Uranium stocks - fad or boggy?

The uranium market is undergoing a boom at the moment. The spot price of unranium oxide concentrates (U3O8) have broke $US21/lb in Dec’04, a 300% increase on their lows reached in Dec’2000 of $US7.10/lb. The long term average spot price is around $US12/lb. Yet all this means little because the bulk of uranium concentrates are sold under long term contracts, and without one of those, you are unlikely to move into production. Financiers generally require miners to secure around 65-75% of their proposed production at the much lower contract prices. These contract prices are much lower because producers decision which project they will support. Normally this decision comes down to the following characteristics:

1. Low production costs > preferably in the global lowest cost quartile (<$40/kg U3O8). The factors which determine a projects cost competitiveness are in basic terms: size of orebody, uranium concentration, depth of orebody, geometry of orebody (flatter, shallower, massive is preferred)
2. Mine life > the longer the better (>20 years)
3. Political stability > assurance that policies to uranium mining won’t change
4. Environment & Safety > assurance that attitudes to the environment & safety won’t change.

There are host of uranium projects around the word seeking development. The following table outlines the current recoverable reserves of uranium oxide worldwide:
Country Recoverable Resources (Mt) % of global total
Australia 0.989Mt 28%
Kazakhstan 0.622Mt 18%
Canada 0.439Mt 12%
South Africa 0.298Mt 8%
Namibia 0.213Mt 6%
Russia 0.158Mt 4%
Brazil 0.143Mt 4%
United States 0.102Mt 3%
Uzbekistan 0.093Mt 3%
Other 0.050Mt 14%
Total 3.537Mt 100%

Australia fortuitously has a high proportion (38%) of the world’s lowest cost resources, as it’s also a politically stable country with established mining & environmental policy. These factors give it an edge in the market along with Canada. Australia’s uranium mining industry had a slow start despite its dominance over reserves – the reason being the ‘3 mines’ uranium policy adopted by the Labor government in the 1970s(?). The policy was finally dropped in 1996 by the Liberal government (PM John Howard), however with all states controlled by the Labor Party, Australian-based projects have been stalled. The Labor Party folly has allowed the Canadians to commission new capacity. There are currently 3 producers in Australia:

1. Olympic Dam owned by WMC Resources > currently being taken over by Xstrata
2. Ranger mine in the NT, owned by Energy Resources of Aust (ERA)
3. Beverley mine in Sth Aust, owned by Heathgate Resources (General Atomic of the US)

The Federal-government administered Northern Territory is the only Australian precinct where uranium can be mined. What explains the explosion in Australian uranium stocks? Is the Labor government about to change its policy? Its unlikely to abandon its irrational heartland. But since its a state government decision - it seems likely that Sth Australia and the Northern Territory are likely to approve new mines, since they already have existing uranium mines. WA is actively opposed to uranium mining.

Of course a number of companies are looking for uranium outside Australia. The market has already recognised the market leader:

1. Paladin Resources (PDN) has rocketed from 4c to $1.75. Its projects are in Namibia and Tanzania. it has already established a large resource base there and has JV partner funding.
2. Goldstream Mining (GDM) is more prospective for its platinum & nickel than its uranium, but adds to the upside given that its project interests are funded.
3. Giralia Resources (GIR) is attractive because although its project is in Australia, its JV partner is Heathgate Resources, which already has an export licence.

In addition, there are 2 advanced projects planned for development at Jabiluka and Honeymoon. Details? There is also a multitude of projects in Australia hoping to see the light of day. Sponsors include Paladin Resources (projects in Aust & Namibia), Wiluna Resources, Havilah Resources (floating off Curnamona Energy), Summit Resources, Minotaur Resources, and this is before we even consider the brownfields potential of existing mines, and project sponsors in South Africa, London, Canada, the UK and elsewhere. Consider that some uranium mines are developed by virtue of their contained uranium by-product. In conclusion, there is a lot of ‘potential’ primary uranium capacity to come on stream. These uranium inventories were identified in a period stretching back to the 1970s mining boom. Companies in the search for other minerals were sometimes encountering uranium. The deposits were tested, but despite many substantial finds, most were not developed for 2 reasons:

1. Strong community opposition to uranium: The Three Mile Island nuclear accident in the United States in 1976 focused community attention on the dangers of uranium. This was followed by the Chernobyl disaster in the Ukraine in 1986. Many western governments cancelled plans for nuclear power stations, yet a number of plants managed to proceed despite this opposition. Even in the west, opposition had declined.
2. High cost power: Nulcear power stations are a relatively expensive source of power because of the high capital cost, though fuel is cheap.
3. Safety: There are concerns that a nuclear accident could occur during war, earthquakes or other natural disasters, or perhaps terrorism. The Sendai earthquake in Jul05 however displayed that a nuclear reactor can safely shut down automatically in response to earthquake tremors.

There is however growing community awareness of the benefits of uranium:

1. No greenhouse gases: Nuclear power is an attractive option for countries wanting to reduce their greenhouse gas emissions.
2. Vulnerability to oil supply shocks: A great many governments want to develop nuclear power to reduce their vulnerability to oil supply shocks.
3. Development of safer reactor designs: New designs have fail-safe designs that make disasters a much lower possibility.
4. Established precedence of reactor disasters: The Chernobyl dispelled the fears that a nuclear disaster would destroy the world. The disaster was however a valued lesson in ‘safe nuclear practices’.
5. Improving safety record: Improvements in nuclear plant management & design worldwide has resulted in the incidence of reactor disasters declining. There are currently 430 reactors operating around the world, and problems are generally minor.
6. Excess Supply: Following the collapse of the Soviet Union in 1992, large stockpiles of weapons-grade enriched uranium were blended to produce reactor-grade uranium, which were subsequently released into the market, depressing prices for many years. These stockpiles are still being absorbed today, and are not expected to be depleted until 2015.
   

On the demand side, high energy prices and strong global growth has resulted in a growing demand for all fuels. The higher spot price for uranium is the result of a massive 10 million lbs per annum shortfall between mine supply and demand. This ‘gap’ is expected to grow to 30mil lbs by 2015. As a consequence, uranium prices are expected to test their previous high of over $US43/lb set in the 1970s. After adjusting for inflation, that would see prices increase to ???.
There are currently 430 nuclear reactors in operation, which generate 16% of the world’s electricity. A further 30 plants are under construction, and another 70 planned. In China, nuclear power meets just 1.6% of its total electricity demand. It has just 4 reactors in operation, with another 2 planned. Yet the nuclear industry is betting that China will adopt more nuclear capacity in future.
Known resources of uranium could supply the existing reactors with uranium oxide concentrates for decades, so there is no question of a uranium shortage. The 430 reactors consumed 77,000 tonnes of uranium in 2003, of which existing mines supplied 42,300 tonnes. The balance was sourced from secondary supplies (weapon-grade blends) and utility stockpiles. Stockpiles are however becoming depleted. The secondary sources currently meeting 45% of the market demand includes recycled uranium, plutonium from spent fuel, re-enriched depleted uranium tails, ex-military weapons-grade uranium & plutonium, as well as civil stockpiles. Supplies are falling, but analysts believe there is still sufficient stores to last the industry until 2020. That’s a long time to wait for a recovery, and there is always the possibility of further disarmament given China’s move towards are market economy. Russia’s moves towards a market economy appear less certain.
The nuclear industry will have reached an agreement with the Russian & US governments on a sensible & managed program for increasing mine supplies, to ensure that when stockpiles deplete in future years, there will be plenty of mine capacity to fill it. In the interim, it will be a long wait. We might expect some mines to be developed, remembering that these governments will be weary about any future military threats – possibly from Russia or China. Its hard to see whether escalation of nuclear tensions is likely, but it remains a possibility. Regardless it will be the better projects that will proceed, and the uranium price is unlikely to be so attractive. Get data on how many mines are required to meet demand? The bulk of any new mine supply will be contracted on very competitive terms, even if the spot price remains attractive. There are just too many potential suppliers. We only see great commodity prices when there is a shock. The spot price is a marginal issue. The other factor is that it takes 6-8 years to commission a power station, compared to just 3-4 for a new mine. In addition, nuclear plants are often delayed indefinitely. Experiences in Taiwan, US, China, Japan should demonstrate that point. So long as power plants need to be tied to transmission lines, and though lines leak power, the ‘not-in-my-backyard’ (NIMB) factor will remain an issue.
For all the reasons above, you might want to reconsider investing in uranium explorers and project vendors until the vendors can demonstrate that their project will be profitable at <$US20/kg, as otherwise their returns will be competed away by buyers. And stay mindful of the criteria for a prospective supplier above. The average Australian export price reached $A92/kg in 1984, falling to $A50/kg in 1992, and has since stayed around $40-55/kg. For more information on the uranium market, contact:

1. TheUranium Information Centre, Melbourne
2. TheUranium Institute, London
3. The World Nuclear Association

- Andrew Sheldon www.sheldonthinks.com