Uranium 2012 Preview Fundamentals

Published on Tuesday December 27 2011 (AEST)
 

At the beginning of 2011, analysts everywhere championed a "renaissance" of nuclear power. The Japanese tsunami and subsequent Fukushima nuclear accident in March challenged market sentiment; spot prices and stocks alike suffered setbacks. The Energy Report has been there for the entire wild ride, interviewing industry experts, sharing sector news and scouting out the best companies for any market. Read on for a retrospective of expert commentary on this still-promising sector.

After a sluggish 2009 and a slow 2010, uranium seemed to be coming into its own at the beginning of 2011. The spot price went from $42/pound (lb) at the end of the decade to start 2011 above $60/lb. It quickly topped $70/lb in February and had $75/lb in its sights before the March 11 Fukushima nuclear accident slammed it back down briefly to $50/lb. With the exception of a couple bounces, it stayed lower through the rest of the year, closing at $52/lb.

The Energy Report research shows that uranium company stock prices generally followed the spot price as measured in the UXA1 Commodity Futures Price (shown as the bright red line). The real low for almost all the companies—and the commodity itself—was in August and September, with signs of life returning in the fall.

The week after Japan's natural disaster and subsequent nuclear emergency, we called then-Jennings Capital Mining Analyst Alka Singh for some context in the article, " Uranium Future Intact."

"I'm still using a long-term uranium price of $75 per pound," she said confidently. "But, there is so much market uncertainty that I put off initiating coverage on uranium names because of negative sentiments people have surrounding this sector. I think that all of this is more emotionally than fundamentally driven. Actually, this is a great buying opportunity to pick some of the better uranium companies with the solid assets and management teams. I'm just waiting for the market volatility to slow down."

When asked about how to spot the best opportunities, Singh had this advice: "The companies that are already in production with all their permits and most of their long-term contracts in place are the best companies to own right now. The long-term contracts have already been signed, so the utilities are actually paying the set price for the next five to eight years. Typically, companies that are already in production tend to sell about 70% to 80% of their production on these long-term contracts. Only 10% to 15% of their production is sold on spot prices. So, companies already in production with low cash costs and long-term sales contracts in place are the types of companies that you would want to own."

Singh was not alone in her positive view of the long-term uranium market. In July, Mining Analyst David Talbot spoke about his continued bullishness for the market in an interview titled "Uranium and Lithium Demand Powers Stocks."

"We remain bullish on the spot price of uranium," Talbot said. "In January, we said it was all about uranium demand and it largely still is. The demand picture hasn't really changed as much as the general media portrays. We might see uranium demand decline about 5% to 10% from where we predicted, by about 2020. But, we still expect about 240 to 280 million pounds (Mlb) of demand per year by then, which is really an increase of about 30% to 55% from here."

In an August article titled "Catalysts, Not Uranium Prices, Grow Stocks," Haywood Securities Analyst Geordie Mark advised investors to forget about the price of uranium and focus on the strength of individual companies.

"I think investors are looking for value within the sector. That can be translated as a company either witnessing good production growth potential, or nearing production having mitigated risk by receiving relevant permits and licenses. It could also be a company that has shown significant potential for resource growth. So, there is still investment potential. There is still interest in the sector, but investors are far more selective."

Later that month, Frontier Research Report Publisher Carlos Andres suggested looking outside the usual sources for investments in an article titled "Uranium and Potash Stocks on the Frontier."

"Emerging and frontier markets provide opportunities to buy high-quality companies at a discount simply because of the perceived risk factor," he said. "So we look at places such as Mongolia, which is a resource-rich country that is just beginning to realize the benefits of 20 years of market liberalizing. As a result, foreign direct investment has been steadily increasing, the rich resource endowment is starting to be developed and the country is experiencing historic economic growth. From a broader perspective, there are emerging and frontier market economies in South America, Southeast Asia and Africa with similar stories, although they all have their own unique twists. Countries like Colombia, Peru, Chile, Brazil, Guyana, Argentina, Ghana, Namibia, Tanzania, Botswana, Ethiopia, Indonesia, Papua New Guinea and others all play an important role in meeting historic and rapidly increasing global demand for natural resources."

