Price rise, page-3

The last part talks about Covid implications for fuel cycle. Enrichment is very tight at the moment. Silex should attract some interest with a spike in SWU price.

URANIUM
Excerpts from conversation between Andrew Weekly, Founder and CEO of
SmithWeekly Research, and Joniel Cha, Senior Specialist at S&P Global Platts
April 13-14, 2020
“The supply shortage was already firmly in place before COVID-19 exposed an un-greased supply chain that was
bound to freeze up on such an event,” Weekly said. “This not only brings forward the realization of the problems that
were obscure to many market observers, but it adds unbearable pressures to the market that will lead to notable price
increases in the coming months and years ahead,” he added. “The only short-term question is will the volatile broad
market direction dictate that response in the uranium equities or will uranium create a standalone trend?” Weekly said.
“The shortage will last for years until the sector becomes over capitalized and over built,” he added.
“The spot price will continue to move up; however, the real action will occur in the long-term market once the
uncertainties of the U.S. election and COVID-19 are behind us,” Weekly said. “We know long-term contract prices
behind the curtain are already well above where the market price reporters disclose it,” he added. “This unreported
disconnect will come to an end as the pressure mounts,” he said. “The market response is now starting to be forwardlooking as compared to many years of backwards-looking,” he added. “We are headed higher and this sector is the best
opportunity available in all markets,” Weekly said.
“There hasn’t been much competition [among utilities in the term market] for a number of years,” Weekly said. There
will be a “resurrection of competition between utilities,” he added. In addition, utilities will prioritize “Triple A-rated
sources of supply versus Triple C, in bond rating terms or corporate debt ratings,” he said. Any excess supply that is
built, cannot get term contracts, and becomes desperate “will flood into the spot market,” including through traders, he
added. “We will see higher volumes” traded in the spot market, but “the long-term [market will hold] the bulk of
transactions,” he said.
Regarding BHP’s Olympic Dam significantly reducing uranium production, this was thought to be an operation which
COVID-19 could potentially halt copper production and thus uranium by-product. However, given Australia’s
response and COVID-19 statistics in that country, operations are unlikely to be impacted.
Cameco’s Cigar Lake could be shut for “at least around five to six months,” Weekly said. This period “coincides” with
“scheduled maintenance at that facility,” he added. “Half a year’s anticipated production down” is significant, he said.
Cameco’s share of production was 9 million lb U3O8 in 2019. So approximately 4 million pounds are gone over a
five-month suspension.

Utilities’ demand for uranium is around 190 million lb U3O8 per SmithWeekly estimates, Weekly said. Meanwhile,
the “current supply prior to Covid-19” was 130-140 million lb/year, he added. Per World Nuclear Association 2018
data, that number is 140 million lb, with the assumption that 2019 was in the mid-range of around 135 million lb.
However, COVID-19’s impact would lead to a decline into the mid-upper 120 million lb range.
Yet “with current cuts” resulting in a greater deficit, producers are waiting for prices to rise even higher, Weekly said.
“Could Cameco survive for the rest of year without production? Sure, they probably could,” said he added. But they
are “taking a gamble on recovery timing,” he said.
“Last year, Cameco didn’t buy [the amount] they said they were going to buy,” Weekly said. “There hasn’t been any
notable purchasing activity” this year, despite “small trading [activity] or churn here and there,” he added.
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Cameco is not buying much material in the spot market, Weekly said. That is because “the depth they need in the spot
market probably isn’t there,” he added. The second problem Cameco faces is that their general and administrative
expenses, as well as care and maintenance costs, “eat at their finances” and “cut significantly into their cash balance
sheet when they have outside spot costs added and need to buy spot in notable size,” he said. At a current spot price of
around $30/lb, it would not be in Cameco’s interest to purchase notable size in the spot market, Weekly said.
Therefore, Cameco “could borrow material” at its own storage facilities owned by others but controlled by Cameco,
which “could buy them a year, if they were to take all the material that is available,” Weekly said. Cameco could make
an agreement in which it pays “at an interest rate either in dollars or additional barrels of uranium,” he added. The
Canadian producer could “use that to fulfill contracts” and “supplement in lieu of the spot market,” he said. Those
agreements could be made with Yellowcake, Uranium Participation Corp., traders, and smaller private holding
companies, Weekly said. “That would be sufficient to get them through until Cigar Lake has restarted and well into
2021 if select spot purchases and remaining inventory is used,” he added. Cameco has a blue chip rating and can obtain
bonding or letters of credit. The Canadian producer could also borrow from the few utilities that are better stocked for
uncertain and volatile times in the market, as they have extensive relationships.
