Weekly Reports | Dec 02 2020
As the spot price of uranium holds steady for the month, an investment firm details bright prospects for the sector.
-Are we past the cyclical downturn for uranium?
-Five investment ideas
-The monthly spot price is unchanged
By Mark Woodruff
In the view of Australian investment firm Shaw and Partners, uranium markets are past the cyclical downturn driven by the Fukushima earthquake.
A recovery is evidenced by spot uranium prices having increased 25% to US$30/lb this year due to supply-side discipline and inventory drawdowns, notes Shaw. The inertia that took hold after the US Section 232 petition, which was compounded by covid-19, is finally ready to be dislodged. In addition, Russian Suspension Agreement and US election uncertainty is now over.
US and European utilities have the clarity and bandwidth to think about procurement. Shaw believes utilities will have to act in 2021 to cover a shortage of term contacts from 2023, given the two to three year upfront contract lock-in period.
On the supply side, several of the world’s largest uranium mines will cease production over the coming years, starting with Australia’s Ranger mine and Niger’s Cominak mine in 2021. These mines alone are the equivalent of around 6% of 2019 global production.
Longer-term, Shaw believes fundamentals are increasingly appealing for the sector. Nuclear Energy is recognised as an essential element of the clean energy mix, which potentially enables nuclear power to increase its contribution from around 10% of global electricity currently.
Consensus suggests uranium demand needs to increase by over 100% from current levels by 2050 if decarbonisation is to take place. Re-investment in uranium mines is required. Most industry forecasters believe that a long-term sustainable uranium spot price based on cost curve support is in the US$40-50/lb range, notes Shaw.
The firm uses a long-term U3O8 spot price assumption of US$46/lb (2020 real).
Australian Stock Recommendations
Shaw and Partners looks at five uranium companies in the sector.
In their view Paladin Energy ((PDN)) is the stand-out on a risk-reward basis.
The company is preparing for a restart (assumed FY23) of the Langer Heinrich (Paladin 75%) uranium mine in Namibia. Langer Heinrich is expected to operate at an all-in sustaining cost (AISC) of about US$32/lb, which places the operation at the low end of the second quartile of uranium producers. The combination of low capital intensity to restart with low operating costs means that Langer Heinrich should be one of the first restarts when market conditions allow.
Next is Boss Energy’s ((BOE)) 100%-owned fully-permitted Honeymoon project in South Australia. Shaw explains the project requires low upfront capital and only 12 months to restart. In their view, the company has the potential to be one of the lowest cost uranium producers in the Western World.
Peninsula Energy ((PEN)) has the flagship Lance Projects in Wyoming, USA. It requires low upfront capital and can rapidly restart post a final investment decision, notes Shaw. The company is the only ASX-listed uranium miner with direct exposure to US Government initiatives, which are pro domestic mine development.
Shaw explains Lotus Resources ((LOT)) is looking to re-start operations of the fully-permitted Kayelekera project in Malawi. The company acquired 65% equity from Paladin in March 2020. A low upfront capital requirement of around US$50m is appealing to the investment firm.
Finally, Bannerman Resources ((BMN)) is a highly leveraged play on the uranium price. The company’s 95% owned open pit Etango-8 project in Namibia is lower grade, but higher volume compared to its competitors listed on the ASX. The company is considered to require a spot uranium price around US$60/lb in order for the project to be sanctioned.
Victorian report on nuclear prohibition
A parliamentary committee has found nuclear power remains cost prohibitive, risky and in need of a substantial subsidy to have any chance of being viable in Australia.
The Victorian parliamentary inquiry’s final report into nuclear prohibition was released last week, stating there was no serious case for lifting the current prohibition.
The Victorian state parliament has maintained a ban on nuclear activities since 1983. This prohibits uranium milling, enriching, fuel production, fuel reprocessing and waste storage.
The government of Victoria is required to provide a response to the report within six months.