The COVID-19 pandemic continues to negatively impact commodity markets, with prices for metals such as copper, zinc, lead, aluminium and many others falling rapidly since the shuttering of mines and disruption to supply chains around the world. One metal, however, is defiantly bucking the trend.
The spot price for uranium oxide in the past few weeks has risen by 14% to over US$27 per lb., ending a long period locked between US$24 to US$26 per pound.
"On the supply side, several main production centres have either closed, are reaching the end of their lives or are starting to hit lower grade ores at their mines, pushing up spot prices for uranium," Leigh Curyer, CEO of NexGen Energy (TSX: NXE; NYSE:NXE), said in a telephone interview. "Also, the higher consumption of nuclear power, which has been growing by around 1% to 2% per year over the last few years, is also putting upward pressure on prices."
A Canadian-based uranium exploration and development company, NexGen Energy holds several properties with over 2,590 sq. km of land in the Athabasca Basin, a region in the Canadian Shield that spans northern Saskatchewan and Alberta, and is one of the world's leading sources of high-grade uranium oxide, the feedstock for nuclear power reactors.
The company's southwestern properties include the high-grade Arrow deposit, the South Arrow, Harpoon and Bow discoveries and the Cannon area, all situated within the company's 100%-owned flagship Rook I property.
The property is located in northwest Saskatchewan, around 40 km east of the Alberta-Saskatchewan border, 150 km north of the town of La Loche and 640 km northwest of the city of Saskatoon.
In 2018, the company reported a resource estimate for the Arrow deposit of 2.88 million indicated tonnes grading 4.04% uranium oxide for 256.6 million lb. contained uranium oxide, with a high-grade core of 460,000 tonnes grading 17.85% uranium oxide for 181 million lb. contained uranium oxide. Inferred resources totalled 4.84 million tonnes grading 0.86% uranium oxide for 91.7 million lb. contained uranium oxide.
"The pre-feasibility study released in late 2018 was based on a 1000-tonne-per-day mine with an average production of 25 million lb. per year for a mine life of nine years at a very low operating cost of around US$5 per lb.," said Curyer. "In 2019, we conducted another drilling program over 58,000 metres, which further helped to delineate the mine plan. We also undertook several studies as part of an updated feasibility study, which all point toward Arrow becoming one of the world's largest sources of uranium once operational."
The COVID-19 outbreak, however, has interrupted work on the latest feasibility study.
With the large-scale electrification of global transportation systems and manufacturing processes, the demand for electricity is increasing at about twice as fast as overall energy use, and is expected to rise by more than half by 2040. The challenge, however, is to meet this rapidly growing demand while also reducing the greenhouse gas emissions from electricity generation.
As the second-largest source of low-carbon electricity globally (after hydropower), nuclear power currently provides around 10% of the world's energy. Modelling carried out by the World Nuclear Association in 2019, however, shows a divergence in the supply and demand curve globally for uranium, with demand outstripping supply from 2023 and global production dropping dramatically between 2035 and 2040, as a quarter of all mines in the model come offline.
"The world will need reliable and cheap sources of electricity to meet the increasing demand, and nuclear power can provide that," said Curyer. "But we'll need at least another four or five Arrow-type deposits to come into production to meet the medium- to long-term demand. However, as demand for uranium increases beyond the supply and the average cost of production increases, the price of uranium will also increase."
Although the demand for uranium is very evenly distributed with around 442 nuclear reactors operating in 31 countries around the world, the supply side is very concentrated, with only around six mines producing two-thirds of the global supply. Therefore, any disruption to the supply side has a significant and lasting impact on uranium prices.
Last week, for instance, spot prices for uranium spiked after market leader Cameco (TSX: CCO; NYSE: CCJ) announced the closure for a month of its Cigar Lake mine, which accounts for around 13% of global uranium supply. The announcement was shortly followed by a 21-day lockdown of mines in Namibia, another significant uranium-producing region, and the shuttering of Energy Resources of Australia's Ranger uranium mine, placing further pressure on supplies.
So far, however, supplies from Kazakhstan have not been affected, reports the Financial Times.
According to The World Nuclear Association, the uranium industry will need to double primary uranium production by 2040 to meet demand. But with global production tipped to drop dramatically between 2035 and 2040 as a quarter of all mines are likely to come offline, the supply of uranium will dwindle in the absence of new development projects or the ramping back up of mothballed mines.
With increased restraints on supply coupled with new reactors currently in construction across Eastern Europe, the Middle East and Asia, uranium prices could see a significant jump to around US$50 per lb. from 2025, according to analysts at Canaccord Genuity, a London-based independent investment bank.
"In the short-term, we expect uranium prices to pass the US$30 per pound mark soon and will increase over the longer-term," Curyer said. "Currently, there is also an unprecedented level of uncontracted demand for uranium, so we think prices will only get higher this year, into 2021 and to the middle of the decade, and to encourage new production to come on board we could see far higher contracted prices for uranium, possibly as high as US$70-80 per pound."
At press time in Toronto, NexGen Energy was trading at $1.29 per share within a 52-week trading range of 76 and $2.45. The company has 339.34 million common shares outstanding for a $464.72-million market capitalization.