Uranium price will rebound: analysts (Part 1)

“A roller coaster ride” would be one way to describe the uranium spot price in recent years, rising to US$136 per lb. uranium oxide last year from less than US$10 per lb. in 2001, before falling to US$45. Analysts now forecast that prices will go up in the medium- to long-term due to strong fundamentals for the radioactive metal.

Gene Clark, CEO of Denver-based uranium consultancy TradeTech, says that the reason spot prices have gone so high was not just demand from utilities for use in power generation, but also investment demand from speculators hoping to profit from a price hike. As a result, the spot price overshot. He points out that the uranium market is relatively small, with an annual consumption of 170 million lbs. uranium oxide, worth about US$6 billion, so it is sensitive to even small changes in supply and demand.

The price has since declined to a level which, in Clark’s opinion, is below where it should be. One reason is that, as prices went up, utilities stopped buying, while at the same time more supply came on the market. Another reason for this dive is the crash in financial markets, which forced a number of investment funds and hedge funds holding uranium to liquidate their holdings to raise cash.

Taking advantage of low prices, utilities have been discretionary buyers on the spot markets, and are continuing to buy “on the quiet”, but there is sufficient supply to meet spot market demand.

However in the longer term Clark sees “a perfect storm” which could be a catalyst for higher uranium prices because of the difficulty in bringing new mining projects on line. There are two reasons for this: firstly, low prices make some new projects either marginal or entirely uneconomic, and secondly, even when a project is economic, it is harder to finance it now that financing has become more scarce. The bottom line is that the number of new mining projects coming on stream will fall short of what is anticipated, constraining supply and creating an upward pressure on price.

In the face of scarce financing for new projects, it is possible that nuclear reactor makers could get involved in new mine development to ensure uranium supply, via takeovers, joint ventures or strategic alliances. As an example of a uranium miner becoming more vertically integrated with other links in the nuclear market, Clark points to miner Kazatomprom in Kazakhstan, which now owns 10% of Pittsburgh-based reactor maker Toshiba-Westinghouse. Kazatomprom is also talking to Cameco (CCO-T, CCJ-N), the world’s largest uranium miner, about a possible conversion plant in Kazakhstan. And it could be a partner in a proposed international enrichment plant in Angarsk, Russia. Another example is Wilmington, NC-based Global Laser Enrichment, where reactor maker GE Hitachi Nuclear Energy is partnering with Cameco (T.N.M June 30-July 6/08).

Another way the industry could address the dearth of new projects is by majors such as Cameco and Areva (ARVCF-O) buying up juniors which own deposits in the vicinity of their existing mills.

Clark does not project spot prices taking off substantially next year, because of adequate supply. The picture changes from 2010-2011 onwards, when new mining projects which are supposed to be producing, will not come on line, pushing up prices.

Clark says that short-term buyers from China and India do not access the spot markets, preferring to buy from Kazakhstan and Uzbekistan. Commenting on Cameco’s Cigar Lake mine in Saskatchewan, currently on hold owing to water seepage problems, Clark assumes that it will be mined eventually.

Another mega-project is the expansion of Olympic Dam mine in Australia, owned by BHP Billiton (BHP-N, BLT-L). Capital costs for this expansion are high, and since the mine also produces copper, project economics also depends on the market for the red metal. BHP may decide on a stagewise expansion, but a decision is years away (T.N.M. Aug. 25-31/08).

One long-term solution to uranium availability is to replace some mine supply with more intensive enrichment. Clark sees this becoming increasingly viable in 8 or 10 years. He sums up his outlook on the uranium market as bullish in the medium- and long-term.