Could Cameco suspension kick-start the uranium sector?
By Peter Kennedy
Cameco Corp. [CCO-TSX; CCJ-NYSE] is temporarily suspending production at its Cigar Lake uranium mine in northern Saskatchewan. It said the move is a safety precaution that stems from the threat posed by the Coronavirus [COVID-19] pandemic.
Cameco is one of the world’s leading uranium producers. Cigar Lake is the globe’s largest operating uranium mine and represents 100% of the company’s current output of 9.0 million pounds. Cigar Lake also accounts for 13% of the world’s mine supply and 10% of total supply, including secondary material.
As result, the suspension at Cigar Lake is being viewed by analysts at Scotiabank as a potential turning point for the uranium sector, which has been locked in a bear market since a 2011 earthquake and tsunami in Japan disabled three reactors at the Fukushima nuclear plant, causing their cores to melt down, forcing Japan to shut down 50 nuclear reactors that remained intact.
Spot uranium is trading this week at US$24.10 a pound. That is down from US$72.63 a pound just prior to the Fukushima disaster, which prompted major producers like Cameco and Kazakh state-owned KazAtomProm, to shut down production and announce indefinite layoffs.
In November 2017 Cameco said it was temporarily suspending production at the McArthur River and Key Lake operation in Saskatchewan. It attributed the move to the continued state of oversupply in the uranium market and the expectation of little change in the immediate future. McArthur River remains on care and maintenance.
In a press release that came after the close of trading on March 23, 2020, Cameco said the Cigar Lake operation will be ramped down over the coming days and placed into care and maintenance for four weeks. During this time, Cameco will assess the status of the situation and determine whether to restart the mine or extend the care and maintenance period.
Cameco shares advanced on the news, rising 4.8% or 44 cents to $9.46. The shares are currently trading in a 52-week range of $7.70 and $16.24.
This supply shock, if extended beyond four weeks, has the potential to become the turning point in a 10-year bear market, said Scotiabank analyst Orest Wowkodaw in a research report.
“Given low inventories, the closure will increase Cameco’s required market purchases (current guidance 20-22 million pounds) to meet its significantly higher 2020 sales commitments (28-30 million pounds guidance),” Scotiabank said.
Cigar Lake ore is processed at Orano Canada Inc.’s McClean Lake mill, also located in northern Saskatchewan. The decision to suspend production at Cameco’s Cigar Lake mine was made in conjunction with Orano to suspend production at their McClean Lake mill.
Cameco said the decision will affect 300 highly skilled employees at Cigar Lake, with about 35 expected to remain on site to keep the operation safe.
As of March 21, 2020, total packaged production from these operations for 2020 was about 4.0 million pounds (100% basis, Cameco’s share 50%).
“We are in unprecedented and challenging times,” said Cameco President and CEO Tom Gitzel. “In the face of great uncertainty, our first priority is to protect the health and well-being of our employees, their families and their communities,” he said.
“Our leadership team took a measured approach and weighed many factors in assessing the situation both globally and locally to make this decision, which takes into account the specific and unique circumstances at Cigar Lake, a remote, isolated fly-in/fly-out northern Saskatchewan operation.”
Meanwhile, shares of a number of other uranium companies rallied on the news. CanAlaska Uranium Ltd. [CVV-TSXV; CVVUF-OTCQB, DH7N-FSE] jumped 13.6% or $0.015 to 12.5 cents. CanAlaska is a uranium exploration company with a very large land position in the Athabasca Basin. The shares trade in a 52-week range of 10 cents and 32 cents.
NexGen Energy Ltd. [NXE-TSX; NYSE American] advanced 12.50% or 10 cents to 90 cents. The shares trade in a 52-week range of 76 cents and $2.46. NexGen is developing one of the world’s largest uranium deposits on its Rook 1 property in the Athabasca Basin and is currently in process of feasibility and environmental assessment under the Canadian Environmental Assessment Act 2012 (CEAA).