Japanese nuclear re-start is the key for higher uranium prices

With spot uranium oxide prices in the third quarter averaging US$35.95 per lb. — down from US$66.50 per lb. before the Fukushima Daiichi nuclear power-plant disaster in March 2011 — it is no surprise that uranium producers in Russia and Kazakhstan have called off plans to expand uranium output. 

In mid-November, Atomredmetzoloto, the mining arm of Russia’s state-owned reactor-builder and supplier Rosatom — which took over Canadian miner Uranium One earlier this year — confirmed that low uranium prices were forcing it to suspend expansion projects around the world, including at its Honeymoon mine in southern Australia.

That announcement came a week after Kazakhstan’s state-owned uranium producer Kazatomprom — the world’s largest uranium miner — said it would not increase uranium output.

The negative sentiment is the same in North America, where on Nov. 14, Energy Fuels (TSX: EFR), the only conventional uranium producer in the U.S., said it plans to discontinue uranium oxide (U₃O₈) production at its White Mesa mill from next August until the latter half of 2015.

The moves are seen by mining analyst David Sadowski of Raymond James in Vancouver as something of a watershed moment in the industry — unlike the 80 million lb. U₃O₈ sitting in the development pipeline that have been shelved since mid-2011 — such as Areva’s Trekkopje project in Namibia and its Imouraren project in Niger, and BHP Billiton’s (NYSE: BHP) US$30-billion Olympic Dam expansion project.

“This is the first time that meaningful cuts to growth at existing operations have been announced, and that’s a fundamental change in the response of current producers,” Sadowski explains in an interview.

At the same time, he adds, there is “incrementally positive” news trickling out on the demand side, ranging from the U.K. pushing forward “its wave of new builds” to the five reactors under construction in the U.S., China ramping foreign-reactor vending and India appearing “more willing to bend on its liability law,” which is the main hurdle for its build plans. He says Russia is also confirming its growth in nuclear-reactor building through 2030, and news out of South Korea and France is giving comfort that “their heavy reliance on nuclear power will continue into the future.”

With the slowdown in production and a slight improvement in demand, Sadowski forecasts that a uranium supply shortfall should emerge in 2017. “The market is currently oversupplied, certainly, but we see that changing in the next couple of years, and that should also apply upward pressure on the price.”

The supply shortfall could be brought forward to as early as 2015, he adds, if there are further closures next year at major mines, such as Paladin Energy’s (TSX: PDN; ASX: PDN) Kayelekera mine in Malawi and Rio Tinto’s (NYSE: RIO; LSE: RIO) Rossing mine in Namibia, as a result of market conditions and low uranium prices.

“We now forecast the global uranium surplus extending only through 2016 versus 2019 in our previous model, followed by two years of tight supply and demand, before large supply deficits emerge by 2019, quickly growing to crisis levels in the new decade.”

These events should help lift uranium oxide above its spot price of US$36 per lb. — which is just US$2 per lb. above the eight-year low of US$34 per lb. that it traded at in September 2013 — and closer to the US$70 per lb. that Sadowski believes is the minimum price needed to incentivize companies to kick-off new uranium projects. Typically, he says, it takes between three and five years to build and commission a conventional uranium mine, and between two and three years for the same at an in-situ leach operation.

“If you’re a potential developer and you need to know whether or not to develop your asset and deploy capital to build your project, you’re going to want to have comfort that the price is going to maintain its strength — that it gets to US$70 per lb. and stays there,” Sadowski adds. “I think it could happen towards the end of 2015, which we think is going to be a big year of price run-up.”

Rob Chang, an analyst covering uranium at Cantor Fitzgerald in Toronto, argues that “demand is not as fragile as some people worry about,” and forecasts that it will far outstrip supply, especially with reduced expansion plans in Kazakhstan and Russia, the world’s No. 1 and No. 3 uranium producers.

“Based on our numbers, there’s an unavoidable deficit in 2019,” he says, arguing that it takes seven to 10 years for a uranium project to go from a greenfield discovery to a producing mine.

Both analysts agree that one of the catalysts for uranium prices to move higher is the restart of Japan’s nuclear reactors, which is likely to begin in 2014.

About a dozen reactors have had applications submitted to undergo pre-restart inspections, and a handful of them are going through them now, Sadowski points out. He expects the first restarts will take place in mid-2014, with several more in the second half of 2014 for a total of between six and eight reactors back online before the end of next year.

“There’s no guaranteed certainty [that the restarts will happen next year], but there are some factors that make it pretty sure in our minds,” Chang says. “First, the current government in power is the same one responsible for the build-out of Japan’s nuclear program, and second, you have a country struggling economically. It is expected that in the fiscal year ending in March 2014, Japan has had to spend about US$75 billion to import power to generate electricity, which is about twice what it was three years ago.”

Sadowski notes that before the Fukushima disaster, nuclear energy provided Japan with 30% of its electricity needs, and since then the country has had to rely on importing costly fossil fuels. In November Japan abandoned its greenhouse gas-reduction targets, largely due to a reduced amount of electricity generation coming from nuclear, and with the Japanese yen depreciating against the U.S. dollar, its fuel-import costs are soaring. “Japan has had several trade deficits since Fukushima, and a large reason for that are its large imports of fossil fuels,” he says.

Patricia Mohr, Scotiabank’s vice-president of economics and a commodity-market specialist, points out that the higher energy costs have led to the loss of manufacturing capability in Japan, with manufacturers moving their manufacturing plants to lower-cost countries in Southeast Asia, such as Thailand.

She notes that 10 to 15 million lb. U₃O₈ under contract with Japanese utilities are being deferred annually, with some resold. 

“The real issue in the uranium market these days is the fact that Japan has 50 nuclear reactors that continue to be shut down, so any real kind of meaningful increase in price really awaits the restart,” she says. “Japanese utilities have applied to Japan’s new Nuclear Regulation Authority to restart 14 reactors. While local public concern is the main obstacle, 10 could possibly be restarted by the end of 2014 — triggering a price recovery.”

While she concedes that any restart is “not for sure” and there are still “quite big risks in the uranium industry for investors,” she hopes that the spot price of US$34 per lb. last seen in mid-September will turn out to be the bottom of the market.

Mohr forecasts spot uranium will average US$38 per lb. in 2013, and stay at that level until the fourth quarter of 2014, when it will be closer to US$45 per lb. In 2015 she expects a price improvement of over US$50 per lb. “I think that the next 18 months are still going to be fairly lacklustre,” she says. “I don’t think we’re going to find a lot of final investment decisions for new mine development until it does get up over US$50 per lb.”

Chang of Cantor Fitzgerald forecasts average uranium prices will hit US$49.50 per lb. in 2014, and make a big jump to US$66.25 in 2015 and US$70 per lb. in 2016.

Sadowski of Raymond James believes spot uranium should average US$45 per lb. in 2014 — strongest during the second half — and rise to US$56 per lb. in 2015 and US$70 per lb. in 2016.