It was in 2004 that it became clear that uranium was in a sharp recovery phase after spending years down and out, with the upswing largely fuelled by sharply renewed interest in nuclear energy, which uses uranium as its feedstock.

The rush to get in on the meteoric yellow-cake (or uranium oxide) market led to an all-time high spot price of $136/lb in 2007, well above the $7,10/lb recorded in 2000.

However, the market has since been hit by volatility, with the spot price at $64/lb, which is a slight recovery from the $59/lb recorded only weeks earlier.

Royal Bank of Canada (RBC) Capital Markets analyst Adam Schatzker regards the current number as too low, as he believes anything under $75/lb carries the threat of dampening the market’s hard-won momentum.

“We think that the current uranium spot price is too low, and that the potential effect of a prolonged spot price at these levels is a substantial shortfall of future supplies, which may jeopardise new nuclear reactor builds.

“We understand that the spot price does not alone dictate the price that suppliers will receive, and that the term price has remained robust. However, rightly or wrongly, equity market participants are very focused on the spot price, and investors make their decisions based mostly on the prevailing or anticipated spot price.

“Therefore, we believe that at spot uranium prices below $75/lb, the uranium industry may find the equity markets unwilling to fund exploration and development capital that is, and will be, required to sustain the industry,” explains Schatzker.

He adds that an expected supply shortfall post-2015 will require uranium prices higher than $80/lb, in order to provide the incentive to explore for and develop new projects.

The long-term uranium price has also fallen prey to bleaker market conditions, dropping from $95/lb in March this year, to the current $82,50/lb.

PRICE EXPECTATIONS

The bad news is that it seems unlikely that the spot price will breach $75/lb this year.

Ux Consulting Company (UxC) president Jeff Combs says his company’s three-month price forecast from the end of April this year was $55/lb to $75/lb.

Since that time, the spot price has dipped to $57, recovering more recently to just under $65, where it has met some resistance.

Combs believes that the $55/lb to $75/lb range will continue to be relevant through the end of the year, barring any major event.

UxC is a well-respected US-based uranium market analyst and consultancy.

Combs says the price is being influenced by a “relative lack of [power] utility near-term demand”.

He adds that while the spot market has been fairly active, much of this activity represents material that has been bought and resold, and not necessarily new core demand that has surfaced.

However, the better news is that speculators and investment funds have started to show renewed interest in buying after the price fell so much this year, which has sparked a budding price recovery.

Australia-based equity research company Resource Capital Research (RCR) MD John Wilson says RCR’s uranium price forecast for 2008 and 2009 is about $70/lb.

“We anticipate the gradual convergence of the long-term and spot uranium price,” he adds.
RCR publishes a uranium report every three months, with a specific focus on junior miners and explorers.

Wilson says some of the recent price volatility can be attributed to rumours of expected uranium fund purchases.

He says the expectation of a fund trade can have a significant impact on the spot price because of the relatively small annual spot volume of uranium traded – about 20-million pounds a year from a current annual market of about 170-million pounds.

The timing of utility activity in the market (utilities account for over 90% of uranium end-use) also plays a key role, with seasonal or strategic inventory adjustments being a major factor in influencing short-term uranium price movements.

Wilson says the uranium industry is also highly concentrated on the mine supply side, with seven producers accounting for about 85% of world production. As such, the uranium price remains vulnerable to supply disruptions.

Recent examples include mine disruptions or delays such as flooding at Ranger (Australia), and project development delays at Cigar Lake (Canada).

Wilson adds that the current uranium spot price means some early-stage explorers without cash will be struggling to raise capital, whereas more advanced explorers or junior producers that need to raise capital will do so at lower uranium prices and, therefore, with higher dilution to existing shareholders.

“However, from an operations point of view, an economic slowdown will serve to relieve some of the competition for drill rigs, people and materials, making it cheaper and easier for those companies to operate.”

Wilson says there is no fixed spot price at which uranium exploration activity will simply stop, although he adds that there was little or no activity at the junior end of the market when the uranium price was below $10/lb.

Schatzker says RBC Capital Markets has “made significant changes” to its spot price forecast.

“Previously, we thought 2008 and 2009 would be peak years, but it seems clear now that contract coverage is high, and utility participation in the market is very low, resulting in a much lower spot price than we had expected. We believe that the price will need to rise in later years to stimulate the development of needed supply,” he reiterates.

RBC Capital Markets now forecasts a spot price of $75/lb for 2008, down from $110/lb, and $75/lb for 2009, down from the original forecast of $100/lb.

However, the expectation is that the price will gain strength in 2010, reaching $85/lb, with $90/lb possible in 2011, 2012 and 2013, before dipping to $85/lb in 2014, and $80/lb in 2015.

