Dec '11/Jan '12


Short-term uncertainty

By D. Zlotnikov

Uranium, like most commodities, saw prices plunge when the 2008 financial crisis hit. But, by early this year, it showed significant signs of recovery, with spot prices exceeding $72 per pound in January, up more than $30 from a year prior. Unfortunately, uranium took another big hit shortly thereafter. In mid-March, following a major earthquake and consequent tsunami, the Fukushima Dai-ichi nuclear power plant in Japan failed catastrophically, with three of its six reactors suffering partial meltdowns. Although the full scope of the accident’s effects has yet to be discovered, in the short term, the nearly 100,000 residents that evacuated the 20 kilometre exclusion zone are still displaced and will remain so until early 2012.

As the extent of the accident became clear, more and more countries moved to review their own nuclear safety measures – or, as is the case of Germany, to completely end their reliance on nuclear power. This led to a sharp decline in uranium spot prices – from US$72.63 per pound to $52.25 by the end of April. Yet, despite these developments, uranium producers are feeling fairly confident. Tim Gitzel,  president and CEO of Cameco Corporation, told analysts in a November conference call that the company was still on track both in terms of its 2011 sales and its long-term goal of doubling production by 2018.

Unwanted inventory

According to Gitzel, the current fluctuations, which he expects will continue in the short and medium term, are driven by uncertainty over fuel already purchased by utilities in Japan and Germany. While Japan is expected to restart some of its reactors, Gitzel says that only 11 of the country’s 54 reactors are currently running, and it is still unclear how many more will be approved for restart and by when, putting future Japanese uranium buying in question. The situation is even less certain in Germany. As more power plants are shut down, they may seek to sell off their fuel stockpiles. Until the exact timing and amount of such sales becomes clear, uranium traders will remain concerned.

In contrast, Gitzel points to the developing nations as drivers of future demand. China, which slowed down its growth plans somewhat in the wake of Fukushima, is still expected to reach 60 to 70 gigawatts of nuclear generating capacity by 2020, up from the current level of 12 gigawatts. In its third-quarter MD&A report, Cameco calls China the largest example of a trend. Most of the world’s nuclear nations are either maintaining their reliance on nuclear or are actively expanding their nuclear generation capacity, and more non-nuclear countries are turning to nuclear to meet their energy demands.

The Athabascan advantage

Given the projected growth in demand, established operators are looking to expand their production, and Saskatchewan’s Athabasca region is a prime target. Devinder Randhawa, chairman and CEO of Fission Energy, an exploration firm with 11 of their 13 properties located in the Athabasca Basin, explains that the ore found there offers grades 10 to 20 times the world average. Randhawa also points to existing mill capacity in the area, which could offset the need for significant capital outlay for new projects.

But it is important to recognize that there are two, sometimes very different, uranium prices: the spot and the long-term contract. Utilities wish to minimize uncertainty and seek to secure their fuel supplies early on. As a result, most of the world’s uranium is sold under long-term contracts, which offers greater stability to producers, but it does not help exploration-stage companies that see their stock price and fundraising ability heavily impacted by the spot price. “The short-term effect Fukushima had on uranium company stock prices makes it tough to raise capital in a depressed market,” Randhawa says.

The experience of Vancouver-based Hathor Exploration, with its Athabasca Basin Roughrider deposit, is an excellent example of these short- and long-term forces at work.  In the four days after the Fukushima incident, Hathor saw its share price plunge from $2.86 to $1.54. In August, Cameco offered $520 million for the junior, whose property is near the producer’s Rabbit Lake Mine. This was the first offer in what became a bidding battle between the world’s premier uranium miner and Rio Tinto, who eventually prevailed with an offer of $654 million ($4.70/share).

It still remains to be seen what the long-term effects of the Fukushima crisis will be. But, given the expansion plans of many of the world’s existing nuclear consumers and uranium producers, and the competition for Hathor, demand for the development of quality uranium deposits seems secure.

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