By: The Energy Report
Source: Tom Armistead of The Energy Report (10/16/14)
Investors in the uranium space are like Goldilocks: They have three major ways to play, says David A. Talbot, senior mining analyst at Dundee Capital Markets. The Athabasca Basin entices with high rewards for high risks. U.S.-based in-situ recovery offers stable cash flow from stable operations. And companies challenged by current market prices that are positioning themselves smartly for an upswing also provide opportunity. In this interview with The Energy Report, Talbot explains the turbulent currents roiling the uranium space.
The Energy Report: David, the uranium spot price has recovered to a 52-week high of about $35 per pound ($35/lb) after nearly three months in the doldrums. What drove the rise?
David Talbot: This uranium price rally is due to a few temporary news items, and perhaps one real supply/demand story.
There is risk with regard to Russia due to increasingly harsh sanctions, but this is simply a worry at this point. We have a hard time believing that Europe and the U.S. are going to cut off 24% and 18%, respectively, of their own nuclear fuel sources. If the cuts do happen, the impact might be huge, however.
Finally, ConverDyn Corp. (private), the U.S. uranium converter, is suing the U.S. Department of Energy to stop it from dumping stockpile supply into the spot market to the detriment of uranium companies and converters.
TER: The price is back up to where it was stalled for a number of months earlier. Do you think it's going to continue to rise?
DT: We're not confident that we are in a sustainable price rally. We might see a leveling off or rebalancing in the $30–35/lb range. We really don't expect the price to sink back down below $30/lb. Until we see meaningful supply cuts and Japanese restarts spurring uranium purchases, the market remains oversupplied, perhaps through 2017, by our estimates.
TER: The spread between spot and contract price is shrinking. What's your estimate for 2015 for both of those prices?
DT: The spread shrank as the spot price rose, and the term price remained stagnant over the same period. Historically, there was no spread between these two prices, but starting about 2005–2006, when investors started to buy spot uranium, we did see a separation. It's likely that utilities won't contract as much uranium with such a large spread, and that's why term volumes are down so much, in part.
Recently, the spread between spot and term dropped to about $7.50/lb. That's almost a three-year low. Over the past decade, the average has been about $10.50/lb. Our price forecast for 2015 is $40/lb for spot U3O8, and $58/lb for term U3O8. We expect to start seeing an influx of term contracting to cover future uranium requirements by the nuclear utilities, which is very important. Term contract volumes have only been 85 Mlb combined over the past two years, versus about 350 Mlb that has physically been used in the reactors. Term volumes have more than tripled over last year, but still, something has to give.
The Ux Consulting charts of uncovered uranium requirements at reactors show a steepening slope on the graph, suggesting that the urgency of procuring fuel is increasing. This happened in 2005–2007, when many utilities rushed to the market at the same time and prices rose dramatically. When the heavy contracting was done, the line on the chart flattened and prices fell. As we're seeing an increasingly steep uncovered requirement trend line again, we believe when contracting does begin, it will feed off itself, specifically for 2017 and beyond, and prices could take off.
TER: The term price on the charts that I've seen has fallen to $44/lb. If that continues, what would it mean for the economics of mining?
DT: It doesn't look good for the economics of mining. Broadly speaking, only about 100 Mlb of annual supply is economic at the $34/lb level. Considering corporate costs, debt and other reasonable returns on capital, that number would probably be lower. Very few operating companies can actually make profits, except perhaps ultralow-cost mines in Kazakhstan, and maybe some U.S. in-situ recovery mines (ISRs) as well. Most will rely on long-term contracts at higher prices to generate positive cash flow.
World averages for production costs are about $50/lb for open-pit mining, about $45/lb for underground mining, which tends to be higher grade, and $38/lb for low-cost ISR. We see potential for further shutdowns, like the Rossing uranium mine in Namibia, if prices persist at these levels. The lack of margin also eliminates much of the incentive for investors to finance projects.
TER: What developments should investors be concerned about in the uranium space?
DT: People should be worried about underfeeding. For those who aren't familiar with underfeeding, it's a matter of keeping the centrifuge machines turning and putting more work into enriching uranium. The lower enrichment prices get with this technology, the less natural uranium the utilities require, which is not good for the producers. The utilities get their desired amount of enriched uranium, and what follows can be sold by the enricher without losing any additional U3O8.
With the U.S.–Russian Highly Enriched Uranium Agreement (HEU/Megatons to Megawatts Program) gone, enrichers have available capacity and have been enriching their own supplies. Just as worrisome, HEU supplies were sold into long-term contracts, but underfeeding supplies are being partially dumped into the spot market.
Underfeeding has always been around, but it appears that underfeeding supplies have increased by about 50% this year, to an estimated 5–15 Mlb worldwide. This underfeeding is the main reason why the HEU agreement end hasn't had the market impact that many thought it would.
TER: What would you expect the effect to be on spot and term prices if underfeeding continues?
DT: It's certainly going to slow down any rally in the uranium sector. The problem is, as long as uranium prices are low, enrichers are going to have excess capacity. As long as they have excess capacity, they're going to continue to do enrichment work and provide more of a product that's coming into the market at low prices. It's an ongoing issue. Do I see that changing in the short term? Not necessarily. Before we see a fix in the underfeeding issue, I believe that the utilities need to get back to purchasing uranium, thereby using up much of this available enrichment capacity.
TER: Great. Thank you for your time, David.
Dundee Capital Markets Vice President and Senior Mining Analyst David Talbot worked for nine years as a geologist in the gold exploration industry in northern Ontario with Placer Dome, Franco-Nevada and Newmont Capital. Talbot joined Dundee's research department in May 2003, and in summer 2007 took over the role of analyzing the fast-growing uranium sector. Talbot is a member of the Prospectors & Developers Association of Canada and the Society of Economic Geologists, and he graduated with distinction from the University of Western Ontario, with a bachelor's degree in geology with honors.
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