May 192015

DAILY NEWSMay 19, 2015 4:46 PM

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By: Anthony Milewski
By: Anthony Milewski

Of all the metals out there, uranium probably takes the prize for the strongest example of sentiment outweighing fundamentals in the resource sector.

While today’s spot price is nearly 30% higher than its eight year low of approximately US$28 per lb. in May last year, it remains far below the estimated US$65 a lb. to US$70 per lb. required for many uranium producers to make money. That fact alone is one of the biggest reasons that primary production is falling and very few new exploration projects are getting financed.

At time of writing, 65 new reactors are under construction around the world, 165 more have been ordered or are planned and an additional 331 have been proposed. Just so it’s clear, those numbers mean that today’s nuclear energy sector is growing at a substantially higher rate than prior to Fukushima in 2011. Pretty strong fundamentals whichever way you cut it.

On top of this, the nuclear industry continues to put out very strong news, such as Bloomberg’s article this month about nearly $800 billion of new reactors under development in Asia alone and a recent announcement that CNNC, China’s second largest nuclear power operator, is undertaking a $2.6 billion raise to further nuclear development. In a bull market or even in a market with neutral sentiment that sort of news would push up spot prices and company stock prices. Yet for the uranium sector, there’s barely a blink of market recognition. Such is the power of sentiment over fundamentals.

As each new reactor comes online, as more primary supply is put on hold and as each promising exploration project is stalled, so the pressure is building on prices. So, at what point will the scales tip and fundamentals have their way? Let’s take a look at some of the issues involved.

Japan’s reactors remain offline. I think we’d all agree that this is the biggest cause of negative sentiment. Why? Well, if you didn’t fully appreciate the cost of using fossil fuels in place of nuclear energy is placing colossal pressure on Japan’s export-driven economy, as well as its carbon emissions, then you might be concerned that Japan will eventually conclude it doesn’t really need nuclear energy.

How are things going to pan out? Let’s look at the numbers. At this point in time, nearly a third of Japanese reactors are in various stages of the restart application process. The four reactors closest to restart have faced recent legal challenges, brought to the courts by a small but very vocal group of anti-nuclear campaigners – a last ditch attempt to halt the process. One challenge was thrown out a few weeks ago and the other resulted in a temporary injunction that has been roundly condemned by Japan’s own nuclear regulator and is already going through the appeals process.

My opinion? We’ll see two reactors switched on this year and at least another four, maybe more, next year.

The next issue is the current amount of purchasing by the main users of uranium. Despite expectations, utilities have still not yet come back into the market in a meaningful way. The reason is that their inventories are high so they really don’t (yet) have to purchase anything if they don’t want to.  In other words, it’s still a buyer’s market.

However, over time these inventories will begin to shrink because as more and more reactors come online, utilities will chew through their stockpiles and many, particularly in China and India, will do so at an increased rate. The size of the reactor build program in Asia is, I believe, one of the most poorly understood factors in the uranium market today. For example, the Chinese not only have 26 reactors under construction but they are approving more and more reactors, setting themselves up to have the largest nuclear program in the world by 2030.

Now let’s look at supply levels. Despite continued low prices, Kazakhstan, the world’s largest source of primary uranium supply, has been maintaining high (some might say ridiculously high) production levels. However, it has begun to struggle with this approach and this year levels are flat and possibly even down.

Meanwhile, primary production elsewhere in the world is also shrinking. For example, decreased production at both the Rossing and Ranger mines means Rio Tinto (NYSE: RIO; LSE: RIO) may very well shut these down or at least certainly not proceed with any expansion for now.

Secondary supply has been higher than previously expected. Excess enrichment supplies means continued underfeeding thus reducing the amount of natural uranium (from mining) needed to produce fuel. Other ‘secondary supplies’ have come into the market, e.g., down-blended HEU from US, off-spec EUP from Kazakhstan and excess EUP from China. 

To top it off, the US Department of Energy has been selling well above its normal amount of uranium into the market. If fact, it’s sold so much that Converdyn has brought a lawsuit against the DoE. It’s widely anticipated that Converdyn will prevail, forcing limitations on DoE sales but even if it didn’t, the DoE is running out of material and won’t have much more to sell into market (via barters) post 2018.

So, what does the future look like for uranium?

In the short term (aka this year), I believe it’s likely we’ll see uranium prices rise but it’s difficult to see them going higher than US$45 per lb. at the spot level. Looking a little longer term, it’s worth noting that, according to uranium market analyst, David Talbot, around 15-20% of the uranium required to operate the 437 reactors around the world is still uncovered for 2016-2017. In other words, we’re going to start seeing more buying and much stronger upwards price pressure.

Further down the road is where things start looking very interesting indeed and it’s likely we are going to see a violent upswing. Primary supply (from mines) has been less than reactor demand for decades. Secondary supply has done an excellent job of picking up the slack but, as primary supply continues to stagnate and even shrink, secondary sources won’t be able to cope with the coming growth in demand.

To make matters worse from the supply side, low uranium prices have deterred many new exploration projects and when you combine this with the toughest permitting process of any commodity, you start to realise that the new primary supply projects that can be taken into production is a small, highly select few.

It’s tough to make predictions for any commodity, particularly one like uranium which is especially vulnerable to sentiment-led downturns and security of supply-led upturns. However, analysts are starting to agree that an unavoidable supply deficit is headed our way by 2020 and I think it can be safely assumed that we’ll see increased by from utilities well in advance of that deficit so that they are not caught unprepared. However you look at it, that’s going to mean exciting times for anyone involved in the supply side.

— Anthony Milewski is a director of Fission Uranium and an expert on uranium industry supply and demand dynamics. He has experience in paper and physical uranium trading and has also managed mining projects at the exploration, development, and production stages, and has served as a director of both public and private companies.

Prior to founding Black Vulcan Resources, a metals, mining and energy advisory and investing firm, Mr. Milewski worked at Firebird Management, a specialist emerging market fund. He holds a BA in Russian history, an MA in Russian and Central Asian studies, a J.D., and an LLM in corporate finance.

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