Sachem Cove's Primary Focus today is Nuclear Power

The Cycle Has Turned

Synopsis

We believe a near decade-long bear market for uranium miners has ended. Due to unsustainably low prices, the market is seeing significant production curtailments, no green-field project development, shrinking inventories, and reduced secondary supplies. As a result, the uranium market has entered a significant multi-year supply deficit. The price of uranium needs to almost double from today’s spot market levels and stay there for a sustainable period before the majority of miners can even contemplate restarting idled capacity or moving ahead with new project development. Even with the proper incentive price, the length of time to bring on new projects (2-10 years plus) needed to meet global increasing nuclear power demand will drive deficits for years into the future. On the demand side, numerous long-term contracts inked by utilities during the previous contracting cycle (2007-2011) are expiring at an accelerated pace, which is leaving the nuclear power utilities at dangerously low levels of inventory and threatening its biggest concern; security of supply.

Uranium Market Bottom

 

The spot price of uranium has declined about 75% from peak to trough. Uranium related equities have declined even more, or disappeared during this grueling, multi-year bear market. We believe the uranium market has bottomed and the equities of certain miners are dramatically mispriced.

 

Rising Demand - Nuclear Power is a Growth Business

 

Contrary to public perception, nuclear power (low enriched uranium is the fuel) is a large scale, 24/7, carbon-free source of electricity that provides 11% of global energy needs and helps satisfy climate initiatives. Driven by surging demand in the developing world, there are 54 reactors under construction today, totaling nearly three-quarters of a trillion dollars of in-process construction. We forecast demand for uranium to grow low single digits percent annually between 2020 and 2030.

 

Reduced Production

Mining at today’s prices is uneconomical for many of the world's uranium miners. Uranium miners are under water as extraction costs exceed both the spot pricing and the long-term price for most of the cost curve, by a large amount. This has led to reduced capital expenditures by miners on exploration and development as well as dramatic production cuts, totaling more than 20% of existing supply since 2017. There is not enough combined primary mine production and secondary supply to meet future demand.

 

Market Disruptor Displaying Discipline

 

In January 2017, Kazatomprom, the State-owned uranium producer of Kazakhstan, and its Joint Venture (JV) partners, which combined account for ~41% of global supply, announced a 10% production cut. Since, the Kazakh’s have announced a further 20% cut from planned production through 2021. Kazatomprom has floated 25% of its shares to the public in the last couple of years. Prior to floating its shares to the public, the company underwent a strategy shift driven by the view that shareholder value is best created by being a disciplined producer. In other words, value over volume. 

 

Legacy Contracts are Expiring

 

The uranium market is characterized by long-term contracts (7-10 years) between the miners and nuclear power utilities. The contracts entered preceding the March 2011 Fukushima nuclear accident are entering a phase of rapid expiry. Given the length of the fuel cycle (two years) and the lack of green-field development, utilities are putting security of supply at great risk without a commencement of long-term contracting in the short-term.

 

Equity Shortage

 

At the peak of the last bull market in uranium there were over 500 uranium miners. Today, we estimate there are only about 40 contenders for investor capital.

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