While a rising tide of investment earlier in the year lifted prices for most uranium companies, the recent fall, largely in reaction to volatile spot prices, means that investors now need to become far more discerning and look at which projects will actually be viable. Securing a long-term offtake agreement is critical, as only 10 per cent of uranium is traded on the spot market.
Key criteria include project resource and grade, infrastructure (water and power) and jurisdiction. Political uncertainty in Australia, Canada and Kazakhstan means that with predicted supply shortfalls in 2012/13, many end-users are looking to secure geographic diversity of supply now.
!!!!>>>>>>>In Namibia, our favoured jurisdiction, Korean state-run power company Kepco is planning to acquire a mine next year, possibly with Rio Tinto. Extract Resources' Rossing South project is a potential target, being next door to Rio's Rossing mine and with Rio controlling 16 per cent of Extract. This is by no means certain, though, since Kalahari Minerals and Polo Resources also significant shareholders with respective stakes of 41 per cent and 10 per cent.<<<<<<<<<
Areva and Nuclear Power Corp of India may sign an agreement next year, which could include a stake in Areva's Trekkopje mine in Namibia. Areva could also increase production at Trekkopje using West Australian Metal's Marencia as a satellite project. However, Areva is also currently constructing the $1.4bn (£840m) Imouraren mine in Niger and has strategic alliances with other companies in Africa, including Forte Energy where it is a major shareholder.
Areva may do similar deals in Namibia and elsewhere in Africa with Russian state-run ARMZ Uranium Holding. However, ARMZ is also in discussion with Cameco about projects in Africa and Australia after their joint venture in Russia stalled due to the strategic investment laws.
However, many existing projects elsewhere are too small to stand alone and we expect a wave of consolidation to hit the junior sector as licence areas are combined. Recent transactions such as those involving Uranium Resources in Tanzania and UrAmerica in Argentina indicate this has already begun. We expect it to continue, especially in Australia, Southern Africa and South America as smaller companies run out of cash and realise they need to merge to survive.
Uranium's glowing opportunity Created: 10 November 2009 Written by: Martin Li Uranium remains a highly emotive commodity. Mere mention of the heavy metal stokes up memories of the catastrophic accidents at Chernobyl and Three Mile Island. However, governments across the world, including in the UK, have concluded that nuclear energy produced from uranium is the only viable way to combat climate change and global warming. Global nuclear power capacity is growing steadily, although not yet dramatically. There are currently 436 nuclear reactors operating in the world, with a further 52 under construction and 135 planned, according to statistics from the World Nuclear Association (WNA).
Much of the anticipated long-term growth in demand for nuclear power is driven by China's wish to move its economy away from a high dependence on fossil fuels. China operates 11 nuclear reactors, and is building 17 more with a further 34 planned. Growth in nuclear usage is also being seen in Russia, South Korea and Japan. The UK government has just announced 10 potential sites for new nuclear plants.
However, concerns are growing over whether all these new reactors, plus around another 300 being proposed, will be able to secure enough uranium for their needs. Demand for uranium is particularly acute at start-up since nuclear reactors use around three times the level of uranium to fire up as they need once they reach steady-state operation. If these concerns are bourne out it will push up uranium prices and the profitability of producers.
One supply worry is that China has yet to sign agreements to source a meaningful long-term supply for its fast-growing nuclear sector. How it decides to secure supply is likely to have a major influence on the uranium market over the near term. Another concern is the problems suffered at two important existing projects. Cigar Lake in Saskatchewan, Canada, which is potentially the world's largest undeveloped high-grade uranium deposit, has been delayed following mine flooding, and isn't expected to enter production until 2011 at the earliest. It might even be delayed until 2015. Plans to expand BHP Billiton's Olympic Dam mine in Australia have also suffered delays.
Making the grade
However, in the short term, the outlook for supply looks more positive. Uranium is naturally plentiful and is found in many rocks and even in sea water. The WNA estimates that Australia holds "reasonably assured uranium resources" of 732,000 tonnes, representing about 27 per cent of the world's total. Kazakhstan holds around 17 per cent of resources and Canada around 13 per cent. Other countries with significant uranium deposits include the USA, South Africa, Namibia, Brazil, Niger and Russia. Many more countries have smaller deposits that could be developed and mined if necessary. The issue is not supply, but grade: uranium deposits need to be in sufficient concentrations to allow economic mining.
