Uranium: Not if but when
Presenters at a uranium seminar organised this week by the London branch of Women in Mining, and sponsored by Fission Uranium, from a broad spectrum of the industry were all in agreement that uranium prices would likely rise substantially, but perhaps not yet – only in the medium to long term. And medium to long is just another way of saying ‘jam tomorrow’, although in this case ‘tomorrow’ will undoubtedly come but price rises may not be significant until perhaps the end of the decade.
The opening keynote was given by Ian Hiscock of commodities research group CRU who reckoned that short term price weakness would remain but that demand for uranium would likely double in the next 20 years with growth in usage for nuclear power generation flat to downwards in the West, due to the probably overdone post Fukushima fallout, but very substantial growth occurring in the East, and in particular in China which has a huge nuclear power development programme in place. Nuclear power arguably offers the only real major scale non polluting, zero carbon emission technology out there and China sees this as a means for reducing its enormous air pollution problems which beset its major cities from its massive coal-fired power generation sector.
The problem for uranium is that because of its association with atomic weaponry many people live in fear of it – a fear exemplified by the three main nuclear power disasters – Three Mile Island in North America in 1979, Chernobyl in the Ukraine in 1986 and most recently Fukushima in Japan in 2011. All had a very significant effect on nuclear power programmes and Fukushima perhaps most of all in this respect prompting huge knee-jerk reactions against nuclear power in particular in Europe. It may take the nuclear power industry in the West many years to recover – if ever.
But, as Hiscock pointed out, the mining of uranium and its use in power generation is, in reality, one of the safest means of producing energy. Far more people will die worldwide as a result of air pollution from fossil fuelled power plants than will have had their lives shortened by the very rare nuclear power plant disasters – and nuclear technology and safety is evolving as lessons are learned from those which have occurred. But nonetheless uranium prices have just about halved since the Fukushima disaster making many uranium mines uneconomic – indeed most of the industry so were it not for the fact that most uranium is sold under long term contracts many of which are at double the current spot price – or even more.
Hiscock was followed by the impressive Fletcher Newton of New World Consulting who enlightened the audience further on the long term contract position. Nuclear power utilities need to secure their supply base to a far greater extent than fossil fuel power utilities do given the relatively small number of uranium miners and thus need to set contract prices at a level which will guarantee future supplies. Even so, long term contract prices do move with the spot price and those miners who entered into long term supply contracts when the uranium price was high will still be able to produce profitably even though they couldn’t survive on current spot price levels which will currently only account for a fraction of their sales.
But, low spot prices bring long term contract prices down and also militate against new uranium mining developments and expansions and have already seen some casualties in mine closures. Meanwhile the post Fukushima demand drop-off in Europe has somewhat countered the end of the Russian Megatons to Megawatts programme whereby uranium had been supplied to western markets via the decommissioning of much of Russia’s nuclear arsenal.
Utilities have also been building up inventories which are at the highest levels in 20 years thus securing supplies purchased at the lower prices, while, Newton averred, prices WILL rise substantially, the high inventory levels will put this timing back.
Thus in terms of uranium miners, the low grade operations, which provide the bulk of the world’s supply at present are rapidly becoming hugely uneconomic as long term contracts run out and need to be renegotiated at lower levels and in terms of new projects grade is going to be key. Indeed Newton likened high-grade uranium projects as like gold – although perhaps with the gold mining sector facing its own price problems at the moment this might not have been the best analogy!
The final speaker was David Sadowski of Canadian broker Raymond James who covered the investment angle. Why invest now? For the long term. Prices are depressed and can’t fall much lower as overall global demand is increasing as Eastern nuclear power expansions come on line and, probably, Japan reinstates at least a part of its nuclear power generation industry. Sadowski sees the current uranium surplus turning to deficit, but probably not until 2020 so he sees the short to medium term ‘iffy’ but longer term price performance very strong.
Key factors for investment in uranium plays are grades, depth, metallurgy, access, additional exploration potential, orebody geometry/mineability, land tenure/ royalties, permitting and geopolitical factors. And it terms of the companies themselves investors should look out for capital access, management track record, management invested in the company, capital structure, forward sales (hedging), shareholder base, trading liquidity and newsflow. Most of these factors apply to any resource company of course. If one does one’s due diligence there are still good stocks to be picked up – even in a hugely depressed sector like uranium.