The transition to cleaner energy has led to price rallies for certain commodities considered essential to its production. Craig Hutchison, Director for Equity Research at TD Cowen, says uranium prices could benefit as countries consider nuclear power to reach their low emission goals.
Transcript
Greg Bonnell – The push for greener energy has driven the price rallies for commodities, such as uranium and copper, this year. But is that momentum set to continue? Joining us now to discuss is Craig Hutchison, Director for Equity Research at TD Cowen. For full disclosure on the companies covered by TD Cowen, please see the link to the website at the end of this program. Craig, welcome back to the program.
Craig Hutchison – Yeah. Thanks for having me back.
Greg Bonnell – We’ve have had a very interesting, I think, run in several key commodities since you were last on the program. I want to break some of them down. A bit of a green energy theme for some of them. Let’s start with uranium.
Craig Hutchison – Yeah. No, it’s been a very volatile Q2. So– in fact, for uranium, it’s been a volatile first half of the year. Uranium hit a 16-year high– $106 a pound back in February. Since then, we’ve retreated. We’re back to around $85 levels right now.
I think it’s important, just as you look at uranium to take a step back and kind look at the macro. You know, late last year you had that COP28, the climate conference. And in the past, nuclear really hasn’t been part of that conference, has really been more of a sideshow. And this year, it took center stage. * And you had, I think it was 22 different countries pledge to triple nuclear capacity by 2050. So it’s a huge statement. That includes Canada, the US, all the key Western countries. Obviously, we know China is building up their nuclear fleet. Layer on the fact that you’ve had some supply disruptions out of Niger.
I think more recently what’s really interesting is you’ve had this bipartisan support in the US. And there’s been the banning of nuclear fuel from Russia. And Russia is a major contributor to the nuclear fuel industry. I think they’re a little over 10% of the primary supply and close to 40% of all the enrichment capacity. So that’s going to be pretty disruptive to the market.
I think there are some people that expected the price to rally on the back of this, including ourselves. But I think there’s this just concern in the market, and people are kind of waiting for it, whether the Russians will counter those measures and actually ban nuclear fuel immediately to the United States.
Because right now, the US utilities actually have to apply for waivers to still acquire that Russian material because there’s obviously contracts in place, and they need that material. It’s difficult to shift away. But over time what I think you’re going to see is those US utilities are moving away from Russia, move to Western sources. And obviously that’ll be positive I think for uranium prices that we see quoted today.
I understand also the dynamics in the market, why it’s been weak. The spot market, which is very thinly traded. Sometimes only 100,000 pounds can move the market several dollars.
Greg Bonnell – There’s a lot of participants in the uranium trade.
Craig Hutchison – Exactly. There are financial players. And there are financial players that have gotten involved that I think– obviously, Sprott’s one of them. They’ve helped drive the price up to the levels we’ve had. But we’ve seen some– I understand some hedge funds and other financial players have sold some material, which has caused some of the weakness.
But I think as you look into the fall– the summer months are usually typically poor months for trading in uranium. It’s kind of the summer doldrums. As you go into the fall and the World Nuclear Association Conference in September, you’re going to see, I think, activity start to pick up in the term market, which is really what the utilities trade in. And I think you’ll see that. And hopefully, you’ll start to see the price start to tick back up again here in the fall.
Greg Bonnell – It does feel like when you talk about uranium and the fact that nuclear is back in the discussion of the green energy push, that it’s a longer term play as well. You do get the short-term fluctuations, and they have been dramatic. But as you look at 5, 10 years even beyond, the market I guess from the narrative today seems to have some support.
Craig Hutchison – Yeah. No, for sure. For sure. I mean, renewables are going to be a big part of the piece. You think of the solar. You think of wind. But the wind doesn’t always blow and the sun doesn’t always shine. So there’s a growing acceptance that nuclear is going to play a big part in that stable grid power.
And as you look further afield into this, I would say, the 2030s, Small Modular Reactors, or SMRs, have become an increasing part of the picture. Basically, those are, like the term would suggest, more modular. So the hope is that they cost less. They can be more streamlined in terms of the building process of that.
