Commodities | Jul 12 2011
By Greg Peel
The spot uranium market took a turn for the worse the week before last, dominated by a couple of aggressive sellers bailing in the wake of Japanese reactors remaining idle post Fukushima and the so-called German U-turn. BA-Merrill Lynch analysts had expected a floor in the spot price at US$55.00/lb but two weeks ago industry consultant TradeTech's spot price indicator was marked at US$51.75/lb.
Those aggressive sellers have been sated now, however, which means last week saw remaining sellers backing off in price to tempt buyers higher. Activity was low with only three transactions totalling 300,000lbs of U3O8 occurring. Each deal was completed at a successively higher level so TradeTech spot indicator finished last week up US$2.00 to US$53.75/lb.
With no action in the term markets, TradeTech's mid-term indicator remains at US$58/lb and long-term at US$68/lb.
Weakness in the spot price and general uncertainty has kept investors well away from uranium stocks, Merrills notes. We are also currently in a seasonal low in typical uranium demand. However among the larger caps, investors are beginning to recognise investment opportunities, the analysts suggest.
Merrills has downgraded its average spot price forecasts by 8% in 2011-12, to US$61/lb and US$67/lb respectively. The year-to-date average of TradeTech's weekly spot price indicator on FNArena's calculation is currently US$61/lb. The crunch for the market nevertheless comes in 2013-14 when Russian warhead supply is set to expire, and there Merrills forecasts US$75-80/lb.
Merrills has reduced its global uranium demand forecasts (ex of Chinese stockpiling) by 5-6% in 2011-13. However it's on the supply side of the equation Merrills sees pressure building. The analysts forecast a 0.5% fall in 2011 production, which is significant given Kazakhstan now controls a 35% share of supply. Cuts to global mine production are now 5% lower than previous forecasts through 2013.
Market dependency is growing, Merrills suggests, on a timely 2013-14 commissioning of Cameco's Cigar Lake mine in Canada and Extract Resources' ((EXT)) Husab mine in Namibia.
Most importantly, uranium miners have, like every other miner, being battling with rapidly rising capital expenditure, cost inflation, and currency headwinds. In the analysts' view, the incentive uranium price for a greenfield project is now US$$80/lb, which is thirty-odd percent above their forecast 2011 average price. With barriers to entry building, so too is the incentive for large caps to pursue a “buy versus build” strategy – taking out smaller players with producing or brownfield projects rather than investing funds from scratch. And the turn in investor sentiment since March provides potentially attractive entry points.
Indeed, Cameco's CEO said as much last week in a presentation. Merrills is anticipating opportunistic acquisitions and/or project joint ventures ahead, and on both an Australian and global basis the analysts' two preferred stocks are Paladin Energy ((PBN)) and Extract Resources.