Schatzker says risks to this forecast are any major problems with a nuclear reactor, which could curtail new reactor builds and, thereby, demand; technical or regulatory problems, which could reduce mine supply; and material owned by speculators and investors, which could temporarily flood the market.

If this is the case, he would not have been pleased with the incident last month when nuclear technology supplier Areva discovered a uranium waste leak at its Tracastin nuclear power station, in France.

The nearby town’s 14 000 inhabitants have since been barred from fishing, and have been ordered not to use tap water.
Bloomberg reports that this has shaken the long-acquired faith of the French in the nuclear safety of their country, the world’s second-biggest generator of nuclear power after the US.

SUPPLY & DEMAND

Schatzker believes demand for uranium will grow by an average of 3,9% a year over the next 25 years.

The expectation is that new nuclear reactors will take many years to permit and build, but that the demand for material will precede reactor commissioning by many years.

On the other side of the coin, uranium supply is forecast to grow by an average of 7,6% a year until 2013, down from RBC Capital Markets’ previous forecast of 7,9%.

Schatzker says the market will remain in balance until the end of 2010, with an expected market surplus ranging from 2,5-million pounds to 31-million pounds visible from 2011 through to 2014.

“However, it is also likely that much, if not all, of this material will be absorbed easily into the market, particularly through the building of strategic inventories by countries such as China, India and South Africa,” says Schatzker.

He adds that higher-than-historic uranium prices have attracted new production and increased exploration spending, which should help to fill the supply-demand gap RBC Capital Markets is forecasting after 2015.

Schatzker says current mine-sourced uranium production remains “well short of demand”, with the difference continuing to come from inventories and secondary supplies until at least 2014.

“Thereafter, additional secondary sources will have to be made available, or new mine supply will be required.”
Secondary sources refer largely to uranium from nuclear weapons.

Historically, more than half the uranium produced in the world has been used in nuclear weapons and for fuelling military vessels.

However, since the end of the Cold War in the early 1990s, many weapons have been dismantled under international treaties, and some of the highly enriched uranium HEU) and plutonium have been declared surplus.

In 1993, the governments of the US and Russia agreed to allow 500 t of Russian surplus HEU to be sold into the market as blended-down, low-enriched uranium, which equates to about 395-million pounds of uranium oxide, or yellowcake.
The agreement called for the material to be sold into the market over a 20-year period.

Combs notes that supply and demand are currently being kept in balance by a rather large drawdown of inventories, including HEU feed from these dismantled nuclear warheads. However, as inventory supplies become depleted, more and more supply must come from mine production, and price has been under upward pressure to stimulate this additional production.

“The key question for the future supply and demand balance is thus how quickly production expands,” notes Combs.

“The HEU deal ends after 2013, removing 24-million pounds of supply that must be made up by additional production.

“Another key factor is how quickly uranium demand grows, which is a function of new reactor orders, as well as changes in utility inventory policy,” says Combs.

Schatzker says most of the current growth in primary supply comes from companies that are new producers, such as Uranium One and Paladin Energy, and/or countries that are increasing their supply contributions significantly, such as Namibia and Kazakhstan.

“While we are confident that most of the forecast production will come to fruition, we must caution that if production milestones are delayed, the market reaction would be strong and result in higher-than-anticipated uranium prices.”

Potential new mine supply includes an expansion at Rössing and Areva’s Trekkopje project, both in Namibia, as well as Paladin’s Valhalla/Skal project, in Australia.

Demand from especially Asia and India is expected to surge, with demand from China – with no real uranium of its own – growing from an expected 3,8-million pounds in 2008, to 11,5-million pounds in 2015.

Demand from India – another country with an aggressive nuclear power policy – is expected to jump from two-million pounds in 2008, to 4,3-million pounds in 2015.

Canada is King, but Kazakhstan is the Crown Prince
Canada and Africa are locked in a close contest to be the world’s biggest primary uranium producer.

It is expected that Canada will produce 21% of the world’s uranium output, in 2008, with Kazakhstan making a meteoric rise to second place, at 20%.

Africa and Australia are tied for third place, at 18% of uranium production.

Combs says Kazakhstan is certainly the fastest-growing uranium producer in the world, but “we also see considerable potential in Africa, as there are a number of projects in development, or under consideration there”.

“In fact, we see [most] of the world’s growth in uranium production over the next five to ten years coming from Kazakhstan and Africa, as these are the two regions where uranium production can expand the quickest, from a geological, governmental, and/or regulatory standpoint.”

He adds that the current strongholds of Canada and Australia are still poised to play a major role going forward, and that these countries represent key areas for future expansion.

It is well known that regulatory demands for uranium mine development are generally less stringent in Africa and Kazakhstan, compared with those of the US, Europe, Canada and Australia.

