Toll Cross Report on Uranium - May 13** I was not able to paste the graphs**
Uranium Industry:
Target Price: US$20.00/lb U3O8
Highlights from the WNFM Conference in Vancouver
• We attended the World Nuclear Fuel Market
Conference held in Vancouver, Canada from May 9 -
11. The conference was well attended by global
producers, utilities, conversion and enrichment
companies, energy traders, uranium consultants and
junior exploration companies. Toll Cross was the
only representative of the financial community to
attend.
• Our time and discussions with other participants at
the conference has helped to reinforce our opinion of
a rising uranium market. Concern among many
industry representatives over lack of available supply
to meet a growing demand for nuclear power should
drive the market higher. We are maintaining our
spot price target of US$20/lb U3O8 for 2004.
• The conference focused on two topics: global
uranium inventories and investment. Keynote
speakers from Cameco (CCO – TSX), Areva
(Cogema), Nuclear Fuel Services, Louisiana Energy
Services (LES), Urenco, Rio Tinto (RTP – NYSE),
TENEX and others presented lectures on the above
subjects from a commodity producer,
conversion/enrichment producer, utility, government
and market perspective.
• It is widely believed throughout the industry that
uranium inventories have been depleted. A depletion
of supplier and utility stockpiles has occurred in
recent years due to a decline in production rates, cut
backs in supply from secondary Russian LEU and
HEU, several supply disruptions and growing demand
both in western countries and developing nations.
• Rising demand for uranium as fuel to sustain rapid
economic and population growth in regions like India,
China, Japan and Korea will continue to place greater
stress on global inventories.
• Western demand in 2003 was approximately 160 mm lbs. Western world production was 66 mm lbs and total global
primary production was 92 mm lbs. Scott Melbye, Vice President of Marketing for Cameco suggested that the spread
between supply and demand could reach 100 mm lbs. over the next 10 years and 500 mm lbs. over the next 20
years. This is a best case scenario as this forecast has incorporated all production that is expected to come on line
during this time.
• There were a number of shocks to the supply chain in 2003. These events included a flood at McArthur River,
declining secondary supply of HEU/LEU from TENEX, a shut down of the Converdyne conversion plant and
temporary closure of the Ranger mine in Australia. The disruption to the supply chain in 2003 removed 10.8 mm lbs.
of uranium from the market. The production shortfall resulting from these occurrences was made up from global
inventories.
• Declining primary and secondary supply (TENEX agreement) from Russian producers to U.S. utilities has been a
growing concern for the uranium community. It was well noted during the conference that a curtailment of
Russian supply has been the result of a growing need for uranium as a domestic source of fuel and NOT a
means to disrupt the supply chain or manipulate the commodity price. Further insight into this key
supply/demand factor has helped to subdue our concerns regarding Russian stockpiles.
• Rio Tinto’s Rossing mine in Namibia, Africa was a recurring topic of discussion over the two day conference.
The Rossing mine came online in 1976 when the price of uranium was $40/lb. Although the ore grades at
Rossing are the lowest in the world, the high commodity price in the late 1970’s made uranium mining in this
region economically feasible. A consistent decline to the spot price throughout the mid – late 1990’s until early in
2003 has made it difficult for Rossing to operate profitably.
• Due to the unpredictable nature of the market, a volatile exchange rate, acid market price volatility, lack of water
availability in Namibia and the rising cost of power, there has been some recent discussion of closing the Rossing
mine. Closure of the mine would create yet another disruption in the supply chain and would ultimately remove
10 mm lbs U3O8 from the market beginning in 2007. The company has not forecasted a uranium price that would
warrant continued production at Rossing. A decision on the operating future of the mine should be made by the
end of calendar 2004.
• Increasing investment in the uranium industry was a consistent theme among all speakers. In order to ensure
increased investment across the uranium market it is believed that secure supply and reasonable prices must occur.
However ‘reasonable prices’ were not defined by any of the presenters. In order to attract more investment dollars
the market must be able to ensure strong returns on investment. Another problem facing potential new investors
in uranium has been consolidation, especially within the producer segment of the market. Consolidation over the
past several years has resulted in only a select group of companies for investors to invest. The lack of investment
opportunities going forward might increase the illiquidity issues already present in the market.
• Additional financial resources are essential to further development of the supply chain. An effort to increase the
rate of production from uranium miners, conversion and enrichment facilities will require greater participation
from the financial community.
• Junior uranium exploration companies should play an important role in the fuel cycle for the next several years.
During 2003 and early in 2004 juniors were busy raising equity to finance exploration programs in uranium-rich
regions world wide. Some of these companies have aligned themselves through joint ventures or partnerships
with Cameco and Cogema in an effort to leverage exploration and production expertise. We expect exploration
activity in Canada and Australia to continue at the current pace for the next several years.
May 13, 2004
Jonathan Wiesblatt
Equity Analyst