Uranium is lagging other energy prices – for now

Missing in action, but perhaps not for long. That’s the best way to see uranium, which promised much last year with an 88% rise from US$27 a pound to US$51/lb, before easing back to $US44/lb and sitting at that price while every other form of energy surges higher, including coal and oil.

Russia’s well-telegraphed invasion of Ukraine is the icing on the energy cake, which started to rise as the world shook off the immediate effects of COVID-19 lockdowns and transport blockages.

Oil was up by 48% last year to US$77 a barrel and has kept increasing in first eight weeks of this year to latest trades at around US$96.80/bbl.

Coal was up 30% last year to US$159 a tonne, and has kept rising this year to US$236/t.

Uranium is the laggard, unmoved by events in Ukraine, and failing to build on last year’s big bounce, which came after 15 years in the sin bin – burdened by a trio of nuclear power plant accidents, which started with Three Mile Island in the US, followed by Chernobyl in the Ukraine and Fukushima in Japan.

It was those events which almost killed the case for uranium as a provider of reliable, baseload, low-emission electricity – and an ideal complement to the intermittent flows of power from wind, solar and even hydroelectricity which relies on regular rainfall to operate effectively.

The theory behind a uranium revival remains intact, though last year’s price recovery was largely a financial markets flurry as investment funds bought surplus material, which created the impression of genuine demand – which it wasn’t.

Funds such as the Sprott Physical Uranium Trust and Yellow Cake have done little more than marshal investment funds to buy uranium in one stockpile and shift it to another with little of the material being consumed, just relocated (or simply rebadged in the same secure warehouse).

Waiting for uranium users

It’s what comes next that should deliver a sustainable and substantial rally in the uranium price, but only if the owners of mothballed mines maintain their discipline and don’t re-open too quickly and the funds are also prepared to be patient and not sell too soon.

In effect, the miners and fund managers are waiting for uranium users, and that largely means power plant operators, to re-enter the market to replace what’s been consumed in their reactors or converted into fuel pellets for newly build nuclear power stations.

This shift in the uranium market from short-term bounce to long-term demand drive will not happen overnight, but there are encouraging signs that it is starting to happen.

Uranium sentiment shifting

What’s amusing (in a black humour way) is that the same people who condemned uranium as an environmentally unacceptable source of electricity are now leading the uranium cheer squad having belatedly recognised that the metal doesn’t add to carbon pollution – the chief climate-change culprit.

Governments are lining up to re-join the nuclear power business, led by China, France, Britain and the US with plans to decommission old reactors being shelved and approvals granted for new builds.

Nuclear power utilities re-enter market

For investors with an eye on the Australian uranium sector the key to the next move up will be confirmation that power utilities are back in the market, offering long-term contracts for significant supplies of the metal.

That process might have started in November when the state-owned uranium company of Kazakhstan signed contracts with two Chinese state-owned enterprises.

Cameco, Canada’s uranium leader, is also reported to have become more active in negotiating new contracts.

ASX stocks to re-awaken with uranium sector

News flow from the contract market, as opposed to the froth and bubble of the spot (short-term) market is what will re-awaken Australia’s crop of small uranium players which did well last year before drifting back to sleep.

Stocks such as Lotus Resources (ASX: LOT), up 60% last year but down 28% this year, and 92 Energy (ASX: 92E), up 75% last year but down 30% this year are examples of the first stages of the uranium revival running out of steam thanks to the stalled price of the metal.

Elevate Uranium (ASX: EL8), 196% higher 2021, 15% lower this year, and Paladin Energy (ASX: PDN) rising 88% in 2021, and dropping 24% this year, reflect the same early mover issue followed by a slip, which has probably been caused in part by share-traders cashing out of the uranium success stories.

Strong outlook

Two recent research reports highlight the process through which the uranium market is passing, with Canaccord Genuity arguing that the case for retaining exposure to the metal is strong, while Shaw and Partners reckons uranium has passed its cyclical downturn with fundamentals improving as stockpiles are drawn down.

Positive in their views of uranium, both finance houses dodge the critical question of timing. Only saying that the recovery will continue – just don’t ask exactly when.

Shaw, in a report published last week, listed a series of recent developments underpinning the case for investing in uranium, including supply side discipline as potential mine developers go slow, ageing mines are closed mines, continued buying by investment funds, the long-term Chinese contracts, France planning a reactor building spree, and a surprise turn by Europe which has reclassified uranium as a green fuel – a conversion to rival that of St Paul on the road to Damascus.

Meanwhile, Canaccord noted 2021 was “dominated by financial players” in the uranium market and while this year will see near-term volatility demand for nuclear power continues to rise even as mine supply sits at a 12-year low.

Significantly, Canaccord reckons a uranium price of a bit above US$40/lb is not sufficient to incentivise mine restarts and investment in new mine supply.

“Accordingly, we believe this cycle still has a long way to go,” the broker said.

Conventional demand, according to Canaccord, remains extremely robust as governments affirm their commitment to nuclear power, while the Sprott Physical Uranium Trust is sitting on a cash pile of US$2.4 billion, ready to acquire more metal and possibly seek a New York stock exchange listing later this year which would be a catalyst for the uranium market.

Like Shaw, Canaccord argues that a uranium price of US$60/t or more is needed to incentivise mine development (and redevelopment) – a price likely to edge close this year before being delivered next year.

Once the price dam is broken, analysts expect uranium to move back towards US$85/lb, a price last seen in 2007.

Early movers in the uranium sector did well last year. They could enjoy a second feed later this year as the price of the metal resumes its upward trend – driven this time by genuine consumer demand, and less by financial manoeuvres.