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Morningstar | Proposed U.S. Tariffs on Uranium Imports Would Be Hard to Justify; No Change to Cameco’s FVE

On July 18, shares of Cameco were down nearly 4% at one point during the trading day, following the announcement that the U.S. Commerce Department would open an investigation into uranium imports. The investigation is required after two U.S. uranium miners, Energy Fuels and Ur-Energy, filed a petition under Section 232 of the Trade Expansion Act of 1962. In the petition, the miners claimed that U.S. dependence on uranium imports threatens national security--40% of U.S. uranium demand was supplied by state-owned and -subsidized companies in Russia, Kazakhstan, and Uzbekistan. The petition seeks the imposition of a requirement that 25% of U.S. uranium demand be supplied by U.S. mines.

We view the temporary sell-off as unwarranted, and we reiterate our fair value estimates of USD 17 and CAD 22 per share for narrow-moat Cameco. Uranium prices have increased nearly 10% since April as production discipline has helped address market oversupply. We continue to see further price increases ahead, indicative of an improving environment for Cameco.

We think it’s unlikely a tariff will be enacted, as we see little merit in the arguments laid out by Energy Fuels and Ur-Energy. First, the key reason production from Kazakhstan has grown so much over the last decade is because it simply is home to low-cost uranium deposits. Roughly 12% of global reserves are found in Kazakhstan, second only to Australia. In addition, in situ recovery and easier regulations, rather than government subsidy, have facilitated more rapid development of low-cost production.

Second, national security concerns seem unfounded given that the global uranium market is in oversupply and given that the two companies filing the petition claim that they can scale-up production quickly, if needed. Additionally, uranium could come from underfeeding, re-enrichment, or from Japan’s built-up inventory until mines expand production. This would seem to minimize concerns about a potential uranium shortage in the U.S.

Recent U.S. Section 232 investigations into steel and aluminum imports led to blanket tariffs of 25% and 10%, respectively. Like the fallout from steel and aluminum tariffs, any uranium tariffs will likely drive a wider gap between U.S. uranium prices and global marginal cost. While this outcome could potentially provide windfall profits for uranium miners in the U.S., the overall impact on our outlook for Cameco would be modest. The quota requested by the petitioners would only impact 5% of the current global supply, an amount that will be dwarfed by incremental Chinese demand in the coming years.

Although the uranium investigation is similar to the steel and aluminum investigations, we think differences in political implications will yield a different outcome.

First, improvements for the uranium mining industry are unlikely to garner the same impact. Most U.S. mines utilize in situ recovery, a less-labor intensive process than underground mining. This minimizes the number of jobs that could be created by the proposal. With far fewer potential beneficiaries versus the steel and aluminum tariff program, the political benefits would be far less attractive to the Trump administration.

Second, any gains for the U.S. miners would come at the expense of U.S. nuclear operators, as this would likely result in higher uranium prices in the U.S. This would only add to the challenges that nuclear generation already faces in the U.S. and could potentially result in higher power prices for end consumers.

For details on our long-term uranium supply and demand forecasts, please see our May 2017 report, "Cameco: Down but Not Out."