Uranium Q4, 2016 - Q1, 2017 | KPMG | GLOBAL

Commodity Insights Bulletin - Uranium Q4, 2016 - Q1, 2017

Uranium Q4, 2016 - Q1, 2017

The ongoing uncertainty in the uranium market is holding back a favorable change in sentiment based on the long term fundamentals.

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Commodity Lead, Uranium

KPMG Australia

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Overview

The ongoing uncertainty is caused by a number of factors including the delay in Japanese restarts, debate on the extent of the role of nuclear in a renewable future, the impact of emerging technologies, and the uncertainty added to by the recent Westinghouse US bankruptcy. This uncertainty is impacting investment decisions on both the supply and demand side resulting in a lack of significant long term contracting by the utilities. In turn, suppliers are focusing on matters under their control by reducing their levels of production, cost cutting and delaying investment decisions.

Price outlook

  • In 2016, uranium prices1 were at a low, averaging at about US$32.9/lb over the year — 13 percent lower than the average prices in 2015. In Q4 2016, uranium spot prices dropped significantly by 23 percent q-o-q and 47 percent y-o-y to reach US$19/lb representing 10 year lows. During the same period, uranium’s long-term prices fell 13 percent q-o-q and 25 percent y-o-y to reach US$32.8/lb. This sharp decline throughout 2016 was primarily due to excess supply coupled with slower-than-expected progress in Japanese reactors coming online.
  • During Q1 2017, uranium spot prices increased by 25 percent q-o-q to US$23.8/lb, while long-term prices remained stable at US$31.2/lb. This sudden rise in spot prices was primarily due to an announcement by Kazatomprom (Kazakhstan’s uranium producer) in January 2017 that it would reduce its uranium production by 5 million pounds (Mlbs) in 2017. Currently Kazakhstan supplies nearly 40 percent of the world's uranium supply.
  • Unlike in 2016, uranium prices in 2017 are likely to remain relatively stable at US$31.2/lb (term price) in 2017, as the supply cut from major uranium producers, such as Kazatomprom and Cameco, likely gets offset by a high level of inventories and secondary supply*. These levels of prices continue to present a challenging environment for uranium producers which is restricting future investment decisions.
  • Uranium prices are expected to increase at a compound annual growth rate (CAGR) of 20.5 percent from US$31.2/lb in 2017 to US$54.5/lb in 2020. A return to long term contracting and increased demand from new nuclear plants in China and India are expected to fuel the price rise.

Figure 1: Prices of uranium, Q1 2005 – Q1 2017

Source: Cameco, Uranium Price, accessed April 2017

Figure 2: Market balance vs. prices, 2015–2021F*

Source: Capital IQ consensus prices; BMO Capital Markets: Global Metals & Mining: 2017 Outlook: A much improved backdrop for most equities, via Thomson Research, accessed April 2017

*Market balance presents the difference between the world’s primary uranium production and the world’s uranium consumption.

Supply and demand

Supply

  • In 2016, global uranium supply2 was expected to have increased 7.5 percent y-o-y to about 196.1Mlbs, driven by higher production from Canada and Russia. Russian uranium supply increased by 1.1Mlbs* y-o-y in 2016.
  • In 2017, global uranium production is expected to increase by 7.4 percent y-o-y to 210.6 Mlbs. Increased production is expected from Rio Tinto’s Rössing mine in Namibia, Husab mine (jointly operated by China General Nuclear Power Group and Swakop Uranium) in Namibia, Peninsula Energy’s Lance mine (1.3Mlbs) in the US. The Husab mine produced its first drum of uranium in late 2016. The reduced production in Kazakhstan, followed by Kazatomprom’s plans to reduce its output, is expected to slightly offset the expected increase in production during 2017.Given the unsustainable low price environment there are a number of uranium companies struggling including Paladin Energy which is working through a restructure proposal.
  • The uranium inventories held by nuclear utilities and secondary market supplies is another major factor that is expected to impact the global uranium supply in 2017. Inventory and secondary supply will likely constitute about 19.3 percent of global uranium supply in 2017. There are sufficient inventories held by nuclear utilities globally to sustain the demand for about five years in Japan, three years in both in the US and Europe and about seven years in China. These include an element of strategic inventories.
  • Long-term global uranium supply is expected to increase at a CAGR of 3 percent from 210.6Mlbs in 2017 to 230.7Mlbs in 2020, driven by moderate increase in production from mines located in Namibia, the US and Canada. However, these increases in production will only occur if the prices support the investment needed which current prices do not. At current prices, uranium producers are focusing on cost-cutting, rather than increasing production in the longer-term. High-cost mines, are already being   scaled back or ceasing production and new projects will remain on hold until prices recover and projects becomes commercially viable.

