Kazatomprom Shocks Uranium (Again)

Gold pull backs as post-crash rally loses steam

Gold declined -0.6% to US$2,494/oz, spending a second week mostly above the US$2,500/oz level for the first time ever, as a post-crash market rally started to lose steam and the US PCE Price Index release was broadly inline with expectations.

Another Kazatomprom guidance price shock for Uranium

With the second shock to the uranium price in just a month coming from guidance changes from global market leader Kazatomprom, this week we look at its operations and valuations versus the number two player in the world, Canada’s Cameco.

Gold stocks down as metal and equities momentum fades

Gold stocks declined, with the GDX off -1.8% and GDXJ losing -3.7% on the drop in the metal and equities as the momentum of the post-crash rally started to fade with many of the factors causing the earlier decline still largely present.

Kazatomprom Shocks Uranium (Again)

Gold edged down -0.6% to US$2,494/oz and was above the US$2,500/oz for most of a second week, marking its longest run ever around this key level. The main US economic data release was the Personal Consumption Expenditure Price Index, which was broadly inline with consensus expectations, with the headline figure rising 2.7% yoy and the core number up 2.6%. The markets slowed overall as a two-week rebound from the market crash near the start of the month began to lose steam. The S&P 500 was up just 0.2%, the Nasdaq down -0.9% and the Russell 2000 lost -0.6%. This dragged down gold stocks, with the GDX down -1.8% and GDXJ off -3.7%.

There is potential for a further pullback in markets, with the main factors that propelled the crash, including high interest rates and very elevated equity valuations, still present. There could be some degree of relief from the Fed joining an ongoing shift to global rates cuts over the next few months, and these expectations have been a key driver of the recent rally. However, even with a 50 bps cut this year, rates will still remain high. While inflation continues to decline, it is still about a percent above the 2.0% targets of the both the Fed and the European Central Bank, which could hold back any aggressive cuts through the rest of this year and well into 2025.

Markets could be cautious until US rate decision and election in November

For the gold price, there could be a pause short-term with the metal having gained about US$200/oz over two months and potentially settling into a new range. It is still unclear whether this range will center around an average of about US$2,250/oz that has held so far this year, or whether it will break through to something centered around US$2,500/oz, involving moves towards US$2,600/oz or higher at the upside. The major driver that could push gold into this second, higher range, would be an actual Fed rate cut, and not just the market’s ephemeral expectations for one.

A cut looks unlikely at the September 18, 2024, Fed meeting, with a probability of under 40%, but this rises to 100% for the November 7, 2024 meeting. This means that if the markets are awaiting a US rate cut to move more heavily into gold, that there could be range bound trading for another two months. The other big driver could be the outcome of the US presidential election, which will also be in the first week of November 2024. This could also cause markets to hold off on major moves for gold, other metals and equities, as they await these huge catalysts.

Another Kazatomprom guidance announcement shakes uranium price

This week we look at the two major global uranium producers, after the second shock to the metal price in just under a month. This came from Kazakhstan’s Kazatomprom, by far the largest global producer of the metal, which on August 23, 2024, slashed production guidance for 2025 around 17%-18% to a range of 25.0k-26.0k tonnes (Figure 4). This followed an announcement on August 1, 2024 that it was increasing its 2024 production guidance by about 4%-5% to 22.5k-23.5k tonnes.

The uranium price briefly jumped on the new guidance but rapidly declined back near its lows for the year, after the announcement at the start of August 2024 drove a considerable drop in the price (Figure 5). The price has pulled back this year from a long-term uptrend that started in 2018, went parabolic in 2023, and peaked in January 2024 at over US$100/oz. While this has been driven by a secular upswing in support for nuclear power, even as a part of green energy plans, there was a degree of speculative froth in late 2023 and the price is down over 15% this year (Figure 6). However, there was some clear fundamental support for the H2/23 run up in the price, with the expected 2024 deficit for the industry widening from -13k tonnes from Q1/23 to Q3/23 to -25k tonnes for Q1/24 and Q2/24 (Figure 7). Australia’s Office of Chief Economist (AOCE) expects a rebound in the price to US$92.8/oz for 2024, for a 49% gain year on year, and a more gradual rise to US$101.4/oz in 2026 (Figure 8).

