Uranium Poised For Rebound As Demand Outstrips Supply

VANCOUVER– A symposium on the state of the uranium market and how to profit from it drew a good crowd away from the Vancouver sunshine on June 3 and presenting speakers made it worth the crowd’s while.

Geordie Mark, a uranium-focused analyst with Haywood Securities, started the session off with a discussion of how uranium supplies compare with forecast demand. Essentially, Mark sees “very strong demand growth in the mid to long term” that stems from three sources.

First, many of the countries that already use nuclear power are planning to expand that capacity to meet growing demand for power. In China, for example, demand for power is expected to grow from 9 gigawatts per year, its current level, to 75 gigawatts by 2020.

Second, there are several countries that are developing nuclear power capabilities, which will of course add to global demand for uranium. The United Arab Emirates and Italy are two good examples.

Combining both of those factors with an overall move towards diversifying baseline energy sources, to offset reliance on coal, and an increase in global demand for power, set to rise 50% by 2030, results in a considerable increase in uranium demand. Need further proof? Here it is: there are currently 436 reactors in action around the world but 433 new reactors are in the planning or development stages.

And the third force pushing demand upwards is that secondary sources of uranium are dwindling. A large part of the world’s supply of secondary uranium comes from the decommissioning of nuclear warheads; Russia, for example, has said it will not supply secondary uranium from decommissioning beyond 2012.

So demand looks to be strong over the coming years. What about supply? Currently, 64% of global uranium production comes from just eight mines; that means supply is “massively prone to disruption,” as Mark put it. There are several large new mines coming onstream but most are experiencing unexpected, significant setbacks. Flooding issues at Cameco’s (CCO-T, CCJ-N) Cigar Lake project, in Saskatchewan, for example, have delayed the expected start of commissioning until 2014. The expansion of BHP Billiton’s (BHP-N, BLT-L) Olympic Dam mine in Australia has also been delayed, with increased production now not expected until 2016.

The supply problem boils down to the fact that there have been very few big uranium discoveries over the last 30 years. Most of the projects currently at the economic- study stage are based on old deposits that provide marginal returns, at least at current prices.

Mark pointed out that the issue is not finding uranium, which is abundant, but rather finding mineralization in a place amenable to mining it. “Most uranium deposits are either too remote or too proximal,” Mark said.

He predicts a uranium spot price of US$95 per lb. from 2015 onwards. Perhaps that will be enough to prompt more explorers to again start searching for the radioactive rock.

Eric Zaunscherb, a senior mining analyst with Canaccord Adams started his talk by describing the key environments in which uranium ore is found. There are officially 14 major uranium deposit styles, but he focused on three.

Unconformity-hosted uranium deposits are amongst the most important in the world, as they contain roughly a third of the world’s uranium. Unconformity deposits in Saskatchewan’s Athabasca basin alone currently account for 24% of world production. The great thing about unconformity deposits is the usually high grade, from single to double-digit percentages of uranium oxide. The problem is that unconformity deposits are small and that means finding one requires a fair amount of luck and good geological understanding, and then delineating the resource requires a lot of drilling.

Sandstone-hosted deposits also host a fair chunk of the global resource — roughly 18% — and currently account for some 30% of global production. The grades are lower than in unconformity deposits, usually averaging between a percent and a tenth of a percent, but recovery of uranium from sandstone deposits can be made economic by in-situ leach recovery. In-situ leaching refers to pumping a solution, usually containing sodium bicarbonate, into the highly permeable sandstone and leaching the uranium from the rocks without ever moving them.

The third major economic type of uranium deposit is granite-hosted deposits. These deposits carry low grades — usually between 0.01% and 0.05% uranium oxide — but they make up for their lack of grade by their scale. Rio Tinto’s (RTP-N, RIO-L) Rossing mine in Namibia is a prime example — the open pit at Rossing now measures 3 km in length, 1.2 km in width, and 150 metres in depth. And Rossing alone accounts for 8% of world production.

With that background information in hand, it soon becomes clear that grade cannot be the sole criterion by which one judges a uranium deposit. Instead, Zaunscherb counsels a focus on the potential for annual profitability. For companies with early-stage projects, a good indicator is what’s known as enterprise value per pound, which means market capitalization divided by pounds of uranium resource. Clearly, a high enterprise value means the market is confident in the company’s ability to bring the resource to production.

As projects advance through exploration and economic studies, however, Zaunscherb counsels shifting focus to net present value (NPV). An NPV calculation essentially uses cash flow and cost predictions to put a value on a project; analysts use variable discount rates to adjust the value for risk and time to production.

The spot price of uranium is currently US$49.50 per lb. U₃O₈.