Some Uranium Investors Still blaming Kazakhstan (Rewind to May)

October 26 2020, 15:41 GMT

Brandon Munro is our resident uranium expert. He is a renowned uranium market commentator and serves as the CEO of Bannerman Resources (ASX: BMN). His insights into the uranium space are eye-opening, insightful and authentic.

Back in May, we spoke to him about the West's frustration with Kazakhstan. It has been a long-held suspicion for many Western uranium miners that Kazakhstan and Russia are trying to drive higher-cost players out of business by keeping the spot price depressed, because only KazAtomProm (AIM: KAP), its JV partners, and a handful of uranium by-product producers, can make any margin at todays price of sub $34/lbs. This was evidenced by the Section 232 Petition. Whilst some have viewed the company's emphasis on production quantity as simply a commercial mistake, others think there is a much more nefarious motive lying beneath the shiny corporate surface.

We spoke with KazAtomProm's CCO, Riaz Rizvi, in July. He dispelled any western conspiracies that have become increasingly prevalent the longer this deep bear market has dragged on, stating that it was only up until 2018 that the company was focussed on production levels as part of a state owned enterprise. However, it was not for the purposes of market manipulation; the company intended to consistently increase its production to drive down total costs due to economies of scale. It appears to have been an operational strategy rather than an underhand scheme. Since going public in 2018, KazAtomProm began to seriously look at a new strategy of value over volume, and this is now the company's paramount focus. Rizvi stated that KazAtomProm recognises that it has a duty to the overall health of the market; thus, it has a responsibility to produce at levels conducive to uranium price discovery.

Recently, KazAtomProm has been trying to distance itself from a lot of the negative and adversarial rhetoric being used by some in the market. By taking the company public (in part), the company is indicating that it wishes to operate and be seen to operate more transparently. With legacy thinking from the Cold War still lingering in the minds of some, KazAtomProm has been keen to distance itself from Russia to avoid being caught in an adversarial sandwich between the US and Russia whilst the Russian Suspension Agreement is negotiated (now completed).

How do the opinions of western uranium miners that we discussed with Munro in May stack up today? At the time, it looked like KazAtomProm's 3-month reduction of U3O8 production was about to come to an end with national restrictions easing, leading many a uranium investor to claim KazAtomProm was about to oversaturate the market again. A second wave has since breathed fresh life into the operational hiatus, and it has been extended by a further month. The company alleges it has no intention to make up these lost pounds via additional production, so we'll have to wait to see if it dips into the spot market or depletes its enormous inventory. It would have been extremely interesting to see what strategy the company would have adopted had COVID-19 not forced its hand. One thing that is strange is the lack of M&A. What exactly is going on at KazAtomProm?

Munro touched on the US administration's attempts to get its uranium industry back on track. SMR tech was a hugely popular topic then and it is continuing to be discussed as a way for the US to revolutionise its nuclear infrastructure after decades of neglect. It still remains to be seen how American SMRs will stack up against the impressive Chinese and Russian SMR tech. At the time of the interview, the Department of Energy had made a significant announcement regarding the country's Advanced Reactor Demonstration Programme, with much bigger numbers than the DoE had originally bandied about. We're starting to see some of these moving parts develop into substantial policies, and in an utterly polarising election year, investors can expect to see this accelerate the closer we get to November.

Back in May, Cameco got Port Hope back up and running, pushing it up to full capacity the following week. Some selling at the time was representative of the frustration of uranium investors who don't want to see production continuing at current levels; they want price discovery. However, Cameco's stance on Cigar Lake and general tone in its conference calls surrounding de-stocking and the uranium carry trade have shown that even after restarting Port Hope, driving pounds out of the market is an active priority.

Lastly, the European Atomic Energy Community, Euratom, released an extremely sombre statement and Munro translated it into useful information for us. It warned of a deficiency of transport hubs to accept nuclear shipments, a lack of investment in conversion facilities and a permanent reduction of uranium and withdrawal from uranium exploration. These are all issues that have continued to be actively discussed, but it's a little bit of the chicken and the egg. To drive capital into the uranium space, uranium needs to be hot again.

However, many of the fundamentals of the uranium space are so fragile that price discovery is extremely difficult, particularly when the utilities have much bigger fish to fry than arranging long-term contracts at this moment in time, and expertise continues to be siphoned out of the space by stagnant economics and negative sentiment. Furthermore, by presenting no optionality to the utilities because most uranium players are currently priced out, utilities are able to do the bare minimum to help the uranium producers survive. Euratom insisted that utilities diversify supply and continue to maintain an appropriate 3 years of strategic inventory levels. They appear to have more pressing matters to deal with.

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