Uranium Price Upside Ahead

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– Global nuclear demand ramping up again
– Global supply growth falling behind
– Deficit and price increases expected
– Paladin among preferred producers
 

By Greg Peel

Last year's Fukushima accident has sent the global uranium market into a spiral of uncertainty ever since. At the very least, participants have been unsure as to what Japan intends with regard to future nuclear power production, and as to whether or not its stocks of uranium would hit the market. This has stopped buyers being keen, while sellers have been reluctant at low prices. Japan has not provided the only area of uncertainty nevertheless, given nuclear programs from Europe to China have been largely halted for a rethink.

The spot uranium price has found a bottom at US$50/lb, it would appear. It briefly traded below this level soon after Fukushima, has tried to push higher more than once, and is now back at US$50/lb once more. It seems that under 50, operating utilities are keen to pick up supply at what's seen as a reasonable price. They do not, however, appear keen to chase the price.

Despite this apparent bottom in the spot price, the share prices of global uranium producers have continued to slip away. Uncertainty is bad enough for producers and consumers, but it's even worse for investors. With producer prices now historically low on a relative basis, Canadian research house Raymond James has elected to return to the market, and resume coverage of uranium stocks. Weighing up all the pluses and minuses on both the demand and supply sides, Raymond James suggests the spot uranium price will begin to move up again late this year and into 2013, and the analysts are looking for US$70/lb once we hit the expected global supply deficit of 2014-16.

Raymond James is recommending investors look to get set in uranium producer stocks sooner rather than later. There are several key industry catalysts to consider.

Shortly after Fukushima, China halted its rapid-fire nuclear plant building program in order to review safety protocols. With the review completed, Premier Wen Jiabao gave preliminary approval to a new plan in May. Raymond James believes this approval paves the way for China's building program to recommence by year-end, albeit the pace will be pulled back to a more measured level than the frantic ramp-up pre-Fukushima, with a more diligent focus on safety. China nevertheless is planning a whopping 197 reactors, with some already under construction, on top of 433 in operation globally. Raymond James expects large Chinese utilities to resume buying large quantities of uranium.

After Fukushima, the Japanese government shut down all 50 of the country's reactors – some for good, and others for maintenance – as a rethink of nuclear policy was undertaken. The government warned of subsequent electricity black-outs in the most nuclear-reliant industrial areas of Osaka and Kyoto by the summer peak demand season. Recently the government has approved the restart of two reactors, despite popular opposition.

Raymond James offers a number of reasons why further restarts are likely, beginning with the aforementioned forecast summer black-outs. Without nuclear providing the usual 30% of energy needs, Japan has been forced to import large amounts of fossil fuels the cost of which, for the first time in over three decades, has sent Japan's trade balance into deficit. With such consumption has come a big blow-out in carbon emissions. Having undergone a safety review, plant operators are now very confident about ramping up once more. Now that two reactors have indeed restarted, popular opposition should begin to soften.

The greatest source of uranium market uncertainty has been that of Japan's ongoing policy. Had Japan decided to cease nuclear power production for good, the result would have been both a huge reduction in global uranium consumption and the country's extensive stockpiles would have hit the market, to add insult to injury. However, significant suppliers Cameco, Uranium One and Kazakhstan's state-owned Kazatomprom have all noted some deferrals but no actual end to deliveries of uranium to Japan, and in the first quarter Cameco's sales to Japan actually increased from previous levels. Raymond James expects the next round of Japanese reactor restarts will commence in early 2013.

On the supply side, Russia's “megatons to megawatts” agreement, signed in 1993, will expire in 2013 with Russia not interested in any extension. The agreement sees highly enriched uranium (HEU) from Russian warheads blended down for use in reactors in the US and Europe. In 2011, the HEU agreement provided around 13% of total global uranium supply, bridging the deficit gap between mine supply and total demand. Raymond James expects consumers to begin sourcing new traditional supply contracts ahead of the HEU expiry.

On the demand side, Fukushima has clearly diluted nuclear power plans in the likes of Japan and Germany, while other countries contemplating their first nuclear energy forays have shelved such plans for now. However, the World Nuclear Association believes the current number of global reactor plans are actually higher now than they were pre-Fukushima. Progress will be slower given greater attention to safety, but global demand for electricity will not abate, particularly in Asia (including India) and the Middle East, where state-owned utilities dominate and public opinion is not sought.

Not only has Fukushima forced a pullback on the demand side, but low post-Fukushima uranium prices have also sparked delays or deferrals of planned high-cost supply projects across the globe, including BHP Billiton's ((BHP)) Olympic Dam and Energy Resources of Australia's ((ERA)) heap leach project at Ranger. Even the mighty Kazatomprom has halted growth plans. Raymond James estimates new uranium production projects require a uranium price of at least US$60/lb to be viable.

Given few high-grade discoveries of note in recent times, problems at significant operating sites such as Ranger and Rio Tinto's ((RIO)) Rossing as well as others, and the upcoming end of HEU, global uranium supply growth is going to fall behind the pace of demand growth. Raymond James considers this a very bullish scenario for pricing, with the world facing a supply deficit in 2014-16.

The result is a forecast of an average US$53.50/lb spot uranium price from the analysts for 2012, increasing to US$63.00/lb in 2013, US$72.50/lb in 2014 and US$75.00/lb in 2015. Raymond James' longer term price (2016-beyond) sits at US$70.00/lb.

In resuming coverage in the uranium space, Raymond James has selected to cover three preferred large producers, two juniors and one uranium stock ETF, all of which are listed on the Toronto Exchange. Aside from the biggest private sector producer – Cameco – Raymond James has selected dual-listed Australian-based producer Paladin Energy ((PDN)).

After two years of wobbly and inconsistent performance from Paladin's two Namibian mines, Raymond James now believes a corner has been turned. Costs have been cut, a 2013 guidance upgrade was impressive, and the market should now become more comfortable with Paladin's ability to service its US$1bn debt burden. As the world's largest uranium producer without a strategic partner, Paladin is a takeover target as far as the analysts are concerned. 

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