JOHANNESBURG (Mineweb.com) --With booming base metals prices, uranium can be overlooked, but it takes a brave investor to bet against it. The price of the radioactive metal has barely seen a negative day’s trading in the past five years. Despite its price history – uranium has increased sixfold in less than five years – SXRUranium CEO Neal Froneman thinks there is still upside. His prediction is for $70 a pound by the end of the year and $100 “some time next year.” The current price is about $60, up $4 this week.
The most recent driver of the uranium price stems from misfortune at the world’s largest producer, Cameco, a Canadian company. Cameco’s unfinished Cigar Lake mine, which was expected to come into production next year, and produce up to 10% of the world’s uranium supply was flooded last month, delaying production by at least a year. This set the prices of uranium and competitors’ shares soaring.
Cynics say the uranium story sounds too good to be true. “I think there’s a lot of froth in the price of certain stocks,” Froneman told Moneyweb/Mineweb Radio Friday, not offering an opinion on whether he thought this applied to SXRUranium, which has increased more than 150% this year alone. But he says: “I don’t think there’s any froth in the price of uranium.”
Froneman warns that the uranium investment cycle (at least for shares) is “probably entering quite a dangerous phase”. “Everybody’s climbing on the bandwagon and to a large extent they could even miss the boat,” he says.
Froneman says growing concern about global warming, which is thought to be caused partly by burning fossil fuels such as coal, will result in increased uranium demand. He reckons governments are starting to realise that there is no commercially viable alternative to fossil fuels other than uranium. “I think very little of this environmental impact has really come into the demand side [of uranium] yet,” argues Froneman.
China has plans to build several new nuclear power plants, and Froneman is excited about a deal struck between the Indian and US governments for the latter to supply the former with enriched uranium.
Another factor counting in favour of the uranium story is that its price is only 3-5% of the total cost of producing electricity from nuclear sources, says Froneman. Thus, even a large increase in the uranium price has a relatively small effect on governments’ decisions to go nuclear.
Uranium price increases are not difficult costs to stomach, argues Froneman, “especially when those power stations are run by utilities who just pass the costs off back on to the consumer.”
SO WHAT’S THE CATCH
“I don’t know that there’s a catch in the shorter term,” says Froneman. “Certainly the supply constraint is going to be with us, I think, for the next five to ten years.”
He concedes that uranium is far from a precious metal, although its current price is not far off making it look like one. “The issue is there hasn’t been exploration for many years because it was written off as a material that would not really have real commercial uses,” he says.
Although Canada is the world’s largest producer, Australia has the biggest known uranium deposits. Thanks to a draconian government policy that seems likely to change, there are only three operational uranium mines in Australia. Once its full supply potential is realised, the result will be downward pressure on uranium prices.
That’s why Froneman believes it’s important to be at or near production if you want to take advantage of the uranium price. “I do believe then supply will catch up to demand, and that is part of the problem of some of the new entrants coming into the market now,” he says. “They’re going to probably miss the boat.”
SXR expects to produce uranium at its Klerksdorp Dominion mine in the first quarter of next year.
Other things that worry Froneman are: the possible invention of a competitive technology to nuclear power, the threat of a nuclear incident – either a Chernobyl-type accident or a terrorist attack.
Asked how SXR will respond to a uranium price decrease, Froneman responds. “We certainly have some of the lower-cost projects in the world at $14.50 per pound and at $60 a pound; that’s giving us $45 a pound of margin. So we can stomach a big change, not that I think it’s coming. We’re going to have healthy margins.”
Certainly the uranium story is an appealing one. The question is whether all of this story – and possibly more – is built into the price of uranium shares, including SXR’s, which currently values the company at R9.3bn (US$1.25bn).
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