Cameco closures light up uranium

Uranium investors have been desperately looking for a reason to be positive for a long time. They got that reason on Thursday when Cameco Corp. announced facility closures that will remove a large amount of the commodity from the market next year.

The Saskatchewan- based uranium producer’s decision to suspend production at its flagship McArthur River mine and the Key Lake milling operations in northern Saskatchewan for 10 months will lead to approximately 845 temporary job losses. However, the move is expected to provide a boost to a global uranium market that is forecast to be oversupplied by approximately 20 million pounds in 2018.

Cameco shares rose as much as seven per cent in Toronto Thursday, despite the negative revenue impact that will come from the production curtailment, and the company’s decision to slash its annual dividend by 80 per cent (to eight cents per share from 40 cents). This follows disappointing third quarter results that were released on Oct. 27.

Cameco believes uranium remains at unsustainably low levels, and noted prices f or t he commodity have fallen by more than 70 per cent since the March, 2011, Fukushima nuclear accident in Japan.

“Cameco has been partially sheltered from the full impact of weak prices by its portfolio of long- term contracts, but those contracts are running out and it is necessary to position the company today to generate cash flow if prices do not improve,” the company said.

Cameco’s decision had a positive impact on the uranium sector as a whole, with Denison Mines Corp. climbing more than eight per cent, Fission Uranium Corp. up more than 12 per cent, and U3O8 Corp. surging more than 20 per cent.

“This is the type of supply side shock that is positive for the market, but negative for Cameco in the short term,” said Rob Chang, an analyst at Cantor Fitzgerald.

“... These are necessary moves that reduce losses and actively help fix the global supply situation.”

Cameco shares are still down more than 10 per cent so far in 2017, as investors remain cautious about the supply- demand imbalance for uranium. However, the removal of more than 13 million pounds of uranium from the company’s forecast production for 2018 will undoubtedly help the situation.

“This should place positive price pressure on spot uranium prices,” Chang told clients.

Cameco’s decision to shutter these operations likely took the entire uranium industry by surprise. TD Securities analyst Greg Barnes noted that as one of the lower-cost operations on the cost curve, the company would not normally be seen as a ‘ swing’ producer.

He also pointed out that the closure should reduce 2018 uranium mine supply by approximately 15 million pounds.

“And that may be enough to shock some utilities out of their complacency toward the market,” Barnes said in a research note.

Factoring in t he production curtailment, the analyst estimates that the global uranium market will be in surplus by approximately five million pounds next year.

That assumes the 10- percent production cut (equivalent to about 5.2 million pounds) announced by Kazatomprom in January, is sustained into 2018.

Barnes expects to see upward pressure on uranium prices in the coming days, but cautioned that any sustained gains will likely require supply cuts from other producers. If that doesn’t happen, the market could snap back into significant surpluses in 2019.

“With t he c ontinued state of oversupply in the uranium market and no expectation of change on the immediate horizon, it does not make economic sense for us to continue producing at McArthur River and Key Lake when we are holding a large inventory, or paying dividends out of proportion with our earnings,” Tim Gitzel, Cameco’s chief executive, said in a statement.

The decision by Kazatomprom, Kazakhstan’s stateowned uranium giant, to curb supply earlier this year, triggered a sharp rally in prices for the commodity. However, the move higher didn’t last long because the production cut was not sufficient to rebalance the market.

Other producers al s o failed to follow with supply cuts of their own — until now.

That event i n January contrasted sharply with mine floods at Cameco operations in 2003 and 2006. The collapse of a tunnel at the company’s McArthur River mine i n 2003 was arguably the event that led to a uranium price rally, which eventually saw prices hit al most US$ 140 per pound.

However, the f l ooding of the Cigar Lake project in April, 2006, and again in October, 2006, occurred when t he uranium market was already starting to tighten. China had emerged as an important player in terms of demand, following a 15- year price slump. No such secular trend is in place this time around.