Uranium prices skyrocketed, is CGN MINING(01164) benefiting from the momentum?

Under the stimulation of multiple factors such as geopolitical conflicts, green transformation, and climate actions, uranium prices have been soaring this year. Data from the nuclear industry market research and analysis company UxC shows that on September 15th, the price of uranium octoxide (commonly known as "yellowcake") reached $65.5 per pound. Uranium has outperformed other metals this year, with prices rising by 20% and a 12% increase in just the period of August to September. As the only listed uranium mining company in the AH market, CGN MINING (01164) naturally receives considerable attention. From its performance, since the beginning of 2023, CGN MINING has entered a volatile upward trend and has risen by over 85% during this period. As of the closing on November 14th, its stock price was at HK$1.5, with a current market value of HK$11.401 billion. So, from a deeper perspective, what development effects will this upward trend in uranium prices bring to CGN MINING? Uranium Mining Welcomes an "Upward Cycle" Uranium is a natural radioactive element with slight radioactivity. Uranium isotopes are unstable, with uranium-238 and uranium-235 being the most common. Uranium-235 is the only isotope that can undergo spontaneous fission. One kilogram of uranium-235 undergoing complete fission loses about 0.09% of its mass and releases energy equivalent to the combustion of 2,700 tons of high-quality coal, making it the absolute main "fuel" for global nuclear power. Currently, uranium is widely used in nuclear power generation and nuclear weapons production, with 99% of uranium being used in the production of fuel for nuclear power plants, and the remaining 1% being used in fields such as medicine. From the historical performance of uranium prices, as uranium prices continue to rise, the uranium industry is currently in a "volatile rising cycle," as follows: It is understood that before 2003, uranium prices fluctuated very little. After 2003, it can basically be divided into the following stages: the rising period (2004-2007), where the revival of nuclear power led to a unilateral rise in uranium prices; the declining period (2008-2016), where the subprime crisis and the Fukushima nuclear accident caused significant impact; the consolidating period (2016-2020), where low uranium prices suppressed capital expenditure and output; the recovery period (2021), where investment funds entered in large numbers and attention on nuclear power increased; and finally, the current period of volatile increase since 2022. Looking at the current upward cycle, it is easy to see that it is mainly driven by intensified geopolitical conflicts and the revival of nuclear power. Specifically, in 2022, Kazakhstan, the world's largest uranium producer, experienced large-scale protests. In February, the conflict between Russia and Ukraine broke out, and the supply of enriched uranium decreased due to the fact that TENEX, a subsidiary of the Russian Atomic Energy Corporation, is one of the few companies in the world that can commercially sell highly pure low-enriched uranium. In July 2023, a coup occurred in Niger, and major ore companies such as Cameco lowered their 2023 production guidance, resulting in a continued shortage of natural uranium supply. The security of nuclear fuel supply raised market concerns and the attitudes of political parties in European countries such as Finland, Sweden, and Germany turned, leading to a more optimistic market sentiment. Reflected in uranium prices, data from the nuclear industry market research company UxC shows that uranium prices have risen by 55% this year, reaching $74.5 per pound last week, the highest level since 2008. In comparison, gold has only risen by 7.7% this year. Industry insiders pointed out that the resurgence of the nuclear power industry has led to an increase in uranium demand, while the supply of uranium ore is insufficient, which is the main driving force behind the rise in uranium prices. In fact, from a long-term perspective, due to the impact of supply and demand gaps, the price of natural uranium may continue its upward trend. Under a neutral expectation, the World Nuclear Association predicts that global nuclear fuel demand will reach 130,000 tons by 2040. Specifically, according to the World Nuclear Association's "Nuclear Fuel Report: 2023-2040 Global Demand and Supply Scenarios" released in September, under low, medium, and high scenarios, the operable nuclear power capacity will increase from the current 391 GW to 486/686/931 GW by 2040. The demand for uranium fuel is expected to increase from the current approximately 65,650 tons to approximately 87,000/130,000/184,300 tons of uranium. At the same time, according to UxC's forecast for the second quarter of 2023, future uranium supply will reach a plateau in 2025-2026 and start to decline in 2030-2031. This is mainly due to the decline in the grade of productive mines and the