Cameco announced on 23 March that it was suspending production at Cigar Lake, the world’s largest operating uranium mine, despite no confirmed cases of coronavirus at either Cigar Lake or Orano’s McLean Lake mill.  This development shone a light on the vulnerability of uranium production to the primary and secondary impacts of the COVID-19 crisis. 
 
As the penny dropped, the U₃O₈ spot price rallied 6% off a very low base.  But with further uranium supply disruption a certainty, I would argue that the penny is still mid-air.
 
Prior to COVID-19, the uranium sector was already running a deep deficit after unsustainable prices forced supply disruptions in 2018.  After allowing for secondary supplies, the 2019 global production of U₃O₈ was 20Mlbs less than the consumption of uranium in nuclear power plants.  Put another way, the sector was running a deficit of more than 10% for a material that has no substitutes and is responsible for 11% of the world’s electricity production.  However, this situation defied economic rationale and the uranium price did not respond, setting the scene for lower production in the medium term.  The reasons for this price inertia largely consist of two factors: (a) nuclear power utilities choosing to under-buy their requirements, instead drawing down on inventories and (b) utilities preferring to invest in downstream nuclear fuel products such as UF₆ and EUP (enriched uranium product). 
 
Whilst commercial inventories did expand after Fukushima precipitated knee-jerk reactor closures that cost the sector 10% of demand, three years of deficits and heavy strategic stockpiling by the Chinese government have brought those inventories back toward the normal range.  Moreover, the availability of downstream products has tightened considerably – leading to dramatic increases in the price of nuclear fuel services: conversion is up 400% and enrichment (SWU) is up 50%.
 
Hence the dislodgement of the 2019 price inertia only requires one element: utilities deciding that they should no longer draw down commercial inventories and therefore start buying what they burn.  The factor likely to trigger this decision is unpredictable supply disruption, which brings us back to Cameco’s decision.
 
Cameco has placed Cigar Lake into care and maintenance for an initial period of 4 weeks and will meanwhile “assess the status of the situation and determine whether to restart the mine or extend the care and maintenance period”.  To understand what is likely to trigger a restart – and in what time period - we need to consider Cameco’s core motivations.
 
The Spanish Flu had a devastating and disproportionate effect on Canada’s indigenous communities and public health officials around the world recognise the increased vulnerability of indigenous peoples to the COVID-19 pandemic.  Cameco is a genuinely outstanding corporate citizen and counts amongst its ESG credentials the prioritisation of indigenous employment in northern Saskatchewan.  Cameco has decided, wisely, that short term production targets do not justify the risk that their good name becomes synonymous with another devastating outbreak amongst northern indigenous communities.
 
I can’t see how this risk will change until the virus runs its course, which will still take months even if one of the white swan solutions comes to early fruition.  So, the question becomes: how quickly can Cameco adapt its workforce to eliminate this communities risk and mitigate the other related issues.  Remember that Cameco’s alternative – buying material in the spot market or from joint venture partners to deliver into long term contacts at a modest margin – is not too bad in the circumstances. 
 
My base case is that Cameco adopts a “take no chances” approach that will see Cigar Lake down until end of July, removing 6Mlbs U₃O₈ from 2020 production.
 

Cameco has decided, wisely, that short term production targets do not justify the risk that their good name becomes synonymous with another devastating outbreak amongst norther indigenous communities.

Further uranium supply disruption is, in my view, a certainty.  This disruption will fall into two categories:

1. production disruption due to employee reductions or supply chain issues; and/or
2. enforced suspension of some mines (by company or government decisions).

COVID-19 to cause production disruption at all operations 

Production disruption from primary and secondary effects of COVID-19 will come in many forms – and will clip a few percent off the efficiency of every mine on the planet.  Supply chains will be disrupted, particularly for fuel and reagents as both international and regional borders become clogged.  Mines will want to bring forward maintenance shut-downs to productively pause their workforce but, conversely, specialist maintenance will need to be deferred where vendor supervisors can’t cross borders. Replacement equipment and consumables will be delayed and contract miners may need to declare force majeure.  Mines owned by multi-nationals will not be immune, particularly where their business model relies on centralised teams flying world-wide to perform specialised functions.
 
Employee sick leave disruption will skyrocket as employers encourage workers with any flu-like symptoms (either themselves or family members) to play safe and stay at home.  Catering and stocking of mine villages will become difficult, straining working conditions.  Unions will be concerned about health risks associated with working, transportation and living conditions.  Plus there are safety concerns in relation to those stressed and distracted workers who do manage to turn up for their shift. 
 
Some mines will need to adjust shifts or rosters to segment their workforce so that the entire mine doesn’t go down once COVID-19 cases are confirmed.  And mines with a reliance on fly-in, fly-out workers will find it harder to mitigate the risk of importing transmission and the effects of re-transmission into external communities.
 
All of the above factors will take their toll on the efficiency and throughput of uranium mines around the world.  And the burden of solving these challenges will weigh on management as they decide whether it is necessary to temporarily shut down mines.
 
More mines to be forced into shut-down 
 
Headlines reporting shut-downs will have an impact on utilities and investors alike, as we have seen in the last two days.  I believe that additional shut-downs are inevitable, so the headlines will continue.
 
Kazatomprom, the global leader in uranium production, has already flagged supply disruptions to Kazakh uranium production and the possibility of “pre-emptive suspensions”, reassuring the London Stock Exchange that it has 8 months of producer inventory to meet customer commitments.  Kazakhstan’s in-situ recovery mining is more resilient to short-term disruption than underground or open-pit mining.  Plus, Kazatomprom has already reduced production to the minimum rates permitted under their Sub-Soil Use Contracts, hence they may be able to flex up production to smooth any short term disruptions.  Nonetheless, there remains a risk of pre-emptive shut downs or closure by blanket government decree or a COVID-19 outbreak. 
 
In Australia, Namibia and Niger (the world’s largest respective producers after Kazakhstan and Canada) some enforced suspensions of uranium mining activities are likely, at least for 3-4 weeks to complement societal shut-downs. 
 
The Australian federal government has staged the release of increasingly draconian measures to slow COVID-19 transmission, although it has not yet progressed to shut-downs of communities or mines.  Further measures are being implemented at a state level.  The sparsely populated Northern Territory (where ERA’s Ranger mine is located) has a large number of vulnerable indigenous communities and the least developed healthcare system in Australia.  Although ERA reiterated its production guidance as late as 23 March, as Rio Tinto prepares to plough hundreds of millions into the gold-plated closure and remediation of Ranger, it is hard to fathom ERA taking risks on localised infections.  In South Australia (where Olympic Dam and Beverley are located) border closures have been implemented, although an exception has been made for fly-in, fly-out mine workers if there are “approved disease control measures in place”, whatever that means in practice.  As with Rio, BHP will be mindful of the potential to injure one of mining’s most valuable brands and will proceed with caution.  Indeed, both giants’ overriding priority will be to maintain Western Australian iron ore exports, so any risk tolerance they have will be directed at keeping these operations open.  Accordingly, they will act decisively to eliminate risks from assets with minor profit contributions, including Ranger and Olympic Dam.
 
In Namibia, the government declared a State of Emergency on 24 March and implemented a pre-emptive shut-down of all non-essential activities.  In the next days the government will clarify if mining must be suspended for at least 21 days, following South Africa’s lead. 
 
Niger is yet to pronounce on the issue, perhaps reassured by demographics boasting half of the population aged below 15, but with a non-existent healthcare system and millions living in urban poverty there will be disruption in some form. 
 
The total impact of the above would be a reduction of forecast 2020 global primary production of between 10 - 20Mlbs U₃O₈, which would widen the current deficit and absorb currently mobile inventory.  Given the chaotic state of financial markets, a rapid price response is far from assured – continued price inertia will heap additional pressure on remaining producers and exacerbate the above challenges.
 
The next part in this series will look at short term demand impacts on nuclear power and uranium from COVID-19, including nuclear power plant resilience, the impact of industrial shut downs on nuclear generation and the role of uncertainty in utility procurement decisions.


I look forward to discussing further with you.

Kind regards
Brandon