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Uranium Price Breakout

Brian Hicks

Written By Brian Hicks

Posted August 30, 2013

Are you ready for uranium to make its comeback? You might as well be because if market insiders are correct, prices should begin to embark on an incline very shortly.

Uranium One Inc (TSX: UUU), Paladin Energy Ltd (TSX: PDN), and Deep Yellow Limited (ASX: DYL) are all humming the same tune, predicting that the industry will soon recover from the depression it has found itself in ever since the Fukushima disaster of 2011.

uraniumThey’re all saying the price of uranium is going to double in the next couple of years as supplies dwindle.

Uranium, which is mostly used as a fuel source for nuclear reactors, saw its prices go crashing down after the March 2011 nuclear meltdown at Japan’s Fukushima Daiichi power plant. Prices haven’t recovered since.

Uranium was flying high when it peaked in 2007 at $68, but once Japan was struck by the earthquake and tsunami in 2011 and Fukushima became a disaster area, the price of uranium plummeted right along with it. Now, it sits at about half of what it once was.

Uranium futures on the New York Mercantile exchange are currently hovering right around $35. Companies like Paladin are seeing their share prices fall to 10-year lows. But while uranium miners have had to shift gears these past couple of years, they’re betting on a bright future.

Bouncing Back

If they prove right, we can all expect prices to rise to about $60 per pound in the next 1-3 years.

While the spot price of uranium oxide sits at $35, many of the world’s uranium producers can’t turn a profit. But those strong enough to wait it out will see an upswing starting to take place in the market.

From Business Day:

Deep Yellow MD Greg Cochran told Business Day the uranium spot price should be “deep in the $40s by the end of this year and I would be very surprised if the price does not stand around $60 a pound by the end of next year”.

A lot of high-cost mines are being shut down, inevitably squeezing the rest of the world’s supplies. And because companies are forced to re-strategize with poor returns, a lot of producers are halting operations or delaying production and mine development.

The price will shoot up as a result.

The position of the U.S. will play a critical role as the industry moves forward, too. The U.S.-Russian Megatons to Megawatts Program comes to an end this year, removing about 24 million pounds of uranium from the U.S. market. Now, the U.S. stands at a crossroads and must decide if it will explore its own resources or look to a different supply line.

Market Factors

The U.S.-Russia uranium agreement initially started in an act of good faith and peace, aiming to turn Russian nuclear warheads into low-enriched uranium for nuclear fuel.

That was way back in 1993; 20 years later, Russia won’t be our main supplier anymore. The U.S. must find a way to displace its nuclear fuel needs, start mining for itself, or look to a new uranium source.

There are 102 nuclear energy units in the U.S. that, for the past 20 years, have been fed by Russia, allowing us to turn our lights on at night.

A lot of the needs that were met during the course of the 20 year agreement are resolved. Russia was able to dispose of its weapons-grade material and generate revenue, and the U.S. got its electricity.

Today, market demand is coming from new and emerging markets, and new mine production will become a bigger and bigger necessity.

As for Russia, it’s betting it can prosper by selling on the spot market instead of the fixed long-term agreement it has had with the U.S. for all these years.

Also, the Fukushima disaster had a more prolonged effect on the market than a lot of people expected. Deliveries and supplies never regained their luster – a lot of companies were holding back on many aspects of operation.

As a result, there is a longer than expected lag time for recovery to take place. Analysts thought it would be as soon as next year, but now it looks like it will be more like two or three years out. That’s when the price will reach $60 again.

Turn It Up

With prices so low, it would have been a safe bet for Russia to continue on with its U.S. agreement. But like many of the companies in the industry, Russia sees the global demand for nuclear power jumping up. And that’s where the two world powers will part ways.

It will be most interesting to see what the U.S. decides to do. The nation already gets a lot of uranium from Australia, Canada, Kazakhstan, and Namibia.

Uranium One is focused in Kazakhstan, the world leader in uranium production. Canada is number two, but it only produces half as much. The country continues to dramatically increase its output as demands rise.

But Uranium One is set to be consolidated sometime this year and taken private.

Others, though, like Paladin, are holding strong and are ready to embrace the recovery. Paladin has mines in Namibia and Mawai.

Deep Yellow is Australian-based, with a lot of focus in Namibia.

Paladin Energy CEO John Borshoff said to Business Day that “the true state of the uranium market would be revealed when the ‘term market opens up, which it has not done yet.’” About 80% of all uranium is supplied through “term” contracts with major global utilities, and the “term” price is typically considerably higher than the spot price.

And if the U.S. decides to look into its own sources, Texas and the Rocky Mountains are supposed to be rich in uranium.

The market is definitely set to start shaking up. It’s reached its low point. This is it. But I’d be willing to bet that recovery is imminent upon global demand needs and a balance of supplies.

It’s as low as it’s going to get.


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