The outlook for uranium producers continues to improve as a surging U3O8 price reflects the strong demand/supply fundamentals for the industry. Last week Trade Tech reported the uranium spot price rose +16.5% to $US72.25lb which represents the 8th consecutive monthly rise and the highest level since April 2008. It is worth noting that the U3O8 price is now up $US30lb or a massive +71% in just the last 12 months.
Despite the strong price rise, demand still remains strong with Trade Tech reporting that the spot market was particularly active in January with a total of 27 transactions. The surge in the spot price over the last year has supported a major shift in the industry fundamentals with a supply shortfall emerging due to production cutbacks and disappointments from the big global producers. Make no mistake, I believe a major new long term uranium bull market started last year.
Recently, ERA announced the closure of the processing plant at its Ranger mine for the next 3 months due to excessive rainfall. As a result, the downgraded FY 11 guidance is for flat production of approx 3800t. In the meantime ERA has bought 450t on the spot market to honour existing supply contracts. Further, management announced that the Ranger heap leach project will be delayed until late 2014. This is particularly bad news given the commissioning of the heap leach project was expected to supplement the loss of production from the scheduled closure of the Ranger open-pit mine next year. This delay will almost certainly result in lower future production levels until the full ramp up of the heap leach in 2015 is expected to return production to 4,500t pa. The latest problems for ERA follow a previously disappointing reserves outlook and declining grades at the Ranger mine. ERA�s uranium output has fallen nearly 30% over the last 3 years from a FY 08 production figure of 5,340t to approx 3,800t last year. Consequently, there is market speculation that any additional weather-related delays (highly possible) or lower grade issues (very possible) will result in additional production losses which will exacerbate an already-tight spot market. As a result, in combination with the production problems at Olympic Dam, Australia's uranium production has fallen by 31% to 7,156t over the course of the last 12 months. Considering global mine output last year was approx 60kt (132mlbs) this represents a significant loss of production.
Elsewhere, Denison Mines the Canadian producer, recently reported the intention to cut FY 11 uranium production by about 15% to 1.2mlbs and focus on exploration opportunities. While Denison expects to sell 1.3mlbs this year mostly from stockpiled ore, it is worth noting that the proposed inventory drawdown and the decline in FY 11 production, exacerbates the tight uranium market. Further, Paladin (PDN) recently announced a downgrade to FY 11 production by 1mlbs (14%) to 6mlbs, due to production problems at its Kayelekera mine in Malawi.
The chronic supply problems in Australia, Canada and now Namibia, have acted to mitigate the recent ramp-up of mine output in Kazakhstan, which has emerged as the world�s largest producer. It is worth noting that Kazakhstan has increased production from just 6kt in 2005, to approx 18kt currently, however, the 12kt rise in Kazakhstan output has largely been offset by a production decline of about 8kt from Australia, Canada and other global mines. As a result, increasing global supply constraints have shifted the spot market, which supplies about 10% of global demand from an oversupplied buyer's market last year, to a seller's market currently.
In the meantime, the supply disruptions and production constraints have been exacerbated by aggressive Chinese buying (sound familiar?). Late last year, the NDRC reported that the new 2020 target for electricity generation from nuclear power would be 112GW (70GW previously). This new target represents 7% (2.2% currently) of the forecast 1600GW national electricity generation target for 2020. This is a significant increase on both the market expectations, and the World Nuclear Authority's (WNA) bullish upside case of 73GW. As a result, future Chinese uranium demand forecasts will have to be revised significantly higher. In this regard, a recent report from consulting firm McKinsey reported that on the revised target, Chinese uranium demand is expected to be 80mlbs by 2020. This represents a staggering 60% of the 2010 global mine out of 132mlbs. However, other industry reports expect Chinese demand to be in excess of 100mlbs.
There is also speculation that the upcoming 12th FY Plan, which has a strong focus on renewable energy, could incorporate an even higher nuclear power target. Here's why. According to the WNA, about 15% of world electricity generation is through nuclear power. Yet, currently nuclear power represents just 2.2% of total Chinese electricity generating capacity. Of the 30 countries which currently operate reactors, 16 generate 25% of their total electricity requirements from nuclear power. However, even at the revised target of 112GW, nuclear power will contribute just 7% of total Chinese electricity capacity. Given the clear base load power limitations of wind and solar, I believe China will be forced to revise its nuclear power target to as high as 15-20%, to meet the target of a 45% reduction in 2005 carbon emissions by 2040. I strongly believe the current Chinese target is simply not possible without a major commitment to nuclear power.
In anticipation of a significant increase in nuclear power generating capacity, China began aggressively buying uranium last year. Reuters figures, which appears to be confirmed by industry data, suggest that Chinese uranium imports for 2010 were approx 37mlbs, which represents about 25% of forecast 2011 global demand. China recently signed three major long term uranium supply deals with Areva, Cameco and Kazatomprom for approx 130mlbs, the equivalent of 2010 global mine output. While the purchases have not been in the spot market, the end result is that China has drained the majority of uncontracted global supply for this year. In just one announcement, China has changed the demand/supply fundamentals of the uranium market.
However, I believe the aggressive inventory-building by China could form part of a much larger plan. Here's why. Firstly, I believe China will commit to a much larger nuclear energy program than its publicly-stated intention. Secondly, just 2 years of inventory at the current 2020 nuclear power target of 112MW, would require approx 40kt of uranium inventory. This compares to Chinese inventory estimates of just 13kt currently. Therefore, I believe China may still have to import at least another 27kt of uranium, which will further tighten global supply.
Thirdly, I believe China is aggressively stockpiling uranium given the forecast of a major global supply deficit in two years. Currently, approx 20-25% of global uranium demand is supplemented by secondary supply (approx 15kt), of which a large part is sourced from Russian weapon stockpiles of highly enriched uranium. Importantly, a significant part of this supplementary supply source, is expected to end with the termination of the Russian supply agreements in 2013.Therefore, given the lack of any major new production in the next 3 years, such as the huge Cigar Lake project, which continues to be delayed, the consensus forecast is for a significant global supply deficit for 2013/14 and beyond.
In summary, China has bought the majority of the short term uncontracted uranium supply ahead of its decision to significantly increase nuclear powered electricity generation. Therefore, it appears the previously forecast 2013/14 supply deficit has just been fast forwarded to the present. Any proposed deficit can only widen with Kazakhstan displaying newfound production discipline, combined with the continuing supply constraints from the major producers, and delayed new production. Considering the increased in Chinese demand, I actually wonder where new supply will be sourced?
The Russian government through its subsidiary Rosatom, has initiated a rationalisation of uranium producers with the aim of consolidating supply. India is also seeking to dramatically ramp-up nuclear power with 6 new reactors under construction and another 29 planned. Currently, just 5% of Indian electricity generation is supplied by nuclear power but the official target is for 10% by 2020, and 25% by 2050.
Consequently, I believe the world is poised for a nuclear renaissance driven by unrealistic expectations of the role for traditional renewable energy sources such as solar and wind power. As a result, I expect the spot and the term uranium prices will track significantly higher over the next few years. Make no mistake, this is the beginning of a major new long term U3O8 bull market in which I expect the all-time high of $US137lb will be challenged, and eventually exceeded over the next few years.
BMN Price at posting:
81.0¢ Sentiment: Buy Disclosure: Held
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