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 April 27, 2014
Uranium Renaissance: Fact or Fiction?
    Publisher: U3O8.biz
    Author: Vivien Diniz


It's been well over a year since the uranium market truly started gaining some much-needed attention, and many have high hopes for a "uranium renaissance." Unfortunately, the phrase "uranium renaissance" has been uttered so often that it has begun to feel like a bad joke. The worst part is that the market looks to be the punch line, with spot prices sinking even further than their $34-per-pound resistance point.

As an investor, that might not be what you want to hear. But rest assured, this proverbial renaissance will happen. We just don't know the exact date of the party.

In light of all the attention the uranium market has been getting, Uranium Investing News (UIN) recently asked readers what they want to know when it comes to the uranium market. To get those answers, UIN spoke with Rob Chang, senior metals and mining analyst at Cantor Fitzgerald, and energy metals analyst Chris Berry.

Japanese reactor restarts and prices

One of the remaining catalysts in the uranium market is Japanese reactor restarts. The expectation is that once Japan greenlights its reactors to come online, the excess supply that has been floating around the market for the last few years will finally start to decrease, pushing prices upwards as demand outpaces available supply.

But as Berry explained, there is more at play in regards to uranium prices climbing than simply reactors coming back online.

"Excess supply, the high cost and lead time of nuclear reactor construction and unease about nuclear energy are all contributing to the malaise in the market," he told UIN.

And while Berry does see prices edging higher in the future, he isn't expecting "explosive or violent moves in uranium" due to the fact that uranium is traded via long-term contracts, "and contract markets typically don't react violently or roar unless there's some sort of a fat tail or black swan event."

"I still believe it will be 2016 before we see substantially higher uranium prices," Berry said.

Likewise, Chang said that while Japan is very much a market catalyst, it won't "necessarily be impacting the actual spot market in the short term, but in terms of the markets it probably will provide a bit of a boost."

"The market should get a little bit of comfort from the fact that once Japan does announce the reactors are going to be turned on, it should provide a boost, and at least the material that is being sent to Japan or earmarked for Japan, at least some of it will be used."

What about this secondary supply?

Anyone who has been watching the uranium market closely knows that it has fallen victim to market oversupply. Chang notes that one of the factors contributing to the overhang is secondary uranium supply; however, the exact amount of secondary supply available on the market is unknown.

"At the very least, the utilities think there's a lot out there available, and so far they've been proven to be right, because they can get uranium at cheaper prices right now," he explained.

Chang seemed a little skeptical about how much supply is actually on the market. Referring to a recent uranium conference hosted by Cantor Fitzgerald earlier this month, he said it's possible there could be some "double counting" when it comes to assessing the amount of secondary supply available. Essentially, some industry players are "double counting the impact of tails from underfeeding." However, as he highlighted, the argument there is that some of the tails are not going to be useful in supplying the future as after they've been harvested, they will not have the same high grade that they used to.

Berry, on the other hand, explained that there is "ample potential supply from these sources," but "it all comes at a potential additional cost and these costs vary."

Overall, Berry believes that in many cases, mining and processing uranium may be the cheaper alternative to sourcing supply from secondary supplies of uranium, such as down-blended uranium from nuclear weapons, recycled uranium or re-enriched depleted uranium.

US selling stockpiles

While oversupply is definitely at play when it comes to keeping prices down, another concern is the US government selling its uranium stockpiles to cover expenditures. Both Chang and Berry agree that isn't the wisest of decisions --- on the one hand, the US is selling its metal stockpiles, and on the other, it's not good for the uranium market.

"The US Department of Energy (DoE) has the authority to sell, or 'bleed' its excess supply into the US domestic market," Berry explained to UIN, adding that based on his calculations, the "DoE has about 25 years of supply and can sell an amount each year that does not exceed 10 percent of average annual domestic demand --- approximately 5 million pounds of U3O8."

As Berry pointed out, this is not the first time the US government has sold its critical metal stockpiles. And in the past, selling the stockpiles has led to increased concern about resource dependence. That's a crucial issue considering that domestic production is only about 5 million pounds of uranium and consumption is closer to 50 million pounds.

However, as Chang explained, the government needs to watch its budget and will find funds where it can. Unfortunately, as Chang said, selling uranium stockpiles "does hurt the uranium market."

Uranium prices and utilities

If one thing is clear it's that the oversupplied market, coupled with lingering stigma relating to the dangers of nuclear power, has not helped the price of uranium in the last several years. Add to that utilities' desire to keep uranium prices low and the "uranium renaissance" seems like a far cry from where investors would like to see things headed.

When it comes to utilities and the overall cost of operating a nuclear utility, the price of uranium is small. But more than that, the commodity is actually of more importance to the miners and producers, who as evidenced by the current price climate, cannot economically mine their deposits. Naturally, that raises the question of why utilities would be interested in keeping uranium prices depressed; after all, in the long run, it's really not a beneficial strategy.

Berry and Chang both noted that nuclear utilities are facing competition from all sides when it comes to energy prices. Fossil fuels and renewables (though to a lesser degree) are starting to catch up, forcing utilities to look at their bottom line.

Berry highlighted that fracking has made natural gas "overwhelmingly abundant, " which in turn has become "a real problem for nuclear power fleet expansion in the US." He also said that utilities like Exelon are being forced to take a closer look at the "optimal source of electricity generation," adding that because utilities offer a wide array of energy services, "higher input costs can hurt the overall margin of the utility."

Echoing Berry's statement, Chang said he doesn't see utilities as having the budget to enter too aggressively into long-term contracts. Moreover, Chang believes utilities need to justify locking into a higher-priced, long-term contract when spot prices are at their lowest in years.

While the logic of "why pay more when you don't have to" does make a certain degree of sense, on a longer-term basis, this strategy doesn't seem like a sensible solution for utilities. Lower prices, as mentioned, have stunted the growth and production of uranium across the board. And if prices continue to go lower, or if they stay low for too long, eventually it won't be economic to continue to mine and explore for uranium, which will add some pressure to the market. The again, if the fundamentals are still correct, high demand plus supply shortage, could equal upward pressure on the prices.

What's an investor to do?

Analysts and market watchers are clearly hesitant to provide any definite dates for a resurgence in uranium prices, but that does not mean it will never happen. As highlighted above, there are several factors at play in the uranium market that have put downward pressure on prices, yet there are also some catalysts on the horizon --- reactor restarts and impending supply shortages --- that will act as positive influences on prices.

Hopefully, the adage holds true and good things will come to those who wait.


You can view the Previous Market Commentary item: Sun May 25, 2014, Japan Rules No on Nuclear Plant Restart

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