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Kazatomprom production cuts give lift to uranium market

National Atomic Co. Kazatomprom JSC's decision on Dec. 4 to cut its uranium output 20% — or around 28.5 million pounds over three years, beginning with a 10.4 million pound cutback in 2018 — led to an immediate rise in the spot price for the fuel.

Price reporting company TradeTech reported the daily triuranium octoxide, or U3O8, spot price on Dec. 4 at $26.50/lb, a 14% increase from $23.25 on Dec. 1.

"Given the challenging market conditions, and in light of continued oversupply in the uranium market, we have taken the strategic decision to reduce production in order to better align our production levels with market demand," Kazatomprom Chairman Galymzhan Pirmatov said in a statement. Kazakhstan's state-owned uranium producer is the world's leading producer of the fuel.

Such conditions have seen U3O8 daily spot price remain below the $35/lb breakeven point for virtually all producers since early 2015.

The Dec. 4 announcement follows a decision Kazatomprom announced in early January to cut its 2017 production by about 5 million pounds below what had been planned for this year. Kazakhstan in 2016 accounted for 39% of the world's uranium production, which totaled nearly 54.2 million pounds, according to the World Nuclear Association.

Kazatomprom's announcement "comes as a surprise" and "is the type of supply shock that will spur strength in the spot U3O8 price as a significant amount of expected production for 2018-20 is removed," Rob Chang, a Toronto-based Cantor Fitzgerald analyst, said in a Dec. 4 note.

Taking note of Cameco's November announcement that it would suspend uranium production at its McArthur River conventional mine for 10 months beginning in January, Chang said the Kazatomprom plan for a three-year production cutback equates to about an aggregate 42.3 million pounds of uranium production that "has been removed from the market."

Given Cameco's target of 18 million pounds of annual production at McArthur River, Chang had estimated in a Nov. 9 note that it would translate into an approximately 13.8 million pounds reduction in the mine's uranium production in 2018.

"We expect this news to push spot uranium prices to the mid-high US$20/lb range and perhaps into US$30/lb," Chang said.

Chang noted, however, that U3O8 daily spot price "movement may be muted at first due to the fact that there are a limited number" of uranium buyers.

In addition, he said, "less than 10% of total uranium demand for 2018 and 2019 are uncovered, as utilities have shored up what were once large shortages through spot purchases or short contracts. As such, there is less of an impetus for utilities to make purchases immediately."

Dustin Garrow, managing principal of Nuclear Fuel Associates, said in an interview Monday that Kazatomprom's production cutback "may be linked" to its "plans to do [an initial public offering] in London sometime during 2018."

"One of the more important factors that will determine the value of Kazatomprom will be the price of uranium," Garrow said. The Kazatomprom and Cameco cutbacks, in addition to Areva's October announcement that its Somair conventional uranium mine in Niger would cut production 19% from 2,100 tonnes in 2017 to 1,700 tonnes in 2018, in aggregate are likely to eliminate the existing uranium surplus, he said.

However, Garrow said, the extent of any resultant price lift to a great extent will depend on decisions made by utilities' fuel buyers. "I believe utilities will see a noticeable increase in the price of uranium, but the question is by how much and when?"

"Do [utility fuel buyers] panic and become a herd of buyers, or do they step back, reflect on this and decide to hang out on the sidelines for a while because they now have ample inventories?," he said.

Paul Goranson, Energy Fuels' executive vice president for operations, said in an interview Dec. 4 that he believes the cumulative uranium production cutbacks announced since January would tend to boost the uranium price.

Goranson added, though, that a higher U3O8 price would not necessarily encourage producers to increase output in response.

"Even for some of the world's lowest cost producers like Cameco, it may have a production cost in the $20s/lb, but it needs a [U3O8] price to be sustained in the $40s and $50 [per pound] to stay in business," due to costs for employee salaries, mine maintenance, on-site utilities, insurance and financing costs, Goranson said.

This article was authored by Jim Ostroff, a reporter with S&P Global Platts. S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.