Uranium Regaining Its Energy Sector Mojo

The health crisis imposed by spread of a novel, highly virulent coronavirus has disrupted the delicate rebalancing process that has been playing out slowly across of the global uranium supply sector.  In March 2011, the nuclear power industry and the uranium supply chain supports it was sent into a tailspin by an earthquake and tsunami that devastated Japan’s eastern coast and triggered contamination at the Fukushima Nuclear Power Plant.  Nuclear power was suddenly considered too risky, leading to existing plant closures and new plant delays.  Demand for uranium evaporated, leaving selling prices for uranium ‘yellow cake’ at a depressed level ever since.   

By the beginning of 2020, the global nuclear utility industry had recovered to the point Industry research firm MarketWatch estimated there would be demand for 182 million pounds of uranium concentrate for reactor operations during the year.  As in the last several years uranium production was expected to be well short of that figure as utility companies continue to rely on excess inventories.  Only those uranium mining companies with the low marginal cost structure have remained in operation. 

Absorbing the second natural crisis event within ten years will not be easy for the uranium supply chain.   At the beginning of 2020, MarketWatch had estimated there would be approximately 140 million pounds of production during the year.  Before the end of the first quarter that estimate was no longer valid.  Most uranium mines ceased operations for several weeks in February, March and April 2020 in compliance with government orders to shutdown all but essential services as a tactic to slow the spread of the coronavirus.   Even once operations resumed, production has been impacted by new safety requirements to ensure worker health. 

Now MarketWatch is estimating world uranium production could come in closer to 120 million pounds in 2020.  After having relied year-after-year on inventories, the uranium consumers may be faced with the first uranium supply short-fall in over a decade.  Given that demand for uranium is relatively price inelastic  -  that is uranium consumers are not particularly sensitive to price changes  -  many uranium industry enthusiasts are anticipating higher prices memorialized in supply contracts between utility companies and uranium suppliers.

As this dynamic plays out U.S. uranium producers are also watching domestic government policies.  The Trump Administration budget includes a request for $150 million for the U.S. Department of Energy to build a uranium stockpile over the next ten years.  Even if the budget request is finally adopted, it is not likely those purchases could impact uranium pricing that typically is set in world commodity markets.   Besides triggering a restart of operations at existing operations, an increase in price level could entice developers to accelerate projects for new mines. 

There are a number of promising properties where work is already underway or could be resumed in short-order.  Crucial to the speed at which developers might try to come to market with new projects is the anticipated cost of operation.  It does not make sense to begin production when marginal costs are below current prices.  At these new projects developers have a chance to use cost-saving technologies are processes that improve operating economics.

SELECTED URANIUM DEVELOPMENT PROJECTS
Company	Symbol	Recent Development Progress
ALX Resources Corp.	AL:  TSX	Option on Close Lake project in Athabasca area in Saskatchewan
Azarga Uranium	AZZ:  TSX	Seeking approvals for construction at Dewey Burdock in South Dakota
Azincourt Energy Corp.	AAZ:  TSX	Phase One drilling program at East Preston project in Athabasca area
Cameco Corp.	CCO: TSX	Most development work suspended; holds stake in Close Lake property among other projects headed by junior partners
Denison Mines Corp.	DML:  TSX	Work suspended on environmental assessment at Wheeler River  in Athabasca area
Energy Fuels, Inc.	UUUU:  NYSE	Largest producer in U.S. at White Mesa Mill in Utah and Nicholas Range in Wyoming; Alta Mesa in Texas on stand-by
Fission Uranium Corp.	FCU:  TSX	Pre-feasibility study completed for Patterson Lake South in Athabasca area in Canada
Forum Energy Metals	FMC:  TSX	Diamond drilling started at Fir Island project in Athabasca area
IsoEnergy Ltd.	ISO:  TSX	Chemical assay work started at Larocque East project in Athabasca area and additional drilling planned in Summer 2020
NexGen Energy Ltd.	NXE:  TSX	Feasibility and environmental assessment planned for Rook One project in Athabasca area
Orano S.A.	Private	Interests in several development projects, including Preston, Hook Lake and Fir Island
Purepoint Uranium Group	PTU:  TSX	Continued drilling work at Hook Lake project in Athabasca area in Saskatchewan
Uranium Energy Corp.	UEC:  NYSE	Reno Creek project in Texas remains in pre-construction stage; drilling at Burke Hollow in Texas postponed

Investing in these companies is an exercise in optimism.  Most of the selected developers included in the tables here have yet to realize sales of uranium.  Rather than valuation metrics, investors must look at the quality of the resource assets and management’s track record for delivering successful projects.  For those who are not interested in such due diligence, the more established mining companies with interests in development projects may be a better way to take a stake in uranium development.  Cameco, Denison and Energy Fuels all have reach commercial stage.  While only Cameco remains profitable at the present time, Denison and Energy Fuels may again have their days in the sun as well.  Indeed, loyal holders of DML and UUUU shares are counting on seeing profits again when uranium regains its energy sector mojo.

MARKET DATA FOR SELECTED URANIUM DEVELOPERS
Company	Symbol	Sales	ROA	Mkt Cap	P / EPS	P / BkVal
ALX Resources Corp.	AL:  TSX	na	neg	CN$5.3 M	neg	0.54
Azarga Uranium	AZZ:  TSX	na	neg	CN$31.5 M	neg	0.61
Azincourt Energy Corp.	AAZ:  TSX	na	neg	CN$7.0 M	neg	1.82
Cameco Corp.	CCJ:  NYSE	CN$1.9 B	2.1%	US$3.9 B	72.4	1.11
Denison Mines Corp.	DML:  TSX	CN$16.2 M	neg	CN$369.3 M	neg	1.81
Energy Fuels, Inc.	UUUU:  NYSE	US$4.6 M	neg	US$188.9 M	neg	1.36
Fission Uranium Corp.	FCU:  TSX	na	neg	CN$165.4 M	neg	0.51
Forum Energy Metals	FMC:  TSX	na	neg	CN$10.3 M	neg	4.75
IsoEnergy Ltd.	ISO:  TSX	na	neg	CN$53.1 M	neg	1.01
NexGen Energy Ltd.	NXE:  TSX	na	neg	CN$470.8 M	neg	3.98
Orano S.A.	Private	na	na	na	na	na
Purepoint Uranium Grp	PTU:  TSX	na	neg	CN$7.8 M	neg	7.88
Uranium Energy Corp.	UEC:  NYSE	na	neg	US$207.8 M	neg	2.94

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.