VANCOUVER (miningweekly.com) – Long-term contracting, which is usually borne out of the requirement for power utilities to secure long-term uranium supplies, is not expected to see an uptick in 2018, as the market remains awash with too much uranium, Canada's Cameco said on Friday.
In 2017, excess uranium supply continued to have a significant impact on the uranium market. Abundant spot material was available to satisfy utilities' appetite for low-priced pounds to meet near- to mid-term requirements.
For contracting to return, prices will have to rise, but the longer the wait, the stronger the upwards pressure on pricing, as shown in 2006 and 2007, when near-historic volumes of uranium were sold under contract, at a time when prices rocketed to record highs of around $140/lb.
Impacted by a supply glut and the slow reactivation of nuclear reactors in Japan following the 2011 incident at the Fukushima Daiichi plant, it will take about two years for these mothballed mines to restart once prices recover, exposing utilities to risk higher contracting prices if they wait longer to sign deals.
While there are about 60 new nuclear reactors currently being built, no new mines are under construction. Estimates show that nearly one-billion pounds of uranium pentoxide will be uncovered in the next eight years but, owing to the supply glut, majors such as Cameco will stay a disciplined course and continue to curtail production at some of their best tier-one assets.
Cameco said secondary supplies, consisting largely of government inventories, enricher underfeeding and tails re-enrichment, where the economics differ considerably from mined production, have been a significant contributor to the supply-demand imbalance in the market.
Further, supply from some producers, whose production decisions are not necessarily driven by the economics of the uranium market, such as large diversified miners and companies mining uranium for strategic or social purposes, has also contributed to the imbalance.
Also, higher-cost production, though sensitive to the uranium price, continues to be supported by higher prices under long-term contracts and/or advantageous foreign exchange rates.
"In 2017, we started to see evidence that, at today's low uranium prices, not only is some of the higher-cost production at risk, even the lowest-cost production faces planned and unplanned risks," the company said.
These industry dynamics make it difficult to predict the timing of a market recovery. However, given that Ux Consulting company reports that over the last five years only 320-million pounds have been locked-up in the long-term market, while more than 788-million pounds have been consumed in reactors, the company remains confident that utilities have a growing gap to fill, Cameco stated.
"As annual supply adjusts and utilities' annual uncovered requirements grow, we believe the pounds available in the spot market won't be enough to satisfy demand in the long run," the company commented.
In 2017, the uranium spot price ranged from a high of $24.50/lb of yellowcake, to a low of about $19/lb, averaging about $22/lb for the year.
According to Cameco, utilities continue to be well covered under existing contracts and, given the current uncertainties in the market, it expects they and other market participants will continue to be opportunistic in their buying.
"As a result, contracting is expected to remain discretionary in 2018."
The heavy contracting that took place during the previous price run, which drove investment in higher-cost sources of production, contributes to the perception that uranium is abundant and always will be. History demonstrates that the opposite tends to occur when prices rise.
"After years of low investment in supply, as has been the case so far this decade, security of supply tends to overtake price concerns at some point, and utilities re-enter the long-term market to ensure they have the reliable supply of uranium they need to run their reactors. We believe the backlog of future contracting needs created by the low-price environment presents a substantial opportunity for suppliers like us that can weather the low-price part of the cycle," Cameco said.
Cameco reported a wider net loss in 2017 than in the prior year, as impairment charges weighed on the bottom line, as a result of the continued weakness in the uranium market. The net loss grew to C$205-million, or C$0.52 a share, compared with a net loss of C$62-million, or C$0.16 a share, a year earlier.
Headline earnings, excluding special items, fell 59% to C$59-million, or C$0.15 a share, compared with C$143-million, or C$0.36 a share, a year earlier.
Revenue slid 11% year-on-year to C$2.16-billion.
Cameco has guided for its consolidated revenue to fall further in 2018, to between C$1.8-billion and C$1.93-billion, based on currently committed sales volumes, lower average realised prices for uranium under both fixed and market-related contracts and an expected decrease in sales volumes from NUKEM, owing to the restructuring of the company's marketing activities.
Uranium is expected to contribute 85% of the total revenue, with Cameco guiding for 2018 production from its own operations of 9.1-million pounds of uranium, while it will buy eight-million to nine-million pounds of uranium. Total sales in 2018 are expected to range at between 32-million and 33-million pounds of yellowcake.
Cameco's TSX-listed equity fell 5.4% on Friday to a low of C$10.67 apiece.