The only moderate price gains for the next two years are expected to be driven by an easing deficit in the market, from -25k tonnes in 2024E to -14k tonnes in 2025E and -12k tonnes in 2026E (Figures 9, 10). Underlying this is an increase in supply from 70k tonnes in 2024 to 78k tonnes in 2025 and 83k tonnes in 2026, while demand is forecast to be relatively flat, at 95k, 92k and 95k tonnes over these same three years.

Kazatomprom and Cameco lead the global uranium market

While Kazatomprom is the largest global producer by far, its production is split across several mines (Figure 11). The number two global producer, Canada’s Cameco, has more concentrated output mainly in two mines, including by far the world’s largest, Cigar Lake, with output of 6,928 tonnes of uranium, or 14% of the 2022 global total. The company owns 54.5% of Cigar Lake, with another 40.5% held by France’s Orano. Kazatomprom’s production growth has improved considerably over the past few years, from a low of -2.7% in 2022 to a forecast 8.9% in 2024E and 12.0% in 2025E (Figure 12). However, this is far surpassed by Cameco’s growth, jumping from -32.2% in 2021 to 70.5% in 2022 and 69.2% in 2023 as it reopened the MacArthur River Mine, with the surge expected to continue in 2024E with an 87.5% rise (Figure 13).

Big Uranium operations forecast to remain strong into 2025

The market is forecasting that operations for the two Big Uranium companies remain relatively strong through this year and into 2025. While revenue growth is expected to slow for both from an outstanding 2023, Kazatomprom’s sales are forecast to increase 23% and 19% in 2024E and 2025E, respectively, with 18% and 8% for Cameco over the same periods (Figure 14). Margins for Kazatomprom are expected to improve from an already robust 38% in 2023 to 41% and 44% in 2024E and 2025E, respectively. There has been a much more dramatic improvement in Cameco’s margins from just 1% in 2022 to 11% in 2023, with a continued to rise to 15% forecast for 2024E and to 32% by 2025E, with it starting to close the gap with Kazatomprom.

While valuations for Kazatomprom look subdued in the context of Cameco’s huge swings, they have also been through a major cycle. Kazatomprom’s price/earnings ratio was at just 3.6x in 2018, peaked at 19.9x in 2021, is at 9.5x for 2024E and is expected to decline to 8.0x for 2025E (Figures 16, 17). The EV/EBITDA multiple, a cashflow measure, at 5.0x for 2024E, is at its lowest level of the past seven years, and is expected to decline to just 4.2x for 2025E.

Cameco’s negative or very low earnings from 2019 to 2023 has made its price to earnings and EV/EBITDA ratios not particularly meaningful, and any averages taken from these figures would not be reliable benchmarks for appropriate valuations ranges for the company. While the trend over the past three years has been a substantial decline in the multiples, a price to earnings of 27x and price to book of 12x still are still reasonably high.

Kazatomprom’s strong revenue growth, steady margins and muted valuations has seen it hold up well even as the uranium price has declined over the past five months, losing just -10% (Figures 18, 19). The rest of Big Uranium are down over -20%, with NexGen Energy losing -21% and Cameco declining -23%, while Uranium Energy has fallen -27%. Cameco is likely seeing some pressure still from relatively high valuations, and its strong expected margin improvement in 2025E has yet to be delivered, while Kazatomprom is already operating at these high margin levels.

Most large producers and TSXV gold decline

Most of the large producers and TSXV gold stocks declined as the metal price and equities pulled back (Figures 20, 21). For the TSXV gold companies operating domestically, Snowline Gold reported drill results from the Valley Zone of the Rogue Project (Figure 22). For the TSXV gold companies operating internationally, Minera Alamos reported Q2/24 results and an update on Q3/24 operations (Figure 23).