Barrons, January 2nd
Goin' Fission for Uranium
By SPENCER JAKAB
THERE'S PROBABLY NO KEY commodity in the world that's been subject to more distortion over the years than uranium. The fuel, which produces 16% of the world's electric power, has seen its price soar, plummet and soar again as demand and supply gyrated with events like the arms race, the Three Mile Island accident, the end of the Cold War and, most recently, the renaissance of the nuclear-power industry.
With commodity markets booming worldwide and financial innovations allowing more investors to join the party, non-industry players are participating in some flush times for the sector. Industry watcher Ux Consulting estimates that about 10 million pounds have been purchased by various private investors, equivalent to nearly 10% of annual production. The spot price of uranium oxide was recently quoted at $36.25 a pound, up 300% in three years and up from about $7 in 2000. But not everyone is pleased with their entry into this opaque market.
"For many of the established players in the uranium market -- utility buyers and their counterparts at the primary uranium producers -- the entry of financial participants is unwelcome," writes Greg Barnes, a mining analyst at Canaccord Capital.
The most visible player has been Uranium Participation (Ticker: U.TO), a Toronto-listed company that came public in May. It bought about 2.5 million pounds after its launch and is buying another 1.4 million pounds. They and others are banking on demand continuing to outstrip supply for the foreseeable future.
"It's a tight market," says James Anderson, chief financial officer of UPC and of its sponsor, Denison Mines (Ticker DEN.TO). "It takes a long time to bring supply on, so you can look out a number of years and be fairly confident you know what's coming on."
Annual demand for nuclear fuel is now equal to 180 million pounds of uranium, while only 108 million pounds of ore were produced in 2005, according to estimates by Ux Consulting. Mine output will not increase substantially until the huge Cigar Lake facility in Canada run by Cameco (Ticker: CCJ) comes online in 2007, but even by 2008 output will be about 130 million pounds. BHP (Ticker BHP) is considering a huge expansion at its Olympia Dam site in Australia, but this would not hit the market until 2013 or later. A number of smaller projects are also coming.
Meanwhile, there are about 140 new reactors planned worldwide, many in Asia, versus the 440 existing today. Of the 104 U.S. reactors, most have applied for or have received multi-decade license extensions, and the first approvals for new plants since the 1970's are expected soon by industry observers.
Demand for nuclear fuel is being supplemented by uranium stockpiles, estimated by Anderson to be around 100 million pounds, and other sources such as downblending of warheads by Russia and the reprocessing of nuclear tailings. These processes are mitigating the supply shortfall but are constrained by limited and expensive enrichment capacity.
At the margin, financial investors may be boosting prices through their purchases. "To some extent, it's expedited the price increases," says Nick Carter of Ux Consulting.
Even at these inflated prices, Carter says that fundamentals remain bullish, but he expects some resistance around $40 a pound. He also wonders when financial investors will take their gains off the table. UPC, the largest single player, seems to be in no hurry.
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