Commodities | Oct 25 2006
By Greg Peel
The forecast uranium supply/demand equation for 2008 and beyond is already one of deficit. A major contributor to the supply side from 2008 was meant to be Cameco’s Cigar Lake project in Saskatchewan, Canada, estimated to be producing 10-12% of the world’s uranium by that time.
A rock fall on the site has caused the mine to be flooded. This is no minor setback – it could put the mine out for a year or more, pushing Cigar Lake’s contribution out to 2009 or 2010. This is not the first time Cigar Lake has had problems, and it must call into question the general risk level of the project.
The uranium market is extremely sensitive to supply disruptions. Analyst forecasts to date have had the supply side catching up by about 2010, as new projects come on stream, before falling into deficit once more after 2013 as the Russian warhead supply dries up. Deutsche Bank suggests the forecast surpluses ahead of 2013 are now in danger of being reduced.
The Cigar Lake delay will have a material effect on the uranium spot price. Canada’s Sprott Asset Management’s strategist Kevin Bambrough said last night: “We’ll have to see how high the spike goes. I still think some companies are going to be able to sign long-term deals around $100/pound. I don’t think that will be a problem for some to have that opportunity.”
Bambrough is forecasting a price of US$100-120/lb around the corner.
This is good news for Australian uranium miners – particularly those ones that actually mine the stuff. UBS is now forecasting Paladin Resources (PDN), which has commenced mining in Namibia, can lock in 10-year contracts at US$65/lb instead of the previous US$56/lb spot price (which itself is up 50% in 2006 alone). This would increase Paladin’s net present value by 45cps.
World uranium major Energy Resources Australia (ERA), which is two-thirds owned by Rio Tinto (RIO), has already locked in 2-5 years, but UBS believes the planned extension to Ranger and the promise of Jabiluka will provide upside.
The Canadian shut-down comes at an interesting time in the Australian uranium debate. There is no doubt the federal government will try to bring as much rhetorical pressure to bear on the state Labor governments on an “opportunity going begging” basis. In the meantime Labor will mull over the situation at its April conference. The whole world is awaiting the outcome.
The irony is that as far as commodities go, uranium is actually abundant.
(See also Market Strategist Believes Cigar Lake Delay Could Lead to US$110+ Uranium Price by Stockinterview.com in the Sources of Wisdom section).