George Topping: Sovereign Stockpiling Underway
By: The Energy Report and George Topping
-- Posted Thursday, April 2 2009 | Digg This Article | Discuss This Article - Comments:
With the prospect of 30 million pounds of uranium evaporating from the supply lines four years hence, Blackmont Capital research analyst George Topping sees sovereign stockpiling already beginning to make itself felt on the demand side of the equation. In this exclusive interview with The Energy Report, George says he sees the price nudging up to $65 by the end of this year, then to $70 in 2010, $80 in 2011 and $100 within five years.
The Energy Report: Let’s begin with some of your thoughts about uranium. Almost two years ago, spot prices hit a record $137 per pound. A year ago—well before the bottom fell out of virtually all the markets—the spot price dropped by nearly half, to the neighborhood of $70. You focus a lot of your attention on uranium. How do you see its future shaping up?
George Topping: The situation right now is you’ve got the spot price down at about $43 a pound and the term price up at $69. Historically, the spot and the term price have traded very close together, within a couple of dollars. The hedge funds being forced to sell material in the spot market, which is typically a fairly small market for uranium, have depressed the spot price. But I expect that’s starting to dry up and over the next several months we should see the spot price come up to meet the term price round about the $60 to $65 per pound level.
From there I would expect it to increase further over the next several years, the main new source of demand being sovereign stockpiling. In the last five months, India has rejoined the nuclear club. India had been excluded for decades for political reasons. So with the Indians now having access to the uranium markets, I think they’ll be stockpiling a very large dump of U3O8 to power their nuclear programs, both atomic weapons and domestic power.
TER: What sort of balance is there between nuclear weapons and power plants? It seems it would be somewhat small for weapons.
GT: It depends upon how much test work is undertaken and how large a stockpile of nuclear weapons one requires. For example, over the last 10 years about 30% of the world nuclear power demand has been met by dismantling nuclear weapons and from Russia’s stockpiles. There’s only a small amount of radioactive material—and it’s not commonly uranium—in atomic weapons. But it’s so pure and highly concentrated that you can blend it down to make an awful lot of fuel for power generation. Power reactors use pretty low-grade uranium; whereas a nuclear weapon is 99% pure.
TER: You used the term “sovereign stockpiling” of uranium. So India isn’t the only country doing the stockpiling.
GT: No. And it isn’t only uranium. The Chinese, for example, have said that they’re obviously stockpiling oil right now. They’re actually just commissioning one of the world’s largest storage facilities for oil. In the same announcement, though, the Chinese said that they’d be stockpiling oil as well as other forms of energy. They have coal already and natural gas is not easy to store, but uranium is one of the easier ones to go out and buy and stick away in a strategic stockpile. Given that China has quite an aggressive build of power plants over the next several years, I wouldn’t be at all surprised to see China build up a significant stockpile.
TER: What about the U.S. or Canada?
GT: The U.S. and Canada both have plans to build more nuclear plants, more for environmental reasons that anything else. But I’m not convinced that they will follow through with many of those planned reactors because, in my mind, this terrible recession will drag on for North America. Nothing cures your power demand requirements as quickly as a protracted recession.
So I don’t see the U.S. and Canada being areas of great growth. I think you really have to look toward the developing countries such as India and China as the mainstay for demand.
TER: Will China still be building a stockpile if they’re in recession? Or would we have to wait to see China come out of the recession to start stockpiling?
GT: I believe that, as with oil, they’re not pausing at all due to their own slower growth. They’re carrying on with plans to stockpile metals, particularly metals they produce, actually, to support domestic industry, keep their own mines operating and lower the number of miners who are flung out of work domestically. They don’t want riots and people protesting. A lot of China’s actions address the desire to maintain jobs.
For example, within China, state intervention supports molybdenum prices. They’re buying molybdenum. They’re buying copper. They’ve been buying aluminum; they’ve been buying zinc, trying to keep prices a little bit higher on the one hand, to keep the miners in jobs, but on the other hand also creating strategic stockpiles. They view that as a win-win situation.
TER: So they are mining all these industrial metals that you just mentioned in China. Are they also importing to build the stockpiles or can they do that solely from domestic resources?
GT: The imports are increasing as the Chinese are paying a premium to the LME prices. You’re seeing imports come into the country. With copper, for example, an arbitrage situation closed in the last week or two, but you could have been buying copper in London, putting it on a ship, and sending it over to China for an arbitrage profit.
