The rule of thumb is that mining stocks soar when the underlying commodity sees a substantial price increase.
In recent months, the silver, tin and copper stocks have behaved that way.
Most ASX uranium stocks have seen price boosts in early 2021 — but the spot price of uranium has remained weak. The first week of March saw the spot reported at US$27.30 per pound (A$35.24/lb).
The difference in the uranium stocks’ case is that investors seem to be buying into the story that there is a shortage looming just over the horizon.
There seems little doubt that a substantial crunch is coming up: more nuclear reactors are being built and planned, global mining output is largely in stall mode, China and India are racing to build more nuclear power stations, while the US utilities which account for a sizeable slice of uranium offtake will soon be forced to negotiate new supply contracts.
Doubts over future uranium supply
The big question: over the next three years, will there be enough uranium to go round?
Potential uranium producers are banking on that answer being “no”, with a consequent impact on uranium prices that will make their projects economically feasible.
Meanwhile, several ASX-listed uranium juniors are hard at work readying for the moment that the spot — and, more importantly, the (higher) contract — prices begin to reflect the inevitable tightening of the supply/demand balance.
One such company is Lotus Resources (ASX: LOT) with its Kayelekera mothballed mine in Malawi.
In recent weeks, the company has raised an additional $12.5 million plus begun the process of acquiring another 20% interest in the project to take it to 85% (the balance being owned by the Malawian government).
Lotus project at low end of capital curve
Kayelekera was formerly owned by Paladin Energy (ASX: PDN) and it produced 10.9 million pounds of uranium between 2009 and 2014.
That year, continuing low uranium prices forced Paladin to place the mine on care and maintenance. Paladin now owns around 10% of Lotus.
Lotus estimates that it needs only about US$50 million (A$64.3 million) to get Kayelekera back into production.
The existence of infrastructure already in place means that Kayelekera is at the lower end of the capital cost challenge.
It has a proven resource, a supportive Malawi government behind it, and the permits are all in place.
Plus, there is, the company says, substantial exploration potential in surrounding areas, most with little or no drilling having been done.
New deposit discovered
In February, Lotus announced a new high-grade rare earth oxides (REO) deposit at Kayelekera.
Located 2km from the Kayelekera mine, Milenje Hills was announced as having TREO values up to 16%, the deposit having been explored by trenching.
Of the critical rare earths (dysprosium, europium, neodymium, praseodymium, terbium and yttrium oxides), that grade was an average 3.4%.
Aside from readying the mine for reopening and exploring for additional REOs, last year Lotus began discussions with major global utilities covering offtake from its Kayelekera uranium mine in Malawi ahead of the mine’s re-opening.
Kayelekera was discovered in 1982 by the Central Electricity Generating Board of Great Britain, but the project was abandoned in 1992 due to the then-poor uranium output.
In 1998, Paladin acquired control of Kayelekera and open pit development began in June 2008.
Long-term contract renewals coming soon
Lotus’ move to find offtake partners comes at a time when nuclear energy-generating companies face a tailing off of existing contracts for uranium supply and will need to sign new ones over the next few years.
Global utility contract deals reached their peak in 2005 with 250Mlbs of uranium bought that year under long-term arrangements.
In 2013, by contrast, new contracts covering only about 25Mlbs were signed, and new long-term contracts failed to reach 100Mlbs in the years between 2014 and 2019.
Contract terms range from three to 10 years duration, and typically utilities buy only about 10% of their needs on the spot market.
Given the length of these contracts, it is usual practice to engage in supply contracting discussions long before a mine begins uranium production.
Kayelekera was a reliable producer for nuclear power utilities
In the Malawian mine’s years of operation over 2009 to 2014, it produced 10.9Mlbs of yellow cake (uranium oxide).
The mine’s supply met the standards of conversion agents in the US, Canada and France, the company noted in a new presentation.
During that time, 4.5Mlbs was sold to utility customers and the remainder to nuclear fuel market intermediaries. In all, 63% of Kayelekera output was sold under multi-year contracts.
Why did the mine close?
The answer, in short, is that 2014 was the year when the struggle following the 2011 Fukushima nuclear disaster took its greatest toll on the nuclear industry.
Apart from Paladin mothballing Kayelekera, many exploration companies in Australia and Canada quit the industry and switched to other commodities.
Cameco closed its Cheyenne, Wyoming, office.
BHP Billiton deferred expansion of Olympic Dam in South Australia, one of the world’s largest uranium deposits.
Kayelekera and other projects had been explored or developed in the aftermath of the 2007 uranium bubble, when the spot price hit US$137/lb and the ASX boards featured around 260 companies with uranium aspirations.
The fallout on the ASX among those companies was considerable.
Just as Kayelekera was being closed, several juniors also pulled the plug on uranium.
By 2017, only a few hardy uranium survivors remained listed on the ASX.
Big changes in uranium outlook ahead
Analysts and nuclear experts are now forecasting a significant re-rating ahead for uranium.
“A decade of low uranium prices has resulted in no new developments, discoveries and minimal exploration,” is how Lotus describes the present state of this mining sector.
Some 40Mlbs of production was lost in 2020 due to COVID-19 closures, leading to a 30% increase in the spot price.
It is generally accepted in the industry that prices somewhere in the vicinity of US$50/lb (A$65/lb) will be required to make many of the advanced projects worth developing.
Lotus makes another point: the uranium majors are leaving their own uranium in the ground and are buying on the spot market to supply their customers, thus preserving the value of their in-ground resources for the future.
According to the latest Five-Year Plan released by China this month, Beijing intends to increase the country’s existing nuclear generation capacity of 48 gigawatts to 70GW by 2026.
China now has 49 nuclear reactors, but the World Nuclear Association predicts that number will hit 104 by 2030 and 164 by 2040.
India, with 22 reactors, is predicted to have 36 operating nine years from now and 57 in 2040.
Lotus is expecting annual production of 3Mlbs.
It looks like it will be needed.