Is Uranium Coming of Age?

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Few metals are as emotive as uranium. Due to its not unique but certainly special properties, uranium can be both a source of unlimited low emission power or a potential method of mass destruction either in the form of a bomb or as with Chernobyl when human error can allow a plant operation to go horribly wrong. To be fair, our perceptions of the metal and what it can mean are more influenced by history and popular myth than modern reality. But somehow the metal’s ability to be both of massive benefit to mankind and massive threat make it harder for some to look on it with equanimity.

The fact is that with the world increasingly accepting the need for control of carbon emissions and the massive rise in traditional fuel costs like oil, natural gas and coal, nuclear energy is back on the agenda as the fuel of choice. So it is surprising that as oil prices have rocketed, the price of uranium has gone through such a state of depression these last 12 months. The price went through a dramatic peak in 2007 reaching a high of $138/lb in June before falling back just as precipitously to its current level of around $70/lb.  So what does the future hold? Was 2007 an aberration or the first sign of a bull market that got carried away with itself before demand had truly underpinned the price? Well the truth is something of both. There is no doubt the $138/lb price contained a lot of speculative froth and the government sales of 2007 put aspirations to $200+ from some quarters, but the long term trend is much more favorable for uranium than the recent falls would suggest.

Here’s why we think the price will firm:

Nuclear power is back in fashion. The fuel is relatively abundant (although grades are declining) and the CO2 emissions are zero once the plant is constructed (although the amount of steel and concrete required is enormous creating a significant carbon footprint before a MW of electricity is produced). As China, India and much of the developed world become increasingly concerned about oil and gas supplies and the polluting effects of coal powered stations, nuclear will look more and more attractive. The British government has just decided to replace 8 ageing reactors with new ones while France produces 75% of its energy from nuclear sources.

Rising oil and coal costs are making nuclear a lower cost option, even with decommissioning costs included. A slightly spurious sum we came across showed that one ton of uranium is equivalent to the power output of 16,000 tons of coal or 80,000 barrels of oil at current costs. But the fact is that compared to fossil fuels, the price of nuclear energy is more in the construction, permits and decommissioning, rather than the fuel. And that in itself is a major attraction - once you build the plant the long term drain on the economy is much less than with fossil fuels – an attractive prospect for developing countries with large surpluses to find a home for.

Many of the sources for oil and gas are politically unstable making supplies unreliable and leaving the consuming country exposed. Even India and China are sensing the risk; China imports 47% of its oil and India 50% of its natural gas so both countries are embarking on an expansion of their nuclear generating capacity. With 50+% of the supply coming from just Canada and Australia consumers feel much more comfortable with uranium supply than say oil.

Supply is restricted more by regulation and environmental resistance than a lack of ore bodies. Following a flurry of interest in 2007 as the price rose, new investment has been delayed by the rapid fall in price since last year. If the price stays around $70/lb it may not be enough to encourage further investment. With new mines taking so long to be approved, supply is likely to outstrip supply for the next few years. The swing element will be Russian sales of weapons grade uranium which up to now they have sold under an intergovernmental agreement to the USA. With this making up 13% of the world supply any change to this arrangement could have a profound impact.

–Stuart Burns

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