We’re still a few years away from that. But I think as you look to the future, the growth rate is going to be somewhere in that 3% to 4% range, which is quite robust considering the history we’ve had here the last 10 years.
Greg Bonnell – So that’s uranium. Obviously, another interesting commodity through the spring was copper. I felt like all these different commodities were taking their turns making record runs. What happened with copper?
Craig Hutchison – So there was a short squeeze in May. We saw prices hit 520. That’s an all-time high. It was quite temporary in nature. I would say that sort of squeeze lasted a few days. There was from what we understand, some traders that were kind of left short material on the COMEX. And there’s issues around again Russia again.
There was some ban on terms of the material in the LME sitting in the London exchanges. So you could take– you couldn’t take out that material and put it back on the COMEX. So they were caught short, and that caused the rally that we’ve seen. And obviously, prices have kind of pulled back from here.
If you look long-term, the copper market is still very strong. We’ve had supply constraints, and we can talk about this more. But supply constraints over the last sort of 9 to 12 months. And the demand growth profile going out is still 2% to 3%, driven by electrification of vehicles, solar or wind power, all these things that are very copper-intensive.
Greg Bonnell – There has been some discussion around EVs perhaps not being in as firm of a demand as they were before, even though, obviously, they’re still selling units. And Tesla’s (TSLA) latest numbers seem to be impressive. What does that market– did that sort of affect the copper mindset for a bit there?
Craig Hutchison – I think the market’s more been driven by supply disruptions. We’ve had the Cobre Panamá supply disruption, some cuts from Anglo American (OTCQX:AAUKF) as well. So EVs– certainly, adoption rate has been quite dramatic in China. But you’re right, it has slowed. So I think it’s less of a factor.
But as you look towards the balance of this decade, that whole electrification thing is going to become huge. I think it’s something in the order of 6 million tons of demand in a market that’s around 25 million tons. So it’s very material. But it’s going to take a little bit a while to get there.
Greg Bonnell – Yeah, the demand is there. But obviously, we’re having supply constraints. And it’s not as easy as just to turn on. I was having a discussion with a guest recently and say, if you’re talking about a commodity like wheat, well, then a farmer just says, well, next year I’ll grow more wheat. We’re not going to just suddenly take more copper out of the ground in 6 to 12 months– it’s a bit of a challenge there?
Craig Hutchison – Yeah. No, it’s difficult to start these mines up. There’s a lot of political risk. There’s a lot of factors that go into building these mines and getting them on schedule and budget. We’ve seen a lot of disruption in terms of geopolitical issues and stuff like that. And obviously, some protests around the Cobre Panamá mine.
So yeah. I think the supply is always the challenging thing to figure out, just in terms of those potential disruptions that you can get. So I think that’s going to be a big part of the narrative going forward.
Greg Bonnell – All right. Let’s switch to another commodity now that had its run and its day in the sun as well. Silver– what was happening there?
Craig Hutchison – Yeah. So I think last time I was on the show, I talked about the potential for silver and gold to run. And that really is on the view that interest rate cuts were coming. We still haven’t seen them. We haven’t seen them in the US, anyways.
I think what’s really been driving the market for silver and gold has really been purchases out of Asia– central bank buying, particularly China. Silver is a cheaper metal than gold. So obviously, there’s, I think, been a trade down into the less expensive metals. So more purchasing of silver, and from what we understand, family offices and wealthy individuals in China and other places in Asia have been buying the metal.
If you look forward, interest rate cuts has always been a good time to own these precious metals, and we still haven’t got there. So there’s potential we could see upside from here when those cuts start to happen.
Greg Bonnell – All right. Those are the commodities. What about the miners that take them out of the grounds? What’s the picture for them?
Craig Hutchison – Yeah, so Q2 is looking very strong from a margin perspective. Copper is– the price for copper– average in Q2 will be the second highest in history. So we should see margin expansion for copper.
And similarly with gold and silver. The gold price, I think, is up 13% quarter over quarter, and silver is up, I think, over 20% So you’re not seeing that kind of inflation bump quarter over quarter. So you will see margin expansion. You will see higher free cash flow in Q2. So it’s a very nice setup as we go into the Q2 earnings reports for both copper and the precious metal miners.
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