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Having gone through the latest US Energy Information Administration (EIA) data pertaining to uranium inventories and contracting, we see numerous datapoints which continue to support our bullish stance for elevated uranium prices. Despite the volatility of late and the YTD spot uranium performance of -5.8% (currently at $85.95 per lb), we maintain our LT forecast for $120 /lb. Our positive stance on the commodity remains underpinned by the following three pillars: 1) increasing global acceptance across the world for the need to promote low-carbon solutions for energy use. A multitude of government initiatives have been passed by various governments to financially support and help fast track a nuclear roll-out. In the US, these significant initiatives have been highlighted by the Inflation Reduction Act (IRA) and most recently, by passage of the ADVANCE Act. 2) The need for increased energy security via energy independence. This point has become much more prevalent following Russia's invasion of Ukraine in February 2022. As such, virtually all European nations have decided to wean off of Russian nuclear infrastructure and various uranium supply, favoring instead the west's all-in one solution as provided by the tie-up between Westinghouse (providing nuclear infrastructure & service) and Cameco (providing uranium fuel). Domestically, passage of bill to ban Russian uranium imports was signed by President Biden earlier in May. Though certain waivers were provided to utilities, the complete ban will take effect in August with the last of the waivers expiring in 2028. 3) The emergence of Artificial Intelligence (AI). Projections from this latest theme have forecast the build out of the necessary datacenters to drive AI putting enormous strain on the grid and the need for increasing amounts of energy to to keep the datacenters powered. Carbon-free, baseload nuclear power is the perfect match to meet this emerging need. As such, some of the largest Fortune 500 tech companies have already signed agreements (or are exploring the potential) for power agreements with domestic nuclear utilities. Coupled with a slow production uranium ramp along with holding companies such as the Sprott Physical Uranium Trust (SPUT) and Yellowcake plc (YCA) buying physical inventory, we continue to see a compelling market dynamic for uranium.
Our continued positive view has been enforced when looking at other important factors, namely the markets for conversion, enrichment and the state of domestic inventories.
Historically, the term uranium price has been predominantly higher than the spot. This relationship is perfectly understandable seeing as producers look to hedge their price while utilities look to ensure supply. Though this spot/term delta has remained consistent (albeit at varying degrees) over the last decade+, the relationship flipped in 2023 when the spot surpassed the term price by one of the largest margins ever seen (peaking at a spread above $20). Despite the spread shrinking since, this flipped relationship has since been maintained to date. Whereas the spot has retreated from $100+ /lb level this past winter to the current ~$86 /lb, the term price has only increased since mid 2021. Since 2021 utility participation in the term market has increased, going from ~65% in 2021, rising to ~92% in 2023. This increased participation rate is a driver for higher uranium prices as spot churn (largely by speculators and financial institutions) is supplanted by tangible utility demand. Uranium prices have been known to increase when term activity represents an increasing portion of total volumes. As noted by the US EIA, domestic utilities purchased 51.6M lbs of uranium (or equivalents) in 2023, representing an increase of ~27% from the previous year.
Along with the strength in the term price, we also highlight the continued multi-year highs in both enrichment price (most recently ~$173/SWU) and conversion price (most recently ~$60/KgU). Recall that this all comes in light of the recently signed ADVANCE Act which provides further incentives for the development and deployment of conventional and micro nuclear reactors. It's telling that since Russia invaded Ukraine in late February 2022, conversion prices have since advanced by ~200% while enrichment prices have increased by ~210%. Both enrichment and conversion prices are at all-time highs.
Global enrichment capacity has become extremely tight following Russia's invasion of Ukraine while conversion prices also continue to reflect tight supply. Converdyne ramping up will slowly alleviate the situation however increasing production to full design capacity will remain slow. In short, both cases point to increasing demand for uranium. Whether through a rising rate of overfeeding for enrichment or for an increased demand for uranium as feedstock for conversion, we can only expect corresponding upward pricing pressure on the underlying commodity. The overfeeding has already become apparent of late:
Most telling from the chart above is the divergence since 2011 between the spot and spot/SWU ratio. Though the ratio (right hand of the graph above) has been consistently higher than spot, that dynamic flipped towards the end of 2023. After so many years of persistent underfeeding, the ratio is an indicator of the recent switch to overfeeding by the enrichers.
Lastly, we look at the state of inventories for US Nuclear Power Plants (Civilian Use). As mentioned before, though domestic utilities purchased 51.6M lbs of uranium (or equivalents) in 2023 (+~27% from 2022), the inventory drawdown has been pretty consistent since 2016. Driven by the ban on Russian uranium imports, we've already seen utilities become increasing participants in the term market as they attempt to replenish their stockpiled material. We expect this trend to continue, along with higher volumes. Recall that the limited Russian waivers all expire in 2028. This move to re-stock inventories would only serve to further be bullish on uranium prices. As calculated below, note that total inventory consists of the following: U3O8 concentrate, UF6, fabricated fuel, enriched uranium and natural uranium.
The US EIA estimates that US utilities will need ~433M lbs of uranium over the next 10 years (2024-2033), of which 249M lbs have been locked-in via term agreements. The remaining 184M lbs represents the largest ever unfulfilled amount. For these reasons alone we remain bullish on the uranium pricing dynamic and specifically on US sourced material given the decreasing amounts of material flowing to the west from places such as Russia and Kazakhstan. Both Canada and Australia have massive projects looking to fill the void (Arrow, Phoenix, Triple R), however meaningful production from new mines remain 5-10 years away. As such, our coverage universe is skewed towards North American companies with assets spread over Canada's Athabasca Basin (NXE, DNN, FCU, ISO) and in the hotspot Four Corners states or Wyoming in the US (URG, PENMF, EU, LAM). Contact your HoldCo Markets representative for additional company specific reports.
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