U.S. Uranium Auction Breaks US$100 Barrier

Vancouver — Spot uranium prices, having recently broken through the US$100-a-lb. barrier, should continue to rise as utilities and U.S. hedge funds scramble to buy up available supplies of the radioactive metal, market analysts say.

“It’s still an extreme sellers market right now,” says Jeff Combs, president of Ux Consulting of Roswell, Ga. “Prices are still under upward pressure.”

The forecast comes after an unnamed purchaser agreed to pay US$113 a lb. for 100,000 lbs. of uranium that were offered for sale in a Texas auction by privately owned Mestena Uranium.

Senior executives at Mestena were unavailable for comment just before the April 3 auction deadline.

However, a U.S. newsletter said it has received confirmation that the winning bidder paid roughly US$113 per lb., marking an increase of US$18 from the pre-auction price of US$95.

This is the largest single increase since uranium prices were first reported by NUEXCO in 1968, and marks a 57% increase in the spot uranium price since the beginning of the year,” said TradeTech, a Colorado news service that tracks the uranium market.

Analysts were keeping a close eye on Mestena because every auction it has held in the last few months has resulted in strong price increases in the spot uranium market.

“When I talked to (Mestena CEO George Tanner) last time, they did an auction in December and he said he was surprised at the range of (bidders),” says Gene Clark, CEO of TradeTech.

“It went all the way from hedge funds to utilities,” Clark says. “Almost everyone was interested in buying, put it that way.”

Clark is confident that spot prices will continue to rally because a southern U.S. utility is currently seeking 400,000 lbs. of short-term material for delivery by May 2007.

“Whatever they end up paying is going to take prices higher.”

Uranium prices have soared almost tenfold in the past five years and have more than doubled in the past six months from about US$50 per lb.

The main reason for the strength is the expected global growth in energy consumption, which is likely to be met increasingly by nuclear power stations.

According to a recent World Nuclear Association report, there were 442 nuclear power stations around the world in September last year, with another 28 under construction, and 62 proposed.

Recently, the governments of Pakistan, Russia and Finland indicated that they were planning for new reactors to meet their countries’ energy demand in the future. Russia is spending US$5.8 billion on a new nuclear energy program between 2009 and 2010.

Also contributing to the price rise is secondary demand from utilities, which are buying more than they can consume under long-term contracts that can secure uranium at a discount to the spot price.

“In several cases, they are actually purchasing more than they actually burn in the reactor, just because prices are so low that to buy and hold is better for them than waiting for a higher market,” Clark says.

Hedge funds are also fuelling the rise in prices, he says, by buying now in anticipation that the uranium can be sold at a premium in the future.

Spot uranium prices rose again last month following an announcement by Energy Resources of Australia (EGRAF-O, ERA-A) that it had declared force majeure on its sales contracts, because of flooding at its Ranger operation in the Northern Territory.

Due to exceptionally heavy rainfall, Energy Resources has said production at the Ranger mine in 2008 is likely to be up to 35% below 2006 production levels.

The flooding at Ranger is only one of the supply-side shocks that is currently affecting uranium prices.

Global supply of uranium is expected to fall short of demand because of a lack of investment in exploration and production in the past 20 years, the time taken to bring new mines into production, and severe flooding at one of the world’s biggest developing uranium mines, Cameco’s (CCO-T, CCJ-N) Cigar Lake, in Saskatchewan.

Cameco says Cigar Lake will begin production in 2010 — two years later than originally planned.

Spot uranium prices have leapt from US$56 a lb. in October because the supply side of the market is ill equipped to handle demand from a rekindled nuclear power sector.

The move towards more nuclear power stations indicates a change in attitude towards nuclear energy, according to published reports. Even Australia, which houses 40% of the world’s uranium reserves, but has a moratorium on building new uranium mines, is expected to change its stance after signals from both Labor and Liberal Party politicians.

Meanwhile, secondary demand from electric utilities and hedge funds will continue to drive prices even higher in the short term, Clark predicts.

“We see prices increasing, at least over the course of the next year,” he says.

One Canadian mining analyst agrees with that view.

“Overall, we believe the price of uranium will continue to increase over the next two years, however, we see price weaknesses beyond 2008 due to new and/or expanded production from Africa, Kazakhstan, Australia, and other regions,” says Bart Jaworski, an analyst with Raymond James Financial in Vancouver.

Reflecting that outlook, Jaworski is raising his average uranium price forecast to US$110, from US$90 in 2007, and to US$119 from US$100 in 2008.

In comparison to our previous forecast, we see prices descending in 2009, however, saying stronger for longer over the long term,” he says.

Jaworski’s optimism is based in part on the fact that in 2006, global uranium supply was down 5% to 102.7 million lbs. from 108.4 million in 2005.

He said the delay in Cigar Lake, until at least the end of 2010, as well as the news of a production shortfall at Energy Resources’ Ranger mine, will continue to keep downward pressure on an already constrained supply picture.

Meanwhile, news from the Mestena Uranium auction should provide a boost to the market, Jaworski says.

“The auction will provide price discovery, which is itself a very scarce commodity in the current market.”

2005 World Uranium Production (Tonnes U308)

Canada13,709

Australia11,223

Kazakhstan4,384

Russia4,045

Namibia3,710

Niger3,647

Uzbekistan2,712

United States1,225

Ukraine945

China885

South Africa795

Czech Republic480

India270

Romania105

Germany90

Pakistan50

France8

Who uses nuclear power?

Over 16% of the world’s electricity is generated from uranium in nuclear reactors. This amounts to about 2,400 billion kilowatt hours per year, as much as from all sources of electricity worldwide in 1960. In other words, it is 12 times Australia’s or South Africa’s total electricity production, five times India’s, twice China’s and 500 times Kenya’s total.

It comes from about 440 nuclear reactors with a total output capacity of more than 350,000 megawatts operating in 31 countries. About 30 more reactors are under construction, and another 70 are planned.

Belgium, Bulgaria, Finland, France, Germany, Hungary, Japan, South Korea, Lithuania, Slovakia, Slovenia, Sweden, Switzerland and Ukraine all get 30% or more of their electricity from nuclear reactors. The U.S. has more than 100 reactors operating, with capacity of almost three times Australia’s total, supplying 20% of the country’s electricity. The U.K. gets almost a quarter of its electricity from uranium.