Uranium 2007 Price Forecast
By: James Finch
-- Posted Wednesday, January 10 2007 | Digg This Article |
Price Capitulation or Racing to $100/Pound?
Part One of a Two-Part Series
World Uranium Production continues to fall far short of Annual Uranium Requirements
(Courtesy of TradeTech Nuclear Review)
The big question now being asked by investors, institutions, uranium speculators, fuel brokers, uranium miners, industry consultants and utilities is: ‘How high will the price of uranium reach during 2007?’ Growth in the uranium sector continues to depend upon ever more convincing confirmatory evidence of global warming, caused by excessive fossil fuel use, in order to accelerate broad public demand for the expansion of nuclear energy as a replacement source for electricity.
In that context, it was a fitting end to 2006 when Associated Press reported the Ayles Ice Shelf had broken away from Ellesmere Island in Canada’s northernmost shore, where polar bears are reportedly drowning from the lack of ice to rest upon. This 41-square mile block was one of six remaining ice shelves in Canada’s Arctic, some 800 miles from the North Pole. To put this into perspective, the ice chunk was larger than New York City’s Manhattan Island – about the size of 11,000 football fields. By next summer, oil and gas drillers may find the ice shelf interrupting their production and explorations; shippers may need to re-route to avoid collisions.
While this news passed by generally unnoticed, a new record January temperature in Manhattan’s Central Park was widely reported. Global warming closer to home, as opposed near the Arctic Circle, obviously carries more weight. Juxtaposed against December’s bizarre near-hurricane-like winds in the Pacific Northwest and three winter blizzards in Denver within three weeks, cynics still dismissing abrupt climate change should wake up and smell the CO2. (Perhaps some should visit downtown Beijing for a ruder awakening on this subject.)
According to a 2002 report in the Christian Science Monitor newspaper, three key countries – China, India and the United States – collectively plan to build more than 800 coal-fired plants by 2012. These would emit an additional 2.7 billion tons of carbon dioxide into the atmosphere. Ironically, the Kyoto Protocol countries had proposed “reducing” CO2 emissions by a mere 450-plus million tons by 2012. Climate change, global warming and political tomfoolery worldwide should strengthen the case for stronger uranium prices at higher sustainable prices.
Will 2006 be remembered as uranium’s watershed year? If for no other reason, the past year should be marked as the transformation period for uranium mining projects. Those exploration and development uranium companies, which had uneconomic sub-$40 and $50/pound projects, became very economic when uranium began trading north of $60/pound. After spot uranium broke through $70/pound in mid December, and long-term uranium reached $69/pound, those once-questionable uranium miners took on shades of becoming potential cash cows within this decade.
The Year of the Uranium ‘Auction’
Blue bar shows quantity of U3O8 auctioned in a given week. Red bar shows price increase from the previous week. Black stair step shows end of week spot price. TradeTech is the first to post weekly changes in the spot uranium price on the company’s website, http://www.uranium.info
Courtesy of TradeTech Nuclear Market Review, December 31, 2006 issue.
“The year 2006 was undeniably the most extraordinary in the history of the uranium market,” wrote TradeTech Chief Executive Gene Clark in the December 31st issue of Nuclear Market Review. “Although there is no open exchange for uranium (in contrast to most other commodities), a new market mechanism evolved with the secondary benefit of providing such transparency: the (so-called) uranium auction.”
Clark explained, “During the year, at least 13 such auctions (really, fixed bid price requests) were held – with nearly all resulting in spot market price increases.” He concluded, “It is clear that these public auctions helped establish a level of market price transparency throughout the year. In fact, the auction results became the definitive word on the price level, especially in the period after the Cigar Lake flooding, which created rampant speculation about the impact of the event on the market.”
During 2006, less than 26 million pounds of U3O8 equivalent changed hands in the spot auctions. This is a relatively small quantity compared to the annual uranium requirements of more than 175 million pounds, or the quarter-billion pounds of uranium contracted by world utilities in 2005. According to Ux Consulting’s Jeff Combs, who presented a paper to the World Nuclear Association Symposium, this past September, mid-year 2006 production from some of the world’s largest uranium mines had fallen short of their targets.
