-- Posted Thursday, September 8 2011 | Digg This Article |

This year has brought uncertainty for the uranium sector. Since the tsunami and subsequent radiation leaks in Japan, developers and investors are questioning the best steps moving forward. In this exclusive interview with The Energy Report, Edward Sterck, an analyst with BMO Capital Markets in London, updates us on the sector's status.

The Energy Report: Edward, let's quickly sum up 2011 for uranium. Spot prices for yellowcake have fallen from a high of around $74 a pound (lb.) in January to around $51/lb. now. Most of the decline can be attributed to the tsunami in Japan that caused radiation leaks at several reactors there. After the Japanese problems, chatter started about substituting thorium for uranium in nuclear reactors. Then negative long-term policy decisions started trickling in from Japan, Germany, Italy and Switzerland. Your long-term uranium price of $60/lb. makes you sound less-than-bullish on the sector. What, if anything, is going to pick up the uranium sector, dust if off and send it upward again?

Edward Sterck: The biggest driver is likely to be the uranium price. I haven't actually changed my uranium price forecast post-Fukushima because I had a conservative price estimate previously with a long-term price of around $60/lb. in real terms. But in terms of potential positive catalysts, the main thing needs to be reinforcement of positive sentiment from China once it announces that its safety review will allow it to continue to license new reactors. I would also like to see some buying picking up in the spot markets from organizations such as China Guangdong Nuclear Power Group and China National Nuclear Corporation. Those are the things that the market needs to see before belief in the uranium space returns to investors' minds.

TER: August is typically a slow month for uranium sales, but what about September and October?

We usually see volumes pick up in September and October. I think we'll see the same this year as well although a couple of things are overhanging the market at the moment, making utility fuel-procurement officers a little more cautious on the spot market.

The first is that some Department of Energy material still has to be liquidated into the market. It's not a significant quantity, but fuel-procurement officers may be waiting to see how that plays out before committing to purchases. There are also fears in the market that Germany or Japan may liquidate inventories. Obviously, that would be to fuel-procurement officers' benefit. That's one of the reasons they could be holding off as well. It's a small market and prone to sentiment. If anything, I think Germany and Japan would probably look for bigger buyers rather than just selling piecemeal into the open market, potentially through block sales to countries such as China.

TER: You talked about whether China will license new reactors and move forward with its nuclear program. The country wants to boost power output by 45 gigawatts by 2015. Is there any path to that other than nuclear?

ES: China's main electricity generation focus is still fossil fuels—coal-fired powered generation—but it has a big focus on clean energy as well. Nuclear is likely to be a core part of that strategy, as well as renewables, simply given the amount of airborne pollutants that the coal-fired power generation is pumping out into the atmosphere over China. China's general population in certain areas suffers significant respiratory illnesses related to the pollution problem, hence the drive for clean energy.

Nuclear power is likely to remain a core part of China's power strategy going forward. You also get advantages with nuclear power in terms of base load power generation in that, unlike in coal, you can stockpile uranium to the extent that you can actually cover your fuel demands for several years. It gives an element of energy security that other forms of power generation cannot.

TER: The Chinese want to secure uranium projects, and they want to do it on the cheap. Do you expect that trend to continue?

ES: A number of Chinese power state organizations are securing strategic resources for China's future. It is certainly possible that we may see further moves in the uranium space.

TER: Do you have any other thoughts on the uranium sector before we let you go?

ES: I'm actually feeling slightly more positive than I was pre-Fukushima. The rationale is that the main drivers of growth in nuclear power haven't really changed. The countries that were planning to expand their installed nuclear capacity were countries like China and Russia and India. They're not changing their plans materially as a result of the accident that happened in Japan.

On the other hand, if you look at the supply side, pre-Fukushima, everyone was trying to put a uranium mine into production given the great excitement about the outlook for nuclear power. My analysis at the time suggested that we were going to have a significant oversupply of uranium. Now that there's greater uncertainty in the outlook for nuclear power in investors' minds and we've obviously got general economic woes in the world that have pushed markets lower and negatively impacted investor sentiment, I think that the financing of new production is likely to be more challenging than it was pre-Fukushima.

In summary, the supply/demand outlook is one in which we're less likely to see an oversupply scenario. We could see tighter markets perhaps. I also think we still need a production expansion going forward to meet expected demand. On that basis, to a certain extent, this scenario actually plays into the hands of the established producers that are all pretty well capitalized. They are unlikely to need to come back to the market for additional financing and they could benefit from higher uranium prices next year or the year after.

TER: Thank you for your insights.

Edward Sterck covers uranium, diamond and platinum group metal mining companies for BMO Capital Markets. He joined BMO in 2007, prior to which he was a mining analyst at Hargreave Hale. Before working in mining research, he spent more than four years trading government bond futures on a proprietary basis. Edward holds a bachelor of science in geology with honors from the Royal School of Mines, Imperial College London.

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-- Posted Thursday, September 8 2011 | Digg This Article |