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Uranium’s upside skew: Analysts bullish on uranium market

Global investment firm Morgan Stanley & Co. International plc+ has released a new report highlighting the bullish outlook for the uranium market. The report suggests that while uranium prices have already reached levels close to their forecast for the second quarter of 2024, there is still significant potential for further upside in the coming months.

Amy Gower, Commodities Strategist at Morgan Stanley, and her team of analysts including Chris Jiang, Helen Amos, Walid Hasanzadeh, and Martijn Rats, see several factors contributing to the positive outlook for uranium prices.

Current Uranium Price and Upside Potential

As of now, uranium is trading at $92.5 per pound, just 2.5% below the firm’s Q2 2024 price forecast of $95 per pound. However, the analysts at Morgan Stanley believe that there is a growing likelihood of an overshoot in uranium prices due to various factors, including fundamentals and financial considerations. They have set a bullish case of $119 per pound as the average for FY24.

Increasing Utility Contracting and Spot Activity

One of the key drivers for the uranium market is the rise in utility purchases of uranium through long-term contracts. After a decade of relatively low activity, 2023 saw the highest contracting volumes since 2012. This trend is expected to continue, driven by nuclear plant life extensions in Europe and the emergence of new nuclear startups worldwide. In addition to long-term contracts, spot activity has also been on the rise, partly due to production shortfalls in countries like Canada, Kazakhstan, and Niger.

Financial Factors

While financial flows, such as physical ETFs like Sprott, played a significant role in the uranium rally in late 2021 and early 2022, their activity has diminished recently. This suggests that the current rally is being primarily driven by real supply and demand imbalances rather than financial speculation.

Supply Challenges

The report highlights various supply challenges in the uranium market. These include the military coup in Niger, which disrupted supply, Cameco’s downward guidance revision for 2023, and cautious messaging from Kazatomprom, a major uranium producer. Kazatomprom had plans to increase production in 2024 and 2025 but has raised concerns about securing raw materials and construction delays, potentially leading to a deficit in 2024 and 2025.

Equities and Investment Opportunities

Chris Jiang, Equity Analyst at Morgan Stanley, suggests that uranium miners are likely to be long-term beneficiaries of the uranium market’s bullish cycle. He specifically mentions CGN Mining as well-positioned due to its low production costs, its unique position in the Chinese market, and potential asset injection from its parent company, the largest nuclear power group in China.

On Monday, Boss Energy (ASX:BOE) and Paladin Energy (ASX:PDN) both experienced significant gains, with Boss Energy increasing by 9 percent to $5.55 and Paladin Energy rising by 9.1 percent to $1.30.

These gains were driven by the news of the US’s increased efforts to establish a sovereign supply of uranium, reducing reliance on Russian exporters.

Year-to-date, the top-performing stocks on the ASX All Ordinaries benchmark are primarily focused on uranium. Infini Resources (ASX:I88), a uranium and lithium explorer, made its ASX debut with shares rising by 90 percent.

Energy Resources of Australia (ASX:ERA), which operates a long-standing uranium mine, is the best-performing stock, up 62 percent since January 2, with a significant boost of more than 30 percent on Monday alone.

This rally is causing added pressure on hedge funds that have short positions in Deep Yellow (ASX:DYL), the ASX’s fourth most shorted stock, which has seen its stock price rise by more than 40 percent since hedge funds began betting against it in December, driven by speculation that the company will need to raise capital for its uranium projects.

In the small cap space, Laramide Resources (ASX:LAM) primarily concentrates on exploring and developing high-quality uranium assets in both Australia and the United States.

Cauldron Energy (ASX:CXU) is an exploration and development company with a strong commitment to discovering and exploring minerals essential for a more sustainable environment.

The company boasts a diverse portfolio of projects across Australia and has notably achieved significant exploration success at its Yanrey Uranium Project, where the Bennet Well resource is located. This resource has a global Uranium Resource of 38.9 million tonnes at 360 ppm eU308 (JORC 2012), highlighting Cauldron’s dedication to critical mineral exploration.

In conclusion, while uranium prices have surged and are nearing Morgan Stanley’s Q2 2024 forecast, the firm’s analysts believe that the uranium market still has room for significant upside. Factors such as increasing utility contracting, rising spot activity, and supply challenges are expected to support further price growth in the uranium sector.