Inflation, uranium supply chokehold could send incentive price to US$80/lb

Boss Energy (ASX:BOE) managing director Duncan Craib, whose company plans to bring the restarted Honeymoon uranium mine in South Australia online in the fourth quarter of 2023, says a new incentive price of US$80/lb means an impending supply shortage facing Western utilities could get even more extreme as the next contracting cycle heats up.

In recent years the market has factored in an incentive spot price ranging from US$50-60/lb.

Spot prices rose to a 13-year high of US$63.75/lb shortly after the Russian invasion of Ukraine last year, but have been largely unchanged in early 2022, paying US$48.75/lb over the weekend according to Numerco.

But Craib says the increased cost of production and capex will likely see new uranium mines needing dramatically higher prices to justify their development.

“That inflationary pressure is just saying the incentive for new mines is going to be a lot more difficult and higher, and that bodes really well to increase your uranium price,” Craib told Stockhead.

At the halfway stage of construction, Boss says it remains on time and budget with $55.1m of the $105.4m capex already committed.

Craib says inflation could have an impact on Boss’ future operating costs, but says it has a buffer on its feasibility cost estimates, and that there is a strong prospect of higher uranium prices as the higher barrier to entry puts pressure on utilities with fewer options to restock their supplies.

“Currently your uranium price is US$48.5/lb. For us, we’re a low cost producer so we could be producing now and be profitable.

“But if anything that uranium price is going higher. When we made the final investment decision we’d already factored in a buffer, so to speak, from an all in cost of US$32/lb to US$48.5/lb, the current spot price.

It echoes comments from the world’s largest listed uranium miner Cameco and its CFO Grant Isaac, who told instos at the CIBC institutional investor conference in Whistler, Canada, the groundwork was being laid for a uranium boom.

Isaac said inflation-related supply issues, a clean energy crisis which was seeing more governments support nuclear reactor builds and life extensions and Russia’s cancellation from international markets were all heating the water.

“Reactors we thought were going to be shut down are being saved,” he said.

“A fuel buyer who thought their reactor was being shut down didn’t procure any material, so there’s near term demand to deal with this, we’re seeing medium term demand in the form of reactor life extensions.

“Reactors initially built for 40 years, they then get an extension to 60 years and now some to 80 years, but you might be surprised to know not a lot of markets had been considering that, that was really an US industry phenomenon.

“Then you started to see Canada pivot towards extensions … now we’re seeing other markets we weren’t modelling as extending the life of reactors — France, Japan, all proposing to run their existing fleet for longer.

“On top of that we have … over 50 large reactors being built around the planet and perhaps even more exciting is we’re starting to see SMRs (small modular reactors) being built.”

Isaac also thinks supply costs will be a major issue.

“We’re in the early innings of a contracting cycle and we’ve never started one from this high of a uranium price before,” he said.

“If supply was outpacing demand it wouldn’t matter would it, but that is absolutely not the case.

“While I say the demand outlook is the best ever, I’d say the supply outlook is more uncertain than it’s ever been.

“On the primary production side it is absolutely a fact that the existing production assets are facing challenges, supply chain challenges, logistics challenges, anyone following us would know it’s very difficult to get central Asian supply out of Kazakhstan right now.

“On the primary side it turns out markets work. After years of low prices no one has been meaningfully investing in new supply, there are some projects being promoted but let’s be clear, nobody is seriously building a new mine right now.

“And in fact many of these projects you see that look really attractive, remember they’re trading on 2019 numbers, nobody has really updated those studies to reflect what’s been happening from an inflation and supply chain point of view.”

Then there’s Russia’s invasion of Ukraine, which has also thrown shadows over Kazakhstan’s uranium supply (45% of the global total) given the diplomatic and logistical ties between the two countries.

“The Russians are 40% of the global supply of enrichment, 30% of the global supply of conversion, 13% of the global supply of uranium, and so now you have an important primary supplier Kazakhstan importing risk into the industry, and now you have a major geopolitical realignment going on, which is how do you exclude Russia from a nuclear fuel cycle that had been deeply embedded,” Isaac said.

“There’s nothing stopping Western fuel buyers from buying Russian material, but they are self-sanctioning … and it’s not just Western fuel buyers, it’s a new market for us in central and eastern Europe, it’s a new market that’s never been available to Cameco before — Finland, Ukraine, Czechia, Slovakia, Hungary, Bulgaria, Slovenia, these are all countries that are now pivoting west.

“Just for size of the prize analysis that’s a 15Mlb uranium market, or 6000t conversion per year.”