Uranium’s Uncertain Future

This story features RIO TINTO LIMITED, and other companies. For more info SHARE ANALYSIS: RIO

By Greg Peel

This report noted last week the return of an institutional buyer seeking 1mlbs of U3O8 in the uranium spot market after having withdrawn the same order in the latter half of last year. The order has had the same effect the second time around, that of sellers pulling back their offers to higher prices, and hence the spot uranium price has ticked up a little of late. But as was also the case last year, it does not appear the buyer is a price chaser.

Higher prices brought in more sellers last week, but there weren’t any buyers in panic mode. Moreover, actual buyers currently in the market, not counting speculators, are seeking delivery in Europe when the bulk of sellers are looking to deliver in North America, industry consultant TradeTech reports. These geographical mismatches occur from time to time and can result in bids in one region exceeding offers in the other, with no recourse. Hence TradeTech’s weekly spot price indicator finished down US40c to US$35.60/lb last week as North American sellers were forced to take what they could get. Eight transactions occurred for a total of 850,000lbs of U3O8.

Market participants have been pondering the liquidity issues potentially thrown up by the ongoing departure of large global investment banks from the spot market. Goldman Sachs and Deutsche Bank have both withdrawn from trading in physical commodities, including uranium, leading some to worry spot market volumes may dry up. However, the banks have withdrawn following new regulations intended to end the practice of commodity warehousing and price manipulation, suggesting the withdrawal of Goldman and Deutsche may mean less product tied up in warehouses. And both intend to sell rather than simply close down their businesses, with inventory on hand, so new operators maybe actually provide for greater spot market liquidity.

Beyond issues of short term liquidity lays the more important macro picture of the short to medium term supply/demand balance.

On the supply side, Australia has been in the spotlight due to unscheduled maintenance shutdowns at both Rio Tinto’s ((RIO)) uranium projects while last week BHP Billiton reported 3% lower uranium production for the quarter at Olympic Dam than the same quarter last year due to maintenance. Meanwhile, cash-burning Paladin Energy ((PDN)) was finally able to announce a buyer for an equity stake in the company’s Langer Heinrich project.

Government-owned China Uranium Corp has acquired a 25% stake at a below-valuation price when compared to analyst consensus numbers for Paladin. CUC has also secured an offtake agreement which will see it secure its pro-rata share of product at spot pricing. The equity injection keeps the wolf from Paladin’s door for now with regard debt obligations but does not change the fact the company continues to produce uranium at a cost above the current spot price.

The world’s biggest producer of uranium, Kazakhstan, announced a 2013 level of production equivalent to that of 2012. This is of little surprise, given that’s exactly what government-owned Kazatomprom had pledged to do, despite much greater capacity. Whatever supply/demand balance numbers uranium analysts may forecast for the years immediately ahead, they will always be under threat of Kazakhstan upping its capacity ante if prices improve.

The swing factor of course remains Japan, where last week the now government-controlled Tokyo Electric Power Company gained approval from the government for its post-Fukushima business plan. The plan hinges on the restart of two reactors at the Kashiwazaki-Kariwa plant, being the first two reactors to pass new and far more stringent safety requirements.

Many a uranium analysts believes the restart of these reactors will signal the rebirth of the uranium market, post-Fukushima, and a rebound in the uranium spot price. Once these two reactors start, another four with safety approvals can follow, and others now undergoing their inspections will fall into line beyond that. A restart will mean the end to the uncertainty surrounding the Japanese government’s political wavering.

Popular and political opposition, including from the governor of the prefecture in which the K-K plant is located, nevertheless remains an impediment and the world is hanging out for any news from Tokyo. The Abe government, which is pro-nuclear, may simply be forced into the unpopular decision to reinstate the country’s nuclear industry for economic reasons. The cost of importing fossil fuel alternatives to fire Japan’s generators is not only resulting in growing monthly trade deficits but is threatening to derail Abe’s entire economic restart policy.

The world can only wait.

Deutsche Bank analysts believe Japan’s reactors will restart, but that the process will be a slow one. However, demand from new Chinese reactors should send the uranium market into balance in 2014, they contend, following three years of oversupply. Deutsche forecasts a spot price of US$55/lb by the fourth quarter but sees flat pricing thereafter as new supply, including from Canada’s Cigar Lake, hits the market.

Citi agrees conditions should be tighter up to 2015 but forecasts a world in surplus beyond 2020 as nuclear energy loses its appeal and less dangerous natural gas becomes the value proposition for electricity generation. Citi also sees Kazakhstan as the uncertain swing factor given its power of global supply manipulation. Citi has set a spot price forecast for Australian fiscal year FY14 of US$39/lb, rising to US$48/lb in 2015, but has left its long term price forecast unchanged at US$50/lb.

Cantor Fitzgerald is more optimistic. Cantor sees 2014 as the “kick-off” year for a rebound in uranium prices and sees “significant” upside from current spot. The current spot price is below the current marginal cost of production of US$40/lb, Cantor notes, and well below the minimum incentive price for new supply of US$70/lb. The analysts suggest a “violent” price reaction once the first of Japan’s reactors restart and forecasts 12 reactor restarts in 2014.

Cantor is far less pessimistic over the longer term outlook for nuclear energy and suggests supply deficits in the next two of five years and a “large and unavoidable” deficit from 2019 as global demand outpaces global supply.

Uncertainty and disparity of view clearly still dominates the global uranium industry.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms