Uranium $200 a Pound
Possible in Next 2 Years

Macquarie considers uranium bear
territory but still bullish in near-term

ROSS LOUTHEAN / Mineweb 6jun2007

Macquarie Bank sees blue sky continuing in the near future but sees a supply catch by 2009 which should see a steady tapering of the uranium spot price though it may maintain a floor of $US65 per pound in 2011.

PERTH - Kazakhstan could be a pacesetter in the supply of yellowcake to the global nuclear market by 2013 and could be close to challenging leader Canada as a supplier by then.

A detailed study of the market by Macquarie Bank's stockbroking division indicates Kazakhstan, a relative newcomer, lifting from 5,289t of U308 in 2006 to 16,312t in 2013 by which time Canada was estimated to be producing 18,750t.

The study also projects by 2013 that Africa (projected 12,377t) would be ahead of Australia (10,612t), despite the fact that Australia dominates global reserves and resources with BHP Billiton's Olympic Dam representing about one-third of world resources. This point also flies in the face of BHPB's own indication that its $A7 billion ($US5.8 B) expansion at Olympic Dam could see it producing 15,000 tpa of U308 by 2014. However, unlike Kazakhstan and some African nations the road to developing new uranium projects in Australia is still a rocky one - outside of South Australia and perhaps the Northern Territory - despite the fact that the Australian Labor Party ended its No New Mines policy for the nuclear metal.

The study, by researchers Max Layton in London and John Moorhead in Sydney, said Canada could see a 27% lift on current mine supply, primarily through the Cigar Lake and Midwest mines, while Africa's projected 17% of global supply would come from Langer Heinrich - already producing - Buffelsfontein, Dominion and Kayelekera, with the latter three expected to ramp up in the next three years.

Layton and Moorhead see the market in "significant deficit" in 2007/08 and growing speculative interest makes it "hard to see what could prevent the spot price going higher. Macquarie forecasts a peak $US150/lb spot price by the end of this year, that it will average $US125/lb in 2007 and $US135/lb in 2008, before moderating with improved supply to about $US100/lb in 2009.

"While these forecasts represent a central case, we would not be surprised to see prices move up to around $US200/lb over the next two years," the study said.

Total uranium supply consists of primary mine production, secondary supply and draw-downs of commercial and producer inventories (the latter have fallen from about 160,000 lbs U308 in 1984 to about 60,000 lb in 2004). While primary supply has not been able to keep up with demand (making up only 60% of the reactors' requirements in 2005) secondary sources more than made up for the deficit. This includes MOX (a blend of plutonium and natural uranium, reprocessed uranium and depleted uranium). Macquarie said shrinking secondary supplies are helping keep the market tight.

The report said there is an unique, dynamic relationship now between spot and long term prices.

Contracts to supply uranium over the long term are currently being settled with floors around $US40-50/lb U308, depending on time horizon for forward sales, as compared to contracts set at around $US10/lb earlier this decade.

More recently it has been reported that utilities are trying to resist executing long-term agreements with floor prices significantly higher than these levels.

Macquarie said the issue of floor prices remains controversial with two schools of thought prevailing:

• Some utilities argue that a floor price is intended to protect the supplier in the event that prices decline significantly and should only reflect the producer's cost of production plus a ‘reasonable' profit margin (usually not very large).
• Many producers hold the view that the floor price is a negotiated number which reflects the market at the time of contracting. Indeed, one major producer appears to believe that floor prices should equal at least 80% of the prevailing market price at the time of contracting (which would be $US100/lb at the current spot price of $US125/lb).

Looking at the downside of the study's 2007/08 central forecast the points to consider included greater acceleration of production, perhaps through Cameco's Cigar Lake and from Kazakhstan, while traders speculators and hedge funds could quickly become drivers of the down leg of this cycle in the same way they have been a major driver of the upswing. More than 20% of mine supply is reportedly being held off the market by speculators and hedge funds. Rio Tinto may also be a factor, as it's been positive about bringing forward expansion plans at Rossing in Namibia and Ranger in Australia's Northern Territory.

source: 7jun2007