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Western utilities facing capacity shortage for uranium


The Biden administration recently announced a $4.3 billion plan to buy enriched uranium directly from domestic producers, causing uranium related stocks to see a major jump in price. Like other commodities markets, uranium has been partially disrupted by the war in Ukraine, but the market is also heavily influenced by major producers who can switch off production when prices get too low.

Listed holding company Yellow Cake (LSE:YCA), an Armchair Trader pick due to its direct exposure to uranium stockpiles as opposed to listed miners, has dropped in price recently to 337p from a recent high of 485p. The company has in place the option to buy up to UUSD 100m of uranium from major producer Kazatomprom every year.

Why uranium matters

Uranium as a commodity remains a point of focus for many medium to long term investors, as current forecasts note a shortfall in energy supply between a shift off fossil fuels and the wider introduction of renewable energy supplies. Nuclear fuels represent one way to bridge that gap. In addition work continues apace on several new reactors in parts of the world previously reliant on fossil fuels for their energy supplies. For example, the UAE in March announced it was expanding the generation capacity of its Barakh nuclear energy plant.

“While Russia only provides 15% of global uranium production which is the feedstock for nuclear fuel, it accounts for a significant amount of global capacity in the nuclear fuel cycle with 27% of conversion and 39% of enrichment service capacity,” said John Ciampaglia, CEO of Sprott Asset Management. “Western utilities are trying to source alternatives to Russian conversion and enrichment services but there is currently a lack of capacity available in the West because of curtailments and closures of facilities following a period of uneconomic pricing.”

Sprott says the Western convertors and enrichers will not ramp up production without long term contracts in place from utilities. Even if the contracts are signed, they also need time to bring capacity back on line. In the interim, there is also a threat that Russia cuts off these services from the West.

US government becoming focused on domestic uranium supplies

The U.S. government has recognised these supply chain risks, prompting the Department of Energy to request funding from Congress to assist with the transition to domestic solutions. Details have yet to be released but the signal it sends is very clear – the U.S. wants its utilities to migrate away from Russian nuclear fuel services.

“We believe the U.S. also wants to revive domestic production of uranium as most mines are no longer operating due to a protracted period of low uranium prices,” said Ciampaglia. “The U.S. nuclear reactor fleet requires about 50 million pounds of U3O8 uranium annually to operate and domestic production was only 21,000 lbs in 2021. These idle U.S. mining operations will come back on line but only with a higher incentive price for uranium along with long term purchase contracts with utilities.”

Yellow Cake plc reported 20 May that it had taken delivery of over 2m lbs of U308 from Kazatomprom at the Cameco storage facility in Canada. This followed a recent exercise of a buyback option by Yellow Cake. The investment company now holds over 17.8m lbs of U308. It bought its latest batch from Kazatomprom at USD 43.25/lb.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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