Wilson also notes that Africa is well placed for continued uranium mine development, particularly from a regulatory standpoint.

“Many of the countries in Africa are viewed very favourably from the point of view of having both high uranium prospectivity and a sovereign environment in which mining companies are able to obtain permits quickly and move new projects to production.

“The relatively short lead time for the development of Paladin’s Langer Heinrich mine, in Namibia, is a perfect example,” he notes.

Wilson adds that there are some 50 countries in Africa with identified uranium occurrences, and that there are many projects approaching the advanced explor-ation stage with potential for near- to midterm production.

Countries with multiple advanced uranium projects include Namibia, Tanzania, Zambia and South Africa, besides others.

“Of course, Niger is already a major producer, accounting for about 8% of world uranium production,” says Wilson.

INDUSTRY TRENDS

Wilson says it has been a trend that governments with State-owned power utilities with limited uranium supply – particularly in emerging markets such as China – have been actively investing in strategic offshore explor-ation, development and production opportunities for several years. After all, spending billions of dollars in building nuclear power capacity without ensuring the necessary uranium supply could be risky.

“The large providers of nuclear tech- nology, such as Areva and Mitsubishi, have also been building strategic stakes in mine supply to help shore up reactor sales, anchored with long-term uranium-supply contracts,” he adds.

France-based Areva has ensured its uranium supply by acquiring several mining operations in Kazakhstan, as well as in several countries in Africa.

Wilson says junior miners and explorers seem to benefit from this trend.

“Explorers are always looking for capital and they are, in many cases, pleased to align themselves with a well-funded utility or other strategic investor.

“Recent evidence suggest that larger uranium miners and nuclear reactor suppliers are
prepared to pay the highest price for junior uranium producers or those with production visibility.”

One such deal was last year’s friendly takeover of junior, near-term producer UraMin by Areva.

Another market trend is that uranium end-users are increasingly diversifying their supply, in order to reduce their risk profile.

Combs notes that uranium users are doing this by “signing contracts with different miners, especially those that are involved in different geographic regions of the world.

“Given the supply disruptions that have occurred and the high prices that have ensued, utilities are seeking supply security, which they can accomplish by diversifying their supply sources and holding additional inventories.”

Wilson echoes this sentiment, saying that diversity of supply is an important factor impacting on uranium purchase decisions by utilities.

“One-project uranium-miners are perceived in most cases as having higher operating risk than companies with multiple projects.

“Of course, there are many factors that influence operating risk, but multiple production sources is one way to diversify idiosyncratic project risk.”

An example is Uranium One. When its South African Dominion mine experienced severe production difficulties, it was able to keep the company afloat through its Kazakhstan assets.

NUCLEAR POWER DEMAND STILL STRONG

Certainly the fundamental factor driving uranium demand is still strong.

Nuclear power has been in ascendancy since it has been coupled with the so-called green revolution aimed at reducing harmful emissions leading to global warming.

Then there is also the desire of countries to diversify from oil and gas for energy security reasons, as well as continued economic and energy demand growth, especially in regions such as East Asia, Eastern Europe, and parts of Africa and the Middle East.

Combs says he does not believe that the current slump in the uranium price equates to a
dampened appetite for nuclear power.

“In fact, the sentiment for nuclear power is greater now than it has been in a long time, even though much has been made about equipment shortages and long lead times for the construction of nuclear reactors.

“I think there is a realisation that additional investment in nuclear power infrastructure is being made and that, over time, these bottlenecks can be addressed and the lead times can be shortened.”

Combs says there are numerous types of vital equipment for nuclear power plants, with perhaps the most significant ones being the heavy forgings for the large reactor vessels, steam generators and other large components.

The lead times for some of these large reactor components may be upwards of three to five years in some cases, but with new investment in global capacity, these lead times should be reduced, he adds.

This includes Japan Steel Works which is currently capable of producing the heavy forgings for about 5,5 large nuclear reactors a year. However, the company is now investing more than $450-million to expand that capacity to 8,5 units a year by 2010.

Areva also recently announced the expansion of its heavy forging capacity in France, and there are numerous companies in South Korea, the US, China, and the UK planning new capacity as well, says Combs.

“Since reactor projects typically require an eight- to twelve-year timeframe from start of planning, licensing, through construction and start of operation, these supply chain issues should not be a major hindrance to future reactor growth.

“This is especially true, since we foresee most of the world’s new reactors only coming on line in the 2015 to 2030 timeframe.”

According to the World Nuclear Association, there are 439 reactors operating globally, with 36 under construction.

There are also 93 new reactors on the drawing board, with another 219 proposed.

Should all of the planned and proposed reactors be built, the world total will be more than 787, or an almost 79% increase over the current level – which should bode well for the uranium market.