Uranium price still in the basement but miners believe uptick inevitable
Spot uranium is sitting at about $25/lb — back where it was in 2005 when almost everyone was despairing of nuclear’s future — but Cameco Corp clearly still thinks things will come right in the uranium business. This is apparent from the fact that environmental regulators are trying to block it mining one of Australia’s largest undeveloped deposits, Yeelirrie, but Cameco says it remains committed to the project.
Western Australia’s Environmental Protection Agency says the planned mine fails one environmental test in that it will threaten “subterranean fauna”.
There are two factors at work here. One, Cameco wants to get plans in place for whenever the nuclear fuel’s price rebounds (many long term contracts are near expiry). Two, there is a state election next March and the Liberal (conservative) Party is deeply unpopular and the opposition Labor Party is at present favourite to win. The complication there is that Labor in the past has banned uranium mining, so if the EPA recommendation is to be overruled by the politicians then it will have to be done by the Liberal government and in the next eight months.
Cameco bought Yeelirrie from BHP Billiton in 2012 for $430 million. The deposit was discovered in 1972 by Western Mining Corp, that company being taken over by BHP in 2005. It has a resource of 49,000 tonnes of uranium oxide. Cameco is planning to mine at at the rate of 7,500 tonnes a year with a 17-year mine life.
Cameco is not the only uranium company bullish on this commodity. In fact, the uranium hopefuls in Australia have been remarkably resilient in their bullishness. Among those is Boss Resources (ASX: BOE), a junior that picked up the Honeymoon mine for a song. The mine was closed three years ago when uranium prices continued to decline and last year Russian owner Rosatom unloaded the mothballed mine. The market values BOE at A$43 million.
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Boss is pressing on with engineering studies to restart the mine and this week lodged a presentation. As with similar facts set out by a range of uranium companies, the case for an eventual price rise seems compelling. The only problem is that it continues to fail to eventuate.
Anyway, here the points that make that case compelling:
- Some 1.7 billion people worldwide are still without electricity and nuclear has to be included as one of the sources of power because it provides 24-hour non-polluting base supply.
- Global nuclear generation will increase by 70% over the next decade.
- Uranium demand is forecast to rise by 58% between now and 2020.
- Some 64 nuclear power plants are now under construction.
- Another 173 are being planned.
- China is breaking ground on between six and eight new units a year — Beijing sees nuclear as a key strategy for improving air quality.
- India has 21 reactors in operation, six under construction and other four in the planning stages.
- Japan has five reactors back in service, four more with permission to restart, and a further 26 applications for restart lodged.
But all that reasoning has done nothing to lift the price, spot uranium touching a low last month of $24.90/lb. The key fact is that, while primary mine supply is not producing enough uranium to meet demand, the gap is being filled by sales from government inventories and re-enrichment. The U.S. has a particular problem as pointed out recently by the The Financial Times: cheaper gas. This was behind the decision in June by Exelon to mothball two nuclear plants in Illinois. And so far as China is concerned, that country has built large stockpiles of uranium (an estimated 280 million pounds).
But, as the paper concedes, China depends on coal for 70% of its electricity. It cannot have clean air if that state of affairs continues; nuclear is a more dependable source of base-load power than renewables.
No new uranium mines are likely while the price is below $50/lb, let alone sitting at half that. But as Cantor Fitzgerald uranium analyst Rob Chang has been reported as saying, many 10 and 15 year contracts (set at much higher prices than present-day spot levels) have begun to expire. As many as a fifth of contracts run out next year. Chang says that many utilities have been buying cheap on the spot market to avoid higher-cost contract prices.
But, as he rightly adds, that is not a sustainable situation. Uranium miners will be losing money and he expects the market balance to tip halfway through 2017, when cheap spot uranium is in short supply and contracts expire.
However, we have been expecting that turnaround to be imminent over several years. It will happen, but don’t hold your breath.