Uranium Stays Aloft: The Kazatomprom Effect

From The Maven Letter: 7 February 2024

I’ve been talking about uranium a lot – and I’m going to talk about uranium again today because developments just keep feeding the bull thesis for this market.

The big news last week was Kazatomprom revealing just how much less uranium they will produce this year compared to what they were promising to produce just a few months ago. In the middle of January they warned this news was coming…but the details were worse than expected.

The miner cut 2024 guidance by 14.2%, erasing 9.5 million pounds of expected supply. That was perhaps in line with expectations. The worse part came if you paid close attention to what’s driving the miss, which is not only limited access to sulphuric acid but also that the big new mines Kazatomprom is relying on for growth are requiring more acid to produce each pound of uranium.

Acid needs are higher for two reasons: acidifying a new leach mine requires a big initial flush of acid, and these are big mines so that’s a lot of acid, and the geology at these new mines just requires more acid to pull the uranium out of the rock. Since Kazatomprom can’t get its hands on enough acid overall, this is slowing buildout of these new mines.

That in turn is increasing pressure to squeeze as much uranium out of its existing mines as possible and guess how you do that? With more acid.

There’s no near-term answer for getting more sulphuric acid. Kazakhstan actually makes quite a bit of the stuff but sulphuric acid is a critical component in manufacturing fertilizer and that gets priority. Another sulphuric acid plant is supposed to start producing in 2026 but that will only happen if they successfully build that plant in half the time it took to build the last plant.

So the acid struggle will continue, which means Kazatomprom will remain very constrained in being able to get new production going, which cuts off a key uranium supply growth avenue for the next few years. This development really just negates the until-now-common suggestion that Kazatomprom can just turn on the taps to fix this uranium supply gap. That is now just clearly a hard no.

That’s Kazatomprom. Let me now run rapidly through the long list of other bull potential factors in play.

• We could easily see a ban on moving Russian uranium to America. It’s always hard to move bills through the US House (where this bill has already passed) or the Senate (where approval hinges on unrelated items in the same bill) and the failure today of the mega Ukraine-Israel-Taiwan-US border national security bill highlights that passing things is even harder right now than usual. But this bill will likely happen and it would cement the market’s split, which leaves utilities in the West even worse off than the very tight spot they are in now.
• Utilities keep flexing up their contracts. This means they are taking advantage of an option in long-term contracts to increase deliverable pounds, usually by 10 to 15% at contract pricing. Given that almost all such contracts are priced well below today’s spot price, every utility with this choice is taking it. That’s soaking up supply.
• Producers are buying in the spot market. Kazatomprom promised almost all of its production to contracts…and now will be unable to produce enough to meet those contracts. It’s going to have to make that up finding pounds in the spot market. Cameco is likely in the same boat. There is clearly just not enough supply in the market when producers are competing with the utilities they supply uranium to get their hand on that uranium.
• Reactors around the world keep getting life extensions. In the last week we saw the Ontario government extend its Pickering reactor lifespan, which added to similar news from the UK and Belgium in recent months.
• Several recent requests for supply have garnered no response in the last few weeks. The price had slid slightly after its insane January run and so sellers just didn’t respond to a buyer wanting to buy, preferring to wait until the correction ended and prices started rising again. Talk about the definition of a seller’s market.

There are a lot of bull factors playing out. After its insane January run, the uranium price has bounced between $107 and $100 for two weeks now. Feels like it’s setting up for another leg higher.

Let me finish with two charts. Thanks to Justin Hahn of Uranium Insider for putting them together – for anyone interested in uranium, Justin is the best source of investor information. You can sign up for his newsletter at uraniumsider.com

This first chart shows the inflation adjusted uranium price going back through the last two bull runs. You can see there is a lot of upside left based on past patterns. Notably, the supply picture is far tighter today than it was in either of those situations.

This second chart shows the stages in a bull market, or a bubble if you want to call it that. We just got through the Awareness phase and started in on the Mania phase, which hands out massive gains.

There is a huge amount of upside left in this incredibly tight market for an essential commodity, new supplies of which take years to develop.

My advice: Stay long and enjoy the ride.