Dead cat bounce or major move ahead for uranium prices?
The spot price of uranium has moved from $28.0/lb in May to $35.75/lb as of September 17th, according to Tradetech. Is this the beginning of a major rebound, or a dead cat bounce? It’s not a dead cat bounce because there was some news underpinning the move. First, Cameco’s largest mine, McArthur River and another mine, Rabbit Lake were hit with strike activity about 3 weeks ago. Second, escalating Russian tensions and sanctions from the U.S. and Europe grabbed the attention of utility buyers who’ve been sitting on the sidelines. There is no urgency to buy when the long-term contract price is $45/lb. However, now that the spot price is up 28% from its low, at least some utilities are moving into the market looking for product. To be clear, trading volumes remain subdued. At some point, utilities will have to come back in for size, but is now that time?
On September 12th, news of a possible settlement of the Cameco strike seemed like it might give the recent move pause. Still, prices ticked higher. That was certainly encouraging. I think that this move is a positive development, but not the start of a major move. Evidence for my stance is that the long-term spot price hasn’t budged, it remains stuck at $45/lb. If we were to see a move above $54/lb, (a 20% gain on the long-term price) before year-end, that would make me question my thesis.
Most uranium companies can’t make attractive returns at $35.75/lb, and plenty still can’t at $50/lb. Therefore, when demand picks up, sellers will simply increase their offer prices. Since the cost of uranium used to fuel nuclear reactors is a small portion of overall operating costs, uranium producers know that they can push for higher prices. But, only when there’s real demand. The utilities are still sitting on plentiful stockpiles, especially in Japan where they probably have 5-6 years worth.
What will make utility buyers get off the fence?
In the U.S. and Europe, stockpiles are high, but since utilities have largely stayed out of the term market for the last few years, they are starting to get low on inventory for 2017 on. Now, some analysts believe that date might be 2018 or 2019. A common mistake that investors make is to think that because utilities don’t need uranium for the next 3-4 years that they won’t contract for any. That’s not how it works. Typically, utilities contract 3-5 years in advance. So, in normal times they would already be fairly well covered from 2017-2019. This time around they’re not. Still, only a relative few will step in at first to sign long-term deals. If prices continue to rise, more and more utilities will jump in. Illiquidity is the word of the day, it’s no different for thinly traded penny stocks. A relatively small amount of buying can send a small cap up 20% in a single hour. That’s what we’re seeing in the uranium spot market.
In order for the rally to continue, the long-term price, stuck at $45/lb has to move higher on larger volumes. All eyes are on that long-term price. In the futures market, contracts for 2020 are trading at about $49/lb. Therefore, it’s certainly possible that the quoted long-term price by Ux Consulting and TradeTech will move up as well. That’s when we will see if the rubber hits the road or not. Once the quoted long-term price is above $50/lb, will more utilities get off the fence? Will they cover a lot of their needs or just dip a toe in? No one knows the answer. I believe the rally will slow in coming weeks because of the excess supply around the world. At higher prices, some traders and utilities could actually enter the market as sellers.
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Uranium stocks not feeling any love
Another sign, albeit far from perfect, is the action of uranium stocks over the same period as the spot price rebound. They’ve hardly moved at all. Nexgen moved up significantly, but entirely do to tremendous drill results. Notice that Nexgen has pulled back in the past two weeks. The penny dreadfuls are flat or down. For those wishing to dollar-cost average or double down on a few select names, now could be a decent time to do so, but the same caveat applies….To be safe, you must have a long-term horizon.
One last thing to consider. Late last year uranium, gold and a few other natural resource sectors, rallied robustly for about 3 months. The rally faded in March, 2014. Stocks that rallied have since fallen dramatically. Will we see a repeat in early 2015? We certainly could, but I think we need to see the long-term uranium price above $50/lb to get a meaningful move. Hedge funds frequently are willing and able to open their risk wallets and throw some risk capital around early in a year. Late in the year, they strive to protect partner bonuses. It will be interesting to see how this plays out.
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