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Uranium stocks are jumping today after Kazakhstan's state-owned uranium miner, Kazatomprom, announced that it will reduce output 20% for the next three years beginning in January 2018. Why is that significant? Well, Kazakhstan is by far the world's leading supplier of uranium, accounting for nearly 40% of global production.
The rare bit of good news is lifting uranium mining stocks. As of 2:19 p.m. EST, shares of Cameco (NYSE: CCJ) are up 12.9%, Denison Mines (NYSEMKT: DNN) stock has jumped 12%, and shares of Uranium Energy Corp (NYSEMKT: UEC) have gained 11.2%.
Uranium stocks have had a rough existence in recent years thanks to a grossly oversupplied market and questions surrounding the long-term growth prospects for nuclear power across the globe. So, today's news out of Kazakhstan is certainly positive, especially considering how it connects to recent developments.
Kazatomprom's commitment to significantly slash production follows Cameco's recent announcement that it will take its mine at McArthur River, the world's largest, offline for 10 months. Mr. Market is clearly optimistic that the world's uranium titans are working together to rebalance the market and provide a price floor.
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However, investors should remember that production cuts won't be a magic cure for the industry. After all, Kazakhstan reduced 2017 production by 10% compared to 2016 levels, which had virtually no effect on uranium prices this year. Reducing supply is a sign of a weak market.
While I don't find many reasons to be bullish on the long-term health of the uranium or nuclear power industries, there is a potential silver lining for Cameco investors. The bulk of its long-term supply contracts expire by 2021. Customers (nuclear power plant operators) have been hesitant to sign new long-term supply agreements because, well, uranium prices have only fallen in recent years, so what's the rush to lock in today's prices when tomorrow's could be lower?
If today's news provides a sustainable rise in uranium prices in the next year or so, then it could prompt customers to finally sign long-term supply agreements. That would provide a higher degree of long-term certainty for Cameco shareholders.
The just-announced production cuts from Kazakhstan will have more impact if investors receive bullish news on the nuclear power front. Right now, that crystal ball is a little cloudy.
Japan, which could provide the biggest near-term boost by restarting its shuttered reactors, continues to take its time granting regulatory approvals. The United States doesn't appear likely to build new nuclear capacity anytime soon (if ever). It seems more likely that retiring reactors will offset growth from new reactors starting up, which doesn't bode well for uranium producers in the next several decades.
Nonetheless, removing excess supply from the market is the first step to a recovery in selling prices, even if long-term uranium demand remains the same. Depending on how quickly and significantly the production cuts affect selling prices, today's news could be a big catalyst for Cameco's near-term health by encouraging customers to sign new long-term supply contracts.
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