Desjardins: Uranium Prices Should Stabilize at $60

Uranium prices have been in total free fall over the last 12 months, dropping from a record high of $135 a pound to $60 a pound. So is the bleeding over?

Desjardins Securities analysts John Redstone and John Hughes think it is. They're betting that prices will now settle down and average $60 in the long term, because supply and demand are finally moving into balance.

In a note to clients the analysts wrote:

We expect supply growth to match our most aggressive demand growth profile, keeping total inventories well above adequate levels.

However, they noted that there could still be plenty of volatility, as investment funds can hold up to 10,000 metric tonnes [KMT] of uranium, and any change in that "long" position could lead to turmoil in the spot market.

In the shorter term, they expect that buying sentiment in the spot market could continue to be weak, as about 40% of uranium mine production capacity under development is due on-stream this year. At the same time, the global increase in demand is expected to be steady over the next five years, but not spectacular.

Beyond that, the analysts noted that it is possible demand could accelerate as a new generation of nuclear power plants come online. However, they're still a little dubious about the so-called "nuclear renaissance" given that it is becoming more difficult to finance nuclear plants and there is a shortage of skilled people to run them. New uranium mine production could also offset much of the growth in demand.

Comments

[Secure Energy for Prosperity]

The uranium bull market and nuclear renaissance are currently being massively overstated, and the dangers of nuclear power downplayed. From a financial standpoint, there is a case for nuclear power, but it is a long-term case.

This article is the antithesis to the near-term nuclear & uranium bulls, continually arguing that there is a "uranium shortage" and expecting a "uranium buying panic".

I pointed out months ago in a similar commentary that even with delays in uranium mining capacity coming online, the expected increase in output is a significant proportion of current production. When pressed on the issue of a shortage, the uranium bulls will fall back with the caveat "mining" shortage -- and this is technically true given that a large portion of US uranium supply is met with Russian HEU. But there is no uranium shortage today.

Nor is there likely to be in the next 5 years. 5 years is the relevant timeframe for two reasons:

1. The Russian HEU agreement officially expires in 2013.
2. Any new plants being constructed from here on out in Asia would not come online before 5 years. (Although the Japanese have done some faster than that, its unrealistic to expect this in the near term.)

As with all energy planning, there is a need to meet near term demand, but an imperative to build supply that can only deliver over a much longer term.

Contrary to the nuclear bull arguments, Gen III and IV reactors are not "proven" to be failsafe, or ever safer. A lot of technological development is in process.

The only near term catalysts would be events extraneous to the core nuclear business:

1. Extreme resource nationalism by the Russians, withholding promised HEU supply to the US.
2. Strategic buying by Chinese and other SWFs to lock up uranium supply.
3. A massive oil shock.

We cannot discount the possibility of any of these. But in any event, the likely outcome of any of these would be more reliance on natural gas (and even coal), while we continue to build out solar and nuclear infrastructure.

[John Egan]

Re: Mr. Coombes comment: " Extreme resource nationalism by the Russians, withholding promised HEU supply to the US." ...

The USSR has stated that they intend to increase the cost of their HEU supply considerably. Based on their actions on the petroleum and NatGas fronts, I'd say they intend to do just that. Can anyone say "hardball Comrades!"....

Thx jegan