Andres acknowledged that investing in frontier countries is not without risk. "Mining projects around the world are confronted by governments that want a bigger piece of the pie and at worst might want to nationalize their projects. In addition, big, state-owned enterprises coming from China, India and others are looking to buy publicly traded mining companies outright. Thus, capital coming from the main public natural resource markets like Canada, the UK and Australia, has to compete with these forces around the world. It is impossible to say how this competition will play out in the end, but I don't think state-owned enterprises and national governments can run Western capital off the playing field because the mature natural resource markets in the world are in the West. The expertise for finding these resource deposits and defining, developing and operating mines actually rests in the West as well. They need Western capital, expertise and technology to operate effectively. A balance will have to be found between the giant state-owned enterprises from emerging countries like China and India, and Western capital, technology and management. How it plays out in the end is anybody's guess. But eventually market and geopolitical action will define the balance. It's probably safe to assume that in meeting their resource needs, behemoths like China and India will have to be content, at least to some extent, on being customers rather than owners."

We checked in one last time in December with Dundee Capital Markets Vice President David Talbot for an article titled "The Uranium Industry Is Alive and Well."

"I think we will come back to double-digit returns," Talbot predicted. The stocks actually had double-digit returns on three occasions this summer. But Fukushima put long-term viability of the sector in doubt for some time due to significant negative press, which kept coming, and often it was just wrong. Uranium and uranium equity markets now seem to be hypersensitive to negative news, and the spot price was declining due to supply concerns earlier this year. Stocks were trading hand-in-hand with uranium prices. We think that Fukushima ultimately is responsible for only about 30–35% of the value lost in the uranium equities while many of the stocks are down by about half."

Then Talbot itemized the probably drivers for higher prices in 2012. "We believe that demand will really outpace supply beyond 2013. Uranium demand continues to be strong. Nuclear build continues to increase despite Fukushima and despite that the reactors are now offline in Japan and Germany. Today there are 12 more reactors in operation, under construction, planned or proposed than there were before the Fukushima incident. So that's about 997 reactors on the drawing board right now in one way, shape or form. We have seen uranium production increase about 28% over the past four years with almost all of that growth coming from Kazakhstan and Namibia. In fact, Canada and Australia are actually in decline over the same period. So despite this big runup in uranium prices from about $20 six years ago, we really haven't seen the mine construction that we had expected. Projects have been delayed, deferred or canceled for many reasons. We are estimating maybe just under 200 Mlb of production by 2020 if everything goes forward as planned.

"Another important driver is the reduction in secondary supply resulting from the HEU Agreement, the downblending of the Russian nuclear weapons program and then selling that uranium for nuclear fuel. The HEU Agreement is expected to go offline by the end of year 2013, and the Russians continue to confirm this. The end of the HEU program would remove 24 Mlb from supply annually. That number is huge. It's about 18% of all uranium mining. That is definitely positive for the fundamentals."

India To Require 5,057 Tonnes Of Uranium Between 2012-17

Published on Thursday December 22 2011 (AEST)
 

New Delhi, Dec 21 (PTI) India would require an estimated 5,057 tonne of uranium during the 12th Five Year Plan period from 2012-2017, government told the Lok Sabha today.

"The country''s uranium requirement in the 12th Five Year Plan period is estimated to be 5,057 tonne," Minister of State in the PMO V Narayanasamy said in a written reply.

He said this includes 318 tonne of low enriched uranium for the Tarapur Atomic Power Station (TAPS) I-II and the Kudankulam I-II units.

As part of a long-term uranium procurement agreement, India would import 1,375 tonne of natural uranium dioxide pellets from Russia and 1,150 tonne of natural uranium ore concentrate from Kazakhstan, he said.

On Australia''s moves to lift the ban on uranium imports to India, Narayanasamy said, "No formal communication has been received by the Government of India from Australia, so far."

"It is not possible, as yet, to provide the time by which uranium for our reactors would be available from Australia," he said.

In reply to a separate question, Narayanasamy said a decision has been made to invite IAEA missions - Operational Safety Review Team (OSART) and Integrated Regulatory Review Service (IRRS) - for peer review of safety of nuclear power plants and of the regulatory system respectively.

"The Central Government is in touch with IAEA for scheduling the visit of OSART team in 2012," he added.

Areva Halts Namibian Trekkopje Uranium Development

Published on Thursday December 15 2011 (AEST)

AREVA yesterday said it was putting its investment in the US$1 billion Trekkopje uranium project on hold as the French nuclear fuel and services giant braced itself for a worldwide loss of up to US$2 billion for 2011.

Central to Areva’s financial woes is a provision for an asset write-down of US$1,97 billion for property and equipment at its UraMin operations, which include Trekoppje as well as Bakouma in the Central African Republic and Ryst Kuil in South Africa.

In addition, state-owned Areva slashed its uranium resource estimates at Trekkopje by nearly 42 per cent.

At a strategic action plan presentation in Paris, Areva chief executive Luc Oursel said the Trekkopje deposit is now estimated to carry only 26 000 tonnes of uranium – down from 45 200 tonnes previously.

