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Late last week, Cameco cut over 4 million pounds of U3O8 from its 2016 production guidance on the back of continued spot price weakness. This involved suspending and cutting output from Rabbit Lake and McArthur River/Key Lake in Saskatchewan, Canada, and curtailing production at its US in-situ recovery (ISR) operations.
The spot price of U3O8 dropped to US$27 per pound last week, but hit an 11-year low earlier this month, as excess inventory supplies continue to fulfil utilities' near-term needs.
This has forced Cameco into these moves.
Rabbit Lake is now expected to produce 1MIb in 2016, compared with the original 3.6MIb plan, while the US ISR operations are due to produce 1.1MIb, down from 1.4MIb. While the US operations will not cease entirely – due to mining and wellfield restoration requirements – output will continue to fall over time in line with lower head grades.
McArthur River/Key Lake is slated for 18MIb of U3O8 this year, down from 20MIb at the start of the year, with Cameco taking the opportunity from additional downtime at the mill to prepare it for a capacity increase “when the market signals it is needed”.
The token of positivity Cameco offered with this line and its declaration that Rabbit Lake and the US operations could come back online “when market conditions significantly improve” has been dampened by the reality of the situation.
If Cameco, which tends to sell via the more lucrative long-term contract market, has to shut down an operation like Rabbit Lake that benefits from Canadian dollar operating costs then there must be a lot of juniors struggling to make ends meet.
Then again, it could be interpreted as a ploy to speed up the expected market turnaround in the uranium space.
China and India’s reactor build plans over the next decade-and-a-half are expected to outpace any growth in uranium production, shifting the market from oversupply to deficit and boosting prices.
An output cut of 4.3MIb by Cameco is pretty sizeable when compared with global annual production of some 158MIb in 2015 and, if replicated by its peers, would force utilities back to the negotiating table to tie up long-term deals at higher prices.
David Talbot and Lilliana Paoletti of Dundee Capital Markets said as much: “This news should have positive ramifications for prices, and may foreshadow further high-cost centre closures.”
Not everyone agreed, though. Greg Barnes of TD Securities estimated prices would remain below $40/Ib through 2018 as the planned market turnaround was delayed.
Either way, the decisive action was appreciated by Cameco’s investors. Its New York-listed shares jumped 7% to $13.1/share following the announcement.
