Commodities | Mar 06 2008
By Greg Peel
Hello?
I say hello? Is there anyone in here? Is there a light switch in here?
Remember uranium? It was not that long ago the uranium price was going to the moon and every one who could lay claim to any old piece of dirt was sticking up a shingle and calling itself a uranium start-up. But while every commodity from oil, to gold, to copper and wheat has been rocketing in 2008, the uranium price has remained steadfastly depressed. No one seems much interested anymore – there are other opportunities at play – and there are plenty of small investors looking at losses in their portfolios from once promising uranium juniors (and seniors as well, for that matter). What has happened?
Well for one thing, the spot uranium price has this week increased from US$73/lb to US$74/lb. Woohoo! The longest journey begins with the first step.
And that’s the way uranium experts see it. The uranium price is very unlikely to fall lower than it currently is as the market has bottomed here on a clear lack of activity amongst the real players, and the speculators have had their fun (or otherwise) for now. Uranium research service U3O8.biz this week gathered together three market participants for a conflab and an airing of views. They were Nicole Adshead-Bell, an investment banker (and an Aussie) with Heywood Securities; Sean Broderick, a small cap/natural resources analyst with MoneyandMarkets.com from Jupiter (he was there to provide the universal view); and George Leary, CEO of Canadian junior Bayswater Uranium, the sponsor of the chat. (That’s Jupiter, Florida, by the way).
This is a summary of the opinions expressed. (With some licence).
The uranium spot price peaked at US$138/lb in June 2007 and has declined steadily to sit uninspired at just under US$75/lb for a while now. While the initial rally up from around US$15/lb in 2004 began as the world reignited its interest in nuclear power, in the face of rising oil prices and climate change concerns, the 2006-07 acceleration came about firstly because the traditional suppliers were caught short on contract obligations for whatever reason – production problems, asleep at the wheel etc – and were forced to start buying into an already buoyant market, and secondly because the hedge fund speculators are never far behind, and they bought up a good 20% of a scarce resource and hid it under the bed.
(I would also add that resource analysts across the globe were also slow to catch on, and by the time they woke up they added to speculative euphoria by suddenly deciding the spot price was going to US$200/lb. As soon as that happened, the price peaked.)
The spot price then collapsed because (a) it had run on irrational exuberance and that always has a limit, (b) suppliers caught up with their contract obligations and (c) hedge funds were caught long. (And utilities also conspired to screw the hedge funds by simply not buying uranium for a while).
But two things have not changed – the short term and long term pictures. In the short term, inexperienced players caught up in the rush failed to realise that uranium is not like copper – it isn’t purchased every day across the globe for immediate use. The nuclear reactors that are running simply place long term orders every now and again to update their stockpiles. Start-up reactors need a large amount of uranium to begin with, but then much less to keep the reaction going. On a seasonal basis, there are always periods when the buying and selling dwindles to nothing, and last year one of those time-outs was called.
The longer term picture is still one where the world is currently producing 100Mlb per annum of primary (out of the ground) uranium while consuming 160-170Mlb. With scores of new reactors planned into the next decade, that 160-170mlb figure will soon jump significantly. The shortfall is presently made up by the decommissioning of cold war nuclear arsenals in both the US and Russia. While we know that the US has about 150-160Mlb left, Russia is a bit more secretive. And the bulk of the US stockpile is unusable in today’s reactors in its current form and thus requires further processing. We are also unsure just what the US government plans to do with its stockpile. It did release product onto the market last year when the price was running rampant – another factor which helped set off the correction.
But our experts all agree that spot uranium has probably reached its nadir. The first price rise in a long time – albeit one dollar – was helped by significant producer Uranium One announcing a major production shortfall. Ears pricked up among the downtrodden uranium stock holders. Indeed, a lot of uranium juniors have likely seen their share prices now oversold, suggesting the patient investor may be in for a recovery fairly soon. But there is a caveat.
One expert noted that when he attended uranium conferences early last year, they were packed with people claiming to have uranium companies when really they were no more than real estate companies. Today a lot of those pretenders no longer attend. But while more legitimate juniors might be hoping for a turnaround, the warning is for investors to pick the “real” players. They must have (a) experienced management, (b) “pounds in the ground”, meaning actual reserves, and (c) cash in the bank.
That’s right – the uranium sector has been hit by the credit crunch as well. With the uranium price currently depressed and interest low, some companies are struggling to raise capital or service debt. Many an IPO has now been pulled.
For the patient investor, invested in the right company, the supply-side news is encouraging, mostly because there isn’t much. There have not been any really significant uranium discoveries for a while. The longer term market is really hinging on only two major projects – the start up of Canada’s Cigar Lake and the expansion of Australia’s Olympic Dam. Cigar Lake is still on uncertain timing since being flooded, and the Olympic Dam expansion will only occur over several years. Both projects are also facing problems of water and electricity supply, and are suffering from spiralling costs and competition for equipment and skilled labour.
There are a surfeit of minor projects heading towards start-up phase across the globe, but it takes a few years to get a uranium mine up to production and any short term global production increase will just be making up for the depletion of secondary warhead supply in the medium term anyway. The experts see the supply/demand curve as being exactly where it was in 2007 – supply will catch up and the market may go into oversupply around about 2011-15, but then demand will begin to race ahead of supply once more when all the warheads are gone and the number of new reactors accelerates..
The team also pointed out that depression in the spot price is currently being helped by a misguided belief in the speed in which planned new supply will come on. Some projects will never actually make it. Costs and funding problems will bury others. And the golden rule is that 25% of mining companies of any nature will experience at least one major production delay. That is the way of life. Once again, opportunity exists for the smart investor in the right company.
The prospect of expanding production is also encumbered when you consider there are issues in all of the world’s four major uranium producers/potential producers. Canada and Australia are both under negotiation with unconvinced indigenous landowners. Both have provincial uranium mining bans in place to boot (Western Australia, Queensland, Labrador). Kazakhstan is presently re-evaluating operating licences for foreign investors, which might be a noble policy if you’re a Kazak but it will only slow down the county’s emergence as a major producer. Niger, like many an African nation, is suffering from rebel activity.
The US is not considered a major producer, although it is quietly ramping up as well. But it has its own issues. The Navajo Nation (27,000sqm of Utah, Arizona and New Mexico) is sitting on a “mother lode” of uranium, but after mining was once conducted in the area the Navajo have said “never again”.
So the signs are all good for a recovery in (quality) uranium stocks. It is unlikely that euphoria will prevail the second time around however, and the sector will experience further consolidation. The weak shall fall and the strong shall rise. And the smart investor should be rewarded for longer term patience.
