In the past week, we discussed why uranium stocks - which had been left for dead for much of the past decade - could surge in coming months, not only as a result of last week's compromise version of the annual National Defense Authorization Act, which provides for the military to continue a policy under that classifies the domestic supplies of certain minerals such as uranium, graphite and lithium as vital to national security, but also because the relentless buying frenzy that is the ESG craze could soon turn its attention to uranium companies. Readers who wish to catch up can do so here:
- Uranium Stocks Soar: Is This The Beginning Of The Next ESG Craze
- As Wall Street's Love For Uranium Returns, One Analyst Lists 4 Reasons To Buy The Biggest Miner
In addition to shifting technicals and sentiment, there was another fundamental reason why uranium stocks could grind higher: as we reported last week, a 2nd covid case was reported at the Cigar Lake mine of Canada's Cameco (CCJ), the world's highest-grade uranium mine, which if resulting in a wholesale mine shutdown, would lead to a supply squeeze and potentially far higher prices.
Well, this morning this thesis materalized when Cameco announced it will be temporarily suspending production at its Cigar Lake uranium mine in northern Saskatchewan due to the increasing risks posed by the Coronavirus.
“The safety of our workers, their families and communities is our top priority,” said Cameco CEO Tim Gitzel. “We have had six positive tests at our northern operations in recent weeks, including three at Cigar Lake. While the protocols we have put in place have to date allowed us to effectively manage these cases, there are broader risks we don’t control. Therefore, we believe it is prudent to do our part to continue to protect our people and our operations from the increasing threats that are outside our influence.
The Company said that as of Sept. 30, Cigar Lake had produced 2.3 million pounds (Cameco’s share) of uranium concentrates, however, due to the temporary production suspension, it does not expect to achieve 5.3 million pounds (its share) of production for 2020. The company also said it would incur costs of between C$8 million ($6.3 million) and C$10 million per month from suspension, and will incur additional costs purchasing market uranium (said costs won’t begin to impact results until the first quarter of 2021).
The company also said that due to the suspension, it plans to increase our purchases in the market to secure uranium we need to meet its sales commitments.
From the press release:
Cameco announced today that it will be temporarily suspending production at its Cigar Lake uranium mine in northern Saskatchewan over the coming weeks due to the increasing risks posed by the Coronavirus (COVID-19) pandemic.
Saskatchewan is experiencing a significant negative trend in the pandemic, which is leading to increased uncertainty for the continuous operation of Cigar Lake, due in part to access to qualified operational personnel. We will continue to carefully monitor the provincial COVID-19 situation, especially in northern Saskatchewan, as well as the impacts on our communities and the availability of employees and contractors to travel to Cigar Lake.
At the peak of production this fall, there were about 300 workers on-site at Cigar Lake. As a result of this decision, we will be placing the mine in a safe state of care and maintenance and there will be a significant reduction in personnel. We expect the enhanced health and safety protocols already in place and the decreased activities at site will ensure we can continue to work safely.
“Having Cigar Lake operating was always part of our strategy,” Gitzel said. “The costs of care and maintenance are not insignificant, and you saw that impact in our third quarter results. Therefore, the restart conditions for Cigar Lake are not the same as we have laid out for McArthur River. The timing of the restart and the production rate will depend on how the COVID-19 pandemic is impacting the availability of the required workforce at Cigar Lake, how cases are trending in Saskatchewan, in particular in northern communities, and the views of public health authorities.
“Due to the suspension, we plan to increase our purchases in the market to secure uranium we need to meet our sales commitments,” Gitzel said. “COVID-19 has taught us many lessons, including that the pandemic is a greater risk to uranium supply than to uranium demand.”
We expect our business to be resilient. Our deliveries to date have not been materially impacted by COVID-19, nor do we expect there will be a material impact on our remaining 2020 deliveries. At September 30, 2020, Cigar Lake had produced 2.3 million pounds (Cameco’s share) of uranium concentrates. However, due to the temporary production suspension, we do not expect to achieve 5.3 million pounds (our share) of production for 2020.
There will be costs associated with this temporary production suspension. While Cigar Lake is on care and maintenance, we expect to incur costs of between $8 million and $10 million per month, which will be expensed directly to cost of sales. We may also incur additional costs related to the purchase of uranium, which comes at a higher cost than our production. Given the timing of the suspension, we do not expect these costs would begin to impact our results until the first quarter of 2021.
To be sure, as we first said, and as GLJ Research subsequently echoed, if Cameco reports further Covid-19-related issues at Cigar Lake and ultimately suspends the mine, this will create "acute tailwinds" for uranium contract price negotiations. Meanwhile, ironically, Cameco benefits from the shutdown, which will be over soon, and certainly won't impair the company's balance sheet: as of September 30, CCJ had $793 million in cash and short-term investments and a $1 billion undrawn credit facility.
Sure enough, the fact that the world's largest uranium miner is effectively halting output indefinitely would mean far less supply and thus higher uranium prices, which is also why CCJ's stock has jumped today, rising as high as $14.42 - a fresh five year high - and over 30% higher since we first advised readers to take a close look at the sector last week.
The favorable supply dynamics have helped push the entire uranium sector sharply higher...
...with the Global X Uranium ETF surging to the highest level since 2017.