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

Canadian giant Cameco lays out its argument for why the uranium market is positioned for a boom
Australia’s next producer Boss says higher prices are on the cards, with inflation sending incentive pricing to US$80/lb
Ramelius sees inflation now, dumping gold mine expansion over potential cost blowouts

One of the world’s biggest uranium miners has laid out a dramatic bull case for the nuclear fuel, while Australia’s next active uranium producer thinks inflationary pressures across the mining industry could send prices soaring as supply struggles to meet demand from utilities.

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’s just set to become more profitable as this uranium price picks up.”

Boss Energy (ASX:BOE) share price today:

The best start for a contracting cycle

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.”

BOE was up 7% this morning, with most of the ASX uranium market also rising sharply as the materials sector rose slightly to 0.06%, supported by Pilbara Minerals (ASX:PLS) and strong performances in the lithium space.

Ramelius dumps Edna May expansion as inflation throttles miners

Three days ago Liontown Resources (ASX:LTR) was forced to tuck its tail between its legs and reveal a $350 million cost blowout on its Kathleen Valley lithium mine.

Today those same inflationary pressures are catching up to Ramelius Resources (ASX:RMS), which has dumped a planned open pit expansion at its Edna May gold mine in WA’s Wheatbelt region.

Located near the historic gold town of Westonia, RMS has seen all in sustaining costs rise 28% from $1540/oz to $1977/oz since a scoping study in January 2021, with upfront capital up 33% from $165m to $220m and cut-off grades reducing its open pit ounces from 434,000oz to 292,000oz, even with a base case gold price rising from $2300/oz to $2600/oz.

“Ramelius has remained disciplined when it comes to delivering superior returns to shareholders, whether it be through strategic acquisitions or organic growth projects such as the Stage 3 Open Pit at Edna May Well publicised cost increases across the WA mining sector have eroded the returns on the Stage 3 Open Pit project to the point where they simply do not meet our internal hurdles,” MD Mark Zeptner said.

“Ramelius has a number of development options elsewhere in our portfolio and we will instead look to deploy capital in those directions for better financial returns at a later date. Our short-term focus remains centred on delivery of cash flows from current operations.

Finally, the ounces at Edna May are not lost but we will not mine them merely to fill out a production profile when the financial returns don’t meet our hurdles. However, by completing the permitting the Company maintains optionality.”

RMS expects to produce 240,000-280,000oz at AISC of $1750-1950/oz in FY23, improving to 250,000-290,000oz at $1500-1700/oz in FY24 and 250,000-290,000oz at $1400-1600/oz in FY25.

RBC’s Alex Barkley said it wasn’t a surprise and that Ramelius had already been “planning for life without the cutback”. But he says it could be developed down the line.

“RMS estimates the cutback would produce 293koz (down from 434koz in the scoping study), which would be a material increase to our Edna May LOM forecast of 290koz over FY23-26,” he said.

“Plus it would have the strategic merit of establishing a baseload ore supply. A hypothetical combination of a higher gold price, sufficient hedging and lower industry costs could one day see the cutback approved.”

Bucking the trend today was industry giant South32 (ASX:S32), up 1.31% after revealing its copper equivalent production increased 12% in the first half of FY23m, with operating costs expected to be in line or below FY23 “at the majority” of its mines.

South32 saw production rise quarter on quarter in December at every asset except its stake in the Sierra Gorda mine, where production fell 1% to 18,900t.

Production at its Illawarra met coal operations lifted 17%, with silver, lead and zinc production from the Cannington operation also sharply higher in the December quarter (though down ~13% for the half).

“Despite industry wide inflationary pressures, we expect Operating unit costs for the first half to be in-line with or below guidance for the 2023 financial year at the majority of our operations,” managing director Graham Kerr said.

“We remain focused on delivering safe and stable operational performance, and efficiencies to mitigate cost pressures and capture higher margins as markets improve.”