Russia's war on Ukraine is upending the global uranium market to the benefit of Canadian producers of the nuclear fuel, according to an analyst at RBC Capital Markets. Andrew Wong predicts shares of Cameco (CCO)(CCJ) and NexGen Energy (NXE.TO)(NXE) have more room to run after climbing more than 40 per cent so far in 2022.
For decades, Russia has been a significant player in the global uranium supply chain. The United States, for example, imported 16 per cent of its uranium directly from Russia in 2020, and 22 per cent from Kremlin-allied Kazakhstan, compared to the 22 per cent it imported from Canada that year.
Wong sees Western-aligned markets like the U.S. and European Union cutting reliance on Russian enrichment, adding to a prolonged deficit that he expects to deepen to 70 million pounds annually in the 2030s, as demand outstrips supply.
Wong upgraded Cameco shares to "outperform" from "sector perform" on Monday, raising his price target to $50 from $30. He gave NexGen a similar re-rating, with a price target boost to $10 per share from $7.
"We believe the Russia/Ukraine war, and subsequent shift in Western markets away from exposure to Russia, have fundamentally changed the uranium market outlook and long-term market structure," Wong wrote in research published on Monday. "More importantly, we see a severe deficit in the Western-aligned markets, which could result in a price premium for Western production as geopolitical concerns rise and product origin becomes more important."
The trend has also been observed by nuclear industry researcher UxC, who recently noted the potential for "huge swings in supply and demand fundamentals," and changes to how utilities manage their uranium contracts that could "shape the industry for years to come."
RBC increased its long-term uranium price forecast to US$65 per pound of uranium concentrate or U308, up from US$50. The bank raised its 2035 demand forecast by 15 per cent for the West, and 10 per cent globally. RBC also lowered its global supply expectations by three per cent.
Wong says Saskatoon-based Cameco, the world's largest publicly-traded uranium company, is well-positioned to navigate the expected market transition. He points to the company's McArthur mine, which has an annual production capacity of 25 million pounds per year.
For Vancouver-based NexGen, Wong says the company's Arrow project in Saskatchewan may be "well-timed" to coincide with the expected uranium deficit in the late 2020s and early 2030, assuming necessary permits are secured.
Uranium stocks have been strong performers in 2022, making good on predictions from industry insiders and investors at the start of the year.
Toronto-listed Cameco shares have climbed 40.5 per cent year-to-date. The stock was up 0.93 per cent at $39.10 as at 2:41 p.m. ET on Tuesday. NexGen's Canadian stock climbed 0.51 per cent to $7.92, adding to a 42 per cent gain so far this year.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.