Cameco President and CEO Tim Gitzel Source: Cameco Corp.

? Uranium buyers have not rushed to market despite production cuts

? Aboveground inventories are not pernicious overhang

? Long-term needs suggests current U3O8 prices are low

Cameco Corp. and other uranium majors have made deep cuts to uranium trioxide, or U3O8, production, facing the blistering headwinds of depressed U3O8 prices and a lack of contract buyers. One issue raised by analysts are aboveground inventories, perceived by some as an overhang.

S&P Global Market Intelligence talked with Cameco President and CEO Tim Gitzel about his view on inventories, how end users received production cuts and the long-term prospects for the uranium mining sector. The following is an edited version of the interview.

S&P Global Market Intelligence: Let's start with a number. I do not have a firm one, but you often hear analysts estimate U3O8 inventories at around 1 billion pounds. What do you think of that number?

Tim Gitzel: That's a good place to start on the commercial inventory front. I think it's about 1 billion pounds, and UX Consulting Co. and TradeTech LLC would probably give you a similar number. Let me give you a little bit of really simple math that we work on here. If you started with 1 billion, we would take half away, 500 million pounds, as pipeline material. You've got 448 units that are operable around the world, some operating and some not so much at the moment. And if you look at the pipeline to keep them running ... we think that would be about half a billion pounds.

Then there's strategic inventories. We count maybe another 250 million pounds there. And then traders would hold 35 million pounds or so, and today we, Cameco, have about 27 million pounds of inventory. So then you get down to a hundred and some million pounds, which might leave you a year's worth of consumption. [UXC estimates 2018 demand between 185 million and 190 million pounds, similar to 2017.] But that kind of tells you where we are.

I'd say there's probably 100 to 150 million pounds that are out there. And when I say "out there" it depends where they are. Can they get to the market? What flag is on them? Are they usable in certain markets? Do they run into quota restrictions? So that's what gives us some optimism going forward. And this has been the case forever. This isn't new.

Inventories were much higher in past decades.

We find this normal. What's not normal is the Japanese situation. They had 54 reactors running the day before the Fukushima accident. Today it's five. The inventory is 120 million to 130 million pounds probably. They're not going to be back in the market anytime soon. But nor have we seen them in the past seven years pouring that material back onto the market. We think it's going to stay sequestered in Japan.

And then we look at the rest of the world and say, "Well China's a good story. India's a good story." So we see demand still going up with 57 reactors under construction around the world today. Slow growth. It's not like it was seven or eight years ago with rocket ship growth. But it's still growth at a time when you're seeing a lot of change on the supply side, including our big announcement shutting down the world's largest high-grade mine, 18 million pounds off the market [including other Cameco cuts]. There's probably been about 40 million pounds of production pulled off the market in the last 18 months. So that gives us some hope for the future.

How have the cuts resonated with users?

Too early to say, would be my answer. Everybody is in a wait-and-see mode, asking, '"Is that really what they're going to do?" Lots of moving parts. And we haven't seen much action on the market at all.

Let's talk discoveries. There have been a few interesting ones in the past decade: Rio Tinto's Midwest Northeast, NexGen Energy Ltd.'s Rook I and Fission Uranium Corp.'s Patterson Lake South. How do you view those projects? Potential competition? Potential acquisition?

Look, those deposits are going to be needed going forward. Look at the Chinese. They didn't have a reactor program a decade or so ago. Now they expect 58 units by about 2020. And those reactors are going to run for a long time. And I say, as a producer having been in this business for almost four decades, "Where's the uranium coming from?" Cigar Lake, the second-largest high-grade mine in the world, is done in 2027. McArthur River has about 10 years more [beyond that]. The new stuff just isn't coming online at US$20 a pound of U3O8.

I say there's room for the NexGens, the Fissions, somewhere out into the future. Certainly, it's not now or in the next 10 years. You've got enough, probably, and there are some brownfield sites like McArthur and others that we can bring on much quicker. But absolutely we're going to need those mines going forward.

What price does the sector need as an incentive to restart existing mines and build undeveloped projects?

A bump in the spot price doesn't do anybody any good. We want to refill that contract pipeline. Can we get a reasonable term price floor and ceiling that will encourage us to contract? And then we would use McArthur production to fill that contract. US$50 to US$60 per pound of U3O8 is, ballpark, needed for the next wave of new projects.

Finally, back to that 1 billion pounds as a perceived overhang. Is the supply-demand balance more important on price?

That's exactly the case. I'm much more interested in the year-to-year fresh production, plus secondary supply, versus demand in the market number. It's coming much more into balance. Certainly this year and going forward. That's what I watch. That other inventory has always been there. That's not going to come down to half a billion pounds. If people think there's a half a billion excess pounds, that is not the case at all.