In this article I intend on reviewing the recent Cameco Q4 2017 earnings conference call. Because Cameco is the second largest producer of uranium in the world what they have to say concerning the market is important for us, as investors in the uranium space, to understand. This is a link to the entire earnings call transcript.
“…… the fact that the uranium price starts with a 2 is partially where our optimism stems from. Although demand estimates have come down, there is still growth in our industry. Today, there are 57 reactors under construction, the majority of which could be on line over the next several years, if startup will occur as planned.”
“Many of the countries that are installing nuclear capacity today are countries where massive segments of the population have little or no access to electricity and are demanding more, and those populations are growing. I’m talking about places like China and India where there is a huge need for base load electricity and where clean air is a growing concern.”
I have showed this picture before but it needs to be reiterated. The biggest reason that nuclear power will be a growth business over the next two decades can be summed up by saying, Asia is choking to death on air pollution.
The bottom line is that the governments in places like China and India have to deal with this problem. As the people in those countries become wealthier they will demand clean air. The legitimacy of the regimes is at stake even in a place like China.
“Prices…… are still nowhere the near the levels needed to encourage investment in future supply, supply that will be needed to support reactor construction programs, the return of idled reactors to the grid and utilities’ uncovered requirements.”
This is one of the biggest reasons I am so bullish on uranium. Once the price starts rising it will overshoot to the upside and I believe there will be shortages of uranium. The price has been low for so long that new supply has not been funded and developed. It takes years to find and develop a uranium mine. These low prices have discouraged capital from being invested in new mines.
The utilites have taken advantage of the low prices by going to the spot market and buying their uranium requirements. The problem long term is that Fukishima short circuited the price signalling mechanism to the industry. If the accident would not have taken place then the price of uranium would have found an equilibrium level that would have been suffcient to stimulate new mine development.
That process did not take place and now as you can see from the chart above there are large uncovered uranium requirements well into the future. There will be a scramble for uranium when the price starts to rise and the utilities realize they need to lock in supply.
“It no longer makes sense for us to deplete the world’s largest high grade mine where costs are among the lowest when the market is telling us, it doesn’t need the pounds. So, we spent most of January putting McArthur River/Key Lake into a safe state of care and maintenance. Not easy to turn a mine off and on. And given the significant financial and social impact of our decision to suspend production in McArthur River and Key Lake, we will reevaluate our decision as we get closer to restarting operations.”
One of lowest cost uranium mines has been put on care and maintenance. If the low cost producer can’t make money what about the higher cost producers? As long term contracts roll off expect to see more announcements from other producers on more mine shutdowns.
Cameco management has also said that in addition to drawing down their own inventory, they will go into the spot market and buy material cheaper there than they can mine it. This is actually good news as it further shrinks the oversupply issue.
To sum things up the low cost producer in the uranium industry can’t make money at these levels so they are reacting by shutting down production and lowering their costs as much as possible. The uranium mining industy is an industry in liquidation. The cost to mine the metal is higher than the sale price. That cannot and will not continue.
However, that is the opporutunity because demand for uranium continues to increase as new reactors are added. I have had a few people email me and say when is the urnaium price going to take off? It does not work like that. We may have to wait 6-12 months but I am confident in my analysis.
I was around for the last uranium bull market last decade. Some of the uranium stocks went up 10-20x. I can afford to be patient as I know when this market turns three zeros are going to get added to my net worth.
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