Future Uranium Supply Deficits Trigger Bullish Expectations

on Sep 21, 2012
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On September 17 prices in the uranium market dropped to a 2-year low of $47 a pound as stockpiles in Japan and Germany disincentivise mining companies from developing new projects. According to Thomas Neff, retired physicist at the Massachusetts University of Technology, there will be no net new demand for the “yellow cake” until after 2015.

In a recent interview with the Energy Report, founder of Mine2Capital Alka Singh said there are currently 433 operational nuclear power plants with an annual consumption of 177 million pounds (mlb) of uranium. With production sitting at 130 mlb, the shortage of supply is offset by the Highly Enriched Uranium Agreement (HEU). Part of the Megatons to Megawatts (MTM) Program, the HEU non-proliferation agreement was signed in 1993 between Russia and the US with the purpose of converting Russia’s HEU taken from dismantled nuclear warheads into low-enriched-uranium (LEU) for nuclear fuel.

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With the MTM program expiring in 2013, the uranium market will experience a surge in prices and a subsequent boost to uranium equities. The 24 mlb of shortage in supply will persist unless long-term and spot prices increase and create incentives for companies to expand production. Current the largest uranium producer is Kazakhstan followed by Australia and Canada but even if the regional companies in these countries become motivated to increase their output, it won’t be enough to fill the gap opened by the expiry of the HEU agreement.

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According to Ms Singh, the uranium market will be broadened by two junior firms developing uranium-rich regions in Wyoming and Texas – Uranium Energy Corp. (NYSEAMEX:UEC), which will start production in the second quarter of 2013 and Ur-Energy Inc. (NYSEAMEX:URG), which has already started mining its Palangana deposit.

David Sadowski, analyst at Raymond James Ltd., is one of the people who expect increases in the price for the yellow cake: “We retain strong conviction in starkly higher prices on compelling supply-demand fundamentals and the prices required to incentivize new supply,” as quoted by Bloomberg. Mr Sadowski forecasts $60 per lb next year, $72 in 2014 and $75 in 2015. Uranium prices this year averaged $50.84 a lb and the median estimate of four economists and analysts as reported by Bloomberg was $64 a pound.
The United States is the largest uranium consumer with its 104 nuclear power reactors, which require 55 mlb of uranium annually to operate. The States produces only 4 mlb and imports the rest.

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