Supply crunch signals uranium boom

[miningmx.com] — GOLD is justifiably hogging investors’ attention at the moment, but the uranium market is looking interesting, judging by presentations from uranium producers at recent investment conferences.

Executives such as Paladin Resources CEO John Borshoff (presenting at the Africa Down Under conference in Perth, Australia) and Denison Mines CEO Ron Hochstein (addressing the Modern Energy Forum in Denver, in the United States) reckon the uranium price is about to start moving because of a looming supply crunch.

There are two key factors they maintain will trigger that crunch. While there’s no shortage of the metal worldwide, there’s been a dearth of successful new uranium mining companies able to supply it. That’s due to under-investment in the sector, because the uranium price has been so low for so long while many of the companies that have entered the business have made a mess of it.

Borshoff loves to rub it in on that point, emphasising how Paladin has successfully developed two mines over the past five years – Langer Heinrich (in Namibia) and Kayelekera (in Malawi) – while a string of its competitors have either failed outright or are performing way below expectation.

South Africa provides two classic examples.

Uranium One failed outright with the development of the Dominion Mine, against which it took a $1,8bn impairment charge when it shut it down last year. And First Uranium has run way behind on its production schedules at Ezulwini and its Mine Waste Solutions and is still in business mainly because it was bailed out financially by shareholder Simmer & Jack Mines.

“This is a highly complicated metal to produce. People just don’t seem to understand the complexities of it,’ says Borshoff.

But the crunch factor is probably going to be the end of the highly enriched uranium (HEU) deal through which uranium has been provided to the nuclear power
generating industry from decommissioned Russian nuclear weapons.

That secondary supply is what has kept the uranium price depressed for the past 20 years, bar the short-lived spike in 2007/2008. Hochstein says that deal ends in 2013 and it’s not going to be renewed, which will leave a large gap in the market.

Hochstein reckons there are 440 nuclear reactors currently operating that require 184m lbs of uranium oxide (U308) to keep them running. World supply of newly mined uranium oxide currently sits at around 130m lbs/year.

GROWTH FORECASTS

Now throw in the growth forecasts.

There are now 59 reactors under construction, against 49 this time last year, while 149 new reactors are planned and 344 proposed.

Says Borshoff: “Demand is no longer the issue. The question is on the supply side. Who’s going to produce the uranium that will be needed by a very real nuclear renaissance? So there’s no doubt about the pressure post-2013. But what I’m saying is that the pressure will start to be felt in late 2010 and 2011.’

Current uranium prices sit around $48/lb for the spot market and $60/lb for the more important contract market. The only new companies able to come into production at those prices have been the ISR (in situ recovery) operations based in Kazakhstan.

Hochstein says there’s a limit to how much more ISR production can come on line and that higher prices are needed to encourage new projects. A South African
example of that is Rand Uranium, in which Harmony holds a 40% stake. Harmony CEO Graham Briggs told the Denver Gold Forum last month that construction of the R3,5bn project could be delayed due to current low prices.

Briggs says: “Rand Uranium is a great project at a uranium price of $65/lb. At prices closer to $45/lb it’s not so great and you probably wouldn’t make that investment.’

Gold Fields has so far delayed its proposed uranium project – which CEO Nick Holland has described as a potential “fifth mine’ in SA – for a year, citing technical reasons.

Borshoff says currently low uranium prices aren’t sustainable because they’re based on “perceptions based on hope and not fundamental knowledge’ that sufficient supply was available by the utility companies of certain major countries.

“That’s demonstrably not the case. The adjustment will be quite abrupt, as people are jockeyed into an ever-decreasing space of opportunity to shore up their future needs.’

Not for nothing is Borshoff known in Australia as the “prophet of boom’.

Paladin shares – like most uranium stocks and unlike most gold stocks – are now trading below their 12-month highs and way under the peaks set in 2007 and 2008.

Current South African investor options are limited to First Uranium and Uranium One – which is effectively “Hobson’s choice’, since neither has exactly covered itself in glory.

Despite the Dominion debacle, Uranium One has performed the better of the two due to its exposure to low-cost ISR production in Kazakhstan.

Uranium One is also now – in Borshoff’s assessment – “a proxy for the Russians’ because it’s in the process of being taken over by Russian state company
ARMZ, which will hold at least 51%.

He’s watching that situation closely, as there’s an outside chance Uranium One could be sizing Paladin up as a possible takeover target.

Uranium One CEO Jean Nortier has referred pointedly to the group’s desire to expand in Africa, where he notes Paladin has attractive producing assets.

– The article was first published in Finweek