Uranium's price has been low and stagnant for years, but that's going to change, says Rob Chang of Cantor Fitzgerald Canada. Chang foresees volatility as the 2020 uranium deficit draws closer and demand for the limited stockpile drives the price up.
In this interview with The Energy Report, the analyst points out that investors can find bargains throughout the space, and describes a handful of companies he considers particularly interesting.
The Energy Report: The uranium spot price balloon has lost air again and is back down in the mid-$30/pound (mid-$30/lb) range. It was stalled there for months last year. What pushed the spot price up in the first place? Why is it falling now?
Rob Chang: The uranium spot market is generally pretty thin, and any number of transactions on either the buy or sell side could push it in any direction. What's moved it higher recently could be the news of Japanese reactor restarts happening this summer. A couple of reactors are set to restart in the next few months or so, and we believe that helped push the price along a little bit.
But the spot price really depends on near-term utility demand. I think that's the key point here. In terms of utility demand, according to the numbers that we've seen, globally about 15–20 percent of uranium requirements for 2016 onward are still uncovered.
Between now and the end of 2016, there needs to be some buying, either in the spot market or through some other means, to cover those requirements. We saw a bit of a lift because of that need, but certainly there hasn't been a big rush back toward buying uranium ex-spot yet.
TER: I've heard repeatedly that the deficit is going to occur in 2019 or 2020. Why aren't the mining companies moving ahead to address the deficit they know is coming?
RC: Right now, there is no incentive. For them to spend the money to do the exploration or to develop a uranium project, they need to have a price that justifies the capital that's required to get that going. Based on what I've seen, that magic number is probably in the $80/lb range for a meaningful amount of supply to come online.
Currently, we're sitting in the mid-$30s/lb. To justify any project, a company would need a return of, let's say, at least 20 percent, but likely much, much higher. At a $35/lb, why would anyone spend the money to develop a project? That's where we're stuck.
Everyone knows that prices need to move higher for additional supply to come, but utilities, seeing excess inventory in the market, have been sitting back and only buying what they need when they need it. At some point this will come to a head, and prices will need to move simply because utilities will need to buy and the spot market is thin.
At that point there will be a big scramble to see who can put on production quickly enough to satisfy the demand. It will be very interesting, and it's the primary reason why I believe there's going to be a violent price increase.