The WNA has raised its long-term supply forecasts, driven by expectations of substantially higher output from Kazakhstan, which has sought to increase output from existing mines. Kazakhstan is the only major uranium player that is increasing production. That said, some of its projects are remote and require the construction of new infrastructure. Indeed, given its higher output and the efforts put into rehabilitating Cigar Lake and Olympic Dam, the uranium market could even be in surplus as soon as next year. Yet, despite possibility of short-term abundance, the longer-term outlook remains one of supply struggling to keep pace with burgeoning demand from nuclear power generators.
In fact, according to the WNA, the world is actually already in uranium shortfall: the annual uranium requirement has grown to over 65,000 tonnes whereas 2008 production totalled only some 43,700 tonnes. However, decommissioned nuclear warheads and some civilian stockpiles currently fill the shortfall. But the 'Megatons to Megawatts' programme, which recycles bomb-grade uranium from Russian nuclear warheads into low enriched uranium for American nuclear power plants, will complete in 2013. A new decommissioning deal could be signed, although the uranium derived from warheads isn't always of optimum quality.
Priced out
John Wong, portfolio manager at New City Investment Managers who co-manages the uranium-focused Geiger Counter fund, warns that the first crunch time for uranium could arrive as early as 2013 when the demand-supply gap starts to open. He expects an even bigger crunch to hit in 2020.
Richard Lockwood, also of New City, explains that the uranium market isn't well understood due to the lack of a liquid spot market and this could hold back production. Only around 10 per cent of uranium is traded on the spot market - most is traded on long-term contracts - which results in a lack of transparency and imperfect pricing. This can make life difficult for uranium miners.
First, with the lack of a spot market, uranium needs to be sold on long-term contracts, but major power company buyers demand long-term security of supply, which requires discoveries to be substantial and high grade. Second, at the depressed spot price of some $47 (£28) per pound of uranium oxide (U3O8, also known as 'yellowcake'), companies might struggle to raise enough funds to bring mines into production.
The Geiger Counter fund is looking to invest in the next generation of uranium producers, but Mr Lockwood doesn't see too many on the horizon. Mantra Resources in Tanzania and Uranium Energy in the US might be the next to enter production, but the timeframe could be up to three years.
Kalahari Minerals holds a 40 per cent interest in the exceptional Rossing South uranium project in Namibia. Having recently sold its gold and base metals projects to North River Resources, management's principal focus now is to maximise the return from Rossing South. Shareholders agree: recent fund-raisings to let Kalahari increase its holding have been well supported, which isn't surprising given the growing scale of the deposit and positive recent cost and risk assessments. VANE Minerals continues to develop its portfolio of US uranium assets, bolstered by cash flow from Mexican silver and gold production. The joint venture with Uranium One Exploration now controls over 60 targets in northern Arizona, which contain 10 known mineralised zones that are now the company's priority. Recent drilling encountered high grade material, which the company is evaluating along with historical data to produce a resource statement.
…AND OUTSIDER Niger Uranium is proposing to pay a special dividend representing the majority of its 13 per cent holding in Kalahari Minerals. The shares have been trading at a substantial discount to the value of its holding in Kalahari alone. The company's other uranium assets include licences in a highly prospective region of Niger, which analysts report is seeing an improvement to its security situation.
Nuclear powered stocks
The Rossing South deposit in Namibia owned by Australian-listed Extract Resources, in which Aim-traded Kalahari Minerals owns a 40 per cent interest, continues to develop into potentially the world's largest uranium deposit and is also attractively high grade. Eleven drill rigs are currently working to further define the resource to support a bankable feasibility study. Mining major Rio Tinto, which owns the nearby Rossing mine, holds strategic stakes in both Extract and Kalahari.
Having joint-ventured its Mongolian coal assets with Peabody Energy, Polo Resources has refocused its attention on uranium, building up stakes in Extract Resources and Berkeley Resources.
Aim minnow Red Rock Resources has acquired a 15.8 per cent stake in Canadian-listed uranium explorer Cue Resources, whose principal asset, Yuty in Paraguay, includes 9.5m pounds of uranium resources with upside potential from further drilling.
Forte Energy has also been drilling with exploration results pointing to a significant uranium province in Mauritania. Analysts expect Forte to publish a Mauritania resource statement early next year, and the company already has a resource of 11.6m pounds at a project in Guinea.
VANE Minerals has built up a large portfolio of projects in Utah and Northern Arizona. The portfolio contains some 130 targets, and the company believes each has the potential to contain 1-5m pounds of uranium oxide at a grade of around 1 per cent, which would rank among the highest uranium grades in the US. On some of its acreage, VANE has a 50:50 joint venture with Uranium One Exploration, under which VANE will do the exploration and Uranium One will do the mining.
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