Cameco has said it has no intention of restarting its McArthur River mine until the spot price reaches at least $40/lb. It
would take “12-18 months for McArthur River to fully ramp up,” Weekly said. “But buying at $30/lb in the spot
market” would not be in the company’s interest, he added. “As the spot price rises, so will they find other ways to
fulfill contract needs,” he said. Cameco would not be a large player, in the context of their stated needs, in the spot
market, he added. While the company has “enough cash to come out and buy material in the spot market,” that is
“probably not their first choice,” he said. The company could “issue debt with the anticipation that the market will be
better suited moving forward, and prices will be higher,” Weekly said. That would “buy them time to bring assets back
online when prices are more favorable,” although there would be a lead time, he added.
Storage of Uranium Participation Corp. (UPC) and Yellowcake PLC is around 25 million lb held at Cameco facilities.
See each respective company filings for reference. The most recently provided uranium inventory at Cameco was
around 6 million lb. If Cameco really needs 20-22 million lb per guidance to fulfill commitments, then the company’s
best option would be to use all inventory and then borrow the rest over buying in the spot market. If Cameco is
compelled to buy in the spot market, it could attempt to purchase material per its guidance at the spot price and then
draw all remaining inventory to fulfill delivery guidance of 28-30 million lb stated for 2020.
“[Cameco] could amend some of their agreements to give a window,” Weekly said. The coronavirus pandemic
constitutes an “excusable delay” to “suspend delivery for a period of time,” he added. See U.S. Federal Acquisition
Regulation (FAR) 52.249-14, which sets an example for viability. There is always force majeure as a means to delay
but not fail to deliver, Weekly said.
Cameco will only make “smaller spot purchases,” though it would be likely “more than what they did last year,”
Weekly said, assuming they don't use other options like borrowing. Last year they did not purchase as much as they
said they would, he added.
“They couldn’t buy their guidance in the spot market, since it would eventually hit them financially,” Weekly said.
“We know they get paid a contract price higher than spot, but figure in care and maintenance costs estimated for 2020
at CAD $170 million, figure in general and administrative expenses for 2019 at CAD $125 million, figure in finance
net cost and exploration at CAD $83 million, and add that to the assumption that Cameco purchases 22 million lb at
the spot price of $30/lb, resulting in ‘all-in-cost or total cost’ of around $47/lb, not considering currency differences.
You can start to see why large spot purchases are avoided. The C&M, G&A, and finance costs are near $17/lb,” he
added. Therefore, 22 million lb just at an outside cost of $30/lb would equate to around $660 million in one year alone.
That removes much of Cameco’s cash balance very quickly, though much of it gets replaced upon receivables, Weekly
said.
“Kazatomprom would not be the longest” to reduce its production, and would resume production “to pre-COVID
levels certainly in this calendar year,” Weekly said. “Of all the producers, Kazatomprom is the most ambitious to keep
things rolling” and “wants to be the shortest with regard to downtime,” he added. “They have certain protections as a
quasi state-owned enterprise and with costs in home currency and sales in U.S. dollars,” he said.
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However, Kazatomprom “has not reinvested in its business,” which “is in decline as a result of sector under
capitalization,” he added. “Until this sector gets recapitalized,” it will not reinvest in its business, Weekly said. That
will only happen with higher prices, he added.
The uranium supply “shortage started last year,” Weekly said. “This virus has exposed supply chains across all
industries,” he added. The deficit in the uranium market will last “conservatively” for five years assuming it was fully
capitalized tomorrow and all checks were written, he said. And that deficit “will grow” due to ramp-up production and
new build project lead times, he added. Fuel fabrication cycle processes “can take 18 months, typically 24 months,
without COVID,” Weekly said.
“We will have a deficit for a number of years, until there is a significant amount of capitalization and reinvestment,”
Weekly said. “Conservatively, you can expect a bottleneck lasting five years. That’s very conservative. It could last
into the 2030s,” he added.
How much capitalization and reinvestment is required in the nuclear industry, and how does that compare to the
figures in 2002-2003 and 2007-2008?
Speaking only for the uranium mining sector, not the entire nuclear industry, “I can’t speak to what the actual market
capitalization will be, but I suspect it will be greater than or equal to the last cycle in 2003-2008,” Weekly said.
