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Shining some light on the uranium market

The trading of uranium can be a somewhat confusing process, however, there are still ways for retail investors to get involved

Uranium element
The value of uranium is governed both by market spot pricing and off-market dealmaking

The price of uranium could get its own ‘Trump bump’ in coming weeks after the US president declined to impose tariffs on imports of the radioactive metal.

Investors are hoping the so-called ‘232 decision’, named after the section of the US Trade Expansion Act that governs tariffs, will help pull the uranium market out of a period of uncertainty that has persisted over the last 18 months as investors fretted over the possibility of new restrictions. Colorado-based Energy Fuels Inc (TSE:EFR) (NYSEMKT:UUUU) was one of the instigators of the 232 decision.

WATCH: Energy Fuels commends President Trump's decision to review domestic uranium-supply solution

Andre Liebenberg, chief executive of uranium investment firm Yellow Cake PLC (LON:YCA), said that the move is expected to bring a return to “more measured” market activity, leaving the firm with a “highly confident” outlook of prices.

Uranium investors will be hoping for a recovery, as the spot price of uranium on Monday was languishing at around US$24.5 per pound (lb), down from around US$29 in January and well off the price of US$35.5 seen four years ago.

However, figuring out what moves the uranium price isn’t easy due to the disjointed nature of its market, which involves off-market deals between a cartel of companies and a network of uranium buyers in addition to day-to-day trading.

Who controls the supply?

The global uranium supply is dominated by a handful of producers which, as of 2017, made up 57% of total production.

The biggest player in the industry by far is Kazatomprom, a Kazakhstan state-backed mineral giant that contributed 20% of the world’s uranium output.

It is followed in second place by Cameco Corp (NYSE:CCJ), a Canada-based uranium miner that accounted for 15% of global production. Cameco also has controlling stakes in Cigar Lake and McArthur River, the world’s largest uranium mines.

Taking up the remaining spots in the top four are fellow Canadian firm Uranium One and French group Orano, which contribute 9% and 13% respectively.

There are also some familiar names further down the list, with FTSE 100 miners Rio Tinto PLC (LON:RIO) and BHP Group PLC (LON:BHP) collectively producing 8% of the world’s uranium.

However, while a Kazakh firm is the world’s biggest producer, the country itself only holds 14% of the global uranium resource, with Australia taking the top spot with 30%.

Languishing in fifteenth place is the US with around 1%, so it is perhaps not surprising that Trump would be hesitant about cutting off imports given the country’s limited supply and the importance of the metal to the military’s massive nuclear missile arsenal and as a power source for the reactors of its entire submarine and aircraft carrier fleet.

Long term vs spot pricing

Pricing uranium is a twofold process.

The first element is the spot price. This, in theory, is the daily price that reflects ongoing shifts in sentiment and to some extent trading on an open market between willing buyers and sellers.

Most non-mining companies that trade uranium, such as Yellow Cake, will often calculate their net asset value (NAV) based on this price.

The spot price is also sensitive to perceptions of supply and demand, with outages or production declines at the major uranium mines likely to move the needle.

However, it is widely known that most purchases of uranium are done away from the open market and on long-term fixed contract prices between the seller and the buyer.

These sellers, which are usually uranium miners, and the buyers, such as nuclear power plant operators, are under no obligation to reveal the price at which they trade, and they often don’t.

But a nuclear power station may want to secure a five or ten year supply at a price it has fixed in advance, giving it more security about the way it prices power for its customers.
If the spot price moves during the duration of these contracts, then that is just the good fortune of the party the price moves in favour of.

Most uranium trading is done in this more opaque market, hence using the spot to work out the uranium price can only ever be a guide.

The secondary market

As no new uranium mines are currently under construction, you’d think it would be easy to figure out the amount that is currently in the market, after all, you just need to know the resources within each of the existing mines.

However, it is not known exactly how much uranium is currently held in stockpiles by various countries.

This secondary uranium market often comes from former weapons-grade material or spent nuclear fuel left over from prior decades, particularly the Cold War.

Russia, for example, is expected to have a large amount of uranium stockpiled from the USSR days, and previous price rises have seen Moscow dumping part of their stash onto the market, which in turn depresses uranium’s value.

This mysterious Russian stockpile, coupled with a recent souring of the reputation of nuclear power following the Fukushima disaster in 2011, has depressed the price of uranium.

Uranium investing

With such an unclear (and some would say shadowy) market, how can an ordinary investor trade on the ups and downs of uranium?

This is where companies such as AIM-listed Yellow Cake come in.

READ: Yellow Cake welcomes US decision on uranium imports

Essentially, they buy and hold physical uranium in storage houses, akin to putting gold in a vault, and peg their NAV to the market’s spot price.

This provides shareholders with indirect exposure as the company is effectively acting as a proxy to fluctuations in the uranium price through its shares.

Yellow Cake isn’t the only firm to have adopted this model, with Toronto-listed Uranium Participation Corp (TSE:U) also offering investors the opportunity to indirectly hold uranium assets.

It is these companies that lie in wait for a value spike like that of 2007, when a flood at the Cigar Lake mine sent the spot price soaring 78% to US$135 per lb in six months.

However, with the current price about three quarters lower than that, they will need to be patient.

Quick facts: Yellow Cake PLC

Price: 215.5 GBX

Market: AIM
Market Cap: £185.93 m

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