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In light of Cameco's (CCJ) blowout Q3/2023 financial results, we acknowledge the obvious (lower uranium unit costs, coupled with higher pricing and volumes) and continue to stress that much of Cameco's strong +73% YTD showing can be attributed to the transformational Westinghouse acquisition which was announced in October 2022 and is expected to close by year-end (most recent note here). Though we can spend the majority of this write-up analyzing the many positives ranging from the underlying uranium business, the fuel services business, LT contracting and the positive corporate outlook - inventory analysis (corporate but also industry-wide) remains a key aspect of the story which is often overlooked.
Given the uncertainty of JV Inkai delivery (two-thirds of Cameco's share of 2023 production is supposedly in transit along the Trans-Caspian International Trade Route and expected to arrive by the end of 2023), LT purchase agreements, loan arrangements and inventory management remains vital in order to mitigate the risk of delivery. Along with delivery commitments amounting to an average of 29M lbs annually from 2023-2027, Cameco currently holds purchase commitments worth C$558M encompassing 9.2M lbs of U3O8 equivalent from 2023-2028. We do note due to sales being higher than production, total product inventories have declined to $509M compared to the $665M as the start of 2023. As of September 30, 2023, corporate inventory stood at 7.5M lbs of U3O8 equivalent, compared to 12.4M lbs at the start of the year. That said, FY/2023 production is expected to amount to (up to) 18.7M lbs while purchases are seen between 11-13M lbs.
For context, as per the latest data from the US Energy Information Administration (US EIA), end-2022 uranium inventories held at the various domestic utilities amounted to 103.8M lbs while a further 36.2M lbs held among the various domestic suppliers.
Though the inventory levels at the various US utilities (or nuclear power plants, NPPs) remain near the highs dating back to 1990, we note that:
1) The end-2022 figure of 103.8M lbs is the culmination of drawdowns seen just about every year since the 2016 high of 128.0M lbs.
2) US and EU NPPs typically carry much lower levels of uranium inventory when compared to Chinese NPPs. A well covered US NPP may hold enough inventory for three years of continuous operations, however some utilities hold as little as one year's worth of inventory. A typical Chinese NPP stores closer to twelve years worth of uranium inventory.
For some more context, seeing as the EIA estimated that US NPPs hold a combined ~103.8M lbs at the end of 2022, the World Nuclear Association (WNA) estimated that Chinese NPPs held a combined ~343.0M lbs of inventory at the end of 2022. Much Like their US counterparts, it was estimated the EU NPPs held ~95M lbs in inventory at the end of 2022. We feel that the ~20% drawdown since 2016 in US utility inventory is significant as domestic electricity generation has remained relatively constant between the 750,000M KWh - 800,000M KWh range. How so ? despite the number of domestic operating nuclear units declining from 112 in 1990 to 92 at end-2022, capacity factors have increased markedly, going from 66.0% in 1990 to 92.6% in 2022. One would have assumed that inventory levels would have in the very least remained constant since 2016, however they have declined significantly, going from 128.0M lbs in 2016 to 103.8M lbs at end-2022.
Given the current highly charged geopolitical environment, themes of security of supply and energy independence have come to the forefront post-Russia/Ukraine war. That said, given an average of just a few years of inventory cover at the average western utility, we can only expect that both US and EU utilities will be much more aggressive on the procurement for inventory front in the years ahead. The emergence of financial players such as SPUT (U.UN), YellowCake (YCA), Zuri-Invest and Uranium Royalty Corp (URC) (among others) have also further skewed the supply/demand imbalance - recall that thus far in 2023, SPUT alone has already purchased ~3.0M lbs. Combined, these holding companies hold nearly 100M lbs in inventory. With a partial exception to SPUT (previously Uranium Participation Corp) none of these players were taking lbs off the market a mere ten years ago.
With Japan still in the midst of re-starting its sizeable reactor fleet, the days of the post-Fukushima inventory overhang are likely over (some Japanese utilities have reportedly begun buying). We also note that secondary supplies (underfeeding, re-enrichment and mixed fuel) which now account for ~15% of demand will also very likely continue to decline. As domestic reactor demand will continue growing we envision that the uranium market will now likely be less driven by inventory overhang and more influenced by primary production instead. From the supply side we note that certain emerging producers have already indicated varying degrees of difficulty ramping up for a multitude of reasons - Peninsula Energy (PENMF) due to a sudden toll-milling cancellation, Ur-Energy (URG) reported trouble finding/retaining key employees while Global Atomic (GLO) will have construction delays due to geo-political uncertainty in Niger. As per Cameco's outperformance versus a basket of liquid North American uranium peers - the outperformance spread remains at a near two year high:
We know the demand for uranium will be now driven by western re-stocking, the question now is whether there will be a sufficient supply side response. Recall that at just over $74/lb uranium the spot price is reflecting a fresh 15-year high.
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