Uranium industry at the crossroads November 2, 2009 The time has come for Australia to decide if it wants to be a major player in yellowcake, writes Jacob Saulwick.
In the ocean of Australia's mineral exports, uranium makes up more than a drop - but not much more. The minerals industry shipped about $160 billion in commodities last financial year, and less than 1 per cent of that was uranium. But the story of uranium has never been just about the money. And as the global dash for supply heats up, whipped up by predictions of a doubling in the world's nuclear power generators in the next 40 years, one question is set to become more pressing: what will happen to the politics of yellowcake?
For decades, the uranium industry has been said to be on the cusp of a boom. In the 1970s, for instance, and more recently, prices have risen sharply. In the 1980s, the anticipated surge in global nuclear power ran up against the tragedy of Chernobyl. But for the industry's boosters, the coming decades look like the real deal.
The Government's official forecaster, the Australian Bureau of Agricultural and Resource Economics, is among the bulls. There are about 436 operational nuclear power plants in the world. On ABARE'S tally, another 64 will be commissioned within just the next six years. And, says Ziggy Switkowski, the chairman of the Australian Nuclear Science and Technology Organisation, there are likely to be 1000 nuclear power plants by mid-century.
''There is a revival of interest in nuclear energy around the world,'' Switkowski says. ''And [the current] 440 [plants] are likely to be replaced by then as well. That suggests a continuing increase in demand for uranium.''
What makes nuclear power a potentially awkward fit for a country such as Australia is what makes it attractive to emerging economies such as China and India. There, deep wells of national savings exist to pay the hefty capital costs needed to build plants. Once built, the ongoing costs of running the plants are relatively low, with the cost of the yellowcake contributing about 5 per cent to 8 per cent of the running of a plant. And nuclear power will help countries reduce their carbon emissions.
India has 23 reactors either operating or under construction, and officials have flagged that the country plans to aggressively pursue the power source. By 2050, India hopes to supply as much as a quarter of its energy needs from nuclear power.
By 2014, the Chinese are expected to build another 21 power plants, on ABARE's figures. And in developed markets already reliant on nuclear energy - such as Japan and Korea - the existing plants are aging. Together, the two countries are expected to commission another 14 plants by 2014.
To be sure, the view that nuclear energy is enjoying a renaissance is far from universally shared. David Noonan, a nuclear-free campaigner at the Australian Conservation Foundation, says nuclear energy remains unviable without massive slabs of state support. Only China and India, he says, have the capital to fund expansion programs. And other countries, such as Russia, have found alternative sources of energy much cheaper to come by. ''There is only one reactor being built in the western world,'' he says. ''And that's in Finland.''
Nevertheless, the demand for supply from the rest of the world has been building, particularly in the past three years. In Australia, which has about 40 per cent of the world's recoverable uranium at today's prices, spending on exploration has risen from about $20 million a year in 2004 to more than $200 million last year. Mine production is expected to increase by about 6 per cent a year. As a result, export revenue from uranium is projected to rise from $940 million this year to about $1.7 billion in 2014, says ABARE.
With such bullish predictions for world growth, the increase in supply is just what would be expected. But uranium is not a normal market. Government policy deliberately excludes miners in Australia, for example, from sending their yellowcake to India, one of the largest potential customers. All countries receiving uranium exports from Australia need to sign agreements that attempt to lock them into not using the material to power military resources. But India has not signed the Nuclear Non-Proliferation Treaty, which would prevent the use of civilian nuclear material in the development of weapons, and Australia has resisted a supply agreement.
Russia, another potential billion-dollar trade partner, is still waiting in the wings. The Howard government signed a uranium supply agreement with the country in 2007. A year ago, however, a Labor-dominated committee recommending against ratifying the agreement, against the advice of the Government's own advisory body, the Australian Safeguards and Non-Proliferation Office.
Despite ASNO's assurance that Russia was moving towards separating its civilian and military nuclear operations, and would allow inspectors in to monitor the civilian sites, the committee remained uncomfortable. ''While the committee notes ASNO's assurances, the committee also notes that … IAEA [International Atomic Energy Agency] safeguards failed to discover the efforts of Iraq and Libya to develop nuclear weapons,'' the committee's report said. For ASNO's critics in the nuclear non-proliferation movement, the report vindicated their view that Australia had little control over what happened to uranium once it leaves the country. Against Russian threats of an economic backlash, the Government has been sitting on the treaty since.
