Cannacord brief on uranium marketThanks blindboy. I've posted it as best as possible except that I was not able to post the charts/graphs. If anybody wants those, I will have to send the attatchment by email.
MEMBER OF ALL CANADIAN STOCK EXCHANGES AND THE INVESTMENT DEALERS ASSOCIATION OF CANADA
VANCOUVE R TORONTO CALGARY MONTREAL LONDON PARIS
Uranium market – What will fill the gap?
Last week, Canaccord hosted a luncheon presentation in Toronto at which the outlook
for the uranium market was discussed by two industry experts – one from the point of
view of a nuclear fuel purchasing manager for a US utility and the other as an industry
consultant that works closely with both uranium producers and fuel buyers. Both
presenters came to the same conclusions – the spot uranium market is in short-term
disarray and that the outlook over the longer term does not look much better.
Dustin Garrow, the first presenter, is the President of International Nuclear Inc., a
Colorado-based company that provides technical, commercial and market analysis
consulting services to the nuclear fuel industry. Our second presenter on the uranium
market was Michael Conner, President of Nuclear Resources International and Fuels
Buyer – Nuclear for Rochester Gas and Electric Corporation (RG&E). Dustin Garrow
focused initially upon the near-term issues that are causing the greatest concern in the
nuclear fuel industry, such as the ongoing dispute between Tenex (the Russian executive
agent to the HEU Agreement) and GNSS (Tenex’s marketing agent in the United States)
and the closure of the Converdyn uranium conversion facility in Metropolis, Illinois.
These two issues have caused fuel buyers in the United States in particular to question the
reliability of the fuel supply chain and have only served to strengthen the belief that
strategic inventories are a necessity and not a luxury.
The Tenex/GNSS dispute shows few signs of being resolved at this point. Several utilities
were scheduled to receive shipments of nuclear fuel from Tenex via GNSS in January and
despite Tenex’s assurances that contracted deliveries would be met, the material has yet to
be delivered. Tenex continues to indicate that it will meet deliveries that have been
contracted through GNSS, however, legal concerns could prevent the utilities from taking
delivery.
While Tenex has pledged to meet deliveries as contracted by GNSS, beyond 2008
Tenex has indicated that it will not sell its US quota material into the United States.
Instead, the material will stay in Russia to meet domestic fuel needs and for delivery to
Russian built reactors in the former Soviet Union states. The US market had been fully
expecting that this material, which by 2009 represents approximately 8.0 million pounds
of U3O8, to meet its fuel requirements. Without the Tenex material coming into the
US market, a further supply gap appears to be opening up beyond the mine supply gap
that currently exists.
Mr. Garrow also highlighted the well-known disparity that exists in the uranium market
between primary, or mine, supply of U3O8 and annual consumption. Since the early
1990s, annual global demand for uranium has trended slowly higher toward its current
level of approximately 180 million pounds. Mine supply, on the other had, has drifted
lower from a peak of approximately 160 million pounds in the early 1980s to its current
level of about 90 million pounds.
Of the 90 million pounds of annual production, the top three largest mines represent
40% of the total and the top ten largest mines account for 78% of production. As has
been highlighted over the past two years, production problems at one or more of the
largest mines can cause serious concerns about supply. In fact many fuel buyers are
now uncomfortable with the concentration in mine supply and again are looking at
whether strategic inventories are a necessity to combat uncertainty about supply.
Uranium prices are rising as it becomes more evident that supply issues are looming in
the near future. The question now is: How high do prices have to go to encourage
significantly more mine supply to enter the market? This question is further
complicated by the strength of the Canadian and Australian dollars over the past 18
months. Just this week, we questioned Cameco on what uranium price they need to
justify development of Cigar Lake – the answer was a uranium price in the mid to high
teens (in US dollars) solely because of the weakness of the US dollar. Two years ago,
the answer was US$12.00/pound. In the chart below, International Nuclear Inc. has
constructed a chart that illustrates the uranium price required to bring additional
production on-line. The chart is approximately 12 months old – as a result, it should
probably be upwards to the left by US$2-3/pound to reflect today’s exchange rates
(since of the bulk of potential new supply is based outside the United States). While the
chart seems to indicate that uranium prices are approaching a level that will start to
encourage new mine development, another complicating factor has to be remembered
– time. It takes anywhere from 8-10 years (or longer) to bring a new uranium mine into
production. And the only significant new uranium mine in the development pipeline is
Cigar Lake, which looks like it will enter production in early 2007.
As to what will fill the widening gap between supply and demand in the uranium
market, there is no ready answer. In the past, “surprise” supplies of uranium (Russian
HEU) have entered the market and surplus inventories have always been present to fill
the gap between mine supply and consumption. But with surplus inventories now
apparently close to being exhausted and the Russians talking about repatriating HEU
derived uranium, it does not seem that a solution is at hand. At present, the only fixes
to the supply problem could be higher prices and time.