Uranium Squeeze Creates A Bull Market For A Fuel In Decline

Uranium is hot, in more ways than one. After a decade in the freezer the nuclear fuel has suddenly emerged as the mining world’s top performer, up 20% in a month, though not because of a sudden surge in demand.

What’s driving uranium is a squeeze on supply, the same force which has saved other commodities from crashing as Covid-19 lockdowns whack the global economy.

The first example of supply suppression helping prevent a mining-sector wipe-out was last month’s decision by the South African government to close the country’s mining industry which is a major sources of basic raw materials, including coal and iron ore, as well as exotics such as diamonds and gold.

Mine Closures Creating Shortages

Since South Africa locked the gates at its mines a worldwide mine-closure trend has developed, forcing an estimated 15% of overall copper supply off the market and 20% of the world’s zinc.

The net result is that prices for most metals have remained relatively high, dodging the big falls which followed the 2008 global financial crisis, despite Covid-19 delivering a more significant fall in economic activity.

Copper, the most commonly used measure of metal demand, has incurred a 20% price fall since mid-January when Covid-19 first surfaced in China.

But over the last two weeks the price trend in copper has been up, perhaps because of confidence that a recovery is around the corner, or more likely because supply is being restricted by mine closures and transport restrictions.

The latest examples of copper supply being crimped include the temporary suspension of production at the Cobre mine in Panama after a Covid-19 related death of a worker, followed by threats by mining giant, Glencore, to mothball its mines in the southern African country of Zambia because of Covid-19 operational restrictions, a move opposed by the Zambian government.

Uranium, however, has become the best example of supply being withdrawn from the market with a trickle of mine closures becoming a flood over the past four weeks, starting with Cameco, Canada’s uranium leader, mothballing the world’s biggest uranium mine, Cigar Lake.

The southern African country of Namibia, which has a big uranium industry, dropped out of the market after it followed the example of its neighbor, South Africa, ordering the closure of all mines.

But what ignited the latest upward surge in the uranium price to $28.70 a pound was a move by the government of Kazakhstan to place restrictions on its big uranium industry, a move which could see global supply of the nuclear fuel reduced by up to 10%.

Yellow Cake A Winner

One of the biggest winners from the uranium-supply squeeze is Yellow Cake, a London-listed fund, which specializes in buying and holding a stockpile of part-processed uranium.

Yellow Cake, which takes its name from the most commonly-traded form of uranium, holds 9.62 million pounds of the fuel in safe storage sites having largely acquired the material through a deal with the government of Kazakhstan at an average price of $21.69/lb.

Interest in the company was fading, along with the uranium price, until Cameco shuttered Cigar Lake, an event which lifted Yellow Cake’s share price by 10% in mid-March.

The latest uranium “outage” events have seen Yellow Cake’s share price continue to move higher, closing in London yesterday at $2.48 (201 British pence), taking the stock’s price rise over four weeks to 35.5%.

Interesting as the rise in the uranium price might be, along with the sharp increase in some uranium-exposed companies, the reality is that everything about the higher prices is a result of reduced supply.

Demand, thanks to more nuclear power plants closing than are being opened, is declining and when the mines recently mothballed because of Covid-19 are re-opened the uranium price could easily retreat to where it was a few weeks ago, at around $24/lb.