gradual end of their service period. Supply is trending downward, and the long-term supply and demand gap is gradually widening. In this context, it is evident that the uranium mining sector is entering an "upward cycle," which undoubtedly brings significant development opportunities to related companies in this field. The "Joy" and "Worry" of Uranium Mining Leaders It is understood that CGN MINING is one of the listed subsidiaries of China's first and the world's third-largest nuclear power group, the China General Nuclear Power Group (CGN). It is also the only platform for investment and financing for overseas uranium resource development under CGN, making it the core target of the natural uranium industry. This also means that CGN MINING may gain development opportunities in this upward cycle. What is more important is that CGN MINING has multiple advantages. Firstly, it has a leading advantage in uranium resource production capacity. CGN MINING ensures a stable supply of uranium mines through its subsidiary companies, Xie Company and Ao Company, in Kazakhstan. According to the company's 2022 annual report, as of the end of 2022, the reserves of the Xie mine and the Yi mine in Xie Company were 9,190/13,966 tons of uranium, and the reserves of the Zhong mine and the Zha mine in Ao Company were 24,444/14,256 tons of uranium. As of 2022, the company's total uranium mine reserves were 61,900 tons, with equity reserves of 30,300 tons, ranking second only to companies such as Kazatomprom, Cameco, and Orano. Secondly, it has a leading advantage in production cost. As for costs, since the uranium deposits being mined in Kazakhstan are sandstone-type, they can be extracted using efficient, environmentally friendly, and low-cost in-situ leaching. According to the "Uranium Red Book," the global resources with mining costs below $40/kgU amount to only 775,900 tons, accounting for 9.80% of the total global resources. Among them, Kazakhstan has 502,000 tons of resources with mining costs below $40/kgU, accounting for 64%.70%. The current production costs of Xie Mine/Iron Mine/Middle Mine/Zha Mine in the company are 24.22/17.07/13.82/24.69/9.77 dollars per pound, which is significantly advantageous compared to other regions' mining costs.However, based on the company's recent performance, it seems that CGN MINING's growth ability is not very stable. According to relevant data disclosure, from 2018 to 2022, CGN MINING's core financial indicators have been relatively volatile. The year-on-year growth rates of revenue were -2.89%, 27.72%, 37.83%, 34.83%, -5.46%; the year-on-year growth rates of net profit attributable to shareholders were 94.72%, 31.08%, -2.99%, 15%, 188.47%; and the year-on-year growth rates of gross profit were -46.43%, 9.16%, 40.90%, -56.46%, 67.69%. (The data source is Choice) The instability of performance also implies a greater level of uncertainty for the company, making it difficult for investors in the secondary market to truly be convinced. In the first half of 2023, CGN MINING also presented a record of "increased revenue but decreased profit." During this period, benefiting from the increase in sales of the company's natural uranium products, the company achieved a revenue of 2.934 billion Hong Kong dollars, a year-on-year increase of 21.59%. However, the company's net profit showed a significant decline, recording a net profit attributable to shareholders of 180 million Hong Kong dollars, a year-on-year decrease of 49.4%. CGN MINING attributed the decline in net profit to the decrease in investment income and international trade gross profit. In the first half of 2023, investment income for Company A decreased by 102.723 million Hong Kong dollars, and investment income for Company B decreased by 35.242 million Hong Kong dollars. The main reasons include rising production costs and fines caused by early mining by Company A. The company's international trade gross profit also declined, mainly due to the use of weighted average method to measure inventory costs and the use of long-term trade contracts. The rapid rise in uranium prices in recent years caused the average inventory cost under low-priced contracts signed by the company before delivery to be higher than the purchase cost, thereby affecting the company's gross profit. In addition, the increase in financial expenses in the first half of the year was partly due to the interest rate hikes by the Federal Reserve. Based on the above, it can be seen that as a leading company in the uranium mining industry, CGN's performance is highly influenced by external factors. In the future, if there are fluctuations in international uranium prices, the nuclear power industry develops less than expected, uranium mining projects progress slower than expected, or the increase in uranium mining costs exceeds expectations, these factors may have a certain adverse impact on its performance. Therefore, whether CGN MINING can seize the opportunities in this upward cycle may still require time to test.