Uranium producers prepare for market recovery

02 May 2017

Some of the world's leading uranium miners last week described major changes they have made in response to the protracted downturn in uranium prices. At the same time, they are positioning themselves for an expected pickup in demand.

Speaking at the opening session of the World Nuclear Fuel Cycle (WNFC) conference in Toronto, Canada, Cameco president and CEO Tim Gitzel noted that demand had started to fall soon after the March 2011 Fukushima accident in Japan. WNFC is an annual event organised by the World Nuclear Association and the Nuclear Energy Institute.

"It's been six years of tough times, I would say unsustainably low uranium prices, closing mines, watching friends and competitors struggle a bit, yet we remain hopeful and we're pushing for the future," he said.

Gitzel said Cameco's McArthur River and Cigar Lake mines, both located in Saskatchewan and owned jointly with Areva, produced around 18 million pounds and 17 million pounds U3O8, respectively in 2016, making them the world's two largest high-grade uranium mines.

Cigar Lake exceeded the company's expectations for the second year, he said. "We targeted 16 million pounds last year, we ended up with 17. And so, after many, many years - I think I’ve been working on that project for 25 years from different sides - we've got that up and running and that's going to be a good producer for many years to come."

Cameco reports Q1 loss

Cameco last week announced first quarter net losses of CAD18 million ($13 million) and adjusted net losses of CDN29 million, down from a net profit of CDN78 million and adjusted losses of CDN7 million for the same period in 2016. The company said severance costs related to strategic changes, the termination of its uranium supply contract with Japanese utility Tepco, continued market and price weakness, and strengthening of the Canadian dollar. CEO Tim Gitzel said cost and efficiency changes were "beginning to pay off" amid the uncertainty of a currently oversupplied uranium market.

On McArthur River's production figure last year, he said, "If it was a uranium-producing country, it would be the third largest uranium-producing country in the world. So, it's a great mine and it gives us the added benefit of being able to flex our production up or down in accordance with market conditions, so it's a really important asset for us."

However, as a result of Cameco's decision to lower production due to the weak market, McArthur River's 2016 production was 6% lower than in 2015 and 10% lower than the company's initial forecast for the year. "Cameco had to make some very difficult decisions which result in less supply," said Cameco Inc president, James Dobchuk.

"Gone are the days when we would talk exclusively about production growth," he said. "Today we have virtually all of our production coming from our low-cost mines and as today's prices continue I can tell you that those operations are getting stressed a bit as well."

Producers take the blame

As demand fell, Dobchuk said, supply has been "incredibly slow" to react to ever-lower prices. A number of factors contributed, he said, to the lack of response on the supply side: many suppliers had entered into long-term contracts "in better times" with an agreed price, and these contracts were still being fulfilled; secondly, currency devaluations have helped some of the big producing countries; and, there are "a lot of low-cost operations". These factors have "helped to insulate suppliers for a number of years", he added.

Jacques Peythieu, senior executive vice president at Areva's mining business unit said: "Spot prices have been divided by two last year, so nothing new for you, but we shall admit that last year at the beginning of 2016 no-one expected such a fall ... We have to recognise that we over-produce and we are responsible for this fall in the price."

However, noting that less than 50% of current production is profitable under current prices, and with higher-priced long-term contracts coming to an end, Peythieu said further measures would be taken to limit production. "If you don't want to destroy the value of your company by producing and selling at a low price, you will reduce your production and sell reserves [in] the meantime."

Peythieu described several measures Areva is taking in addition to the reductions in production at the McArthur River and Cigar Lake mines it shares with Cameco. Its Somaïr and Cominak mines in Niger are decreasing their production this year by 16% and 13% compared with 2015 - to 5.5 million pounds and 3.6 million pounds U3O8, respectively. And, noting KazAtomProm's announcement earlier this year of a 10% reduction in Kazakh uranium production, Areva's Katco joint venture in Kazakhstan is expected to lower production by 13% (relative to 2015) to around 9 million pounds U3O8.

Changing fundamentals

Such cutbacks have had a high impact on not only these companies' balance sheets. In Saskatchewan alone - where there are few alternative sources of employment in the area - Dobchuk listed significant workforce reductions at McArthur River and Cigar Lake (120 employees); in addition, there was a reduction of 500 in the workforce as a result of the company's decision to suspend production one year ago at its Rabbit Lake mine.

Nevertheless, market fundamentals are expected to improve for uranium producers over the next few years as a result of the 57 reactors currently under construction, some tentative signs of momentum picking up on the restart of Japan's nuclear units, and the need for a reliable source of low-carbon baseload power to help meet a projected 50% increase in electricity demand over the next 20 years.

"Until then we're going to need to focus more narrowly on the here and now," Dobchuk said. "For the time being at Cameco that means focusing on cost reductions, production flexibility and prudently managing our Tier 1 assets."

As part of its ongoing Transformation Program, KazAtomProm has established a trading office in Switzerland to buy and sell uranium on the spot market. Riaz Rizvi, chief commercial director at the Kazakh state-run company, told the conference the subsidiary, TH Kazakatom, will bring much needed liquidity to the market.

Researched and written
by World Nuclear News