Rocket emojis aside, what's left in this ASX Uranium run?

Uranium.

Uranium, uranium, uranium!

Got your attention didn't I? If you frequent social media, you'll know just how 🔥 #Uranium is right now!

There's very good reason for this. Compared to the dour performance of the broader stock market indices, the ASX uranium sector has been one of the best performing sub-groups across the global stock universe in 2023.

ASX uranium sector performance over various timeframes

We can see from the above table, many of our ASX-listed uranium companies are sporting gains of north of 15% for the past 12 months, and a few, well in excess of that. But, the tide of rising sentiment towards uranium clearly hasn't lifted all ASX uranium boats. Many have missed the run altogether.

In this Part 1 of a two-part article, I'll investigate the factors impacting supply and demand in the uranium market. In Part 2, I'll run a ruler over which Aussie uranium stocks stand to benefit the most. As I go, I'll try to help you answer the market's present million dollar question: "How much is left in this Uranium bull-run?"

How blue is Uranium's sky?

The best place to start in any discussion of demand versus supply for any stock or commodity is with a price chart. I can tell you about coups in Niger and cutbacks in production at the world's largest independent uranium producer. I can then contrast these against a growing demand story...Or, I can just show you uranium's price chart which starts at the bottom-left and finishes at the top-right.

Recent uranium price action has been decidedly bullish

Looking at the technicals for uranium, I note both short-and-long-term trends are pointing higher and are accelerating to the upside. The price action is higher peaks and higher troughs indicating building demand and diminishing supply, and this last push higher has cleared US$72.05/lb - the last major historical resistance point of any note.

So, there's very little from a technical perspective to suggest the current uptrend can't continue, and in the absence of overhead resistance, you could say there's plenty of blue-sky from here.

Charts are just a reflection of the underlying demand-supply dynamics for a particular market. Given the prevailing technicals, you would naturally assume the supply side for uranium is growing increasingly constrained against a backdrop of growing demand.

Looking at the data, both of these factors appear to be true. Let's investigate first the supply side dynamics for uranium, and then the demand side.

Market dynamics, supply side

The major global players in terms of uranium supply are Kazakhstan, Canada, Namibia, Australia, Uzbekistan, Russia, and China. But as you can see from the chart below, Kazakhstan at 42% of global supply (read as state owned Kazatomprom) is daylight ahead of the rest. You can also read "Canada" as "Cameco", the world's largest independent uranium producer, which accounts for around 14% of global supply.

Source: World Nuclear Association, August 2023, "World Uranium Mining Production"

It's clear the supply side of the equation is controlled by two major players. But there are some key producers which provide marginal supply to the market, which if the market tightens as it is doing now, can have an oversized impact on the uranium price.

The first is Niger. The African country accounts for about 4% of global supply. Niger is reeling from a coup d'état in late-July which has thrown significant doubt over that country's supply in the short term.

Russia's supply is also tempered by a ban on US purchases, and although the EU has not imposed their own ban, countries like Sweden and Finland are aiming to reduce or cease purchases of Russian uranium ore. I point out the difference between uranium ore and enriched uranium products here, because there has been very little done to stymie purchases of Russia's enriched uranium, which is the essential product for the world's nuclear reactors.

More impactful on the supply side is going to be Cameco's announcement at the start of September it will experience lower production at its two key Canadian operations due to operational and maintenance issues. We're talking about 2.7 million pounds of lost production, or about 5.5% of annual global uranium production. Meaningful.

Chart Check: Note what happened to the uranium price at the end of July (i.e., Niger news), and at the start of September (i.e., Cameco News).

Apart from mine supply, the major swing factor influencing the uranium price for over a generation has been reclamation from the decommissioning of nuclear warheads. The data suggests this supply window is rapidly closing as stockpiles are now largely depleted.

The final item to consider on the supply side is how quickly existing producers and new mine developers can respond to the recent spike in prices. This spike has made several mothballed projects, in particular ASX-listed Paladin Energy's Langer Heinrich mine in Namibia, marginally profitable again.

Uranium prices have been low enough for long enough to ensure investment in new production and exploration had pretty much come to a grinding halt by the end of the last decade. But nothing helps stimulate the supply side for a commodity better than higher prices - which is what we're experiencing now.

Supply will return to the system from existing producers with the capacity to ramp up production, and from idled mines, eventually. Funding will be easier to obtain, and new and existing projects will likely be fast tracked. But, even projects which might be getting the green light over the next few months probably won't be in production within the next two years.

The biggest near-term threat to increased supply comes from the two major existing producers. We already know Cameco is hamstrung, at least in the short-to-medium term. Kazatomprom is therefore literally an elephant-sized elephant in the room!

On this point, the company announced in September it aims to increase production volumes by 6,000 tonnes annually by 2025. That's an extra Namibia (i.e., the world's third largest producer) potentially hitting the market within the next 18-months or so...

A few things to consider here. It's one thing to propose a production increase and it's another to deliver it, particularly in an environment of ongoing labour and materials shortages and increasing costs. Secondly, the vast majority of this supply is already contracted, and therefore won't hit the open market.

Still, my tip is the supply side response to higher prices remains the key swing factor in the near-term uranium price equation. My research suggests there remains a window of opportunity here as there's likely to be a 12-18 month lag in terms of new supply making any meaningful impact.

Market dynamics, demand side

On the demand side, the most important factor impacting the uranium market is the rundown of stockpiles at nuclear energy utility companies. Data from the Nuclear Energy Agency released in February this year shows an accelerating decline in stockpiles at utilities in the EU and US since 2015, and according to Global X, provider of the Global X Uranium ETF (ASX: ATOM), stockpiles are now at "the lowest level since 2008".

