why the uranium price has been going down, page-5

From the DYL tread:

While the residual effects from the Lehman Bros great uranium liquidation sale continue to resonate on the spot price of $US42.50 (which accounts for only 15% of global sales), the long term price of $US70lb (the real market for sales to utilities) continues to trade strongly. In fact Asian utilities continue to sign contracts at the term price or a significant premium to the spot price. It is interesting that investors, or rather traders, continue to focus on the spot price which has fallen from a peak of $US147lb, rather than the genuine term price which has only fallen from $US90lb.

Despite the weakness in the U308 spot market, we continue to believe the long term demand/supply fundamentals for uranium remain very positive, supporting our buy recommendation for Paladin (PDN). Importantly, we think a recent announcement by China, which has been largely overlooked, has very positive implications for PDN and the uranium market. Last week Cao Shudong, vice director of the power department in the National Energy Administration (NEA), said at the China Power Scientific Development Summit, that the NEA, “will also encourage companies to stockpile uranium and buy overseas uranium resources”.

Make no mistake, this is big news. The Chinese adopt a very long term view on the security of commodity supply, and the intention to accumulate a strategic stockpile is confirmation of the looming supply deficit in 2012/13. In addition, the statement from the NEA provides further confirmation that China is poised to diversify its $US2 trillion in FX reserves into equity stakes in listed strategic commodity companies. As a result we believe this will precipitate an expected consolidation of the listed global uranium sector.

China is the 800 pound gorilla of the global uranium market with just 2% of electricity supply currently generated through nuclear power. This compares to 45% in South Korea and a global average of 17%. China first made uranium stockpiling an aim in May 2007, when the country also set a target for its nuclear power capacity at 40m kilowatts by 2020. Yet with new emission targets, this figure is expected to be raised to more than 70m kilowatts. It is worth noting that China's nuclear electricity generation capacity is currently just 22.9 m kilowatts. A commitment by the Chinese government to increase electricity generation by nuclear power to just 10%, would have serious implications for the future global uranium supply imbalance.

In a presentation last year BHP envisaged two case studies for Chinese uranium demand through nuclear power depending on energy intensity. The first scenario assumed an increase in Chinese energy intensity resulting in uranium consumption increasing to 150tpa by 2030.The second based on a constant energy intensity, forecast Chinese uranium demand rising to 88tpa. It is worth noting that current global uranium supply is about 115m pounds (52mt) against demand of approx 180m pounds (81mt). Importantly current mine output accounts for just over 60% of global uranium supply. The balance of roughly 40%, is sourced from secondary supply which is primarily downblended uranium from Russian nuclear weapons supplied under the under the Megatons to Megawatts program. However the Russian atomic company Rosatom has confirmed that it does not intend to continue the program after 2013.

Consequently, without a major increase in mine output, a significant supply crunch is looming in the next 3-4 years. The expected supply deficit has been exacerbated by the global financial crisis which has curtailed expansion plans and greenfield projects. This is a particular issue in Kazakhstan which was expected to account for a surge in production over the next few years. However the expected Kazakhstan expansion remain in serious doubt. It is worth noting that world supply disruptions remain a feature with recent output problems at Uranium One, and major financial issues at Denison. In addition, major flooding at Cameco’s massive Cigar Lake project has delayed an expected start up from last year, to at least 2011/12. More importantly however, the chronic problems at Cigar Lake are now threatening the mine’s future.

It is worth reflecting on the importance of Cigar Lake to the global uranium demand/supply fundamentals. The deposit has current reserves of approx 100t, which is conservative, at an extremely high grade of 21%. Initial estimates forecast annual production of 8kpta.To put this figure into perspective, this represents nearly 15% of current world mine output. Cigar Lake is the uranium equivalent of the gigantic Ghawar oilfield in Saudi Arabia which currently produces approx 5.5mbpd, or nearly 7% of global oil output. Approx 60% of all the oil produced by Saudi Arabia since 1948 has come from this field. In fact the “peak oil” theory is focused on the possibility that production from the gigantic Ghawar field has peaked. Despite the very real prospect that Cigar Lake may never be developed due to chronic flooding problems, scant mention is ever made of the potential supply implications. Considering Cigar Lake was expected to supplement the end of secondary supply from Russia, a permanent closure would result in a major deterioration of the expected supply imbalance in 2012/13 and serious spike in the uranium price.

In the meantime, global uranium demand is set to increase significantly driven by an initiative by world governments to reduce carbon emissions. Considering electricity generation from nuclear power generates zero greenhouse gas emissions, the uranium industry is uniquely positioned as a genuine “green” alternative energy supply. Particularly as renewable energy sources such as solar or wind do not provide adequate power baseload for electricity generation. In a recent industry study, the IEA forecast that between 2010 to 2050, a total of 24 to 32 new 1,000 Mw nuclear reactors will need to be built each year to just to meet current emission targets. This implies a total of 960 to 1280 reactors to be built by 2050. However the current planned and proposed new reactor forecasts by the World Nuclear Authority suggest this remains impossible considering the construction lead times.

Consequently, the uranium market is facing a significant increase in demand driven by climate change based on the urgent need to reduce greenhouse emissions. This is set against the backdrop of a major future supply deficit supported by the imminent end of secondary supply, exacerbated by delayed production and reduced exploration funding. Currently supply disruptions continue for the global producers with production problems at Uranium One in South Africa, and major financial issues for Denison in Canada. Jerry Grandey, CEO of Cameco said at the recent Reuters Global Mining and Steel summit held in New York, “When you see project cancellations, you see expansion derail, you see some projects that will just go slower. That is just simply taking away future supply and sowing the seeds of the next spike in the uranium price.” There is no doubt that the current uranium price of $US42.50lb is currently insufficient to stimulate sufficient new mine development in a timely enough manner to close the supply/demand gap. As a result, Cameco recently confirmed that securing uncontracted supply is a major priority. In addition, Areva the major global French utility, is currently seeking Middle Eastern funding for expansion plans to source reliable future uranium supply.