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Saturday, March 17, 2007

Yet Another Uranium Post

Here's another StockInterview post about uranium prices. A commodities analyst at Macquarie Bank forecasts uranium prices to fall back to a long term price of $35 per pound of yellowcake. This doesn't make any sense. Given the amount of production needed for the steadily rising demand, there's going to have to be an enormous sustained increase in uranium mining.

The long term market price for that uranium is not going to be significantly less than what it costs to mine the uranium. I don't have links for this, but I've read from at least one credible source (David Miller of Strathmore) that with production up to full demand, the incremental costs of mining are such that the long term price should be roughly $65. I've read this in other places, but don't know how independent they are (Miller makes a lot of noise in what is a small industry). A good sampling is Strathmore's estimated costs of production for each property they own (page 15 of this document). From cheapest to costliest, the price quickly ramps up above $35. However, this is just US properties. The stuff I've been reading over the years has made it fairly clear that most uranium costs above $35 to mine. A lot of the stuff I read when I first invested in Strathmore talked about this because the uranium price at that time was only about $30 or so and that the uranium investment thesis required a significant increase in price.

The price was very low for years because of a massive glut caused by converting huge numbers of nuclear weapons into reactor fuel. Not to mention the situation decades ago when demand was low and uranium mining was in full swing in anticipation of increasing demand that materialized much more slowly than expected.

People might be pointing to Kazakhistan and Namibia for future supply, but the support infrastructure in those places is negligable. For those places to meet the demand, it will cost a great deal to ramp them up that much. There are stories of donkey paths in Kazakhistan. In all honesty, I wrote this down before reading the full article I linked to above where it mentions the same thing.
However, it has to be noted that while Kazakhstan has undoubtedly a massive amount of uranium underneath its surface, the country's role in the industry is also seriously hampered by a lack of modern infrastructure and a highly corrupt political and business climate. You won't hear or read much about this in general, but that's because everyone who wants to do business over there knows that any proof of criticism cannot be bought off and is likely to backfire in a big way.
In other words, keep your mouth shut about the donkey paths. The Uranium Bull Market book* that's being peddled everywhere has some interesting things to say about Kazakhstan. The country does produce a great deal of uranium and that will increase over time. But mining companies definitely need everything in writing signed by everyone possible, and even then they need to hope their rights are respected.
In addition, Kazakhstan is not immune to the lack of available experienced staff that is haunting the mining industry in general. And to make things even worse the Kazakh government currently requires in situ mines to have recovery rates of at least 80%. Existing mines of Cameco and Kazatomprom are struggling to meet this requirement, even after two years of test production.
GSJBW makes two interesting assumptions with regards to secondary supply. The analysts anticipate Russia will not renew the HEU agreement with the US [which they've already stated] and that Techsnabexport (Tenex) — representative of the Russian Federal Agency for Atomic Energy — might stop exporting uranium from Russia in 2008.

With regards to Western inventories which were built up pre-1990, the analysts believe the majority of this material has either been delivered, or is committed.
The analysts also believe Cameco's troubled Cigar Lake project won't be up and running until 3-4 years from now. They subtly hint at the fact that some experts believe the mine will never reach production.
I'm not an expert, but you've got to wonder why a uranium mine with deposits of 19% uranium were left undeveloped all these years after being discovered in 1983, when people are chasing after stuff that is significantly less than 1% elsewhere. Given what mining experts have said, it doesn't seem like the low hanging fruit it appeared to be. They did some work on creating a mine shaft in 1988 and then quit. Then when they go back to it after uranium prices go up, they have 2 separate mine floods.

Australia will lift its 3-mine policy, allowing Honeymoon (resource info, only 5.8 million pounds but at costs of perhaps only $12.40/lb) to open.

The US Dept of Energy is considering increasing its sales of stockpiles up to 5 million pounds of U3O8 equivalent per year...
but Merrill Lynch also notes the DOE has made it known it doesn't want to interrupt the normal market dynamics as well as that the Department wants to support the nuclear renaissance.
Dumping uranium into the market is what caused the current mess. Increasing the dumping would simply forestall the inevitable. Also, I refer back to this chart of supply and demand over time to show that the total amount of 5 million pounds per year is less than 3% of consumption.

UPDATE same day:
* I read the Uranium Bull Market book only fairly recently. Much of the stuff has been on the web at various times. It's the same information from the same people. A big chunk of the book covers various specific companies with a rating system. But it's a very good collection of information in one place. There's some things that I hadn't seen anywhere else, such as the details of various reactor types.

Also, the US will probably have the first new nuclear reactor order since the 1970s within a year. Any new reactors probably won't go online until 2015, which means they'd be buying uranium around 2013. My guess is that the politics will get resolved within the next one or two years and there will probably be several new reactors in the pipeline right after that.
Regulators expect to receive about 20 applications for new plants over the next three years with at least 30 new reactors.
Many of those probably won't get built due to NIMBY political opposition.

Russia plans to build two new reactors each year through 2015.
Government officials said Friday that Russia will build two nuclear reactors annually through 2015, and increase to four a year by 2020 in an effort to sharply increase atomic power generation, according to Russian news agencies
Uranium Participation (U.TO), the only pure uranium holding company, is currently trading at C$14.95 while the most recently reported net asset value claims 4.2 million pounds of U3O8 and 950,000 Kg of UF6, which based on current spot prices, is worth US$91 per pound and [estimated] $249 per Kg respectively. The result is worth US$618 million or C$726 million. With 50.69 million fully diluted shares, this works out to be C$14.32 per share, which is roughly the market price of the stock. This doesn't seem to indicate much of a bubble in uranium, considering that the spot price has been steadily increasing since 2003 (from well under $15) without a single declining week. The market is saying that the value of the uranium is more or less equal to the current spot price.

Paladin opened their Langer Heinrich mine on Friday which is expected to produce 2.6 million pounds of yellowcake per year.

Is that enough uranium news for you? A year ago, things were a lot more quiet. It's very difficult to keep up with everything nowadays. I've clearly seen a shift this year toward more mergers and capital raising events (both public and private).

UPDATE next day:
There's another 100K pound sealed-bid auction coming up at the end of March.
“Bidding is expected to be aggressive,” wrote Nuclear Market Review editor Treva Klingbiel in the March 16th issue.
An article slightly independent from StockInterview.
Most responses we received following our Friday story, inspired by Macquarie analysts forecasting spot uranium would spike shortly and then fall back to US$46/lb by 2011, were highly critical of Macquarie's price forecasts.

One of our readers, a keen follower of the uranium industry, again pointed out to us that production of uranium in major producing countries like Canada and Australia has consistently failed to match projections over the past few years. Last year, total uranium production in both countries fell against the previous year.

Olympic Dam production has been declining, apparently and management has been forced to buy uranium on the spot market to make up for it.

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