Oursel also announced an investigation into the 2007 UraMin deal, which cost Areva US$2,5 billion. French Industry Minister Eric Besson on Monday UraMin was “bought at a very high [cost] level”.

The Financial Post yesterday quoted David Talbot, an analyst at Dundee Capital Markets, saying that Areva bought UraMin before there were any significant metallurgical studies on the Trekkopje asset.

“They were reaching for pounds in the ground,” he said. “That deposit just doesn’t work the way they expected.”

In his presentation, Oursel said Areva has decided “to postpone the start of the three mining production projects stemming from the acquisition of UraMin”.

Trekkopje was expected to reach full capacity next year, producing 3 000 tonnes of uranium a year. In February this year, however, Areva said full production would be delayed until 2013, because of the “complexity” of the project.

By the time of going to press yesterday, Areva Processing Namibia could not tell The Namibian what the exact implications of Oursel’s announcement for Trekkopje would be.

Well-placed sources however dispelled rumours that Areva would be pulling out of Namibia.

The Fukushima nuclear disaster in Japan and its impact on global uranium prices also contributed to Areva’s financial meltdown.

When the company bought UraMin fours years ago, spot uranium prices were at a record height of US$135 per pound. Now it trades in the range of US$50 to US$55 per pound.

It is not just the UraMin outfit that will be hit by Areva’s turnaround plan, called ‘Action 2016’.

The company’s investment freeze also includes shelving a controversial nuclear enrichment plant project in Idaho in the US. Areva would cut its total investments by 34 per cent over the 2012-16 period, compared to the period 2007-11, Oursel said.

The company also plans to cut up to 1 500 jobs in Germany, and has instated a hiring freeze on support jobs like information technology in France.

Oursel said that the German job cuts were necessary following the German government’s decision to shut down eight nuclear reactors and progressively phase out the remaining nine reactors between 2015 and 2022. Germany represents six per cent of Areva’s order book of 44 billion euros.

Global Scarcity of Uranium Looms

Published on Thursday December 08 2011 (AEST)

Challenges in sourcing funds for new mining projects, interruptions in both new and ongoing mine production, as well as the conclusion of the Highly Enriched Uranium agreement are near-perfect ingredients for a shortage of uranium in the very near future, a top producer warns.

Tim Gitzel, Chief Executive Officer of Cameco Corp., the world's largest uranium producer, said the problem lies more on the way investors and producers make their calculations.

"They take every possible project, think it's going to operate to perfection, and add it up and say 'there's lots of supply,'" Gitzel said. "It's easier said than done."

Gitzel argued that investors, traders, analysts and critics concentrate too much on a "post-Fukushima attitude."

"People don't focus so much on the supply side," he said.

Prices of uranium, a radioactive heavy metal used as an abundant source of nuclear energy, have tumbled 24 per cent since the March 2011 magnitude-9 earthquake and tsunami that hit Japan that caused a partial meltdown at Tokyo Electric Power Co.'s Fukushima Dai-Ichi nuclear plant.

The crisis at Fukushima led nations to pause and re-evaluate existing as well as future nuclear programs. Germany, for one, announced it will terminate its nuclear reactors by 2022.

The Japan nuclear disaster, coupled with Germany's declaration, prompted Cameco in August to slash its full-year global uranium demand estimate to 175 million pounds (79,400 metric tons) from 180 million pounds.

Data from the World Nuclear Association showed global mined uranium supply reached 53,663 tons in 2010, but is still insufficient to meet global demand. As a result, some utilities have been utilizing recovered fuel from Russian warheads as contained under the HEU agreement.

But now Russia has declared it will withdraw from the HEU accord by the end of 2013, all the more constricting world supply. Russia's pronouncement will remove 24 million pounds from present global supply. The HEU agreement has been in effect since the 1990s.

In 2010, Cameco yielded 22.8 million pounds of U3O8 - a tradable form of uranium. It has plans to raise annual output to 40 million pounds by 2018.

Uranium Sales To India Opens Up A Whole New World

Published on Saturday December 03 2011 (AEST)

WE should be thankful for small mercies. Before delivering a triumph to Julia Gillard on selling uranium to India, Labor's national conference this weekend is having a debate on the issue.

Indian Prime Minister Manmohan Singh and Julia Gillard. Picture: Lyndon Mechielsen Source: The Australia

That will be a change because so far we've heard little more than applause for the Prime Minister's announcement three weeks ago that she would seek to change party policy to allow sales to a country that has not signed the Nuclear Non-Proliferation Treaty.

