Move over, 2013. You've taunted us enough with promises of a resurgence in uranium. And while you've given us some good news this year, we want more --- it looks like 2014 will deliver.
In the last few weeks of of 2013, the uranium market has seen a flurry of activity. From acquisitions to financings, and from supply disruptions to impending start ups, it looks like the uranium market is ready to shift into high gear.
What kept prices down in 2013?
One of the main catalysts for price movement in 2013 was the start up of reactors in Japan. Unfortunately, Japan didn't restart its reactors on the timeline many were hoping for. Because of the delay in setting up a new independent nuclear regulatory body in Japan, several uranium delivery contracts were deferred and continue to be deferred. That has led to more supply getting introduced into other markets.
Raymond James analyst David Sadowski told Uranium Investing News that "simply put, the market was flushed with excess material, and most utilities are fairly well covered. That has led to limited non-discretionary buying and softer prices," which he believes could persist until Japan restarts its reactors.
Also playing a role in keeping prices from making their bull run in 2013 was more under feeding by enrichers than was hoped, as well as the US Department of Energy amping up its uranium disposition into the market.
When can we expect the reactors to come online?
Japan currently has 14 reactors waiting to be restarted. Once that catalyst has been reached, the consensus is that it is only a matter of time before the uranium market takes off. The question is when will Japan fire up its first reactor?
According to Sadowski, six to eight of the 14 reactors should be back online by the end of 2014, with the first ones starting up mid-year.
What can we expect for prices?
When the ball finally starts rolling for uranium, Rob Chang, an analyst at Cantor Fitzgerald, expects a significant and dramatic move in prices.
Based on the firm's current supply and demand model, "[w]e see that by 2019 there's going to be a unavoidable supply deficit that won't be covered by that point," Chang said, adding, "[y]ou're going to have deficits during that period no matter how you start."
Chang does not expect there to be enough uranium on the market to satisfy impending demand, which could result in several reactors having no uranium with which to operate.
"I think that what's going to happen is when someone starts buying it's going to be the inflection point, and you're going to see a big pile of utilities buying," Chang told Uranium Investing News.
On the other side of that, Sadowski said that utilities need to take a more "risk-based" approach to inventory management, explaining that "[t]hey hold a certain amount of material in advance of their needs, and when they feel they have a security of supplies in waiting, like in a looming global shortfall situation, they can quickly pile into the market."
For the current market, however, Sadowski believes that there is "potential for a dramatic rise in long-term prices, but probably much more gradual than that meteoric run six years ago." And as for spot prices, Sadowski said that they have the "potential to move much more quickly" because it's mostly financial entities trading materials that can influence prices at a quicker pace.
As far as spot prices are concerned, Cantor Fitzgerald forecasts that uranium spot prices will average $43.25 for 2014. That, however, means that spot prices will need to enjoy an extended stay above $43.25 in order to reach that average. But Chang believes that a likely outcome is a price that could be closer to $49 or $50 by then end of 2014. Getting a head start for 2015, Cantor Fitzgerald is forecasting a stop price of $62.50, showing their belief in the uranium market moving forward. As for long-term prices, Chang says the firm is being conservative at $70 per pound.
Raymond James is slightly more bullish with its 2014 uranium spot prices, with a forecast of $45. For 2015 however, Raymond James is expecting spot prices to slip in around $56.
Uranium market barometer?
For investors looking to stay ahead of the uranium market, one company to keep an eye on is Uranium Participation (TSX:U), the reason being that it tends to accurately reflect market sentiment. UPC is the only physically backed uranium fund and can provide investors with exposure to the uranium price without the exposure to exploration, development or mining risks as seen with other equities.
Chang explained that since its inception, UPC has had a historically flat average, and since Fukushima that average was somewhere around negative 9 percent. However, over the last few weeks it has been trading at a 9 to ten percent premium above net asset value (NAV) range, which is pretty high.
According to Chang, of late, the positive view on uranium has been translating to a higher price for UPC, which has been trading ahead of its NAV.
The importance of uranium exploration
As for uranium exploration, it is important, as investors, to be aware of the importance and value of exploration. With what appears to be shortage of primary uranium supply in the future, finding new deposits and bringing them into production will have inevitably have an impact on the global markets.
Helping us understand the importance of uranium exploration was Jim Paterson, CEO of Kivalliq Energy (TSXV:KIV) who explained that when it comes to utilities, diversification is key.
"There's plenty of uranium in the Athabasca Basin but utilities around the world aren't going to just buy from one region," Paterson explained, adding "There's a risk. It's imperative that if you're a big enough utility, that you have enough inventory and diversity in supply" so that come what may, they will always have what they need.
How does this relate to exploration? Well, it's simple.
"When there are bubbles in markets and mines are taken offline, the entire system is strained." Paterson said, who says that this applies to not only uranium mining, but other commodities as well as transportation networks.
"These are the types of things that these buyers are looking at, risks they are looking to avoid. It's critical for them that they just don't have one supplier. It's also critical for them that have a healthy supplier so there has to be a profit margin. Good buyers are look to work with suppliers with a mine company that will actually make a profit so that they can have sustainable production.
That being said, exploration is critical because it creates more supply options, and more supply options are critical to the long term success of the market.