Investment needed to build out capacity (not sustaining capital) is at least the combined market capitalization of
Cameco and Kazatomprom which is around $8 billion. “That assumes no waste and mal-investment, so the figures are
much higher due to mis-allocation that will be attracted by sector ‘jokers’, Weekly added. This figure is only for the
build-out of capacity to compete with demand, not the operations sustaining capital, he said. “I do not have a
compilation of last cycle actual figures at this time, so I cannot compare intelligently,” he added.
There was panic in the uranium market in March, resulting in a 50% loss in uranium equities in only “a couple weeks,”
Weekly said. The spot price remained unchanged but then “slowly, well, quickly for this business, started to rise,” he
added. It was around $24/lb but is now around $29/lb, he said. And “uranium stocks doubled, or more, off of their
recent bottom,” he added.
“The big question is, in the next 12 months, does the price of the uranium equities follow the spot price or the longterm price of uranium itself; or is there a disconnect where the equities are sold because the market is declining but the
spot price stays the same or even increases?” Weekly said. In a “rational market, equities respond to the uranium spot
price,” which is rising, he added.
“Investors are a little more excited” as a result of the price movement, Weekly said. However, “I don’t know that
they’re any more excited than what we saw in late 2016 through early 2017” and in 2018, he added. But some
investors have entered an “exhaustion period” since 2019 and became impatient, he said.
Uranium is among the few commodities in which the price is rising, “attracting a lot of eyes, and a lot of capital,”
Weekly said. Some capital injection would “have a huge impact on the uranium market,” he added. “When utilities
start long-term contracts and the price rises above $40/lb, people will get in” the market, he said. Overall, still too early
to call with accuracy, but most strong-handed participants are ready either way from here.
Cameco’s Port Hope conversion plant “will be closed for a short period of time,” Weekly said. The company “will
likely have this facility restarted not later than September” because the “fuel services side is much more sensitive,” he
added.
“Cameco has enough [UF6] in the short term,” Weekly said. “They can borrow enough for about two months of
production,” he added. “They’ll probably be okay for at least a few months, till September or October,” he said. The
“UF6 market is a lot tighter than any other component,” he added. “SWU and EUP is also a fairly sensitive market,” he
said. “We’ve seen the price of UF6 increase substantially over the past couple years,” Weekly added.
Cameco’s “inventories are very low on their fuel services side,” Weekly said. “Their best margin and majority
revenues at this time in their business is from their fuel services side,” he added. “They don’t have much for inventory
to supply their contracts,” he said. “As a result, they can’t keep [Port Hope] turned off for too long,” he added. “So
their fuel services is much more important at this point,” he said. “But they have a bit of a window, around 6 months,”
he added.
Shutting Port Hope “certainly affects enrichers that get their material from Port Hope, because that’s their feedstock,”
Weekly said. “It’s like getting the syrup for your Coca-Cola mixture,” he added. “That’s significant” and “the whole
fuel cycle chain is the most sensitive,” he said.
“Once you start to squeeze what is already a bottleneck [of the fuel cycle],” which is “the conversion, enrichment and
fabrication process,” it is “a big deal,” Weekly said. The “restart process takes time, about a month or two, depending
on the process” he added.
“This obviously will lead to higher prices, not just a brief spike in price,” but a “sustained higher price,” Weekly said.
That price level would be in the range of $30-40/lb within 18 months, he added. Port Hope “could potentially be back
up by July or even earlier,” he said. “All of these shutdowns and suspensions only bring the timing forward and closer
to us” for the supply panic, he added.
“The uranium ocean freight shipping business is very small,” Weekly said. “You can probably count on less than one
hand how many actual shippers are still transporting this class of cargo,” he added. “These can only point to disruption
and higher prices when producer demand for shipping increases,” he said.
“Fixes to this sector require capital,” but “few are willing to do that unless there are higher prices,” Weekly said. “End
users needing fuel eventually leads to higher prices, due to the nature of this industry,” he added. There will come a
“period of term contracting,” in which utilities are “competing with each other for material and best price,” Weekly
said. They will “go to people they know for [security and] certainty of supply,” paying whatever price, he added.
Meanwhile, “producers will hold their order books to try to obtain higher prices,” Weekly said. “Once the higher price
game starts, a price surge will take place,” leading to a price “spike in excess of $100/lb,” he added.
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