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As Kazakh market discipline points to price trough, uranium developers focus on lower costs

13th January 2017

By: Henry Lazenby

Creamer Media Deputy Editor: North America

     

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VANCOUVER (miningweekly.com) – News this week that Kazakhstan will curtail its uranium output by about 10% this year has sent spot prices to the highest levels since September, provoking cautious optimism among market observers that the trough has been traversed.

“I think that this move signals a fundamental change in Kazakhstan – and I don’t have a clear idea of what the cause of that change is – but it suggests that there is a problem,” project developer U3O8 Corp president and CEO Richard Spencer tells Mining Weekly Online.

He suspects the sudden market sensitivity might be borne out of increasing production costs in real terms.

“When the producer of 40% of the world’s uranium has a problem, that’s got to be bullish for the price, so I do believe that we have seen the bottom of the uranium market and that this rally is the start of a sustainable uptrend,” he states.

According to Spencer, the important thing about the Kazakhstan announcement is not so much the reduction in production of about 3% of worldwide supply, it is the fact that, for the first time, the country is showing that it is thinking about the market. 

Over the last couple of years, Kazakhstan's production has increased irrespective of market conditions.

“When margins became tight because of the drop in uranium prices, they maintained their local profit margin by simply devaluing their currency. It was a ‘market be damned’ situation. Why this sudden market awareness? That is the really interesting question: does this sudden sensitivity to the market mean that production costs are rising in real terms that can’t be managed away by a devaluation in the currency in Kazakhstan, as rumours have suggested?” Spencer pondered.

While there is idle capacity around the world that can be brought back into production, the fundamentals suggest that demand will outstrip supply in the medium term. Spencer emphasises that the key for producers and project developers in the short term is to have low-cost production.

SPOT PRICE MANIA
Kazakhstan is mainly a spot market participant, meaning it has effectively reduced the supply overhang, and created a lot of market excitement for the spot price and uranium equities, says Fission Uranium chairperson and CEO Dev Randhawa.

Randhawa says the Kazakhstan production cut was expected, but it was unknown when and by how much. He believes it is good that the country has implemented some production restraint, as it is mostly this source that is putting pressure on spot prices.

“The stocks are so beaten up that even some spot price movement is generating a lot of excitement. However, people must realise there is a lot of money sitting on the sidelines waiting for a trigger that I believe must come from the supply side,” he tells Mining Weekly Online in an interview.

He stresses that long-term project planning is not influenced by spot prices as it is usually based on long-term contract prices, which remain in the $30/lb to $40/lb range, despite spot prices having dipped well below $20/lb during December.

The average uranium mine is not profitable at a uranium price below $55/lb, and Randhawa believes an average price of between $50/lb and $60/lb will be required to incentivise project development.

The recent price rout has prompted the Fission board to preserve cash and change exploration strategy at the Patterson Lake South discovery, in Saskatchewan. The team will this year focus on what Randhawa calls “blue sky prospects”, stepping out from the established Triple R deposit and investigating the westerly high-grade uranium boulder field.

Randhawa believes the significant resource already defined and the shallow nature of the deposit will boost the project’s profile as a low-cost producer. With expected operating costs of $14.02/lb and a pre-tax internal rate of return of 46.7%, the project is expected to achieve low-cost production with a low payback and highly profitable life-of-mine.

He stresses that the fundamentals for uranium remain strong. “There’s no green energy without nuclear base load generation.”

PROJECT INCENTIVES
Kazakhstan is the world's largest supplier of uranium, producing about 41% of global output, but it is starting to experience production declines.

Investment strategist and writer in the resource sector Marin Katusa explains in a note to clients Friday that the current low price of uranium does not warrant drilling new wells in Kazakhstan. Despite having the lowest cost of uranium production in the world, drilling new wells is not economic at $20/lb uranium. To bring on new production in Kazakhstan, $35/lb to $40/lb is required, according to the analyst.

In the case of uranium, the average production cost of North America’s conventional uranium mining industry is about $60/t. This is an ‘all-in’ cost that takes into account the cost of capital, labour, equipment, fuel and insurance. The highest-grade uranium project in the world, the McArthur River project, in Canada, needs about $30/lb to $35/lb uranium to break even. Kazakhstan’s cheap-producing in situ recovery projects need $25/lb to $30/lb uranium to be economic, according to Katusa.

“And logically expected, Kazakhstan just announced it plans on reducing its uranium production by 10%. When the world’s largest producer of uranium announces a 10% reduction, speculators must pay attention,” he says.

Katusa points out that uranium fundamentals remain strong. Giant energy consumer China currently has 29 nuclear reactors under construction, Russia has nine, India has six and the US has four under construction. 

“Also, Japan has stated that it plans to get two-thirds of its nuclear reactors back on line in the next four years. This means that soon, about 14-million pounds of uranium will be needed to meet just the Japanese demand,” he says.

Growing Asian demand and steady demand from massive current consumers (the US and France) means that uranium demand will grow to 190-million pounds a year by 2020 and to 220-million pounds a year by 2030, a growth of 20% in 15 years.

"As much as any natural resource, uranium has a clear path to much greater demand over the next 15 years. However, that demand will not be satisfied with spot prices under $20/lb. It costs the mining industry more than that to get it out of the ground," the analyst advised.

Edited by Mariaan Webb
Creamer Media Senior Deputy Editor Online

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