Four Factors That Could Boost Uranium Prices

Eric Fry By Eric Fry, Macro Strategist, The Oxford Club


We’re doing something a little different today…

Last week, I had the pleasure of speaking with Amir Adnani, the CEO of Uranium Energy Corp. (NYSE: UEC).

I’m fascinated by the investment prospects for the uranium industry and wanted to get an insider’s point of view.

So over the next couple issues, I’m going to share some of his insights with Energy & Resources Digest readers.

Today, we’re starting with the basics: the four factors that could boost the price of uranium.

Eric: Where is the uranium price heading?

Amir: It’s been going up since the beginning of the year. And it’s up about 40% since last November, when it hit a 13-year low.

For a number of macro reasons, the uranium price is heading higher. If you look at the 10-year high and low, the high was $140 per pound in 2007, and then as recently as last November, the price hit $18 per pound.

Eric: So what do you think is going to drive that?

Amir: There are a number of factors at play. First of all, in the uranium market you have long-term contracts that were signed five or six or seven years ago. Those contracts would have been at a higher uranium price than today’s. Those contracts are now rolling off. [As these high-priced contracts roll off, uranium producers make less money.]

That’s why, at the beginning of this year, the world’s biggest uranium producer, Kazatomprom from Kazakhstan, announced a 10% production cut. That’s about 4% of global supply – so where the price pressures are really cutting to the bone.

I don’t care if it’s uranium, zinc or copper – when the world’s biggest producers announce 10% or 15% production cuts, that’s always a great signal for hitting the bottom. And the uranium price is starting to respond to that.

Second, because the long-term supply contracts are rolling off, many utilities will be entering the uranium market to reload on new contracts to cover the requirements out over the next five years. Over the next five to 10 years, the amount of “uncovered” reactor requirements is near a 10-year high. Almost 1 billion pounds of uranium has to be purchased for long-term contracts.

And if you run a nuclear reactor, you don’t wait until the weekend before you need uranium to purchase it. You’re buying two to four years in advance of when you need the uranium. And so the demand side has that factor going for it.

Last year, we had a nearly record-low volume in the amount of uranium that was transacted under long-term contracts. Hardly any contracts were signed. So many of the contracts that should have been signed last year got rolled over into this year. But ultimately, if you have a nuclear reactor, you need to buy uranium to run it. You can’t put zinc or some other commodity in that nuclear reactor.

Eric: Before you get to the third factor, let me jump in… I’ve listened to a number of conference calls from Cameco, and they’ve mentioned that utilities have been buying uranium in the spot market more than usual, rather than signing long-term contracts, because the price is so depressed. They have theorized that if, as or when the price starts to move higher, a lot of utilities might try to rush into the market to sign long-term contracts. Are you seeing anything like that?

Amir: Yes, it’s a bit of a standoff in the sense that utilities need to buy material, but the market price of uranium is not high enough for suppliers or producers to commit to a long-term contract. And there isn’t enough material available in the spot market to satisfy utilities’ needs. So while they might be able to pick up a few hundred thousand pounds in the spot market, the average reactor needs 600,000 to 700,000 pounds to run for a year. So the liquidity in the spot market is not sufficient. There is not the depth of liquidity or material available to meet these needs. So that’s why.

It’s a great vote of confidence to have the backing of not just someone like Li Ka-shing, but also people like Rick Rule of Sprott Asset Management, former U.S. Energy Secretary Spencer Abraham and Scott Melbye, who was the president of the Uranium Producers of America and Cameco Inc.

When you look at the team, you’ll see we are all very much invested in our company. We have very much aligned ourselves with our shareholders. And we’ve been continuing to add positions in our company’s stock over the last year.

Eric: Owners who have equity skin in the game are a good sign when you’re looking to invest. Okay, so what’s your third factor?

Amir: The third factor is the change in the political winds. There’s a night-and-day difference between this administration and the previous one. Rick Perry at the Department of Energy is a vocal and strong supporter of nuclear power in the U.S. And this administration is also a supporter of energy security. But currently, the U.S. is importing 95% of its uranium requirements.

At the same time, Democrats are embracing nuclear power because they see it as a partial solution to global warming and climate change.

The last factor is Japan… Japan was a very large nuclear nation six years ago. But after the Fukushima accident, it shut down all its nuclear reactors. Only two reactors are back online right now. But more reactors will be coming online. And that could create immediate demand hitting the uranium market.

On Monday, we’ll talk more about what’s going on in Japan and why high-profile investors are piling into the uranium market.

Good investing,