TER: That swings both ways. You have to be on the right side of the trade.
GT: Yes, you have to be on the right side of the trade or else mitigate the risk by buying puts or entering into fixed-price contracts. If you don’t mitigate the risk, you may get caught.
TER: But back to uranium, currently we’re seeing this spread between spot and the term price that a utility would pay. Spot is low because of the hedge fund selling, but you think that’s drying up. So where do you see the spot price and term price ending this year? What direction? What magnitude? And what are you looking at for 2010?
GT: For this year I expect the term price to drift down to $65 per pound or thereabouts, but the spot price to move upwards and end the year very close to the term price. So right about $65 by the end of the year. And then going into 2010, I’m looking at $70, then $80 the year after that.
I think prices will move back up to $100 per pound over the next five years. Come 2013, the agreement to dismantle nuclear weapons expires.
TER: That’s between Russia and the U.S?
GT: Correct. It’s called the HEU Agreement, the Highly Enriched Uranium Agreement, and when that expires, it will leave a 30-million-pound gap in supply. A nuclear power generator that’s just spent several billion dollars adding another couple of reactors will want to be sure of a uranium supply, so it’s in their interest to foster new supply before 2013.
TER: A couple of weeks ago, a Japanese consortium and a uranium company announced an agreement to joint venture on a project in Australia. Will we see more deals like that?
TER: So might we see sovereign governments themselves buying uranium? Would you expect an increase in countries actually buying in this sector of the market?
GT: Yes, and I think it’s a wise thing for them to do. If they can’t rely on their own corporations to ensure supply, they’ll probably step in.
Most countries, though, leave it up to the private corporations to ensure supply. For example, the Ontario government’s unlikely to intervene to ensure that Bruce Power, which is a private partnership, has supply. The partnership owns the power station; it’s up to them to make sure they have the fuel necessary to run it.
TER: Is enough mining underway currently to fill that 30 million pound supply gap? Or will there be a shortfall of supply for a certain number of years?
GT: Right now it looks like there’ll be quite a shortfall.
TER: Would any another potential property be able to come into production before 2013 to yield the Cigar Lake amount of uranium?
GT: Not really. The forecast production rate for Cigar Lake is 18 million pounds of uranium per annum, so that would have taken away a little more than half the gap. The last frontier for a major jump in supply is Australia. We really need Australian governments at the state level to open up their mining permits to allow more uranium mines.
TER: Wasn’t that voted in last year?
GT: The federal government has voted it in, but some of the states are taking their time. So the federal government wants it; they basically said we’re in favor, but it’s really up to the states.
TER: Isn’t a vote in Queensland scheduled soon?
GT: Yes, there is. I spoke with an Australian uranium company recently, and they expect both the Liberal Party and Labor Party are in favor of it. It’s a question of time. Even with permission to go ahead and develop uranium deposits, though, it’s still very tight to get something in by 2011.
TER: Given this picture you’re painting of this massive shortfall in supply, it’s somewhat surprising to hear that you aren’t projecting the price to go up more rapidly as we move toward 2013. Energy is strategic to most countries and many of them, such as France, China and India, use a lot of nuclear power.
GT: It’s quite a jump. I’ve got it going up to $100 per pound. It could go a lot further if there’s no visibility of filling that hole in supply. But right now I think $100 a pound is fine.
A research analyst specializing in the mining sector at Blackmont Capital, George Topping has more than 20 years of experience in the mining industry as an analyst in brokerage firms and in management positions for South African mining companies. Early in his career, George gained valuable production experience with the Gencor Group, a major South African mining company with assets in North America, South America and Turkey as well as Ghana and South Africa. He moved on to develop financial analysis skills in Gold Fields’ Mineral Economics Department, where he conducted due diligence on potential acquisition targets. George switched to the sell-side of the investment industry in 1995 as an analyst for Irish & Menell Rosenberg in South Africa. He migrated to Canada two years later, where he has continued to pursue his career as a sell-side analyst in the base metals and minerals sector, most notably at Sprott Securities from 1999 to 2005. His coverage at Blackmont includes a mix of emerging and mid-cap companies in the base metals sector, each with varying degrees of exposure to copper, zinc, uranium and molybdenum.
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