Figure 3: World uranium supply*, 2015–2021F

Source: BMO Capital Markets: Global Metals & Mining: 2017 Outlook: A much improved backdrop for most equities, via Thomson Research, accessed April 2017

*Please note that the 2016 actual numbers for global uranium supply was not available

Demand

  • In 2016, global uranium consumption3 was expected to have increased by 7.5 percent y-o-y to 187.3Mlbs, driven by the startup of new reactors in China, India, Russia, South Korea and the US. In the same year, nine new reactors came on in China, while six reactors became operational in India.
  • In 2017, global uranium demand is expected to increase by 6.3 percent y-o-y to 199.1Mlbs, driven by the addition of new nuclear capacity in China, India and Russia, and moderate increase in output at the existing reactors in the US and Europe. China currently has 20 nuclear reactors under construction and about 40 planned, India has five reactors under construction and about 20 reactors planned, and Russia has seven reactors under construction and 25 planned. This rising demand is expected to be partly offset by the closure of older reactors in several countries such as Germany, Hungary, Japan, South Korea, Russia, Sweden and Switzerland.
  • On 29 March 2017, Westinghouse electric company, a US-based supplier of nuclear technology, filed for bankruptcy protection amidst financial crisis, due to challenges in its construction business (AP1000 power plant projects) in the US. In 2015, Westinghouse acquired CB&I Stone & Webster (S&W), a US-based construction company. Post the acquisition, Westinghouse started managing AP1000 power plant projects owned by Scana Energy and Georgia Power based in the US. However, these nuclear power plant projects were impacted by cost overruns resulting in investor concerns. This adds to uncertainty in the nuclear market.
  • Long-term global uranium consumption is expected to increase at a CAGR of 8.6 percent from 199.1Mlbs in 2017 to 255.1Mlbs in 2020, driven by the new nuclear capacity expected to come online in the US, the UK, China, Russia and India. These countries continue to dominate uranium demand, as government policies encourage the development of non-polluting, low-emission nuclear energy.
  • The progress in bringing reactors back online in Japan remains slow, the country’s demand for uranium is expected to remain below pre-Fukushima levels through 2020. The following are the recent developments on Japan’s nuclear power plants:
    • On 6 April 2017, the Hiroshima District Court rejected a petition for a temporary injunction against the operation of the Ikata 3 nuclear power plant.
    • On 30 March 2017, the Osaka High Court lifted an injunction against the restarting of Kansai Electric Power Co.’s Takahama 3 and 4 reactors.
    • On 16 March 2017, Japan’s Nuclear Regulation Authority (NRA) accepted the restart applications for 26 nuclear power plants at 16 sites to review whether they comply with the agency’s post-Fukushima safety and security standards.
    • On 9 March 2017, the mayor of the town of Genkai in Southern Japan approved the restart of the Genkai 3 and 4 nuclear power plants.

Figure 4: World uranium consumption*, 2015–2021F

Source: BMO Capital Markets: Global Metals & Mining: 2017 Outlook: A much improved backdrop for most equities, via Thomson Research, accessed April 2017

*Please note that the 2016 actual numbers for global uranium consumption was not available

Figure 5: World nuclear reactors (under construction, planned and proposed), January 2013 – March 2017

Source: World Nuclear Association, World Nuclear Power Reactors & Uranium Requirements, accessed April 2017

  • The number of proposed nuclear reactors increased to 350 in March 2017, compared to 345 in November 2016. However, the number of planned reactors decreased to 164 from 167 during the same period. The number of under-construction nuclear reactors increased to 59 in March 2017, from 58 in November 2016.

Key developments

Ownership changes

The total value of uranium deals4 declined from US$1.9 million in Q4 2016 to US$0.7 million in Q1 2017. The total number of deals increased from one in Q4 2016 to three in Q1 2017. Hence the average deal value* has fallen from 1.9 in Q4 2016 to 0.23 in Q1 2017.

On 14 December 2016, Uranium Africa Ltd acquired the non core Australian
exploration assets of Paladin Energy Ltd, an Australia-based uranium production company, for US$1.9 million.

Figure 6: M&A deal number and valuations, Q4 2016 and Q1 2017*

Source:  MergerMarket and Thomson One accessed April 2017

*Deals with undisclosed value for Q4 2016 and Q1 2017 have also been considered

References

1  Resources and Energy Quarterly, Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2017; Uranium prices glow with decision by main producer Kazakhstan to trim output, 13 February 2017, CNBC website; Uranium outlook 2017: Experts expect a slow recovery, 21 December 2016, Investing news website, accessed April 2017

*  Inventories and secondary supply includes uranium supply from commercial inventories, reprocessing of spent fuel, sales by uranium enrichers and inventories held by governments, in particular the US Department of Energy.

2 Resources and Energy Quarterly, Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2017; Uranium prices glow with decision by main producer Kazakhstan to trim output, 13 February 2017, CNBC website; Uranium outlook 2017: Experts expect a slow recovery, 21 December 2016, Investing news website; Cigar Lake, Cameco company website; Lance project - Wyoming USA, Peninsula Energy Limited company website; Husab produces first uranium oxide, 25 January 2017, The Namibian website, accessed April 2017

* The increase (1.1Mlbs) was calculated by subtracting the 2015 Russian supply data (7.9Mlbs) from 2016 Russian supply data (9Mlbs). The data has been sourced from BMO Capital Markets report.

3 Resources and Energy Quarterly, Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2017; News: Japan nuclear update, Nuclear Energy Institute website, accessed April 2017

4 MergerMarket and Thomson One, accessed April 2017

Average deal value is the total value of deals divided by total number of deals for a particular quarter.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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