Investment funds change the shape of uranium market

These trends were highlighted in a panel discussion following the launch of the latest edition of World Nuclear Association's Nuclear Fuel Report on 8 September and also by Kazatomprom Chief Operating Officer Askar Batyrbayev in a high-level session the next day.

"One thing that's certainly in full gear in the uranium end of the fuel cycle right now is the role of investment funds, and new vehicles that have been set up to raise funds to accumulate for the long term or sequester U3O8 holdings," panel chair Brandon Munro, CEO of Bannerman Resources, said, before inviting panellists to discus the role such funds are now playing and how they might develop in the future.

The Sprott Physical Uranium Trust began trading on the Toronto Stock Exchange in July and this week has reached USD1 billion in assets, with uranium holdings of 24,274,212 pounds U3O8 (9337 tU). Matt Lichtenwald, manager, market research at Cameco, identified Sprott as a main factor in the "run" experienced by the uranium price over recent weeks.

"Some of the numbers are astonishing … it's been quite amazing to see," he said. The constant "bid pressure" resulting from Sprott's activity is something that the uranium market has not previously experienced, and will help with price discovery by giving investors a broader view of both the supply and demand side of the market, he said. "What that will lead to is, hopefully, a true equilibrium to what the uranium price should be, based on [actual] costs", he said.

There has, in general, been an increasing trend of funds participating in the market over recent years, and this is creating a balance in the market, he said. This is leading to a more balanced future and a healthier market going forward.

Shaping the spot market

The Nuclear Fuel Report does not attempt to forecast or estimate what secondary demand could emerge, Munro pointed out.

Riaz Rizvi, a partner at Rice Capital Partners and former chief commercial officer for Kazatomprom, added that the Fuel Report does not consider what amount of material might in future be considered as "strategic" by governments or by commercial players.

"Really, the big story here is how funds are shaping the spot market," he said. "This is an unprecedented level of demand in the spot market - something we haven't really seen before - and what the report does is assume that there is a lot of commercial inventory which is going to fill a gap that already exists between primary and secondary supply versus demand."

Rizvi said he did not "feel strongly" that "a lot of material" would come out of such funds. "That is not what they are designed to do. And when you look around at the rest of the uranium market in terms of commercial inventory, the [World Nuclear Association] report shows that those numbers are going down fairly significantly," he said.

"So when you start to look at it, the impact that these funds have could be very significant in terms of the dynamics of the negotiations between utilities and producers," he said. The "constant bid" for spot market material being driven by the "ever-increasing appetite of investors looking at the fundamentals of our industry" essentially withdrew material that, in the past, could have been used to meet short-term utility demand. "That's going to be harder to do going forward: it's a big, big shift in the way that our industry operates," he said.

Market shift

The spot market became the main avenue of purchase for many uranium market players in 2020 and 2021, when mining companies' response to the COVID pandemic led to some 20 million pounds of U3O8 being "left in ground" Batyrbayev said. "COVID catalysed a transformation of the uranium market and marked a shift from a surplus environment to a deficit one," he said.

Lost production was primarily compensated by increased inventory drawdown but at the same time COVID had exposed the fragility of the spot market, he said. The past two years have seen an increased diversity of buyers on the spot market, with major and junior suppliers entering market in addition to the traditional utilities and traders. These, as well as the entrance of financial players, have contributed to firm "unconventional" demand, he said.

A key question, he said, is whether such interest is an isolated occurrence for the current period, or the forerunner for a much larger demand trend with more new players such as banks and investors entering the market.

Meanwhile, traditional uranium demand remains robust, and growing interest in nuclear in the long term will need more supplies, and the current price environment does not allow for covering future requirements considering the high capital expenditures and long lead times to develop new uranium projects," he said. Multiple factors are in play, including as expiring long term contracts, increasing demand from financial players, and the need to replenish strategic inventories. "Given both conventional and unconventional demand, there might not be enough supply for everybody," he said.

Given the current market fundamentals, he said, Kazatomprom has decided to maintain its 2023 production at a similar level to 2022 which is 20% lower than licensed nominal capacity. Supply chain disruptions as a result of COVID - including shortages of certain production materials and delays to exploration and development works - could result in the decrease in the company's 2021 production being more than 20%, he said.

All of Kazatomprom's supply for 2021 is "guaranteed" to customers and for the first time in many years the company has not needed to sell on the spot market, Batyrbayev said.

"To ensure timely deliveries to our customers, Kazatomprom at times was and will be a buyer on the spot market. However we see that the spot market, due to its fragility and volatility, is not a reliable source for significant purchases of uranium ore. That leaves a question on the security of supply in the long term."