The largest operational uranium mine in the world is shutting down for the second time in 2020 due to the spread of COVID-19, presenting fertile ground for another rise in prices linked to the pandemic.
Saskatchewan-based Cameco Corp. announced Dec. 14 the suspension of production at its 50%-owned Cigar Lake uranium mine in the province after three employees at the site tested positive for the coronavirus. It was the second temporary closure of the mine due to COVID-19. Orano SA, which has a 37% interest in Cigar Lake, announced the same day that it was suspending production at the nearby McClean Lake uranium processing mill.
"COVID-19 has taught us many lessons, including that the pandemic is a greater risk to uranium supply than to uranium demand," Cameco President and CEO Tim Gitzel said in the statement.
The shutdown may be negative in the short term for the uranium mining giant that saw significant losses attributable to its initial shutdown of Cigar Lake in March. However, analysts have again found a silver lining in Cameco bleeding red, in the potential for higher uranium prices and a lift for uranium equities.
When Cameco shuttered Cigar Lake in March and Kazakhstan-based JSC National Atomic Co. Kazatomprom made virus-related production cutbacks, uranium became one of the only commodities to perform well during the crisis on the back of a growing supply-demand imbalance. In the face of a second shutdown, there is hope for another spike in the uranium price as a result of the pandemic.
The price of uranium increased by more than 40% from March 22, the day before the first closure of Cigar Lake, to May 21, when S&P Global Platts assessed the average price of material to be delivered in the next 12 months at $34.52 per pound, the highest price in 2020. Prices fell after the mine restarted in September and have been just under $30/lb in recent days.
"As Cigar Lake is one of the largest uranium mines in the world, its output, or lack thereof, can materially affect the uranium spot price. The longer the mine remains down, the more upward pressure will build in the uranium spot and term markets," Cantor Fitzgerald metals and mining analyst Mike Kozak said in a Dec. 14 note. Shutting down Cigar Lake even temporarily will "boost all other uranium names," Kozak said.
The uranium market was already headed into 2021 facing a supply deficit of 23.6 million pounds, or about 13% of global demand, Scotiabank analyst Orest Wowkodaw said in a same-day note. The suspension of Cigar Lake should result in a material increase to the estimated deficit, and the resulting supply shock will likely have a positive effect on the uranium market, especially if the closure lasts, the analyst said.
"While negative to near-term estimates, the closure could drive a brighter fundamental picture, with higher prices and more incentive for utilities to re-contract. Overall, we view the update as mixed for the shares," Wowkodaw said.
Greg Barnes, an analyst with TD Securities, offered a similar view in a same-day note, rating Cameco as a high-risk "buy" and rating the impact as "mixed" for its shares. Purchasing uranium in the market will come at a higher cost to mined production, but the full impact of suspending Cigar Lake will not be felt until the first quarter of 2021, Barnes said.
"We expect that the uncertainty around the timing of a restart of Cigar Lake, which we believe could be several months away, combined with expected reduced production from Kazatomprom in 2021 due to its curtailment of activities earlier this year, should provide upward momentum for the uranium spot price," Barnes said.
S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.