Mineral of controversy rockets into the future
By Cosima Marriner
20/07/2006)
Spurned for the past two decades, uranium is now selling at record highs as it suddenly finds itself back in favour with governments around the world, which are embracing nuclear power as a key source of future energy.
Uranium demand is escalating
Languishing around $7 per lb at the start of this century, the spot price for uranium has risen more than sixfold to hit a record $45.50 per lb this week. A classic supply-demand imbalance has driven up the price: supplies are rapidly dwindling just as demand for the mineral that fuels nuclear power has returned.
Uranium has been out of favour for most of the 20 years since the Chernobyl disaster in 1986. But its fall from grace actually began in 1979 with the meltdown at Three Mile Island in Pennsylvania. Until then, miners had been ramping up uranium production in anticipation that nuclear power would increasingly become a source of energy.
But after Three Mile Island, many power companies cancelled their orders for nuclear reactors. Rather than pay the penalties for reneging on uranium purchase contracts, the companies calculated it was cheaper to continue buying the mineral and stockpiling it.
Uranium exploration ground to a halt after Chernobyl, and by the mid-Nineties the low spot price saw production at existing mines drop to 50pc below demand. Power companies relied on their stockpiles to make up most of the shortfall, while the decommissioning of Russian nuclear warheads provided 10pc of the uranium needed.
But secondary supplies are now running out just as demand is escalating, and Russian government officials have indicated they will not continue converting their warheads into uranium suitable for US reactors when their non-proliferation agreement expires in 2013.
Meanwhile, the number of nuclear reactors is likely to increase, as countries such as Britain give the green light to nuclear as an alternative source of energy. The proportion of the world's electricity generated by nuclear power is expected to grow from 16pc to 20pc. In addition to the 441 reactors currently operating, 27 are being built and a further 38 are planned globally. Most of the reactors on order will be in Asia.
Within five years there will only be enough secondary supplies to meet a quarter of the expected demand for uranium. The World Nuclear Association forecasts demand will grow from 170m lbs this year to 186m lbs by 2010. But Merrill Lynch believes supply will lag behind demand until at least 2015.
Charles Scorer, the head of Nufcor Uranium, a new uranium trading exchange, said: "Because of the lack of exploration and falling inventory, there is expected to be a tightness in the market for the next 10 years." This has underpinned a surge in the spot price, which in turn has prompted miners to increase production and has kickstarted exploration around the world.
Australia and Canada dominate the uranium market, accounting for 52pc of production in 2005. Australia boasts the world's largest resource, with 40pc of known reserves, but Canada is the largest producer, producing 28pc of the world's uranium each year. The biggest uranium company is Canada's Cameco, closely followed by Rio Tinto (which has interests in uranium mines in Australia and Namibia). Uranium is also found in Kazakhstan, eastern Europe and African countries such as Zambia and South Africa.
The world's biggest miner, BHP Billiton, last year took control of the world's largest known uranium deposit, Olympic Dam in South Australia, when it bought WMC Resources for $7bn (£3.8bn). It now plans to double production at the mine.
There has also been a sudden increase in budding uranium explorers. The number of Australian and Canadian uranium companies has more than trebled in the past year from 40 to 150. In the UK, uranium explorers Brinkley Mining and UraMin recently listed on Aim, only to watch their share prices sink. "There are a flood of new players out in the field staking new ground everywhere," Rio Tinto's chief executive of energy, Preston Chiaro, said.
From tomorrow, investors will be able to gain exposure to the rising uranium price when Nufcor Uranium floats on Aim. A spin-off from the South African First Rand/Anglo Gold joint venture Nufcor International, Nufcor Uranium has used $92m of the $120m proceeds from its initial public offering to buy 2m lbs of uranium.
Merrill Lynch expects the average spot price of uranium to hit $43 per lb this year, 54pc higher than the $28 average of 2005. "We see no short-term trigger which would reverse this bull trend," analyst Vicky Binns said.
Sentiment towards uranium only began to turn two years ago, as environmentalists became more amenable to nuclear power as an alternative to fossil fuels. One tonne of uranium generates the same amount of energy as 116,000 tonnes of coal, and nuclear power does not generate direct greenhouse gas emissions. Uranium is also far cheaper - it accounts for just 5pc of the cost of operating a reactor, compared with gas which accounts for 75pc of plant operating costs.
"A few years ago you couldn't even talk about the possibility of extending the lives of existing [nuclear] plants, let alone building new ones," said Mr Chiaro. "People are now listening more carefully and recognising nuclear power has its benefits. From a climate change point of view, people understand that there are trade-offs that have to be made. "
Of course, there remains the problem of storing radioactive waste. But supporters of uranium, like Mr Scorer, argue that this environmental hazard is far easier to contain than "the rather random dispersal of CO2 into the atmosphere". In the current climate of terrorism, security of nuclear power plants remains the biggest concern.
Like all minerals, uranium is a finite resource, but market participants argue that a lack of exploration, coupled with improvements in mining and power-generation technology, mean there is plenty left.
As recently as 2004, demand for uranium was still stagnating, if not falling. But the resurgence of nuclear power is now expected to fuel a 2pc annual growth in demand. Until supply catches up, the price is expected to climb. "It's just mushroomed. You seldom find a commodity that has had no exploration for 20 years," said Mr Scorer. "Uranium is only now entering the proper commercial stage for the first time."
