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Experts say Kazatomprom's early uranium spot deals to pressure other fuel buyers


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Experts say Kazatomprom's early uranium spot deals to pressure other fuel buyers

Top uranium producer JSC National Atomic Co. Kazatomprom confirmed that it started spot market uranium purchases, joining Cameco Corp. in doing so, which experts said may put fuel buyers at the mercy of spot sellers as the Kazakh producer clearly sees higher prices ahead.

Kazatomprom said that while it is still targeting an ongoing inventory level of about six to seven months of annual attributable production, it expects inventory levels to fall below this threshold in 2020 and 2021, "with no opportunity to catch up production losses in these periods."

As such, Kazatomprom purchased "some volumes" in the spot market at the end of the second quarter in its ongoing efforts to optimize inventory levels.

Though its sites are expected to be back to normal staffing levels within two to three weeks, with COVID-19 testing for everyone returning to site during the ramp-up, Kazatomprom warned that production levels for the second half of the year are "expected to be severely impacted" by the four-month shutdown.

"In 2018 and 2019 Kazatomprom's share amounted to 23% of the total market demand, and in 2020 the sales volume of the company is expected to be similar to the level of 2019," company CEO Galymzhan Pirmatov said in an interview with Kazakhstanskaya Pravda in July.

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Bannerman Resources
CEO Brandon Munro.
Source: Bannerman Resources

Market messaging

Brandon Munro, CEO of ASX-listed uranium hopeful Bannerman Resources Ltd., said in a personal note to fund managers and analysts that "what is interesting about Kazatomprom's news is not that they need to buy from spot ... but rather that they have started purchasing so early."

Though Kazatomprom's first-quarter production was hardly affected by COVID-19 disruptions as its in situ recovery mines could continue to extract uranium by pumping from ore bodies that were acidified before April, in a July 6 statement, the company had indicated the possible need for spot buys.

Munro, who co-chairs the demand subgroup that determines global demand projections for nuclear fuel out to 2040 in the World Nuclear Association's Nuclear Fuel Report working group, said it was telling that Kazatomprom chose to top up in the US$30s per pound rather than run down inventory.

That indicates Kazatomprom believes that there will not be plentiful or cheap pounds available over the next half year, Munro said, which is important as Kazakh production accounts for about 40% of global uranium supplies. More than 10% of the world's electricity is generated using nuclear power.

American uranium specialist Andrew Weekly, founder and CEO of SmithWeekly Research, said in an interview that the amount Kazatomprom will buy is more important than confirmation that it is buying spot volumes.

"Large quantities will likely drive prices higher in the spot market, cleaning up material that is available at current and slightly-out-of-the-money price levels," Weekly said. "More buyer demand than seller supply in the spot market only speeds up the process in this cycle and leads to the long-term contracting table, which is where key people will end up seated before this is over. Fuel buyers will come hat-in-hand."

Weekly said such spot buying will "only add more pop to an already dire situation that is coming at the term contracting table. Term price is much more important to us over spot. If everyone becomes buyers ... that is something nobody expected nor predicted, and the consequences are abundantly clear."

'Ominous' comments

Cameco CFO Grant Isaac said during a July 29 call with analysts and investors that most of the company's year-to-date purchasing of 19.3 million pounds was from the spot market and it was not the only producer buying in the market, which Munro said was "ominous."

"Even if you believe that 50% of the total volumes in the spot market are just meaningless trade or churn, it still suggests that there's other demand in the market, not just us ... some of it has been utilities, discretionary purchasing in the spot market. A lot of it seems to be producer purchasing to cover sales commitments due to the unplanned supply disruptions. " Isaac said.

Munro said smaller players such as ASX-listed Peninsula Energy Ltd. and Toronto-listed Ur-Energy Inc. are also buying from spot to deliver into contracts, adding to the competition.

Meanwhile, Cameco's Cigar Lake Saskatchewan project partner, Orano SA another major uranium producer, "must be wondering when to time their entry into the spot market," given it has lost much of its share of production from Cigar Lake and Kazakhstan, will lose production from Cominak in Niger in 2021, and "can't ignore" the 5.4 million pound uranium loan from Cameco due in 2023, Munro said.

Munro said the spot market in the second half will be characterized as much by decreased supply as by increased producer demand.

Of those understood to be selling primary production into spot, Munro said only BHP Group from Olympic Dam and Uzbekistan's Navoi Mining & Metallurgical Combinat State Co. are unaffected thus far by COVID-19.

"Traders will think twice about selling into a market that looks ready to rise, and are more likely to become net buyers as utilities look for midterm delivery via the carry trade," Munro said.

"In fact, given a spot transaction can be for delivery up to 12 months forward, it is quite possible that sellers could be caught short if they forward-sold pounds before the uranium world was turned upside down by COVID-19," Munro added.