Source: UxC Market Outlook, Q3 2023, from Paladin Energy Shaw & Partners Uranium Conference, 31 October 2023

As stockpiles run down, utilities must return to the long term contracting market, which is the most important influence on the spot market. According to uranium research agency UxC, long term contracting in 2023 is shaping up as the most active year by volume since 2012. This stat is better illustrated in the chart below from UxC (via Paladin Energy). Note in particular the substantial ramp up at US utilities.

Source: UxC Market Outlook, Q3 2023, from Paladin Energy Shaw & Partners Uranium Conference, 31 October 2023

Long term uranium prices

Call it coincidence or conclusive, but the two charts above suggest when contracting is high, so too are uranium prices, and vice versa. Note how solid contracting volumes from 2005 helped drive a massive bull run which culminated in an exponential blow-off in 2008 as the GFC hit. In addition to high demand, that bull-run was also assisted by several supply-side shocks.

Note also, how contracting ground to a halt following the 2012 Fukushima Nuclear Power Plant disaster. Prices dutifully collapsed. And here we are, in the present, with contracting and prices rising in lock-step again.

Looking further out, it's worth noting nuclear energy production is forecast to grow steadily as countries look to secure their energy supplies amidst growing global tensions, and as the world aims to transition away from fossil fuels by 2050.

I will leave the debate as to whether nuclear is the correct alternative to fossil fuels to those who care to wage it, but my own interpretation of the current rhetoric surrounding the topic points to an increasing acceptance nuclear must play an increasing role in the generation of low-emission baseload capacity.

On the reactor front, according to the International Atomic Energy Agency and the World Nuclear Association, there are 437 nuclear reactors presently in operation, 58 in construction, 110 planned, and a whopping 321 proposed.

CHINA vs URANIUM: Most of the reactors either in construction or planned are in China. Whilst the debate rages in the West as to whether nuclear power generation should be expanded, I put to you China has signalled it is going all-in on nuclear. They are clearly going to be a major player on the demand side, but probably also on the supply side as well by progressing uranium exploration and production at home and abroad.

Even after putting proposed nuclear reactors aside, the data does point to a significant increase in requirements by the nuclear power generation industry over the coming decades.

Source: IAEA, Power Reactor Information System, October 2023; WNA, World Nuclear Power Reactors & Uranium Requirements, August 2023, Paladin Energy Shaw & Partners Uranium Conference, 31 October 2023

When we compare potential demand against potential supply, there does appear to be the possibility of a large and growing supply deficit out to 2040. To put some colour to this, the World Nuclear Association recently forecast global uranium demand could double from 65,650 tonnes this year to 130,000 tonnes by 2040.

According to uranium and nuclear energy thinktank TradeTech, the uranium supply deficit could be as much as 35 million pounds per annum over the next decade.

Source: TradeTech, Uranium Market Study 2023: Issue 3, from Paladin Energy Shaw & Partners Uranium Conference, 31 October 2023

And then there's Sprott

I've deliberately excluded the Sprott Physical Uranium Trust (SPUT) from the discussions of uranium supply and uranium demand. This is because it could end up as a significant player on either side of the supply-demand ledger in the future.

For those who don't know, The Sprott Company is a precious metals focussed global asset manager named after founder Eric Sprott. In July 2021, Sprott expanded its portfolio of exchange traded physical trusts to include uranium, i.e., SPUT.

Using cash from investors, SPUT began aggressively buying uranium in the spot market and storing it. It now holds over 62 million pounds of U3O8 in trust with a market value of nearly US$4.5 billion. SPUT's latest releases indicate they're still buying despite the recent rally in prices, adding 500,000 pounds in September and October.

The advent of SPUT has been a positive for the uranium price with the trust’s purchases adding to existing demand. It's existence has certainly bolstered investor confidence, and I don't think it's a coincidence the major low in the uranium chart coincided with the commencement of the fund's purchases.

So far, all of Sprott's public statements regarding SPUT suggests it intends to be a long-term holder, and that it has no intention of selling any time soon. If this is the case, Sprott has removed a significant chunk of supply from the market indefinitely.

Sprott’s uranium purchases continue unabated, and the trajectory of their stockpiles is very closely monitored by market participants, so make sure you keep a close eye on this item!

Coming up...

That's it for our look at the supply-demand dynamics for the uranium market. In summary, there does appear to be a valid argument the uranium market has finally once again entered a period of excess demand. Rising prices are the best evidence of this.

How long the run lasts is one for the prognosticators - of whom I am not one. I do believe there's a window of opportunity here, possibly not dissimilar to that seen in lithium a few years ago. But! There's already plenty of hype built into the uranium narrative and hype can leave as quickly as it arrived (again, cue the appropriate references to lithium!).

I'm going to remain firmly in the 'cautiously optimistic' camp on uranium, and therefore I am open to allocating risk to the current bull market until I see signs in the price action which tell me otherwise.

With that in mind, In Part 2 of this two-parter, I'll drill down to the most prospective ASX-listed uranium companies. In particular, I aim to focus on those which are producing, nearing production, or at late stages of identifying an economically viable resource. (Hint: Boss Energy (ASX: BOE), Paladin Energy (ASX: PDN), Deep Yellow (ASX: DYL), and Bannerman Energy (ASX: BMN) to name a few...)

Missed any of the previous articles in this series?

Check out my articles on the other Top 5 ASX Uranium Companies: Demand and supply dynamics of the uranium market, Part 1: BHP Group, Part 2: NexGen Energy, and Part 3: Boss Energy.