Despite the negative outlook for many other commodities, many analysts now forecast that uranium prices will go up in the medium-to longterm due to strong fundamentals: expanding demand from more reactors and constrained mine supply.
However, analysts are far from unanimous. For example, one calls for a uranium oxide price as high as US$130 per lb. in 2013, while another sees a longterm price of US$25 per lb.
The spot price for the metal has been on quite a roller coaster ride in recent years — rising to US$136 per lb. uranium oxide last year from less than US$10 per lb. in 2001, before crashing to US$45 earlier this year, followed by a modest rebound to US$55. The long-term contract price, currently at US$70 per lb., is a better market barometer, however, as most uranium sales are covered by such contracts.
With annual consumption of 170 million lbs. uranium oxide and based on an average delivered price of US$35 per lb., the market is worth about US$6 billion per year. Such a small market is sensitive to even small changes in supply and demand, points out Gene Clark, CEO of Denver, Colo.- based uranium consultant TradeTech.
The market is affected by a myriad of factors — such as new reactor construction, inventory and stockpile levels and mine development — each one influencing prices.
Uranium demand
Many observers, including Parisbased Nuclear Energy Agency (NEA), forecast that there will be substantial growth in nuclear reactors and generating capacity in coming decades that will raise demand for uranium.
In a report entitled Nuclear Energy Outlook 2008, the agency counts 439 nuclear reactors in operation around the world generating a total of 372 gigawatts of electricity; another 41 reactors are under construction. By 2050, the NEA estimates the amount of electricity generated by nuclear reactors will grow to at least 580 gigawatts, an increase of 56%, and as high as 1,400 gigawatts — a rise of 276%.
The report calculates that the low-case scenario implies a demand of 3.3 million tonnes uranium until 2050, while the high-growth scenario implies a demand of 5.3 million tonnes. And with an estimated 5.5 million tonnes of uranium resources identified globally, according to NEA, those resources should be sufficient to meet demand for the next 42 years — even for the high-growth scenario. In fact, NEA projects the identified resource base is sufficient for at least 100 years of reactor demand, while the entire conventional resource base will last 300 years.
Looking at medium-term plans for new reactor construction, Deutsche Bank analysts Joel Crane and Paul Young project that by 2015, 84 new reactors will be built, while 40 older ones will shut down. Generating capacity is expected to rise 27% to 473 gigawatts over the same period.
In a report issued in June, before the latest crash in commodities markets, the two analysts projected a 17% hike in uranium demand between 2010 and 2015. However, they project a greater supply growth than demand growth between 2009 and 2013.
The report cites an estimate by the International Atomic Energy Association (IAEA) forecasting that by 2030, nuclear generating capacity will increase to at least 473 gigawatts, 27% above present capacity. The IAEA’s high-case scenario sees a doubling of capacity to 748 gigawatts by 2030.
On the basis of another high-case scenario by the International Energy Agency (IEA), which projects 1,000-plus new reactors by 2050, Crane and Young estimate that by 2050, uranium demand could increase between 215% (to 243,000 tonnes uranium per year) and 290% (to 300,000 tonnes per year) from 2008 levels — clearly an aggressive projection.
Citigroup analysts Alan Heap and Alex Tonks count 36 reactors under construction, with 99 planned and 232 proposed. Based on the reactors that are under construction or planned, nuclear generating capacity is projected to rise to 512 gigawatts — an increase of 37%.
But Nick Carter, vice-president at Roswell, Ga.-based uranium consultant Ux Consulting, suggests these projections may be overly rosy, since not all plans for new reactors will go ahead. For example, in the U. S., the Rockville, Md.-based Nuclear Regulatory Commission estimates a total of 23 applications for 34 new reactors for the years 2007-2010. However, Carter estimates that only three or four of these will be built by 2020, although higher oil and coal prices could be a catalyst for more new reactors. Carter is more sanguine on new reactor projects in China and India, but even there, plans for new reactors could be scaled back to some extent.
The short term
The new reactors will take time to complete, so they will not affect the demand picture in the short term, which is nevertheless projected to outstrip mine production. Citigroup estimates mine production this year at 40,500 tonnes uranium, while reactor consumption is estimated at 72,000 tonnes. Next year, mine production will rise to 44,000 tonnes, and consumption to 73,000 tonnes. In 2010, mine production will rise further to 49,000 tonnes, while consumption is projected at 73,500 tonnes.
