Globe & Mailhttps://www.theglobeandmail.com/servlet/story/LAC.20070418.RURANIUM18/TPStory/?query=denison
Price forecasts red hot for uranium
'Bellwether' change in attitude cited
JOHN PARTRIDGE
INVESTMENT REPORTER
CIBC World Markets Inc. has raised its price forecasts for uranium oxide by 40 per cent, citing an environmentally driven renaissance in nuclear power and a gap between demand and supply for the metal.
The firm's chief economist Jeffrey Rubin said yesterday that he now expects the nuclear fuel, which is currently fetching $113 (U.S.) a pound, to hit $140 this year and $160 in 2008.
The move comes amid developments that could bring a new transparency to "yellowcake" prices, which have already risen 15-fold in the past six years, by allowing speculators as well as industry participants to play the market through futures contracts for the first time.
Until now, prices have been set behind the scenes, mostly in contracts between utilities and uranium suppliers. As well, it is only in the past couple of years that investors have been able to bet on these prices directly, by investing in a handful of funds that have gone out and purchased actual yellowcake.
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On Monday, however, the New York Mercantile Exchange revealed plans to launch futures contracts for uranium oxide next month in collaboration with Ux Consulting Co. LLC of Roswell, Ga., the key source of what little public information there is on prices. The contracts will be settled in cash, meaning no one will have to arrange to take delivery of the stuff.
The Nymex-Ux plan came just over two weeks after British energy broker Tullett Prebon (UK) Ltd. said it has set up a nuclear fuel derivatives desk to sell a variety of futures contracts -- also to be based on the yellowcake price and settled in cash -- to utilities, mining companies, banks and investment funds.
Mr. Rubin said there has been a "bellwether change" in North American attitudes toward atomic power. He cited environmentalist opposition that recently forced Texas's largest power utility to scrap plans for 6,000 megawatts of new coal-fired generating capacity in favour of building up to five nuclear power plants.
"It's one thing for California to ban coal-fired capacity, but it's a whole other ballgame when Texas is cancelling 6,000 megawatts of capacity for environmental reasons," he said when reached in Toronto.
As well, 21 new nuclear plants are slated to come into service in China and elsewhere in Asia by 2010, and twice that many more by 2020, he said in a commentary.
At present, mine production provides just 66 cent of the approximately 68,000 tonnes of yellowcake civilian reactors around the world require annually, while the balance comes from secondary sources.
However, the report notes that one key secondary source, a program under which Cold War-era atomic warheads are converted to fuel purchased by U.S. power plants, is set to end in 2013, and Russia has already said it will not renew the pact.
Mine production is slated to expand to 59,000 tonnes a year by 2010 from 42,000 last year, with 12,000 tonnes of the increase coming in the final year.
However, Mr. Rubin noted in his report that much of the 2010 leap will depend on the timely completion of the currently flooded Cigar Lake mine in northern Saskatchewan that uranium giant Cameco Corp. of Saskatoon is trying to drain and develop. Any slippage will leave the market "significantly tighter."
There are mixed views on what sort of impact the addition of futures trading will have on prices.
Mr. Rubin said the development "certainly wouldn't cause me to lower my price targets."
However, Kevin Bambrough, market strategist at Sprott Asset Management Inc. of Toronto, which has invested aggressively in the uranium sector, said the futures market may siphon off some of the speculative money that has been pumped into buying physical yellowcake.
"I think adding liquidity is usually a good thing over all, but I don't expect it to have too much of an impact on the global supply-demand picture, which ultimately will dictate where the price is going to head," he said.
Bob Mitchell, who heads Adit Capital LLC of Portland, Ore., and was one of the first fund managers to invest in physical uranium, figures nuclear power plant operators will likely try to use the futures to try to slow the fuel price rise. "But at the end of the day they're going to need uranium to put in their reactors to produce electricity, and paper profits and losses won't do that for them," he said.
Meanwhile, Peter Farmer, chief executive officer of both uranium miner Denison Mines Inc. of Toronto and Uranium Participation Corp., a publicly traded closed-end fund that buys uranium oxide, also played down the potential impact. "It's just a bet on the [yellowcake] price, so it shouldn't have any more effect on the price than the trading value of UPC shares has," he said.