Uranium Market OverviewApr 26 2010 3:00PM
Uranium Market Overview
Uranium stands out from the other metals, having barely budged from the post-melt-down low.
Overthe last year, nearly all of the metals have recovered from the lowsfollowing the financial crisis. The uranium price has been held back bya number of factors, which are poised to change over the coming weeks.As the uranium price finally begins to track the other metals higher,the companies in the sector will also come alive.
Toa large extent, the sharp fall in the uranium price and the inertia atthe bottom of the market is a result of the success enjoyed by uraniumbefore the crash. Uranium, for a period, was the most popular of metalsfor many investors. The uranium price, and the prices of many of thecompanies, was driven to unsustainable levels.
Fordecades, a spot market for uranium barely existed. Nearly all of themetal was traded under long term contracts between suppliers and users.Suddenly there was an active spot market, propelled largely byinvestors. Uranium, which traded as low as $8 in 2002, reached a peakof $136 a pound in early 2007.
During thatrun-up in the uranium price, more than 400 junior companies suddenlybecame uranium exploration experts, at least according to theirinvestor relations materials. The early stages of the financial crisistriggered the bursting of the uranium bubble. The sharp sell -off inuranium companies affected all companies in the sector. The goodcompanies were sold off along with companies that never did have value.After such a steep decline, investors have been reluctant to get backinto uranium. Yet, the fundamentals of the uranium market areexceptionally strong.
Demand for Uranium is Growing Strongly
Demandfor uranium to fuel nuclear power plants is set to grow rapidly as thenuclear industry expands. The world’s appetite for energy is expandingat a fast pace, driven largely by modernization of the developingnations. At the same time as total energy demand is growing, there is agrowing impetus to reduce the burning of carbon-based fuels.
Currently,nuclear energy provides 6% of the world’s total energy supply,including 15% of the world’s electricity. Some countries rely heavilyon the nuclear industry; in the United States, nearly 20% of theelectricity is produced from nuclear power and in France it is awhopping 78%.
There are now over 430 reactorsoperating worldwide and 56 more are presently under construction.Plants now in the planning stages number 136 units in 26 countries –mainly in China and India. China, struggling to reduce its reliance oncoal, is expected to further expand its nuclear industry, and could seemore than 100 nuclear power plants. The country has plans to stockpilethe metal to avert supply shortages. In North America, existing nuclearreactors are being expanded (although at a slower rate due to therecession and permitting delays) and licenses are being extended. TheU.S. stimulus plan has also dedicated funding to providing loanguarantees for new plants.
New generationreactors are more efficient than older units, and that will moderatethe growth in demand. Nevertheless, over the coming years, usage ofuranium as a fuel for nuclear power plants is forecast to grow at afast pace. At present, annual global usage of uranium is around 150million pounds.
Supply of Uranium is Constrained
Ofthe 150 million pounds of uranium consumed annually, only 100 millionpounds comes from mines. Most of the balance is derived from convertednuclear warheads. In 1993, Russia and America signed a deal called“Megatons to Megawatts”, under which the Russians are converting aportion of their weapons-grade material from warheads into nuclear fuelfor reactors. That material has been an important part of the uraniumfuel market for more than a decade. Russia has given notice that after2013 it will reduce or curtail uranium fuel sales to the rest of theworld. Much of the original stockpile of weapons has now beenconverted, and Russia will require more fuel for its own expandingnuclear power industry. (That material will not be available to therest of the world, but will be a component of the Russian supply.)
So,as demand for uranium is on a strong growth trend, an importantcomponent in fuel supply will be reduced. Clearly, the mining industryhas a major task to grow supplies to match growing demand and to offsetthe loss of the Russian supply. In addition to nuclear fuel, new usesfor this metal are continuing to emerge, adding further pressures tothe supply picture.
Uranium is a fairlyabundant element in the earth’s crust. Numerous deposits have beenidentified over the past few decades. Several companies are workingtowards developing some of those deposits. Exploration for new depositsis also continuing. Companies that make high grade discoveries are mostlikely to attract investor interest.
Newsupplies of uranium will be coming on-stream, but it is doubtful thatnew mine development will keep pace with both the growth in demand andthe loss of the Russian supplies. Permitting any mine takes a longtime, often years. Uranium mines are more difficult and time consumingto permit than other mines. For that reason, the uranium market willlikely see a supply squeeze over the next couple of years.
Outlook for the Uranium Price
Investorattention is focused on the spot price. Yet, more than 80% of tradingin uranium is under long-term contracts. The size of the spot marketwas even smaller until investors began to take an active interest inthe market in 2006.
It is important to notethat the long term contract price has been consistently above the spotprice since the collapse of the spot market in 2007. This shows thatoperators of nuclear power plants are prepared to pay substantiallymore for uranium supplies than indicated by the spot price.
Supplywill grow, but is unlikely to match the growth in demand and offset thesupplies now coming from Russia. The anticipation of a supply squeeze acouple of years into the future will see the market rebound in the nearfuture.
Inevitably, the spot price will getback into alignment with the long term price. That thinly traded spotmarket could rebound quickly with any signal that interest is returningto the uranium market.
With new reactors setto come on stream over the coming years, operators will be lining upsupplies. Add to that the likelihood that China will build a strategicstockpile, and it becomes clear that there will be new buying cominginto the market.
With the spot price moribund,and the long term price stable, there has been no urgency. Once eithermeasure begins to track higher, buyers on the sidelines will quicklyenter the market.
At the very least, the spotprice should realign with the long term price, and that would provide astrong boost to investor sentiment.
Implications for Uranium Developers
At this time, investors are tending to value uranium developers on the basis of the more visible spot price.
Usingthat measure, valuations are not terribly exciting. However, as thespot price moves higher, the valuations will be re-rated.
Compoundingthe issue at the moment is that the western world is mired in a periodof slow growth. Therefore, industrial commodities like uranium remainout of favour for most investors. Companies in that sector aresimilarly unattractive at this moment.
Overthe coming weeks, investor sentiment is almost certain to improve, fora number of reasons. First, the pain of the last meltdown is fading.Secondly, any rise in the spot market will trigger renewed investorinterest. Most importantly, once investors begin to look objectively atthe companies in the uranium space, they will see some compellingvaluations.
Another important trigger will befurther consolidation in the uranium mining industry. The large and themid-tier producers have a firm grasp of the big picture in the longerterm. They want to grow their production capabilities. There have beena number of deals over the past few years that brought small companiestogether to create mid-tier producers.
Thereis a huge value creation in going from a small one-project miningcompany to being part of a larger multi-mine producer. The combinedentity often has a value well in excess of the sum of the parts beforethe merger. That boost in value comes from a number of sources:
The perceived risk is lower for a multi-mine company compared to a company where the entire value is dependent on a single mine.
The large size brings the combined company into the realm where it is owned by larger institutional investors.
Thelarger companies can afford a higher level of management and technicalexpertise, as the cost is shared over multiple operations.
The consolidation process is likely to add value to the shares of both the consolidator companies and to the acquired companies.
Lawrence Roulston
source:
https://www.kitco.com/ind/Resopp/apr262010.html