Commodities | Dec 02 2015
By Greg Peel
Canadian research house Raymond James believes the global uranium market will be in a state of structural oversupply for the next five years. But by 2020 the market will move into shortfall, as supply growth proves insufficient to keep pace with demand growth.
Production from new, and large, mines will be needed by this time, and Raymond James’ modelling of the demand/supply balance going forward supports a long term equilibrium price forecast for uranium of US$70/lb.
Uranium mining stocks, likely feeling the effects of market fatigue, remain disconnected from this reality, Raymond James contends. Thus many are offering “outstanding entry points” at this time.
To that end, we note stockbroker Canaccord Genuity has this week initiated coverage on Australian uranium start-up Vimy Resources ((VMY)).
As the nitty gritty of the UN Climate Change Conference in Paris continues for the next two weeks, Canaccord suggests the global focus on low emission base load power solutions has never been more apparent. The broker expects nuclear power to emerge as a key talking point at the conference. Despite the advances of wind, solar and hydro as clean power alternatives, Canaccord believes nuclear still offers the most functional “here and now” solution.
Reliance on nuclear power is on the increase. China, India and Russia are leading the charge on new reactor construction and Japan is forecast to increase its previously idled reactor utilisation from 2% now to 62% over the next five years. Canaccord forecasts a long-term uranium price of US$65/lb.
Vimy Resources has just completed a pre-feasibility study on its Mulga Rock project in Western Australia, which suggests a 3mlb per annum operation with a 17-year mine life. First production is at this stage targeted for 2018. The broker has initiated coverage of the stock with a Speculative Buy rating and a 70c target.
Meanwhile, back in today’s world, the uranium spot price continues to languish. Last week’s Thanksgiving break interruption in the US market ensured industry consultant TradeTech’s weekly spot price indicator remained unchanged at US$36.00/lb for the fourth week running, and unchanged at the end of November.
Total spot market volume fell to 3.5mlb in November from 5mlbs in October, TradeTech notes. Utilities are currently absent from the spot market, leaving intermediaries to represent the bulk of buying and selling. However while a drop-off in activity towards year-end is not unusual, a pick-up in term market activity, and requests for tenders, has meant spot market participants have been holding out to assess pricing direction as proposals are considered.
Term market activity was decidedly strong in November, TradeTech reports. Contracts totalling 17mlbs U3O8 equivalent were settled for delivery spans from as early as 2017 to as late as 2025. In contrast to the spot market, utilities were the major buyers.
Spot market activity will remain subdued until several term delivery contracts currently out for tender are settled, and pricing subsequently becomes apparent. Meanwhile, TradeTech has trimmed its mid-term uranium price indicator by US25c to US$38.50/lb, while leaving its long-term price indicator at US$44.00/lb.
Note that the “long term” price forecasts set by Raymond James and Canaccord Genuity above, of US$70 and US$65 respectively, are not comparable to TradeTech’s long term price indicator of US$44. TradeTech’s price reflects actual trading prices being set today for delivery over a longer term timeframe, for example out to 2025. The long term prices used by market analysts are forecasts into the future used to provide for the valuation of uranium mining stocks out to latter years.
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