Uranium poised for next leg up

You know it’s been a bad month when a 4% share price fall is considered a good result, but that’s one way of looking at the uranium sector where declines of that size, and less, stand out against double digit drops elsewhere.

No one needs reminding that the past four weeks have been among the toughest for investors in two years, though a handful of industries have held up reasonably well, especially those exposed to energy, as a simple test demonstrates.

Over the past month, as the overall Australian stock market (as measured by the All Ordinaries Index) has lost 6.5%, the energy index has risen by 3.5% and while much of that increase is a result of higher prices for oil and gas, it also reflects the latest uptick in the uranium price.

From US$46 a pound (A$67/lb) in mid-May, the price of uranium has risen to US$49.75/lb (A$72/lb), but did get as high as US$53/lb (A$77/lb) last week.

Those latest prices are well down on the US$65/lb (A$94/lb) achieved in April when uranium staged a breakout thanks to a surge of interest in nuclear power triggered by the war in Ukraine and sanctions on Russian oil and gas.

The slip back to the latest price of just under US$50/lb (A$72/lb) has rubbed some of the gloss off uranium but there is a strongly held view that the slide is nothing more than a pause before the next upward move as nuclear power claims a role in energy transition away from fossil fuels.

Supply and demand mismatch

High profile Canadian investor Rick Rule, a leader in the uranium revival after its decade in the sin bin, thinks the incentive price of uranium, the price at which new production becomes viable, is US$75/lb (A$108/lb) thanks to a mismatch of supply and demand.

Rule reckons the current worldwide annual consumption of uranium totals 180 million pounds while production totals 120Mlbs with the shortfall met from stockpiles, a situation which cannot last much longer.

The problem for investors is that they’ve heard the uranium story many times before and it always seems to be the commodity which never quite delivers.

But if you look at a five-year graph of the metal, a pattern of surge and plateau can be seen with upward steps that include a rise from US$20/lb to US$28/lb between mid-2017 to the end of 2018. From US$25/lb to US$33/lb in early 2020, and most recently from US$36/lb to US$49/lb.

The last time I had a close look at uranium was in late February, just after the Russian invasion of Ukraine when the nuclear fuel was described as a laggard relative to its energy rivals, coal, oil and gas.

But a look back at that earlier story shows that uranium was trading at US$44/lb meaning that the April rush to US$63/lb was a case of pure speculation fostered by the Ukraine war whereas the latest price of US49/lb represents the sort of incremental growth which can stick before another surge, perhaps up to Rule’s target of US$75/lb.

Investment banks have been cheering on uranium for the past few years, encouraged by courageous bets placed on the fuel ‘ranium’ by a small group of specialist investment funds such as the Sprott Physical Uranium Trust and London-listed Yellow Cake. Both are ‘buy and hold’ funds, acquiring metal and stockpiling it in the belief that a U-boom is coming.

It hasn’t been a bad bet so far for the funds which have a longer investment horizon than most private punters and an ability to own barrels of yellowcake (uranium oxide) which is not something most people can do.

Yellow Cake, a window on the uranium price, has been a solid investment over the past 12-months, rising by 32% on the London Stock Exchange, though looked at over a shorter time frame it is down (with the rest of the market) by 5.5% over the past month.

US to increase domestic output, lower exposure to Russian nuclear fuel

The latest batch of bank research reports have refreshed the case for uranium with the Ukraine war and sanctions on Russia coming into play again, this time via a US Government proposal that it become a buyer of nuclear fuel to be on-sold to local nuclear power-plant operators.

The US idea is that if the government stands in the market for uranium supplies it will encourage an increase in domestic output and lower exposure to Russian material, which currently accounts for 23% of enriched uranium use in the US.

Positive as the news from the US was, it actually did nothing for the uranium price which slipped US$2/lb lower after the announcement, very much a comment on the overpowering effect of the negative sentiment which has been driving down all financial markets this month.

Macquarie Bank, Canaccord Genuity, and Bell Potter reckon the downbeat mood of the market is being overdone when it comes to uranium because the underlying, long-term market conditions are so positive, especially given nuclear power’s growing acceptance as part of energy transition and the supply/demand shortfall.

Bell Potter encourages supply from Australian uranium producers

Bell Potter in its latest edition of Uranium Sector Musings said that if the US Congress approved the purchase of enriched uranium from domestic producers it would encourage supply from non-Russian uranium producers (such as Australia) and effectively make the US Government a direct buyer of enriched uranium.

The broker named two stocks as being in a prime position to benefit from the potential US action, Paladin Energy (ASX: PDN) and Boss Energy (ASX: BOE).

Canaccord said the US Government proposal was “highly supportive of our view that demand for western origin uranium is increasing, creating an even more pronounced supply deficit in the aggregated global market”.

Macquarie said the US move added to its confidence in the uranium market given the growing focus on energy security and the forecast supply deficit.

The next rally in the uranium price could also be the signal for nuclear power operators to enter the market to ensure their future fuel supplies, potentially sparking “frenzy of contracting” which could drive the price of uranium to US$80/lb (A$116/lb) over the next two years.

“In the longer term (from 2026 onwards) we believe uranium prices would need to be above US$55/lb (A$79/lb) to incentivise new supply,” Macquarie said.

Paladin, one of Macquarie’s top uranium picks, could be heading to a share price of $1, the bank said, up 56% on last sales at $0.64. Boss, the other stock on the Bank’s radar could be heading up to $3.20 from last sales at $2.05 (also a possible 56% gain).