Investors in uranium need to know that the largest mine for this commodity in the world, is located in western Canada. It was recently announced that Cameco Corporation the owner of the McArthur River uranium mine, had failed to reach an agreement with unionized workers. The lack of a new contract will lead to a shutdown in production at the site. This is important because the mine located in northern Saskatchewan possesses the highest grade uranium deposit known to exist. In addition, the mine is responsible for 10% to 13% of total world production. Canada as a whole is responsible for 15% of global output for this vital commodity. The amount of ore available on a yearly basis from the site is regulated at 18.7 million pounds of yellow cake. Uranium is the raw material for nuclear reactor fuel.
A final offer was made to the union bargaining committee on the 28th of August and requested that it be voted on. The organization rejected the petition. The failure to reach an agreement this week led the union to call for a strike beginning this weekend (August 30th). The company has responded with plans of it’s own. The idea is to begin closing down the mine itself as well as the nearby Key Lake uranium processing mill.
The previous labor contract already expired at the end of 2013. Nine months of negotiations which included a total of 28 face to face meeting between the union and the company have failed to produce a new accord.
The uranium mine site is jointly owned by Cameco and Areva Resources Canada at 70% and 30% respectively. The operation of the mine however, is exclusively done by Cameco. The mine has probable reserves of over 1 million tons of ore with an average grade of 15.76%. This equates to 360.5 million pounds of U3O8. The largest producer of uranium ore in the world would be KazAtomProm located in the Republic of Kazakhstan. Next in line is Cameco. So the shut down of the mine will eventually lead to reduced stockpiles of uranium.
Uranium has already increased in price the most in over 2 years. The cost of U3O8 rose 3.2% to $32.50 USD (United States Dollar) a pound on news of the actual strike and mine closure. This was the largest reported increase since November 2011. Uranium has advanced as much as 18% from a low of $28 USD a pound last reported on May 20th of this year. The average price for the year (2014) has been $31.80 USD. By yesterday the price had increased further to $32.65 USD. Cameco stock itself increased $0.27 USD or a 1.29% increase on the news of the impasse. The stock settled at $19.46 USD. On August 29th the stock ended the day at $19.57 USD. An investor should consider shorting the stock now, as production at the mine ceases.
Cameco is able to produce uranium at the McArthur River mine for about $20.00 a pound.
Uranium prices are still 52% lower today than right before the March 2011 nuclear disaster in Japan. The earthquake and resulting tsunami led to the meltdown of 3 reactors there and the suspension of all Japanese nuclear power plants. A little more than half (28) of Japan ‘s nuclear power plants are expected to be fully operational by 2018. Only 4 are due to be restarted in 2015.
Cameco still insists that all 2014 deliveries will still be made, which will require the company to draw down inventories. A prolonged strike will force the company to purchase uranium in the spot market. Not exactly good news for the owners of stock in the company. A strike of at least 4 months (the rest of 2014) will take more than 7 million pounds out of the world market. As with any other commodity it will come down to supply and demand. Before the problems in Canada, there was estimated 13.2 million pounds of surplus uranium sloshing around the globe. A strike of four months alone, will eliminate half of the world stockpile.
In June of this year forecasts of uranium prices were reduced from $45 USD to $31.50 USD. This was largely due to the slowness in the Japanese bringing their nuclear plants back on line. Targets for 2015 and 2016 were also reduced from $60.00 USD and $80.00 USD respectively. The new price expectations for these two years are $40.00 USD and $45.00 USD. This was all before the mining strike in Canada of course.
Although 73 nuclear power plants are under construction around the globe, quite a few of them will not be on line before 2020.
The future Cameco goal of increasing production to 36 million pounds per year by 2018 will have to wait. The surplus in world supplies of uranium was making this objective increasingly unlikely anyway.
However, a shut down in mine operations with Cameco will provide a positive impact to the supply and demand fundamentals of uranium. It is a good time to consider an investment in uranium, especially if the strike continues. A prolonged disruption in supply will result in a tapering down of world inventories. As the surplus stock disappears look for price increases for uranium to commence. One may also consider an investment in the stock of a competing company.
If an investor wishes to hold a long position on uranium as a futures contract, they will need to follow the provisions of NYMEX. Each bid requires a holding of 250 pounds of uranium. You will be required to deposit an initial margin to maintain the position. If the price drops you will need to invest additional amounts of money to keep the contract. As an investor you will need to establish a reasonable target, so you will be able receive a return on your initial investment.