Russell Fryer: Higher Uranium Price Coming?

Russell Fryer April 11, 2016

A lot of experts are forecasting higher uranium prices as seen by Bloomberg’s sell-side forecast below. Erring to the side of prudence, we use the median (the middle) forecast because it is lower than the mean (the average).

Spot uranium price today: $29/lb

2016 median: $39.90

2017 median: $41.00

2018 median: $46.00

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How Many Producing Or Near-Term Uranium Producers Will Make Money Under These Prices?

I can only think of 4-5 that will be profitable, of which, only one company that is only going into production in Q4 2016 or Q1 2017.  We see uranium companies that are trying to get into production in 2018, 2019 and even 2020, but are using $65/lb, $70/lb, $75/lb as inputs. Only one analyst in the table above believes the spot price of uranium could go above $65/lb.

And what about all the higher grade Athabascan ore that might come into production in 2024-2026? Will these projects get funded at $40/lb uranium? Personally, a bird that is “producing or at near-term production” in the hand today is worth so much more than the uncertain future.

In addition to expert forecasts, there is a strong correlation that also points towards rising uranium prices. Below is a chart of the spot uranium price (in white) versus the price of WTI crude oil (in brown) starting in 2011, around the time of the Fukushima Daiichi nuclear disaster.

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Notice the correlation of uranium and WTI in 2011 and in the end of 2014 to the end of 2015.

Now look at Q1 2016, and the move of oil rising higher while the white uranium line moves lower. Just as the lower oil price resulted in the massive reduction of capex and lower rig counts globally, this same phenomena has already happened in the uranium market in 2014 and 2015.

On the right side of the chart above, I produce the spread summary. The spread is currently at -11.14, pointed out by the yellow arrow. But notice the median is -46.09 and the mean is -41.46. This points out that at $39.64 oil price, the spot price of uranium needs to increase substantially in order to move back to the normalized median and mean.

Interesting times coming in the uranium sector. I would expect a lot of M&A activity if I am correct in saying uranium prices will be lower for longer.

Russell Fryer has been the Chief Investment Officer at Baobab Asset Management LLC since 2009. Mr. Fryer also served as the Managing Director at Macquarie Bank and as Managing Director covering the natural resources sector at North Sound Capital LLC. Prior to this, he served as a Director of Emerging Market Equities at Deutsche Bank AG and previously ING Bank. Mr Fryer has over 26 years experience investing in the natural resources industry.

Palisade Global Investments Disclaimer:

The views and opinions expressed in this article are those of the authors, and do not represent the views of Palisade Global Investments Ltd. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.

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