His statistics pointed out that actual uranium production during the first half of the past year was about 5.6 million pounds less than the companies had anticipated they would mine. Subsequently, Combs downwardly revised the estimated 2006 production to 109 million pounds from the previously expected 113 million pounds. So a million pounds auctioned by privately held Mestena Uranium LLC in 2006 doesn’t even make a dent in the production deficit from the major mines. Combs reviewed production shortfalls at Ranger, McLean Lake, Olympic Dam, McArthur River, Rabbit Lake and Rossing.
What will happen over the early weeks of 2007? According to TradeTech’s latest Nuclear Market Review, “Current spot demand now stands at almost 6 million pounds U3O8 equivalent and is expected to increase over the next few weeks as new demand emerges.” NMR editor Treva Klingbiel explained in the January 5th issue, “Several buyers that were considering purchases are now faced with the harsh reality of much higher prices and securing less material than they initially budgeted for or planned.” At this time, nineteen buyers are seeking long-term contracts for 57 million pounds of U3O8.
In his “Year of the Auction” essay, Clark made a case for subsequent price increases after each spot auction. Investors seem to be trading in anticipation of the next uranium auction.
Lack of Major New Uranium Production Coming in 2007
Australia’s Olympic Dam project. The world’s largest uranium mine might need a $5 billion overhaul to help meet China’s voracious appetite to fuel that country’s nuclear energy expansion plans.
Aside from the announcement by Paladin Resources and the pre-announcement by SXR Uranium One of commencing uranium mining in early 2007, new uranium mining production is unlikely until later in the year when Energy Metals Corp commences its Texas in situ project. None of these are major uranium mining projects. Although their mining operations would very likely benefit their shareholders, the combined production from these three new uranium miners during 2007 would probably not make up the 2006 production deficit of six of the world’s largest uranium mines mentioned in the previous section.
It is no wonder the research analysts are bullish about the uranium price. Vicky Binns and Daniel Hynes of Merrill Lynch forecast an average price of $75/pound in 2007 and $80/pound in 2008. The analysts stated, “We don’t see a major trigger on the horizon that will force spot prices down.” Adam Schatzker of RBC Capital Markets remarked, “There is not a lot of mine production. The inventories being sold into the market are disappearing and we’re actually in a supply-demand deficit.” He predicted the uranium price would average $100/pound in 2007.
Canada’s Scotiabank Vice President of Economics Patricia Mohr, who told us at the Platts Energy Conference in September of a secular change in the global energy markets, forecast $80/pound average through 2007 and a year ending price close to $90/pound. She commented, “There has been little improvement in mine production.”
In September, Mohr told us the uranium price would end above $60/pound, but in light of the Cigar Lake episode, she has joined other analysts in ratcheting up her estimates. The same is true of Raymond James analyst Bart Jaworksi, whose latest estimates show an average uranium price of $90/pound for 2007 and an average of $100/pound for 2008 and 2009. But, Jaworski did not budge from his price forecast of an average uranium price of $60/pound for 2010.
Who can accurately and honestly forecast how much new mining production can come online by 2010? We have been warned that Kazakhstan and Olympic Dam should alleviate the tight supply situation. This was after being lectured to, by a Florida Power and Light utility vice president, about how quickly Cigar Lake would come online. In late October, nearly all industry insiders discovered Cigar Lake wasn’t the sure thing they expected. Following Sprott Asset Management Market Strategist Kevin Bambrough’s guidance on the uranium price, anything is possible during the 2007 to 2010 time frame. Last spring, Bambrough cautioned the Cigar Lake delays might stretch out longer than expected.
There are other troublesome areas which could sustain a higher uranium price. According to John Busby, who writes an energy column for UK-based Sanders Research, utilities should not yet count upon BHP Billiton’s Olympic Dam project in Australia. He believes the feasibility study would not be completed until 2009, and if the project goes ahead (which he doubts will occur), it would mean four years of digging to reach the first ores at 350 meters, after shifting three cubic kilometers of rock.