She says it is time to modernise the party platform. Those who agree present the change as little more than tidying up a diplomatic anomaly.

There is a case for a change in policy, including the contribution nuclear power can make to reducing India's carbon emissions, the practical reality that other countries are willing to sell uranium to India and that we already sell to countries like China and Russia.

But there is more to it than that.

"I am horrified that the media have not explained the enormity of this proposal," says Ron Walker, a former diplomat.

As a head of the nuclear division in the Department of Foreign Affairs in the 1990s and chairman of the board of governors of the International Atomic Energy Agency in 1993, his views are worth considering.

No anti-nuke activist, he subscribes to the policy first adopted by the Fraser government: that we should use our position as a major uranium supplier to demand strict safeguards against nuclear non-proliferation.

Leaving aside its surreptitious development of the nuclear bomb, India has been presented as the model nuclear citizen. Unlike China, Russia and Pakistan, it has not exported its nuclear weapons technology and expertise, at least on any significant scale.

Therefore, so the argument goes, India deserves to be made the exception to the rule that we do not sell uranium to countries that do not sign the NPT.

Walker thinks this is a dangerous idea that risks unravelling the whole international non-proliferation edifice -- one that, despite its failings, he says has discouraged a host of countries, including Australia, Canada, Sweden, Brazil and Argentina, not to pursue plans to develop nuclear weapons.

He also argues that India is far from blameless. Unlike other major powers, it still is producing fissile material to make bombs, has failed to sign the Comprehensive Test Ban treaty and refused to make any concrete commitment to disarmament.

"India's rejection of multilateral commitments on non-proliferation and nuclear disarmament is at least as contemptuous of the concerns of all other countries as India claims those countries are of its security concerns," Walker wrote in a recent Lowy Institute blog.

"If it were willing to accept commitments similar to those undertaken by NPT countries, this could easily be negotiated."

Walker tells Inquirer that the idea of "special mates' rates" for India is the start of a slippery slope. "Once you start making special rules for your mates, are we then going to say that Israel (also outside the NPT) isn't a mate? How could we be harder on Japan and South Korea if they acquired nuclear weapons?"

It is a view echoed in 2006 by Alexander Downer when he was foreign minister: "The problem is, if you start to make an exception for India then it raises questions, of course, about Pakistan, and then it raises questions about Israel. You'd have to be pretty persuasive in not extending the same privilege to Pakistan and Israel."

Then there is the risk of a new arms race. "No one can be certain that China will not follow the US example (of becoming a nuclear supplier to India), sell more nuclear material to Pakistan and set itself up as the sole arbiter of whether doing so is legitimate and responsible," Walker argued in an earlier Lowy Institute paper. "Or that Russia or Namibia won't start supplying Iran on a similar basis."

Kevin Rudd as opposition leader recognised the dangers in 2006, when he said: "The consequences of the collapse of the (NPT) regime for Australia are acute, including the outbreak of regional nuclear arms races in South Asia, Northeast Asia and possibly even Southeast Asia."

The US has extracted concessions from India in return for selling it nuclear fuel, equipment and technology. The argument is that this will bring India into the international fold of responsible nuclear citizens. But it still has some distance to go. India has promised to maintain a moratorium on nuclear tests, but will not go the whole way and sign the test ban treaty.

It will work with the US on an international treaty to stop the production of fissile material, but not stop doing so itself just yet. It has promised not to transfer enrichment and reprocessing technology to countries that do not have it -- an issue on which it has a better record than others.

Gillard says Australia will require strict adherence to IAEA rules, as well as "strong bilateral undertakings and transparency measures that will provide assurances our uranium will only be used for peaceful purposes".

But, as former Defence Department secretary Paul Barratt has pointed out, the Prime Minister has indulged her penchant for making announcements first and negotiating second, thus weakening her bargaining power. If India baulks at some of the conditions Australia places on uranium sales, what are the chances Gillard will reverse her reversal of policy?

In any case, Walker argues that a bilateral agreement is not enough and that it is the multilateral system that provides the real protection. Rather than backtracking on international commitments, Australia should be looking with other countries to bring India, Israel and Pakistan under the international umbrella.

"The aim is to put multilateral meat on the bare bones of India's new willingness to accept the responsibilities of a nuclear-armed state that is supportive of non-proliferation," Walker writes in his Lowy paper.

Gillard has responded to the urgings of the Obama administration, tying us into America's broader strategy of India as a counterweight to China. Whether this is in Australia's interests, particularly if it develops into an anti-Chinese containment strategy, is another issue worth debating.

Selling uranium to India may be realpolitik. But it is a decision we should make with eyes wide open and without pretending there are no consequences.