Until now, the main supply-side victims of post-Fukushima...

Until now, the main supply-side victims of post-Fukushima uranium price weakness have been planned development projects – the likes of Trekkopje, Imouraren and Olympic Dam expansion (we estimate over 80 Mlbs/year in pipeline mine supply has been shelved since mid-2011); but only over the last several weeks have we started to see a meaningful reduction of production guidance from existing mines – the CEO of world top producer Kazatomprom is now guiding for flat growth through to 2015; ARMZ/Uranium One is throttling back growth plans in Russia and effectively halting operations in the US and Australia; and Energy Fuels, the US’ only conventional producer, is placing its White Mesa mill on care and maintenance.

Meanwhile, recent demand news has been incrementally positive as the UK pushes forward with its wave of new builds, five reactors now under construction in the US, China ramping foreign reactor vending, India appearing more willing to bend on its liability law (main hurdle for its large new build plans), Russia confirming its growth through 2030, and news out of South Korea and France providing additional comfort that their heavy reliance on nuclear power will continue into the future. Our supply projections have been reduced by 6, 8 and 10 Mlbs respectively in 2014E–2016E and we now anticipate global over-supply to persist only though 2016E in our base-case outlook (vs. 2019E, previously). There is also potential for further major mine closures during 2014, which could bring upon a shortfall as early as 2015E if operations such as Kayelekera and Rössing fall victim to the current price environment. Scenarios are provided on the following pages.

Positive Trading Signals. Spot prices and equities appear to have responded to these developments and are up 3% (to US$36/lb) and 16% (producers, juniors; MC-weighted), respectively, over the last six weeks. UxC reports a wave of spot market buying by traders, suggesting intermediaries may be anticipating an upward trend. Physical fund Uranium Participation – often a leading indicator for spot prices – has corroborated this near-term outlook, implying higher prices over the past five weeks. Moreover, Goldman Sachs has reportedly put its uranium trading desk up for sale, which, depending on the buyer, could push up the average cost of capital amongst participants in futures trading, likely steepening the forward price curve. Given the probable motive behind Goldman’s decision – increased complexity and expense due to Basel III – we believe Deutsche Bank could soon follow suit.

Bullish Outlook. We believe strength in prices and equities will continue in early-2014, accelerating mid-year as (i) first Japanese reactors restart, de-risking the space, discouraging further deferrals of Japan-bound supply and easing fears of inventory dumping; (ii) utilities emerge from a historic hiatus in contracting to address large uncovered requirements in the 2016-onward period; and, (iii) potentially, more mines shutdown. We now have even greater conviction in our forecasts of US$45/lb in 2014E and US$56/lb in 2015E, re-iterate the need for >US$70/lb to incentivize new mines and urge investors to buy uranium equities today.