Busby also told us, in a November email, “The project needs Aus $700 million desalination and pipeline, a 400 MW connection, a rail link, and they will have to shift the airport and expand Roxby Downs.” Busby also explained BHP’s current underground mine production is down with falling grades. As others also believe, Olympic Dam is dependent upon the strength or weakness of the U.S. economy and the copper price. Busby believes there might not be new Australian uranium until 2014 at the earliest.
As we have been advised through 2006, Kazakhstan remains the wild card for uranium mining production. In an earlier article we reported upon the important ingredient used to solution mine in Kazakhstan: sulphuric acid. For example, at Cameco’s ISL project in this Central Asian country, uranium mining might annually consume about 2200 truckloads of sulphuric acid. That amounts to six truckloads of sulphuric acid, daily driven on what were once camel trails to extract the rich uranium grades found down to 1500 feet. And this is one of many hurdles the country’s miners face.
While the potential for superlative uranium mining in this country exists, how quickly can the government and its foreign joint venture partners construct the infrastructure and mobilize the labor force for such mining? In emails exchanged with those on the scene in this country, we have been advised to remain cautious and skeptical.
Kazakhstan has euphorically predicted a goal of producing 39 million pounds of uranium by 2010. Analysts are questioning this time table. In September, Patricia Mohr called the timeline unrealistic. Merrill Lynch forecasts the country’s production might climb to 26 million pounds by 2010. This doesn’t discount a possible regime change between now and 2010 or later. On Monday, Kazakh’s Prime Minister abruptly resigned, possibly because of disagreements and tense relations with the country’s strongman, Nursultan Nazarbayev.
Growing Interest in Uranium Mining Sector
Strong and steady orders for StockInterview’s “Investing in the Great Uranium Bull Market” suggest the uranium bull market is intact and growing stronger every week.
Lawrence Roulston wrote in the December issue of his Resource Opportunities newsletter, “Investors in general are becoming increasingly comfortable with the idea that high metal prices are a fixture of the long-term investment outlook. As a result, more money is coming into the resource sector, propelling the uptrend.” We agree with Mr. Roulston who expects the extremely bullish ending of 2006 will bridge over into the first quarter of 2007.
One unusual tracking statistic StockInterview has developed since September is the monitoring of investor interest in the uranium sector through book and CD orders for “Investing in the Great Uranium Bull Market”. Since the release of the uranium guide, we have been able to not only determine the strength, but also the geographic interest, of the uranium sector. Judging by the large and diverse number of financial institutions across the world ordering this book, we believe the state of the uranium sector remains intact and very healthy. We have been overwhelmed by the large number of institutions and funds asking for courier service to their worldwide destinations.
Since the Cigar Lake disaster, investors and institutions from more than 60 countries have been ordering “Investing in the Great Uranium Bull Market.” Had we not added the Compact Disc version of the book, the entire first edition would now be on the brink of being sold out. The uranium guide is quickly becoming a collector’s item, as evidenced by at least one offer of a “used” copy of this book being sold by Gildonbooks for nearly twice the price – at $44.95 plus shipping on Amazon.com.
The strongest interest for this book is in areas where nuclear energy plays an important role. Contrary to what some might have believed there is also very strong interest in this book in nearly all parts of the United States. For many this became an introduction to the uranium sector – some of whom were unfamiliar with mining stocks and the natural resource sector. The feedback about this book has also been overpowering for us.
During the first quarter of this year, we expect the uranium guide to begin finding its way in bookstores across the United States. In December, StockInterview contracted with the largest U.S. book wholesalers for distribution in the major bookstore chains. As books begin selling in these chains, we might then more accurately gauge the health of this uranium bull market.
Accelerated interest in uranium mining stocks and the uranium price is encouraging. According to our research there could be more upside in the uranium price during the first half of this year. But, can the uranium price reach or surpass the century mark in 2007? There could be bumps in the final leg of this journey.
PART TWO: Will 2007 Become the Year of the Big Hiccup?
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-- Posted Wednesday, January 10 2007 | Digg This Article |
Investing in the Great Uranium Bull Market
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