Australian uranium market update – Part One

By Freya Purnell

Crunching the numbers
Importantly for the viability of future uranium projects, demand fundamentals remain strong. Australian Uranium Association executive director Mike Angwin believes with a global focus on climate change and clean fuels, as well as a need for energy security, nuclear power will be a key part of the world’s energy portfolio.
According to Resource Capital Research (RCR), there are currently 436 nuclear power reactors in operation around the world, with 43 under construction, and 374 new reactors planned or proposed globally. The global nuclear industry today needs an estimated 181 million pounds of uranium a year for reactor feed requirements, and this figure may double by around 2030.
However despite this positive outlook, the uranium spot price has suffered in recent times, and according to RCR, remained under pressure during the March 2009 quarter at US$42.50/lb. This compares with the long-term contract uranium price of US$69.50/lb at the end of March, down from US$70/lb in December 2008. The spot price has been relatively stable since peaking at US$95/lb in 2007/08.
“The current divergence in spot and contract prices likely reflects the negative impact on the spot price of supply and demand responses to the global financial crisis,” John Wilson, managing director of RCR, said.
“Apparently the utilities have been sitting on the sideline and haven’t been as active buying uranium in this market, and also over the last six months, there has been pressure on funds that hold liquid stocks of uranium to liquidate some of those stocks.”
Looking at the uranium price outlook in the mid-term, Wilson said it is almost anyone’s guess as to the interplay between new production versus the rate of new supply, particularly when trying to forecast the price from around 2015.
“The cash cost curve suggests that a uranium price of around US$60/lb would be necessary to support the project development expenditures required to bring new products to production, whereas for existing production the cash cost curve is probably closer to US$35/lb,” Wilson said.
This type of long-term forecast gives Toro Energy managing director Greg Hall confidence in the ongoing strength of the market.
“Even though the spot price has dropped down to nearly US $40/lb, the long-term contract price has been at US$70/lb and has not dropped much below that. That’s because the industry knows two things - one, there is always short-term fluctuation in supply and demand, month by month, and what’s available on the spot market, which is really only 10-20 per cent of the available tonnes, and two, the long-term price really needs to be an incentive to bring new production on,” Hall said.
There is also now some uncertainty around supply, with question marks over when Cameco’s Cigar Lake mine will be ready for production following flooding, other uranium mines not hitting production targets, and companies underestimating the timeline for bringing new production into the market.
Barry Dawes of Martin Place Securities believes uranium stocks offer the best long-term opportunities for investors out of all the energy stocks, for its minimal pollution output and lowest strategic supply profile.
“Uranium can be flown in to power stations without requiring delivery by ships, trains or pipelines that may be subject to interference. Piracy on the high seas has become an issue again,” said Dawes.
“Uranium stocks around the world have also begun to move up with gusto and I think the quality plays will make new highs this year.”

New uranium supplies
Arguably the most advanced of the new uranium projects, the Honeymoon project in South Australia looks set to become Australia’s fourth uranium mine. Aiming to bring the mine into production in mid-2010, Uranium One recently secured a joint venture agreement with Mitsui & Co for the Japanese company to acquire a 49 per cent interest in Honeymoon and Uranium One’s Australian exploration project in return for a total minimum cash commitment of $104 million.
However Wilson said that while Honeymoon may be regarded as most likely, “there are other factors that will determine which projects are the first to get to production.”
Another possible starter is the Crocker Well project in SA, owned by the SinoSteel PepinNini Joint Venture, with a bankable feasibility study underway and a lease application lodged with the South Australian Government. If approved, Crocker Well may be up and running by 2011.
Additional supply may also come from expansion of the existing Energy Resources of Australia (ERA) Ranger mine in the Northern Territory, which has applied for statutory approval of a heap leach facility which would potentially come online in 2012.
Also on the table is a proposed expansion of BHP Billiton’s Olympic Dam into an open pit mine, which is expected to increase the mine’s production of uranium significantly. While doubt was raised over these plans following recent job cuts and relocations from Olympic Dam, South Australian Minister for Mineral Resources Development, Paul Holloway, recently said the SA Government “remains confident in the prospects for BHP Billiton’s proposed expansion of the Olympic Dam mine”.

To read the final part of this report see next week's AJM newswire.