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Uranium Market
The uranium spot price continues to move higher at a faster rate than we had
anticipated, helped along by the problems at Cameco’s 50% owned Cigar Lake mine
(18 million pounds of planned capacity) and aggressive investor buying. (The mine
flooded and in our view development will be delayed by approximately three years.)
It remains our view that the market will remain tight for the next three to five years and
possible longer if supply problems continue. The supply response to the high prices is
being limited by the lack of exploration and mine development over the last 20 years,
resulting from a long period of low prices. Though there are now a large number of
companies exploring and making interesting discoveries or re-discoveries of old
projects, the permitting process will delay the supply response. With the high prices (Ux
Consulting Spot price of US$72 per pound at year-end) there will be a supply response
eventually.
Demand in the Western World has been in excess of mine production for over 20 years
but large inventories of uranium; exports from the former Soviet states after the collapse
of the Soviet Union; long-term high priced contracts; and later the 23 million pounds per
year of material made available to the markets from Russian nuclear weapons under the
Highly Enriched Uranium agreement; convinced the market there would be ample
supply forever.
Mines that had survived longer than they should have because of the high price
contracts slowly closed and the main production centres in New Mexico and Utah in the
U.S. and the Elliot Lake region in Canada closed and were reclaimed as they were
never expected to be economic again. Production declined and only a few large and low
cost mines survived but even some of them were struggling and their end was in site
(Rossing).
Then a little water at Cameco’s McArthur River mine – think Cigar Lake but not quite as
bad, announcements that Rossing was getting ready to close, then the Tenex
cancellation of the marketing agreement with GNSS and the world changed. Suddenly
utilities and the miners and investors (not all at the same time) took notice and the
uranium price started to move higher. It hasn’t stopped and nor will it in the near term.
The recent water issues at Cigar Lake only added to the upward moment and the spot
price jumped US$4.00 to US$60.00 per pound at the end of October. The market
continued to move higher and jumped at the end of the year by US$6.50 to $72.00 per
pound, while the term price jumped US$17.00 to $75.00 per pound at the end of
December 2006. The big increase in the term price reflected the absence of fixed prices
in the long-term contracts that were agreed to over the proceeding two months. With all
the term contracts being market based there had been no basis for a new term price
until December.
Besides the issue at Cigar Lake, uranium production has been lower than expected in
2006 at BHP Billiton’s Olympic Dam and ERA’s Ranger mine and at a number of smaller
producers, while demand remains good on improved reactor performance and
discretionary buying by utilities and investors.
New production will be coming from Namibia (Paladin Resources), South Africa (SXR
and Anglo Gold), Kazakhstan (Cameco, Urasia Energy), Canada (Cigar Lake at some
point and McArthur River expansion), United States (numerous players – some real and
some not) and Australia. It will take time to get permits or in the case of the Olympic Dam
expansion (20 million pounds possibly); time just to test the feasibility and make a
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decision about the expansion; and then three years to construct followed by a ramp up
period. It is our view that if there is an HEU II and if Olympic Dam is expanded then the
market will eventually move back into surplus as a result of the high prices and utility
contracting activity. It is in the utilities’ best interest to have the uranium markets return
to surplus and they will over contract in the early years at high prices if need be to
encourage excess capacity. We are not as confident as we were even two months ago
that this will occur within the next five years.
So where does this leave us. We were forecasting a spot price of US$70 per pound for
2007. Since we don’t see the price sliding back and the spot price is currently US$72 per
pound, we need to increase our 2007 forecast. We also had the price peaking at US$85
per pound in 2009 by which time the market will know or have a better idea about Cigar
Lake; the Olympic Dam expansion; the speed of the Kazakhstan production ramp up;
and hopefully about the Russians intentions on HEU II. If SWU capacity increases then
this will be a further source of uranium supply in allowing for lower tails assays. We think
that our peak price is too low as well. Our new peak is still in 2009 but is US$90 per
pound. We do think the price increases are about to slow as the potential returns on
buying and holding uranium are falling as the price increases. It is our assumption that
the supply response will be underway by 2010 and we have prices starting a slow
decline starting in that year as the buyers visualize the new sources of supply in the
years ahead.
We are positive that there will be a supply response, (and mine life extensions –
Rossing and Ranger) but we also think it will come at a price. Though some of the larger
mines have low operating costs and low capital per pound of annual production, some of
the new capacity will come from smaller higher cost operations that will be supported by
utilities. Utilities will be looking at supporting more production sources to lower industry
concentration and provide better security of supply through more sources. Our
long-term price is unchanged and we have the spot price levelling off at US$30 per
pound in 2016.
A table of our prices and a graph showing our forecasted prices and our estimated
realized prices for Cameco out to 2019 is presented earlier in this note. We have
incorporated Cameco’s guidance on their price sensitivity from their Q3 release. If there
is no HEU II and/or no expansion of Olympic Dam the market will may in deficit longer
and prices over $100 per pound are possible.