FYI | Nov 02 2006
The first rumours have started to spread about uranium producers rigging the price of their key commodity.
Uranium hit an all-time high of US$60.25/lb this week, so no surprises there.
Not that anyone is suggesting Canada’s uranium giant Cameco allowed its Cigar Lake mine to flood on purpose, but maybe it would be in the overall industry’s interest to remain as circumspect as possible about what’s going to happen with future production now that Cigar Lake won’t be delivering any product at least until 2009.
The irony of all of the above is that Cameco itself would only derive relatively small benefits of a further increasing uranium spot price. That’s because, similar to Australia’s largest producer of yellow cake, Energy Resources of Australia (ERA), Cameco’s current production is mostly delivered to customers under long running supply contracts.
Five or ten year contracts are the norm in this industry. Or at least, they used to be. Cameco’s latest quarterly result, released this week, suggests management has grown increasingly frustrated by the fact that upcoming juniors such as Paladin Resources (PDN) will soon be reaping the immediate benefits from an ever surging uranium spot price, while the world’s largest uranium producer cannot.
For those investors who have been looking closer into the financial details at ERA, Cameco’s third quarter result brings up a few familiarities: the average realised price for product sold during the past quarter was US$20.12/lb (remember uranium shot through US$50/lb at the beginning of September and though US$60/lb just this week). The average selling price for Cameco uranium for the first nine months of the year was US$19.96.
The good news is that comparable figures for last year were US$15.46/lb for the third quarter and US$14.82/lb for the first three quarters. So this year is unmistakably better, but nevertheless a far cry from what Paladin Resources will be selling at from next year onwards.
As I reported on Monday, Cameco sent shockwaves through its customer base in the US when it revealed its delivery contracts have serious protection built-in that allows it to reduce supply whenever something happens like it did at Cigar Lake. The fact this should have been common knowledge, but clearly wasn’t, probably tells the rest of the world something about how business is done inside the uranium fuel sector.
Cameco’s contracts also have price flexibility built-in so in case uranium suddenly becomes expensive, as has happened over the past twelve months, or cheap again, both seller and buyer of the product do not completely miss out on any benefits from the changed market dynamics. It doesn’t take a genius mind though to figure out that current contracts clearly benefit the buyers.
Cameco management has now expressed the intention the company will seek to sell more uranium than it actually produces. Of course, this extra supply will be purchased at spot price. And here’s probably where part of the market rumours find their origin.
Is it in Cameco’s interest that the price of uranium climbs further? This is what the company has to say about it itself: “We look to purchase uranium in the spot market when we are confident that we can re-sell this material at a profit.”
In addition, management is currently seeking increased operational flexibility including Cameco being able to “take advantage of short-term opportunities by selling material directly in the spot market”.
In case you hadn’t figured this one out yet: the uranium market is changing beyond recognition. Must be exciting times for industry veterans who lived through the dour nineties with first hand experience.
Cameco, of course, won’t be the first producer trying to buy some product in the open market. Others have already noted an increased interest from speculators and investors as well. Having said this, the presence (and therefore impact) of industry outsiders is still relatively small. 25% tops, some experts say. Compare this to, for instance, the oil market where investors and speculators are believed to represent around 55% of the market nowadays (no doubt this explains the sudden US$10 per barrel price swings that occur on a regular basis).
Right now, however, uranium is still a very small market. In fact, it is so small that any significant increase in investor participation in the buying and selling of the product is probably not even possible, from a practical point of view. Gene Clark, CEO at one of two leading consultancy firms in the industry, not so long ago summarized it all superbly in one single quote: “As for the number of participants in the spot uranium market in a given month, if you wanted to, you could put them all in a Starbucks.”
Indeed, uranium is still eons away from the instant dynamics that today govern markets such as crude oil, natural gas, copper or zinc. In the yellow cake arena buyers receive offers that remain valid for up to a week and deliveries can take six months or more. Don’t try to find a daily spot price for uranium either.
Two US based consultancies, Ux Consulting and the above mentioned TradeTech, gather information from their industry contacts on a weekly basis to determine the new spot price. Usually the lowest offer in the market is picked, regardless of whether anyone actually bought at that price or not. More than anything else, the uranium spot price shows market outsiders, including investors, at what price level the sellers are situated in the market.
It’s going to take a while still before this market can accommodate derivates such as Futures and Exchange Traded Funds (ETFs), or before its so-called spot price will become something closer to what people assume it is.
All this, however, won’t stop the uranium price from rising in the short term. On TradeTech and Ux figures, the U3O8 spot price averaged US$54.88 per pound during the September quarter. This was up 20% from the US$45.75/lb for the three months to June 30.
It is Cameco’s view that a potent cocktail of “steady demand and limited availability of secure supply” has been responsible for the price increase in the third quarter. The company anticipates supply to remain tight in the closing quarter of calendar 2006 while market demand is expected to increase further.
I probably don’t need to say any more, do I?
Till next week!
Your ever glowing editor,
Rudi Filapek-Vandyck
(as always supported by the Fabulous Greg, Terry and Chris)
Note: FN Arena has contributed to a new book on uranium called “Investing in the great uranium bull market – A practical guide to uranium stocks”, published by our good friends at Stockinterview.com. The book will hit US book stores in 2007 and sell at US$24.95.
Some information in this week’s editorial, including the quote from TradeTech CEO Gene Clark was taken from this book.