Commodities | Oct 04 2006
By Greg Peel
The rapid return to focus of nuclear energy as an alternative in a world stricken by higher fossil fuel prices and environmental crises has highlighted a leap in demand for uranium in the face of tight supply. US$16.50/lb now seems a relic of a distant past when the China Syndrome meant something very different to what it means now.
Deutsche Bank reports September saw the greatest ever single month increase in the reported spot price of uranium oxide (11.3%) setting the current price at US$54/lb. This level has been reached must faster than most analysts, including Deutsche, expected. Each new contract presented is being settled at slightly higher levels.
While global demand for uranium has taken a step up, production has not yet followed. Production is set to ramp up across the world, but this won’t happen overnight. In the meantime, the previous vital source in the secondary market – decommissioned Soviet weapons and other Cold War supplies in Russia – is on the wane towards its 2013 exhaustion.
While attention has been drawn to the nuclear power ambitions of China and India, current customers France, Japan and the US are also looking to gear up. These three countries already represent 50% of the market. Britain, too, is now moving towards revitalising an industry that is reaching its use-by date. Scandinavian countries are well into nuclear mode.
The US has 27 new plants on the drawing board with around 12 old ones looking to extend their licenses. Current US policy is to provide loan guarantees for any alternative energy form that will “avoid, reduce or sequester greenhouse gases”, so with hundreds of millions of dollars of savings in the offing, the nuclear rush is on.
Japan is in the process of reducing its coal-fired electricity generation in favour of nuclear, with a target of 40% nuclear by 2015.
As new reactors are commissioned pressure will come to bear on existing uranium supplies. The Australian Bureau of Agriculture and Resource Economics (ABARE) notes that a nuclear reactor typically requires 600 tonnes of uranium for its initial core, with supply requirements falling thereafter as the reaction is brought to a steady state.
2007 uranium demand is expected to increase by 4% to 80,500 tonnes as new reactors are commissioned in China, India and Romania. US consumption is expected to increase by 9% as generating capacity is increased.
2006 was a slow year for production, falling 1% as uranium giants Canada and Australia both suffered production drops for various reasons, including inclement weather. Shortfalls offset increased production in Kazakhstan, Namibia and the US.
2007 production is expected to increase by 15%, with Kazakhstan, Namibia, South Africa and Canada all contributing. Canada’s massive Cigar Lake project will begin a three-year ramp up, and Paladin Resources’ (PDN) Langer Heinrich mine in Namibia will also commence production. Nevertheless, the production forecast for 2007 is only 56,200 tonnes, versus 80,500 tonnes of demand – a big shortfall on primary sources.
Australia’s production is forecast to increase by 8% in 2007, but any real increase won’t be until around 2014 when BHP Billiton (BHP) is expecting to complete its upgrade of Olympic Dam and ERA (ERA) hopes to have Jabiluka under way. Other projects in South Australia should be well into production by then but it’s still anyone’s guess as to what might happen to uranium in Queensland and Western Australia.
Deutsche Bank has responded to the latest demand/supply data by increasing its forecast spot prices by US$66.50/lb in 2007 and US$76./lb in 2008. ABN Amro has also adjusted forecasts recently, but at US$50/lb in 2007 and US$55/lb in 2008 the analysts are either conservative or behind the times.
As a result of increased uranium price forecasts, Deutsche Bank has adjusted earnings forecasts for Australia’s two listed pure-play stocks currently offering actual production – ERA and Paladin. Deutsche has increased ERA earnings by 14%, forcing the 12-month target price up from $16.41 to $16.72. Deutsche rates ERA a Buy.
Deutsche has had a more spectacular change of heart on Paladin, which it had earlier considered to be fully priced in the 2006 rush to buy all things uranium. The analysts have lifted earnings by 24%, the target from $5.27 to $6.07 and the recommendation from Hold to Buy.