Short-term estimates from Deutsche Bank portray a smaller supply-demand gap. The bank estimates mine production this year at 46,000 tonnes uranium, and consumption at 65,000 tonnes. Next year, the bank projects mine production at 51,000 tonnes uranium, while consumption is forecast at 67,000 tonnes. In 2010, mines will supply 52,000 tonnes, and reactors will consume 67,000 tonnes.
There’s wide consensus that spot prices reached an all-time high of US$136 per lb. uranium oxide in 2007 because demand from utilities combined with investment demand from speculators to drive up prices. Since last year, prices fell hard to US$45 per lb. U3O8 for a number of reasons: utilities stopped buying, new mine supply came on the market, and hedge funds and speculators sold metal as the credit crisis gathered steam.
GMP Securities analysts David Wargo and Krystal Nagel estimate that as much as 15 million lbs. of uranium oxide has now been offloaded by speculators, leaving only two investors holding uranium inventories: Uranium Participation Corp. (U-t) and Nufcor Uranium (NUURF-o).The companies are unlikely to sell the metal in the short term, setting the stage for a uranium price rebound.
Taking advantage of low prices, utilities have been discretionary buyers on the spot markets, and are continuing to buy “on the quiet,” says TradeTech’s Clark, but there is currently enough supply to meet spot market demand, so prices are not moving higher. Ux Consulting’s Carter believes that spot prices are close to a bottom. One indication of this is that some uranium miners are buying on the spot market, either because they cannot meet scheduled deliveries, or because they feel that prices are bound to go north from here.
One potential source of new short-term demand could come from India, which may enter the market looking to buy 1,350 tonnes uranium, according to Deutsche Bank.
Two huge projects
Two unknowns on the supply side are Cameco’s (CCO-T, CCJ-n)Cigar Lake project in Saskatchewan, and BHP Billiton’s (BHP-N, BLT-l) Olympic Dam mine expansion in Australia. Cigar Lake has been plagued by water seepage problems, while the Olympic Dam expansion entails hefty capital costs. TradeTech’s Clark points out that Olympic Dam is a large copper producer, so the economics of the expansion are also dependent on the copper market. BHP may decide to expand the mine in stages, but Clark says that a decision is years away.
Ruban Yogarajah, a spokesman for BHP in London, says that the company is studying the project, looking at the scope, finalizing an environmental impact statement. Stage one — which is just an optimization of the existing operation — is scheduled to be in production by 2013.
While there is no firm timetable for the subsequent stages of the expansion, most analysts believe that BHP will go ahead with it. There is less certainty about Cigar Lake, which Jeffrey Christian, managing director at New York City-based commodities consultant CPM Group calls “a giant question mark,” but most analysts believe that Cameco will manage to solve the technical problems and bring the mine to production. A spokesperson for the company, Lyle Krahn, says Cameco does not have a firm time table for startup. Ux Consulting’s Carter estimates that commissioning of Cigar Lake could be pushed back to 2013, while production from Olympic Dam mine could start ramping up gradually in 2016.
Uranium prices
There is wide agreement that for the next few years, prices will stay moderate. GMP Securities’ Wargo and Nagel see prices going up to US$60 per lb. uranium oxide, since this price gives marginal producers an internal rate of return (IRR) of 15%, which they must meet to be able to finance projects.
Christian sees spot prices rising to US$60-65 per lb. in 2009- 10, before settling at a US$60-90 range during 2010-13, which he considers a market-clearing price in a finely balanced supply and demand situation.
Looking beyond 2013, Christian forecasts that prices could move sharply higher, to US$130 per lb. and more. There are two catalysts that could push prices that high, he says. Firstly, a large number of new reactors are going to be built, steadily increasing demand. Secondly, the agreement that Russia signed to supply uranium from old nuclear weapons to the U. S. expires in 2013. Christian believes that it will not be renewed, and that Russia will then stockpile the metal for domestic use.
TradeTech’s Clark expects that, from 2010-11 onwards, new mine projects that were expected to produce will not come online after all, pushing up prices.
In the longer term, Clark sees “a perfect storm” that could be a catalyst for higher uranium prices because of the difficulty in bringing new mines online. There are two reasons he sees for that difficulty: firstly, low prices make some new projects either marginal or entirely uneconomic, and secondly, 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 pushing prices up.
In the face of scarce financing for new projects, Clark says that nuclear reactor makers could get involved in new mine development to ensure uranium supply — either through takeovers, joint ventures or strategic alliances. The industry could also address the dearth of new projects through consolidation, with majors such as Cameco and Areva (ARVCF-o) buying junior explorers that own deposits in the vicinity of their existing mills.
One partial long-term solution to uranium availability is to replace some mine supply with more intensive enrichment. Clark sees this becoming increasingly viable in eight years or so.
A number of new mines need a price of US$50-70 per lb. uranium oxide to be economic, says Ux Consulting’s Carter. Since utilities are now stocked up on uranium, spot demand from utilities next year could be flat and largely discretionary. Carter does not anticipate spot prices going up much next year, but over the next two to three years, they could go up to the US$60s and US$70s.
Citigroup’s Tonks and Heap say that the supply/demand balance in the uranium market is set to remain tight for the next few years. Citigroup’s price targets are US$60 per lb. uranium oxide in 2009, US$80 in 2010, US$60 in 2011, US$50 in 2012 and US$25 long term.
According to a Bloomberg report, JPMorgan Chase analysts have lowered their price projections for the next two years. The spot price target for 2009 was dropped by 14% to US$64.75 per lb. uranium oxide, while the target for 2010 has been lowered by 4.7% to US$71.50. The long-term price forecast is unchanged at US$65.
Among other analysts, GMP Securities’ Wargo and Nagel are bullish, casting the current uranium lull as a buying opportunity.
“We believe that the ‘nuclear renaissance’ has significant global traction and will continue as reactor builds, primarily in China, India, Russia and Western Europe, will require growth across the entire fuel cycle,” they write in their report.
“We believe that the uranium industry as a whole is in its strongest position ever for long-term growth. However, we believe that this growth will be at a much more measured pace from a uranium price and equity valuation perspective than has been the case over the last three years.”
Among uranium stocks rated a “buy” by the GMP analysts are Cameco, with a $25.60 price target, Bannerman Resources (BAN-T, BNNLF-o) with a 40 target, Denison Mines (DML-T, DNN-x) with a $4 target, Laramide Resources (LAM-T, LMRXF-o) with a $2.40 target, Paladin Energy (PDN-T, PALAF-o) with a $4 target, Uranium One (UUU-T, SXRZF-o) with a $3 target, and Uranium Participation Corp., with a target price of $9.20.
Meanwhile, Deutsche Bank’s Young and Crane predict that supply issues will persist because of production shortfalls. They forecast an increased reliance on mine supply and less reliance on stockpiles and dismantled nuclear weapons. Their post-2015 scenario has mines possibly scrambling to meet the increased demand from the higher number of reactors.
“We believe that the world is on the verge of a uranium renaissance, and in our opinion, the financial markets continue to underestimate the potential for a rapid increase in uranium demand,” they write in a recent report. “We believe that supply could struggle to respond to the potential increase in uranium demand between 2010 and 2050.”
———
T. N. M.NUGGETURANIUM FACTS AND FIGURES
RESOURCES: 5.5M t U in resources identified globally that can be recovered at a cost of up to US$50 per lb., including 2.1M t in inferred resources;
UNDISCOVERED URANIUM: Estimated at 2.8M t U
ADDITIONAL URANIUM 7-22M t U in phosphates, uneconomic to mine except at high prices; 4-4.6B t U in seawater, also uneconomic to extract
REACTOR CONSUMPTION 27,000 t U in 2006; projected to rise to 94,000-122,000 t by 2030
MINE PRODUCTION 40,000 t U in 2006; 81,000 t in 2010; 96,000 t in 2015; 83,000-118,000 in 2030
Source: Nuclear Energy Agency report Uranium 2007: Resources,
Production and Demand
Be the first to comment on "Uranium Price Will Rebound: Analysts"