For those who may not have been following the uranium sector, the spot price for uranium oxide has climbed more than US$3.50 per lb. in a matter of weeks. Recent events over the past year have woken utilities up to the fact that securing off-take from safe jurisdictions is an important part of their buying going forward. Indeed, the market is beginning to realize that security of supply is a major factor underlying global production because at any given time, a percent of world supply could go offline.
It may seem like a bold statement, but as we are seeing, much of uranium’s global supply is built on shaky foundations. Before I get into the finer details, let me highlight an indisputable fact: Demand for uranium is strong, and it’s growing. There are already 432 operable reactors and a nuclear construction boom, led by China, means 72 reactors are being built and, in eight to 10 years, a total of 172 new reactors are expected.
Want more proof? Check out the ‘Red Book’ report available at www.oecd-nea.org and published on Sept. 10 by the International Atomic Energy Agency and the Nuclear Energy Agency of the Organisation for Economic Co-operation and Development. The report is one of recognized global references on uranium and this year it has confirmed that demand for uranium will keep rising, regardless of declining market prices since the Fukushima disaster, and lower electricity demand as a result of the global economic crisis.
Now let’s get into the issue of supply. Canada, the second largest source of uranium production, has the highest uranium grades in the world and large reserves of recoverable uranium. Australia, just a little further down the pecking order, has the world’s largest known recoverable reserves. But the World Nuclear Association says that 54% of global supply comes from Kazakhstan, Uzbekistan, Niger and Russia — all of which, for one reason or another, have stability issues that won’t be going away any time soon.
The last year has seen major problems for uranium producers in Kazakhstan (Uranium One’s subsoil use was invalidated by a Kazakhstan judge) and Niger (Areva took two years to renegotiate its uranium mining contracts due to government intransigence). Yet, perhaps due to lack of understanding of the uranium supply chain, these issues have been all but ignored by the markets.
What has finally grabbed market attention is the threat of Russian sanctions. Russia is a major player in the uranium market — particularly in the area of secondary supply (reprocessing spent fuel, etc.). The fear is not uranium fuel sanctions (though it’s a concern), but rather banking sanctions. Indeed, Deutsche Bank has already rejected a uranium deal for this reason. We are seeing the Russians being excluded from the market because people don’t want the extra risk management.
The result is that utilities are coming into the market after a longer-than-normal absence. Nuclear power station fuel managers are no longer convinced the Russians can deliver fuel with sanctions in place, so they are buying options and even the physical material.
In reality, Russia is just one part a supply side house of cards that has been getting increasingly fragile since 2012. The last 18 months have seen steady decline in production, with producers shutting down existing and near-term production due to the low spot price. In fact, this year Rio Tinto will produce less than one-third of the uranium it produced two years ago.
Very few if any companies make money at the current uranium oxide spot price of US$32.75 per lb., once sustaining costs are included. Many companies are staying alive because they have a term contract book that allows them to sell uranium far above the current spot. For most of these companies, including Cameco, their term book is slowly rolling off and exposing them to the low spot price — further damaging their balance sheets and causing bankruptcy risk for a number of current producers.
Labour disputes are also a factor. Cameco recently stopped production for two weeks at two major Saskatchewan uranium facilities — Key Lake and McArthur River — due to a strike by union workers. In addition, on Aug. 1, Honeywell’s management ordered a worker lockout at the Metropolis Works uranium conversion plant. As if that weren’t enough, the U.S. Department of Energy is being sued by ConverDyn for selling too much uranium. The initial comments from the presiding judge have favoured ConverDyn.
There’s no “sure thing” when it comes to market and price predictions, but having been in the uranium sector on both the supply and demand side in various capacities for years, my view is that the combination of steadily growing demand and an unstable supply side will increase uranium prices, as utilities move to secure their long-term fuel supply from secure sources.
— Anthony Milewski is a director of Fission Uranium and an expert on uranium industry supply and demand dynamics. He has experience in paper and physical uranium trading, has managed mining projects at the exploration, development and production stages, and has served as a director of public and private companies.
Before founding Black Vulcan Resources, a metals, mining and energy advisory and investing firm, Milewski worked at Firebird Management, a specialized emerging market fund. He holds a BA in Russian history, an MA in Russian and Central Asian studies, a J.D. and an LLM in corporate finance.
This commentary originally appeared on www.miningmarkets.ca, The Northern Miner’s hub for industry insights and opinion.