Cameco clo­sures light up ura­nium

National Post (Latest Edition) - - FINANCIAL POST - Jonathan Rat­ner

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.

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