It is unclear, however, whether Government opinion has moved since that report, drawn up in the context of Russia's 2008 conflict with Georgia. ''The conflict undoubtedly had some influence on that committee,'' says Michael Angwin, the executive director of the Australian Uranium Association.
Last month, the same committee reported on nuclear non-proliferation and disarmament, and had little to say about Australia's existing uranium export treaties. Noonan says the committee deliberately chose to focus on non-proliferation, at the expense of uranium exports, to secure a unanimous viewpoint.
Another result of the country's long political unease with the uranium sector is the unique patchwork of regulations in different states. The federal Labor Party shed its ''three mines'' policy in 2007; this July, the former anti-nuclear campaigner and present Environment Minister, Peter Garrett, approved the country's fourth mine, FourMile, in South Australia.
The policies of the states and territories, however, remain more ambivalent. South Australia permits both uranium mining and exploration, as does the Northern Territory. The Territory's resources minister, Kon Vatskalis, made much last week of his dedicated Chinese and Japanese investment strategy. ''We are expecting a number of significant announcements over the coming months,'' Vatskalis said, citing prospective investment deals across a number of commodities including iron ore, copper, lead, zinc, nickel, and uranium.
In Western Australia, the state's Coalition Government has rescinded the ban on uranium mining. The Labor Opposition is committed to reinstating the ban. And in Queensland, the Labor Government permits exploration but not mining.
A flipside of Labor's past angst over uranium is that the contours of the industry make it ripe for expansion. When Labor slapped its three-mines policy on the sector in 1984, a number of fledgling uranium projects were mothballed. These, many of which would have been made uneconomic by the fall in the uranium price in the 1980s, are now ripe for development.
The issue of foreign investment remains. The top end of the industry - BHP's Olympic Dam mine in South Australia, Beverley in South Australia, Ranger in the Northern Territory, and the Kintyre and Yeelirrie depots in Western Australia - will continue to dominate Australia's exports.
But at the smaller end, a host of explorers and smaller projects are attracting interests from foreign investors, mostly from China, Japan and Korea. Indeed, insiders say, just about every smaller project in the country has had some contact with a foreign investor.
For smaller miners and explorers, tying up an investment with a potential customer can be much cheaper than trying to raise money through the stockmarket. ''The sort of funding arrangements that potential users could offer is at a premium for what could be obtained through equity arrangements,'' says Mike Fewster, the executive director at Energy and Minerals Australia, which has projects about 250 kilometres from Kalgoorlie.
The initial interest from China started to heat up about 2006. By June 2007, Sinosteel had taken a 60 per cent stake in South Australia's Crocker Well project, alongside Pepinnini. More recently, China Guangdong Nuclear Power announced plans to buy 70 per cent of Energy Metals, a Perth-based explorer. Chinese investment has supported feasibility studies for a rare earths, phosphate, and uranium deposit in Central Australia for Arafura Resources.
There is talk that a number of other deals have been sounded out with Australia's Foreign Investment Review Board. ''There is no doubt that the Chinese and the Japanese are becoming much more interested,'' Angwin says.
Others note, however, that for all the talk of Chinese investment, there have been few agreements finalised. Noonan says there will be little need for smaller projects if the growth plans of the existing major mines and projects go ahead. If the expansion of BHP's Olympic Dam proceeds as proposed, uranium production will increase from 4000 tonnes to 15,000 tonnes.
Warwick Grigor, the managing director of advisory firm Far East Capital, says he knows of about six cases in which potential Chinese investors have negotiated memorandums of understanding with uranium firms, only to back out of the projects. Grigor is even ready with a motive. ''In a lot of cases the Chinese have used these MOUs to get access to information and geological assessments,'' he says. ''I'm sure there's been a quite conscious data collection.''
In the future, he says, Chinese investors may be more interested in African projects, and the next wave of Australian investment could well come from Korea.
''In the past 12 months [Korean investors] have started to come out of the woodwork,'' Grigor says.
''Their government is taking quite a long-term view. They are mostly concerned about whether they can secure long-term suppliers.''
One question being asked in Canberra, however, is what will happen when the various smaller projects and explorers in the industry want to start mining. And nobody, as yet, has an answer to that
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