which alongside Langer Heinrich could make the miner a sizeable uranium player versus international peers, Morgan Stanley suggests. Boss Energy's growth is in an early exploration phase (limited reported resources) and will likely be geared toward expanding/extending Honeymoon life.

With regard uranium prices, Morgan Stanley sees supply risk for Kazatomprom production over 2024-25, a slower ramp-up of supply expected to restart, and a Western sanction on Russian uranium could surprise to the upside. Demand risks are longer dated, but a substantial increase in the number of reactors being moved to the planned pipeline from proposed, as uranium potentially becomes a bigger player on the path to net zero emissions, could be positive.

Canaccord's preferred global uranium equity exposures are NexGen listed in the US, Kazatomprom listed in the UK, and Paladin Energy and Lotus Resources ((LOT)) in Australia.

With uranium equity prices largely driven by capital flows, Petra Capital believes the addition of NexGen Energy (Canada) ((NXG)) (Australian listing), Bannerman Resources ((BMN)), Lotus Resources, Aura Energy ((AEE)) and Alligator Energy ((AGE)) to Australian indices is a major positive, joining existing contributors Boss Energy, Paladin Energy, and Deep Yellow ((DYL)).

Lotus Resources, which has 85% of the Kayelekera mine in Malawi previously owned by Paladin, offers compelling value among brownfield peers, in Petra's view.

Uranium companies listed on the ASX:

ASX CODE	DATE	LAST PRICE	WEEKLY % MOVE	52WK HIGH	52WK LOW	P/E	CONSENSUS TARGET	UPSIDE/DOWNSIDE
1AE	08/04/2024	0.1000	– 9.09%	$0.19	$0.05
AGE	08/04/2024	0.0600	1.61%	$0.08	$0.03		$0.100	66.7%
BKY	08/04/2024	0.2850	1.79%	$0.80	$0.26
BMN	08/04/2024	3.9000	3.15%	$4.00	$1.19		$7.040	80.5%
BOE	08/04/2024	4.8900	0.40%	$6.12	$2.23	46.9	$5.422	10.9%
DYL	08/04/2024	1.3800	0.73%	$1.76	$0.48		$1.770	28.3%
EL8	08/04/2024	0.5200	1.96%	$0.68	$0.27
ERA	08/04/2024	0.0600	– 3.45%	$0.08	$0.03
LOT	08/04/2024	0.4200	5.00%	$0.44	$0.17		$0.610	45.2%
NXG	08/04/2024	12.3900	– 1.54%	$13.66	$5.16		$17.500	41.2%
PDN	08/04/2024	1.5200	5.57%	$1.52	$0.52	2434.2	$1.570	3.3%
PEN	08/04/2024	0.1300	4.00%	$0.20	$0.08		$0.340	161.5%
SLX	08/04/2024	5.1200	– 3.71%	$5.78	$2.92		$7.600	48.4%

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